Softening Hawaii slows down cruise company

CRUISE SHIP COMPANY American Classic Voyages Co. has taken losses in the past year, and analysts who follow the company are speculating as to what comes next for the liner.

The Chicago company, which operates cruise ships in Hawaii, on East and West coast waterways and on the Mississippi River,

A softening tourism market in Hawaii also has hurt. The company relies on its Hawaiian island cruises for nearly half its revenue.

American Classic reported a net loss of $12.7 million for the first quarter, which ended March 31. The company lost $10 million in the full year of 2000 on revenue of $221 million.

While the cruise industry as a whole saw an almost 20% increase in passenger counts last year, American Classic didn't see much of the windfall, says Peter McMullin, an analyst with Ryan Beck & Co. in Florida. A fare war among major cruise companies sent ticket prices plunging for hot spots in the Caribbean and Mexico. Because those destinations are the first choices of most cruise travelers, the bargains caused many would-be customers of American Classic's specialty cruise lines to postpone trips, says McMullin. Only one of four American Classic subsidiaries - Delta Queen Coastal Voyages - goes to the Caribbean.

American Classic is a small player in a North American cruise industry dominated by four giants that control roughly 85% of the market: Carnival Corporation, Royal Caribbean International, Princess Cruises and Norwegian Cruise Line. Analysts say that while a major cruise company can weather a slump with minimal pain, a small outfit like American Classic feels a downturn much more acutely.

The drop in business comes at a bad time for American Classic. In 1999, the company announced it would spend $1 billion to expand and refurbish its fleet of ships; it is now deep into those projects. The biggest is construction of two 1,900-passenger cruise ships at a cost of $495 million each. Ingalls Shipyard in Pascagoula, Miss., is building the ships and has demanded payment above the original contract to complete and deliver the ships by 2003 and 2004, prompting American Classic officials to threaten legal action if the contracts are not honored.

But even as the company added one new slip, the "Patriot," to the American Hawaii fleet, revenue for that subsidiary fell $4.5 million in first-quarter 2001 from the same quarter a year earlier. Occupancies on the American Hawaii ships declined from 103% to 76% over the same period. Company officials have said they feel confident the Hawaiian cruise market will rebound.

Tim Conder, an analyst with A.G. Edwards in St. Louis, says "longterm, the Hawaii line would have the biggest potential to make money, because it's the biggest fleet."

Conder says what the company should be wringing its hands about is its rapidly evaporating $30 million line of credit. He believes it could be used up by year-end. "One way or another, this company needs some new money by the end of the year," he says.

American Classic's first-quarter 2001 report to shareholders indicates that the company considers its access to capital resources adequate. The report notes that if costs rise and revenue continues to decline, "we may need to secure additional financing to fund our expansion plans" or "postpone, curtail or terminate" the plans.

Analyst McMullin believes that prospects for the Delta Queen side of the business remain bright. While the mean age for cruise ship travelers is 51, the average steamboat rider is over 60, he says. With the baby-boomers approaching their late 50s, "you've got 15 good years of good demographics," says McMullin.

But even the Delta Queen steamboats have hit rougher waters recently. Fare revenues were down in the first quarter and occupancy levels dropped from 93% to 86% from first-quarter 2000 to firstquarter 2001.

Within the last year, American Classic Voyages Co.'s stock has plunged from a $20.12 to less than $3. Last week, the stock was trading for around $2.40 a share.

American Classic is in the process of closing offices in Chicago and New Orleans and consolidating operations in Sunrise, Fla.