Cloudy days for a sunny coast

The management of KGMB is kind enough to allow me to do some outreach from time to time -- career day at Ahuimanu Elementary last Wednesday, emceeing the Quiz Bowl for College Connections a couple weekends ago -- and on Saturday I flew to Kona to address a group called Destination Kona Coast. This is a quasi-chamber of commerce outfit that works to ensure a happy experience for people who visit Kona and avail themselves of members'  services. Members include the Kona operations of Atlantis Adventures and Roberts Hawaii, Captain Zodiac, Kona Joe Coffee and Kapa Fabrics. My usual formula for a speech is to give the latest economic roundup, up to that day and tailored for the audience, and then take questions. This ensures that no two speeches are alike. As you might guess, this group's members were mostly concerned about NCL pulling out two of its three ships. It occurred to me while talking that some of the points I made to my Kona friends, I should also make to you:

• NCL made a business decision. It should be expected to. If it does it will eventually go out of business and Hawaii won't benefit from that.
• The decision had less to do with Hawaii than with Europe. Currency exchange rates made it attractive to deploy a ship in Europe. The money it makes in euros will convert to a lot more dollars. (I didn't think of it while speaking to the Kona audience, but this is roughly analogous to when Hawaiian Airlines pulled out of Ontario International Airport, east of L.A., to launch its Sydney route. The Ontario route was profitable, but Hawaiian could make a lot more money in Sydney and it needed the jet.)
• NCL wants the feds to encumber its competitors by forcing them to spend 48 hours at their international port calls (foreign-flagged vessels must make a foreign call on otherwise all-U.S. cruises, so mainland cruises to Hawaii stop in Ensenada, Mexico, a town that might be described as being like Campbell Industrial Park but without the charm) but simultaneously asserts that its sole remaining ship has a greater economic impact for Hawaii than all rival cruises combined. This is true, and it is precisely why the proposed 48-hour rule is largely irrelevant to NCL. Carnival Corp. and Royal Caribbean Cruises Ltd., the only cruise companies larger than NCL's parent Star Cruises, have been cutting back their Hawaii cruises even with shorter foreign port calls. NCL engineered a near-monopoly on Hawaii cruise business and none of the current or recent economic changes have changed that.

NCL President Colin Veitch made some pissy comments about the move, indicating that he thought Hawaii should stop whining about losing two ships and ask what could be done to keep the third one, but he has since calmed down and specified that the remaining ship -- the Pride of America -- makes a profit and will stay. We now realize Veitch was just kvetching, a forgiveable human trait. On the other hand, it seems fair to note that NCL, far from suffering from Hawaii's infamous anti-business ethos, actually got a sweetheart deal to operate here, with terms of NCL's own devising. Hawaii profitability for NCL was delayed and limited by three factors, two of them beyond the control of either NCL or Hawaii:

1. Hawaii's economy performed so well that NCL had trouble recruiting qualified employees. Many of the best prospective employees already had good jobs on land. The essence of "full employment," defined by economists as 3% joblesssness or less, is that most of the people still looking for work are still looking because they're not qualified, have unrealistic expectations, or have some kind of baggage, like a drug habit. A third of NCL's first wave of applicants flunked the drug test.
2. The Pride of America, the second ship in Hawaii service and the first new one to arrive, sank at the dock in a gale at a Bremerhaven, Germany, shipyard. It took about a year to replace rusty wiring and other problems, because even though only the bottom three decks were submerged that's where the engines are.
3. The third factor, NCL can blame only on itself. It deployed managers who were used to supervising foreign nationals to train and supervise Hawaii residents and other U.S. citizens. Many of these employees proved unsuitable and were dismissed, but others who were making it chose to quit because they regarded the supervisors as martinets. The mostly Filipino personnel whom these supervisors were used to ordering around, tolerated it because they were sending money to be converted into Philippine pesos at a currency exchange rate that made their families affluent. Taking orders meekly made good business sense for them, for the same season that sending the Pride of Aloha to Euroland makes sense for NCL. (NCL did eventually figure out that it could save more U.S. hires and get good work out of them by using supervisors who understood the American character.)

NCL, working with Hawaii officials in a way that belied the seldom-questioned assertion that Hawaii is bad for business, structured a deal that was good for Hawaii and good for itself, and even now it can be argued that both sides benefit. Even a single ship means thousands of direct and indirect jobs and some first-time visitors who will come back again for land-based vacations. And even now the economics of the U.S.-flagged cruise ship enterprise create barriers to entry for Carnival and Royal Caribbean that ensure a stable franchise for NCL. Clearly, however, a two-thirds reduction in capacity will hurt businesses that ramped up to serve cruise passengers, which brings us back to some of the members of Destination Kona Coast. So what do they do? It seems to me that they will wind up working with travel agents and airlines, because in the current uncertain economy it is going to be easier to work for incremental traffic that way than to try to persuade a cruise line to redeploy an entire cruise ship in the islands. (If they can swing it, it will be quite a feat.) And the 48-hour foreign port call rule? The Hawaii Congressional delegation supports it, effectively siding with NCL. Gov. Lingle opposes it, effectively siding with Carnival and Royal Caribbean. This is perfect. Now all three major cruise players feel there is someone in Hawaii officialdom they can count on for a sympathetic ear. But the practical effect will be limited either way. Carnival and Royal Caribbean have been scaling back their Hawaii voyages and a requirement for an extra day in Ensenada won't change the economics appreciably. Neither will it much affect NCL. The market drives this.