RUNNING AGROUND
American Classic Voyages Co. had a thriving New Orleans paddlewheel company, $1.1 billion in federal loan guarantees and a monopoly right to cruise Hawaii. Now the company is in bankruptcy. How did it fail?
Times-Picayune, 28 Oct. 2001
By Stewart Yerton and Rebecca Mowbray, Business writers
In 1999, American Classic Voyages Co. embarked on what was viewed at the time as an ambitious and ingenious plan: The company would invest upward of $1 billion to expand its New Orleans and Hawaii-based niche franchises and build new operations on the East and West coasts.
In addition, to expand in Hawaii, American Classic Voyages would draw on up to $1.1 billion in loan guarantees from Uncle Sam to build two bigger, better ships for the Aloha State. And in case the loan guarantees were not enough, the federal government also had granted American Classic Voyages a 30-year monopoly right to conduct inter-island cruises in Hawaii.
But just over a week ago, American Classic Voyages' plan proved not so ingenious after all.
On Oct. 19, the company filed for Chapter 11 bankruptcy protection from its creditors, reporting assets of $37.4 million and liabilities of $452.8 million. The company said it would lay off 2,150 workers, including 550 ship-based employees in New Orleans.
Last week, the company's contractor, Northrop Grumman Ingalls Shipbuilding in Pascagoula, Miss., ceased work on the two $459 million, 1,900-passenger vessels for American Classic Voyages' planned Hawaii expansion, putting 1,250 shipyard employees out of work, and endangering another 500 subcontractor jobs.
When it declared bankruptcy nine days ago, American Classic Voyages pointed to the Sept. 11 terrorist attacks and a subsequent decline in reservations as the reason for the bankruptcy.
But the problems behind American Classic Voyages' demise went much deeper.
Even as the company rolled out its ambitious expansion, American Classic Voyages, which is backed by its billionaire chairman and main investor, Sam Zell, was beset by operational problems. Some travel industry professionals and a former senior executive say the firm had watered down its successful brands so much that they no longer appealed to the niche clientele they were originally geared toward. The rollouts of new cruises were bungled. Finally, and perhaps most dramatically, the company ran into a dispute with Northrop Grumman Ingalls Shipbuilding.
All of this occurred against the backdrop of a slowdown in the U.S. economy, price wars in the cruise industry, a recession in Hawaii's important Japanese market and a headquarters relocation that American Classic Voyages' chief executive acknowledges caused a disruption at a critical time.
In August, well before the terrorist attacks, Joseph Hovorka, an analyst with Raymond James & Associates, issued an ominous report outlining serious problems for the company: a reduced credit line, soft demand for its new cruise along the East Coast, and Hawaii operations that were in the red.
"Cash commitments . . . over the next 18 months are expected to exceed the company's current cash balance," Hovorka wrote at the time.
The terrorist attacks, Hovorka now says, simply gave a shove to a company already on the brink.
"I think the events of Sept. 11 are what pushed them over the edge," Hovorka said.
American Classic Voyages' chief executive Philip Calian calls the attacks the "catalyzing event" but acknowledges the company was struggling.
"There were many issues," Calian said. "That being said, there were a number of them that were being addressed and had the clear potential to be worked though."
The failure could have serious repercussions for the U.S. shipbuilding industry and the Title XI loan guarantee program, which leaves U.S. taxpayers to foot the bill if a company cannot pay its debt. The Pascagoula ships were financed under this program. So were several other American Classic Voyages ships. Altogether, the exposure to U.S. taxpayers totals $367 million, said John Swank, a Maritime Administration spokesman.
Although the Maritime Administration holds mortgages on four ships in the company's fleet, the estimated value of those ships falls about $221.5 million short of what the government has guaranteed, bankruptcy documents indicate.
This situation is irksome to political leaders such as Sen. John McCain, R.-Ariz., who has criticized the Title XI program for shipbuilders as corporate welfare. In July, McCain wrote to President Bush, expressing support of the president's proposal to eliminate federal assistance for Title XI.
"This has been a concern of Senator McCain's for some time now," said Rob Freeman, a senior staffer for the Senate Commerce Committee. The bankruptcy underscores the risks the program requires the public to shoulder, Freeman said. The government could end up having to sell the mortgaged ships to recoup its losses -- no small task amid a travel slump. The central question, Freeman said, is whom the Maritime Administration aims to serve.
