American Classic Voyages (AMCV) has reported a net loss of $12.7 million, or $0.60 per share, on revenues of $64.2 million for its first quarter ended March 31, 2001, compared to a net loss of $6.4 million, or $0.33 per share, on revenues of $40.7 million for its first quarter last year.

News of the results sent AMCV's stock plummeting 40 percent in the days following its conference call, to $4.35, 81 percent off from its 52 week high of $23.50. The stock had rebounded to $5.40 at press time.

"We had a very rough quarter in terms of our financial performance, especially with regard to our Hawaii operations," admitted AMCV CEO Phil Calian. Yields at American Hawaii Cruises were down 39 percent versus the same period last year, which Calian attributed to a difficult Hawaiian leisure market, heavy discounting in the cruise sector overall, cannibalization from the Patriot, and "challenges in hitting the proper price point for the product while sufficiently broadening our travel-agency distribution channel."

Also in the first quarter, AMCV paid approximately $500,000 to repair a bow thruster on the Independence, while unscheduled repairs to the Patriot resulted in $1.6 million in refunds to passengers and $500,000 in future travel credits.

Calian reiterated AMCV's position on the fate of the Independence, stating, "If the Independence is uneconomical, the Independence leaves service." AMCV's projections for Hawaii yields for the remainder of 2001 appear to indicate the Independence has indeed become uneconomical: AMCV anticipates that yields for the full year of 2001 will drop to $105 for American Hawaii (down 50 percent from its year 2000 yield of $212), and for United States Lines (USL), yields will be $131-$137. AMCV reported fleetwide revenue per passenger night of $232 in 2000.

All is not well with Delta Queen Steamboat Co. and Delta Queen Coastal Voyages either. AMCV believes that yields at Delta Queen will decrease eight to 12 percent in 2001 versus 2000.

Further AMCV execs admitted for the first time that the second coastal ship, the Cape Cod Light - originally slated to begin sailing Aug. 4 after completion by builder Atlantic Marine - will be delivered late. Company executives said the ship would be delivered sometime in the third quarter and would begin sailing in the fourth quarter. According to a Delta Queen reservations agent, the first scheduled sailing for the Cape Cod Light is Oct. 27, translating into a delay of three months. An AMCV spokesperson said that an official launch date would be announced within the week.

Topping off AMCV's troubles is the threat of a significant delay and cost overruns in its other newbuilding program underway at Litton Ingalls Shipbuilding, which is slated to deliver two 1,900-passenger ships for AMCV's USL brand in 2003 and 2004. Unconfirmed reports of problems have swirled for months, but AMCV executives have only recently acknowledged the issue. In its April 10-K filing, AMCV reported that Ingalls was "seeking additional sums beyond the contract price for certain interior work and had requested a delay in the delivery schedule." Unconfirmed rumors put the size of the monetary claim being made by Ingalls in excess of $20 million.

Beyond the interior-finish dispute, AMCV acknowledged yet another potential source of delays. Said Calian, "We are very concerned about the shipyard's progress in its steel fabrication and hull erection. We are closely monitoring this situation."

Sources who had informed Cruise Industry News of both the interior and steel-fabrication problems prior to AMCV making the information public now conservatively estimate that the first USL ship is at least five months behind schedule already - and potentially much later - unless a significantly stepped­ up level of manpower is thrown at the project.

Rebound Strategy

Calian laid forth the following strategy to reverse the company's fortunes: aggressive pricing in Hawaii, expansion of AMCV's distribution channel, continued product improvement at USL, and a reduction in the company's overall cost structure.

Specifically, Calian explained, "We have filled our Hawaii ships with an approximately equal mix of group and individual business. In 2000, for Hawaii, the mix was roughly 55 percent group business and 45 percent individuals. In 2002, due to the re-alignment in our sales force and a shift in group policies, we are looking at a group-to-individual mix of roughly 25 percent to 75 percent."

Consequently, AMCV has established "simpler, industry-consistent group policies" and has pushed for greater price reductions for its group business combined with a focus on developing yields on the individual front. Calian also pointed to a bottoming-out of pricing in Hawaii. He explained, "During the past three weeks for our Hawaii products, we have averaged 428 net bookings per day - numbers greatly above our year-to­ date average of 235 net bookings per day."

Calian said that AMCV is "aggressively broadening its distribution channel" and has increased the number of travel agencies it works with from 5,300 last year to over 8,200 agents in 2001. He also said that "within the next 30 days we will be announcing a significant marketing agreement with one of the largest sellers of leisure travel."

Challenging Outlook

As for 2002, even if the U.S. economy rebounds, AMCV must face a radically altered competitive landscape in Hawaii. Beginning in late 2001, Norwegian Cruise Line (NCL) will sail the 2001-built, 2,300-passenger Norwegian Star year-round from Honolulu. NCL will market the ship as a direct competitor to the Patriot, and will offer passengers extensive balcony cabins and other modern amenities absent from the 18-year-old USL ship. In 2002, NCL will be the capacity leader in Hawaii, controlling 43.3 percent of the market, versus a 35.5 percent combined share for AMCV's two Hawaii brands.

But AMCV must raise its yields by 2003 assuming its first newbuild comes on line as scheduled. According to analyst Joe Hovorka of Raymond James & Associates, "At the current yield being achieved in Hawaii, we do not expect the newbuilds being constructed at Ingalls to be able to meet their interest obligations. We estimate that the yields on those vessels would need to be nearly $160 to meet interest payments based on stated contract value for the vessels. To get to $160 yields by 2003, the Hawaii cruise market must show an eight percent increase in yields in the next two years, despite large increases in capacity in each of those years."

Finally, AMCV said it will institute "a reduction in the company's overall cost structure" to be more in line with current revenues." But AMCV is in the midst of a top-to-bottom reorganization of its workforce, its offices, and just about every technological system underpinning its operations - seemingly making short­ term cost-cutting difficult. Likewise, the rapid development of AMCV's fleet could increase its debt to an estimated $1.2 billion by 2004, with a corresponding increase in interest expenses.