The owners of both Cunard Line and Royal Caribbean Cruise Line have been negotiating in on-again, off-again talks with financially strapped Aloha Pacific Cruises in a bid to move into the potentially lucrative Hawaii cruise market, reliable sources told Cruise Industry News.
Start-up Aloha Pacific Cruises, which filed for Chapter 11 reorganization last week after it failed to obtain some $20 million in last-minute financing, has reportedly been talking to both Cunard and the Pritzker family of the Hyatt Hotel chain because both parties are eager to tap what they view as a potentially rich cruise market.
While any vessel operating in Hawaii will be required to fly an American flag with a hull built by American workers at American shipyards, the sources all stressed that either Cunard or RCCL would be able to negotiate a long-term charter or joint marketing agreement and still meet stringent restrictions under the U.S. Jones Act.
The sources said that both Cunard and RCCL viewed the relatively untapped Hawaii cruise market as being ripe for expansion for incentive and affinity groups - as well as FIT clients - if a new cruise operator had the financial resources to aggressively promote its product.
"It would have to be a long-term charter because the ship would still have to be owned by an American company and would still have to be registered in the U.S. because of all the restrictions with the Jones Act," one source explained. "Both Cunard and RCCL were really eager to get involved in the Hawaii market because they see enormous potential for the right operator with the right financial backing."
The persistent lack of hard, cold cash and the difficulty of developing dining room service to match per diems averaging $300 were widely perceived as the major reasons why Aloha Pacific Cruises filed for reorganization. The highly undercapitalized, start-up cruise operation joined Exploration Cruise Lines and American Cruise Line by becoming the third North American-based cruise line to file for bankruptcy within the past 100 days.
Lawsuit Kept Lending Institutions Away
The sources said that last-ditch efforts to come up with the desperately needed financing failed because the lending institution feared that a nagging lawsuit might ultimately force Aloha Pacific to withdraw from the severely restricted Hawaii market. They noted that what was initially viewed as a mere "nuisance" lawsuit by American Hawaii Cruises proved successful because it created so many financial hardships for American Hawaii's only major competitive challenge in recent years.
Documents filed by the S.S. Monterey Limited Partnership in U.S. Bankruptcy Court in Alexandria, Va., on Feb. 7 showed that the parent company of Aloha Pacific was in default on two preferred ship mortgages for some $38 million and owed nearly $50 million to more than 100 creditors. The public records show that the limited partnership was in an advanced stage of negotiations with several unnamed international corporations to enter into some form of a joint sales and marketing agreement.
The public documents also show that the 600-passenger Monterey had been operating with about 225 full berths since it launched a series of year round 7-day, inter-island roundtrip sailings from Honolulu to three other islands on Oct. 1. The records show that Aloha Pacific would have to sail with an average of 450 full paying clients - or 75 percent occupancy - to reach a break-even point.
An Aloha Pacific official - who asked that he not be named - said from Hawaii that the Monterey had cruised on its normal Saturday departure date on Feb. 11 with 228-passengers and said there was "probably enough cash to operate for a few weeks" without a further infusion of capital.
He said that the Monterey had sailed without interruption for 20 cruises and several phone calls confirmed that Aloha Pacific reservationists were still accepting bookings at presstime.
While Aloha Pacific tried to distance its product from its American Hawaii Cruises competitor by positioning itself as a luxury cruise line, dissatisfaction with the all-American dining room staff triggered widespread reports that the sailings on the 37-year-old Monterey simply didn't justify per diems averaging $300.
Classic Hawaii suspended its bookings on Aloha Pacific last month and then American Express Vacations warned Aloha Pacific that it would become the second of its three major tour operators to suspend bookings if on-board service didn't improve.
"Too Expensive for Hawaii"
Owner Katherine Hertzberg of the Century City Travel Service in Los Angeles said that her travel agency didn't book any Aloha Pacific cruises because "it's about $300 per person, per day and we can book cheaper tour packages for Hawaii resort hotels with air for $400 to $500 per person for a full week." She said that her more affluent clients who are willing to spend $300 per person, per day "generally prefer to stay at some of the posh resorts there."
Hertzberg said that she had "heard" that the Monterey was an attractive ship but felt that it was "still a little too expensive because even my more affluent clients don't want to spend more than $150 a day on an Hawaii cruise." She added that she almost never books on American Hawaii's Indipendence or Constitution because "I've never liked their product because their ships aren't very attractive."
Market Study Shows Hawaii Has Great Appeal
A recent study by the market research firm of Temple, Barker & Sloane Inc. showed that cruising in Hawaii has great appeal to both first time and repeat visitors who want to see several islands without being repeatedly forced to pack and unpack. The TBS study also showed that a well-financed cruise operation with an attractive cruise product would be well positioned to tap Hawaii's lucrative incentive group market.
"The Hawaii incentive market is the largest incentive market in the world and a cruise operation should be in a good position to attract some of it because U.S. corporations can write those meetings off as a business expense," explained Dr. Stanley Buchin, senior vice president of TBS. "Cunard seems to be so interested in getting into the Hawaii market because its sales operation is basically a group-oriented operation and that's what Cunard does best."
Buchin said that the challenge for any cruise line in Hawaii is to position itself as "a unique product."
Buchin said that as a unique product, the cruise must be presented as very different from all the resort hotels by stressing that passengers can see so many islands in so short a time. He added that any new cruise operation should be capitalized with about $10 million for its pre-inaugural operations and should then be able to spend about $4 million to $5 million a year on promotions "to make sure that the public and the agents know they're out there."
Chief Operating Officer John Broughan had said that Aloha Pacific had expected to spend about $1.2 million for its initial promotional budget in 1987 and then had expected to increase that only slightly during 1988. Broughan had always stressed that a third vessel in the Hawaii market was virtually assured of success because only one half of one percent of all Hawaii tourists were taking cruises there before Aloha Pacific entered the market.
Buchin said that the challenge for any cruise operation is to "convince people to take a cruise because Hawaii is already such an attractive destination that they simply have to convince them that cruising is more attractive than a land-based resort." He added that the Japanese tourist market is rapidly expanding and speculated that the Japanese market might be tapped for full charters "because they like to travel with other Japanese."
"Our study for MARAD shows that most of the attractive resorts and both Aloha Pacific and American Hawaii positioned themselves with per diems of about $300 and that the 'uniqueness' of product was what Aloha Pacific had to sell," Buchin said. "The major problem with Aloha Pacific was obviously lack of capitalization and, when the money goes, the promotions go first and that's when it becomes a vicious spiral that keeps going downward."