"Are they really looking out for the interest of the taxpayer, or are they looking out for the shipbuilders and their desire for cheap money?"
Back to the future
The tale of American Classic Voyages' rise and fall goes back to 1890, when the firm began as the Greene Line, a freight and passenger steamboat company. In 1946, the company bought the Delta Queen steamboat, a historic vessel built in 1927. In 1973, the company changed its name to Delta Queen Steamboat Co., and three years later it launched its second luxury steamboat, The Mississippi Queen.
In the early 1990s, Delta Queen Steamboat Co. began a series of dramatic changes. In 1992, the company went public, and the next year it expanded into the Hawaiian islands with the acquisition of the bankrupt American Global Line, which operated under the American Hawaii Cruises brand name. In 1994, the parent company changed its name to American Classic Voyages and launched its third riverboat, the American Queen, the next year.
In the late 1990s, the company began rolling out new cruises under the Delta Queen Coastal Voyages brand. The line offered small, luxury cruises off the East Coast and Pacific Northwest. American Classic Voyages' business plan, which drew cheers from some Wall Street analysts, was to build on its core market of older, affluent travelers -- a market that was poised to mushroom with the baby boomer generation heading toward retirement.
Jeff Krida, a former president of the Delta Queen Steamboat Co. who is now president of CruiseWest, a high-end small cruise company based in Seattle, said this "business plan was more hopeful than real."
Indeed the company was in for rough waters.
In June 2000, during the maiden voyage of the 161-passenger Columbia Queen from Portland, Ore., some 40 passengers and staffers came down with a gastrointestinal illness that the company described as a virus. Upon the ship's return the company sanitized the vessel and moved its inaugural luncheon to a hotel.
Then came the launch of the company's expanded Hawaii operation, which operated under the U.S. Lines brand. That division was to have large vessels akin to the ships run by big outfits such as Carnival. In order to further expand in Hawaii even while it waited for its new ships to be built, American Classic Voyages bought a $114 million, 1,212-passenger ship from Carnival Corp.'s Holland America Lines subsidiary, reflagged it as a U.S. ship and renamed it the Patriot. The ship joined the company's Independence, which sailed under the sister American Hawaii brand.
But American Classic bungled the Patriot's launch to travel agents in December 2000. As hundreds of agents waited in San Francisco for two inaugural luncheons, a dinner and a cruise to nowhere, the ship didn't pass a Coast Guard inspection in Los Angeles. It never arrived, disappointing the people who were to sing the Hawaiian vessel's praises in the important California market.
The next month, a Los Angeles Times travel writer went on a seven-day cruise aboard the Patriot. Titled "Not-So-Smooth Sailing In Hawaii," the ensuing article described a "musty" stateroom, "Saturday Night Fever" decor in public spaces and lackluster food.
By the spring, Calian says, the company had worked through what he admits were initial problems associated with the new ship.
But as travel agents across the country got wind of the botched launch and the bad press, and when their own customers gave the Patriot mediocre reviews, they started sending business elsewhere.
"People were hesitant about selling it," said Bob Wall, owner of Vacations at Sea, a New Orleans cruise-only travel agency that has been in business since 1983.
American Classic Voyages' next launch didn't do much better. In May, the company launched the Cape May Light, a 300-foot, 224-passenger vessel to sail in the Northeast and Central America under the Delta Queen Coastal Voyages brand. But by late summer, American Classic Voyages had decided to scale back its itinerary and cut the Central American winter cruises. The move caused concern among Wall Street analysts such as Hovorka, who viewed the schedule changes as a sign of soft demand.
Calian said soft demand was only part of the reason, saying that there also were "shipyard issues that needed to be fixed in the winter season."
It is not uncommon for cruise lines to encounter problems during early, shake-out voyages, so the company's initial operational glitches and less-than-stellar reviews are hardly unprecedented in the industry. But American Classic Voyages' problems extended beyond operations, say former company executives and travel agents who sold the firm's packages. With all of these new businesses, they say, the company had trouble establishing a marketing strategy.
Service and tradition
The Delta Queen steamboats and American Hawaii ship had always been positioned as upscale niche vessels. They were successful because they were marketed to sophisticated travelers seeking service and tradition, say former sales and marketing officials with the company.
But the new "blue-water" executives hired from large, ocean-cruise lines, including president and chief operating officer Rod McLeod, who joined the company in February 1999 after building his career at Royal Caribbean International, Norwegian Cruise Lines and Carnival Corp., tried to bring a mass market approach to the business, former employees say. Selling berths at these companies is more about dropping the price until the ship is full than playing up what makes a voyage unique.
