American Classic Voyages (AMCV) has reported a net loss $7.7 million, or $0.36 per share, on revenues of $78.1 million for the second quarter ended June 30, 2001, compared to net income of $1.3 million, or $0.06 per share, on revenues of $60.8 million for the second quarter of 2000.

For the six months ended June 30, 2001, AMCV reported a loss of $20.4 million, or $0.97 per share, on revenues of $142.3 million, compared to a loss of $5.1 million on revenues of $101.5 million for the same period in 2000.

AMCV attributed the results to a weak Hawaii leisure market, continued heavy discounting in the cruise industry and the North American economic downturn.

In addition, the company's newbuildings at Ingalls Shipbuilding are already running over budget and behind schedule, which has put AMCV and Ingalls in discussions regarding the project's future and even viability, according to AMCV. At press time, the issues had not yet been resolved.

Ingalls issued a statement saying the two parties were in discussions concerning contractual and business matters relating to the two ships and that it would be inappropriate to discuss the content or tone of those discussions, but that the shipbuilder remains committed to this program.

AMCV said that it was also committed to the project and was prepared to submit the matter to binding commercial arbitration by a third neutral party, if it cannot reach an agreement with the yard.

According to AMCV, it has paid Ingalls $236 million for the two ships as of June 30, 2001 - close to $200 million for the first ship and $39 million for the second.

AMCV said that it became clear this past spring that production milestones were not being reached on time, while Ingalls claimed that AMCV was responsible for the delays and increased costs.

"Given the uncertainty as to the shipyard cost and delivery dates of the ships, we believed the economic viability of the project needed reevaluation, and we consequently entered into discussions this summer with the goal of putting the project back on track," said Phil Calian, CEO of AMCV.

Year-over-Year

The second quarter increase in revenues was attributed to $14 million generated by the Patriot, which was partially offset by yield declines by the Independence and to a lesser extent, by the riverboats.

Gross per diems for the Independence decreased from $215 in 2000 to $107 in 2001, which AMCV said was primarily caused by the 140 percent increase in capacity in the seven-day Hawaii market when the Patriot was introduced. The company said that the Patriot was getting yields about 20 percent higher than the Independence. Riverboat yields decreased from $275 in 2000 to $249 in 2001. The first of the coastal vessels generated gross fare yields of $196 in the second quarter.

AMCV launched a cost-cutting program this past June and also eliminated 70 shore-based positions out 470. Certain onboard costs were also eliminated without affecting the passenger experience, the company said.

In addition, AMCV expects to realize savings and operational efficiencies from the consolidation of its offices in South Florida.

Long Road Ahead

AMCV, which has been marginally profitable before (posting losses in 2000, 1999 and 1996), is clearly facing an uphill struggle.

At Raymond James & Associates, analyst Joe Hovorka said that AMCV's cash commitments over the next 18 months will exceed its current cash balance and that he believes the company will need to seek external financing.

The industry grapevine also suggested that AMCV is delaying its newbuildings both at Ingalls and at Atlantic Marine because of shortage of funds.

"That is not true," responded Calian, who said, "We would like the new ships as soon as possible. They will lower our costs of operation."

Calian also said that the company had rushed the first of its new coastal vessels out, the Cape May Light, in order to meet the summer schedule, and that it was going back to the yard in December for "some issues that need to be corrected." He also said that the yard was behind schedule on the second coastal vessel. "When we contracted the two vessels, the yard said it could ideally deliver with a six-month interval between the two," Calian added.

The 2002 program for the Cape May Light starts with Central America sailings on February 7, 2002. The second vessel, the Cape Cod Light, joins the fleet in April. Both vessels will sail on the Great Lakes during the summer.

Adding to the company's challenges have also been what Calian called "our own issues" such as moving its sales force and establishing a new call center.

Challenges

But the challenges remain.

AMCV is attempting to do something nobody has done in 40 years: to build two ocean-going cruise ships in an American yard. At the same time, it is introducing two new brands, United States Lines and Delta Queen Coastal Voyages, while consolidating offices from New Orleans and Chicago into one location in Florida.

AMCV also suffered start-up problems with U.S. Lines and the Patriot and is seeing increased competition in Hawaii, which will make it difficult to raise per diems there. (Hovorka estimated that gross per dierns need to be in the $270 range just to meet interest payments on the new ships. That is more than twice what the Patriot generated in the first half of 2001.)

Company executives have also previously suggested that they neglected the marketing of the coastal vessels.

Meanwhile, the per diems of its backbone brand, its long-established riverboats, are also declining although still at the premium level - along with the softening of the American economy.

From a start-up and expansion mode, AMCV is now clearly in need of a turnaround.