Though the company maintained different marketing staffs for each of its ventures, it merged the sales forces for the different brands -- something operators such as Norwegian Cruise Lines and Cunard Lines abandoned on diverse product lines. As the company adopted its mass-market approach, it even changed the titles of its sales staff from sales reps to business development managers, the titles used by Carnival.
But the new business development staff had trouble explaining what made each line special, and how they all fit together under the American Classic Voyages brand. Sales calls left travel agents confused.
While the company failed to distinguish its new products in the marketplace, it succeeded in watering down the well-recognized Delta Queen brand.
"They began to market all of their cruise products with the same philosophy. I think that was the beginning of their demise," said Krida, the former Delta Queen Steamboat Co. president. "They made a common denominator over everything. They lost the specialization and the personal touch that the Delta Queen once had."
Calian acknowledges it was a challenge to maintain the Delta Queen Steamboat and American Hawaii brand identifications as the company tried to roll out the coastal voyages and the U.S. Lines businesses.
"I'm not sure if the brand was diluted," he said. "But it was somewhat confusing. In hindsight, I think that was a little confusing for the distribution channel."
As its capacity in the Pacific doubled, the company's failure to prime the market for introducing the Patriot to American Hawaii's market was reflected in its sales.
In his first year on the job, Rolf Logan, who was American Classic's national sales director from November 1999 until February 2001, said that prices for an American Hawaii cruise dropped from $1,500 to $700 a passenger.
"They needed to turn around Hawaii, stem the pricing declines, and fill the ships up at better prices," said Hovorka, the Raymond James analyst.
Bookings finally began to strengthen as the company headed into 2002.
"We were comfortable that we had turned the corner," Calian said.
In fact, Calian said, the company was looking forward to making it in the black by the second half of 2002 on a cash-flow basis.
Nonetheless, bank lenders appeared to be getting antsy. In August, the company repaid $29.5 million drawn from a $30 million revolving credit line with Chase Manhattan Bank. Afterward, Chase lowered the credit line to $10 million and increased the interest rate charged to the company by 100 basis points.
In the meantime, the company had thrown another wrench in its own works. In September 2000, the company decided to move its reservation and operational headquarters from New Orleans to Sunrise, Fla. The move was supposed to let the company take advantage of a sweetheart real estate deal and other financial incentives offered by Sunrise, as well as to tap into South Florida's skilled cruise-industry workforce. But the move also meant that American Classic Voyages lost workers with years of experience at a time when stability was needed.
"With the move to Florida they lost most of the middle, upper management. As a result you had new folks who had to go through the learning curve," said Logan, who stayed in Louisiana and now operates a Mandeville travel agency with his wife. "The company was put under a strain that it couldn't bear. There were drastic personnel changes with respect to the move."
Calian acknowledged that the move, which also involved shifting personnel from the company's Chicago corporate headquarters, caused problems.
"There's no question that the transition from New Orleans and Chicago to South Florida had an impact on us -- in part in dollars, but also from a disruption point of view," he said.
Late, over budget
While the company was struggling with its new roll-outs, a credit crunch and its relocation, it also was embroiled in a dispute in Pascagoula. The new cruise ships were billed a jump-start for the U.S.-passenger ship building industry, which had been dormant for 40 years. But skeptics questioned whether a U.S. shipyard accustomed to military projects could meet the challenge of delivering the two massive passenger ships on time and within budget.
By the summer, it became apparent that the shipyard was failing to meet this challenge.
In a letter sent to President Bush in July, McCain warned that the project was behind schedule and that the taxpayers could end up footing the bill if it failed. Futhermore, McCain said, the shipyard and company were in a dispute with both sides crying foul. In September, the companies resolved the dispute. The agreement extended the shipyard's deadline to February 2004 and increased the price per ship by $19 million from the original contract price of $440 million. In addition, American Classic Voyages committed $42 million in new equity and Northrup Grumman, the shipyard's parent company, committed $44 million in equity to help pay for the new ships.
This was an important provision for American Classic Voyages, Calian said. Although the company is financing most of the vessels with taxpayer-backed loans, American Classic Voyages had put in $100 million of its own money over the previous two years. Although American Classic Voyages was to fork out an additional $42 million, Calian said it would not have to do so immediately.
Effectively, the deal with Northrup Grumman would allow American Classic Voyages to refrain from providing any more cash until the first ship was delivered, which would have helped the firm deal with cash-flow issues caused by the new ships.
"That was a significant restructuring of an obligation that would not have eaten into our cash flow near term," he said.
But it was not enough to protect the struggling company from the unforeseeable events of Sept. 11. After the terrorist attacks, bookings declined by 50 percent, and cancellations increased by 30 percent. The company, already cash-strapped and on a short leash with its bank creditor, acknowledged it had "no prospects for additional capital at this time."
1,000 unsecured creditors
The bankruptcy has left the company with more than 1,000 unsecured creditors, according to the filing. The largest of these is the Ingalls shipyard in Pascagoula, which is owed $300 million.
Next largest is the Maritime Administration. Although the agency holds mortgages on several American Classic Voyages ships, the estimated value of the ships is not enough to cover the administration's $367 million exposure. The unsecured portion totals $221.5 million, according to the bankruptcy filing.
Carnival Corp.'s Holland America Lines subsidiary has a $40 million claim. American Airlines has claims totaling $9.1 million.
Beyond these creditors are untold employees and passengers who might have bought tickets and put down deposits for cruises. Some of these employees are the reservations agents at the Robin Street Wharf in New Orleans, who had agreed to stay until the company completed its move to Florida in exchange for generous severance packages. Instead, they left a week ago Friday with only a paycheck for days they had worked.
Joe Litpin, a 65-year-old retired Lockheed Martin supervisor from Slidell, was supposed to head out to Hawaii for a cruise this weekend. He paid $3,180 for the cruise for him and his wife. Now the company is shut down, he's out a wad of vacation money, and, he says, nobody with the company will tell him anything.
"They didn't notify anybody, and they won't answer the phone," Litpin said.
As the base of American Classic Voyages' Delta Queen Steamboat line, New Orleans will suffer less than other locales, such as Hawaii, where the company laid off more than 1,000 ship-based workers, and Sunrise, where the company was in the process of moving its corporate headquarters.
Although American Classic Voyages laid off 550 ship-based workers after the bankruptcy, the company will continue to operate the Delta Queen steamboat, sustaining 30 shore-based jobs and 80 jobs on the ship. It plans to get the Mississippi Queen operating again by the spring of 2002, Calian said.
As for the move to Sunrise, the Florida town that had offered a lavish incentive package to lure what a year ago seemed to be a growing company with a massive call center operation, Calian said that is over.
"There is no Florida move," he said. "The Florida operations are essentially being shut down."
Half-built ship for sale
What will happen to the ships under construction is unclear. Last week, Northrop Grumman announced it would suspend work on the vessels because the Maritime Administration, also known as MARAD, had not agreed to continue to provide loan guarantees to finance the project. That could leave the government with a half-built ship to sell, in addition to the ships on which its holds mortgages, listed in American Classic Voyages' annual report as the American Queen riverboat, the Independence vessel in Hawaii and the Cape May Light and Cape Cod Light coastal cruise ships.
Swank confirmed that the Maritime Administration could end up having to sell the ships, depending on how the bankruptcy proceeds.
At least one thing is clear in all of this: Now is not a good time to be selling cruise ships.
In the past five years, the capacity of the cruise industry has increased by 57 percent to 165,381 berths, according to the Cruise Lines International Association, whose members represent 96 percent of the North American cruise ship market.
As capacity has increased, cruise vacations are selling for less than they did a decade ago. With 80,000 berths under construction and set to come online by 2005, that trend is unlikely to change, especially with Americans skittish about traveling.
"That's a good question," said David Krapf, editor of WorkBoat magazine, a trade publication, when asked who might buy the Pascagoula ships. "I don't know who they would sell them to."
Freeman, the staffer for the Senate Commerce Commitee, was equally pessimistic.
"Clearly," he said, "those (ships) are going to sell for fire sale prices."
Stewart Yerton can be reached at (504) 826-3495 or at syerton@timespicayune.com. Rebecca Mowbray can be reached at (504) 826-3417 or at rmowbray@timespicayune.com
Frank X. Prudent sent this news:
This past Friday, May 3rd. the Delta Queen Steamboat Co. and the three steamboats DELTA QUEEN, MISSISSIPPI QUEEN and AMERICAN QUEEN were sold at auction for a reported $80,000,000.00. The winning bidder is Delaware North Corp. with headquarters in Buffalo, NY. The official announcement is expected from the U.S.Bankruptcy Court on Monday, May 6th.
Excerpts from The New Orleans Times-Picayune, 12 April 2002
American Classic Voyages has signed an agreement to sell The Delta Queen and Mississippi Queen for $3.75 million to Chicago-based Waveland Investments LLC, which hopes to establish a headquarters in New Orleans, creating more than 300 jobs in the next few months.
The New Orleans Times-Picayune reports the privately held Waveland plans to take over the boats officially at an auction May 3 in Chicago, adding Waveland has agreed to commit up to $10 million in working capital for the boats' operations.
In another development, AMCV Vice President Jordan Allen, who is general counsel for American Classic, told the paper that billionaire investor and AMCV chairman Sam Zell will no longer be involved in the Delta Queen operations.
Allen said AMCV reviewed a number of bids to buy the two boats out of bankruptcy and deemed Waveland's the best. The companies have been in negotiations to work out the terms of the transfer. However, the asset purchase agreement is subject to the May 3 auction and if a company with a higher bid emerges at the last minute, the DQ and MQ could go to someone else. Allen said he was bound by confidentiality agreements and could not say who other potential bidders are.
The newspaper says the asset purchase agreement means that New Orleans "will regain a base of operations it nearly lost and will gain a corporate headquarters." The paper adds, "In the past, the steamboats conducted their operations from New Orleans though their parent company, American Classic, which was based in Chicago. The city began losing those operations in September 2000 when American Classic announced it was consolidating its operations and moving its headquarters to Florida. Waveland's hiring plans would erase the job losses from American Classic's move and subsequent Chapter 11 bankruptcy filing in Delaware."
The newspaper quotes Allen as saying about 300 offshore employees will be hired to run the vessels, and the Robin Street Wharf offices will hire five to 10 people to join the 30 people who still work there.
New Orleans could gain jobs if Waveland also is able to buy other American Classic ships. The company plans to purchase the Cape Cod Light and the Cape May Light ships, and the American Queen and the Columbia Queen paddlewheel riverboats out of bankruptcy. Waveland will continue to operate the Mississippi Queen and Delta Queen under the brand name the boats have been sailing under, the Delta Queen Steamboat Co.
Waveland Investments is a privately held Chicago investment firm whose principals have experience in the travel and hospitality industry. The company is an owner of the Fred Harvey Management Co., which manages lodging concessions in national parks such as the Grand Canyon, Yellowstone, Mount Rushmore and Death Valley and certain Four Seasons and Westin hotels. These hospitality assets generate about $500 million in revenue and employ 7,500 people.
08 May 2002
Latest News about our Queens
(Newest articles are first, older articles are at the bottom.)
Photo by Bill Muster, circa 1970.
Delaware North Companies today said it expects to take possession of the American Queen, Delta Queen and Mississippi Queen in 15 to 21 days and will keep the fleet's base of operations in New Orleans. As reported here Friday, the Buffalo, NY-based international corporation purchased the three vessels for $80.4m at a bankruptcy auction in Chicago. They comprised the fleet for Delta Queen Steamboat Co, whose parent, American Classic Voyages, filed for bankruptcy protection October 19.
Dennis Szefel, president of Delaware North's Hospitality and Entertainment Group, said the company will interview and retain most Delta Queen employees. 'We were very impressed with the local management and talent,' Szefel said. 'Their knowledge of the rivers and the company's history, along with the exceptional skill it takes to operate these vessels, is incredibly important to the ongoing success of these operations.' He hinted that Delaware North, which also purchased the Delta Queen brand, is looking to expand the line. 'We look forward to bringing Delaware North's innovative and creative hospitality business approach to this new business line as we look to enhance and grow these operations in the future.'
Delaware North is a $1.3bn food service, recreational and hospitality management corporation with operations in the US, Canada and the Pacific Rim. The privately owned company's travel portfolio includes hotels, resorts and conference centres - managing properties in Yosemite and Sequoia national parks - but this purchase marks its entrance into the cruise industry.
ACQUIRED ROYALTY: The U.S. Bankruptcy Court, District of Delaware, yesterday approved the sale of American Classic Voyages' steamboats Delta Queen, Mississippi Queen and American Queen to Buffalo, N.Y.- based Delaware North for about $80 million. Delaware North is a privately held firm with operating subsidiaries in food service, retail, sports and hospitality management in the U.S., Canada, Australia and New Zealand.
