Maritime Law Exemption: Exemption Provides Limited Competitive	 
Advantage, but Barriers to Further Entry under U.S. Flag Remain  
(27-FEB-04, GAO-04-421).					 
                                                                 
No large U.S.-flagged cruise ships (ships registered in the U.S. 
that are U.S.-built, U.S.-owned, and U.S. crewed) are in	 
operation. Foreignflagged vessels cruising to foreign ports serve
most of the U.S. demand for cruises. However, Norwegian Cruise	 
Line (NCL) recently obtained an exemption from U.S. maritime law 
to operate three foreign-built ships under the U.S. flag in	 
Hawaii. Cruise lines and others have raised concerns over the	 
advantage the exemption might confer to NCL, since		 
foreign-flagged competitors are unable to offer the same	 
itineraries due to the Passenger Vessel Services Act (PVSA),	 
which prevents foreign vessels from transporting passengers	 
solely between U.S. ports. Concerns have also been raised over	 
the effect this exemption might have on future attempts to grow  
the U.S.-flag cruise vessel fleet, since potential U.S.-flag	 
competitors would need to build ships in the United States,	 
presumably at higher cost. GAO was asked to (1) review the	 
original intent of the PVSA and rulings and decisions regarding  
it, (2) determine if the exemption will affect the implementation
of the PVSA or other maritime laws, (3) assess the potential	 
effects of the exemption on competition and entry into the U.S.  
domestic cruise market, and (4) assess the potential economic	 
effects of granting other cruise lines similar exemptions. The	 
Departments of Homeland Security and Transportation generally	 
agreed with the findings in this report.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-421 					        
    ACCNO:   A09373						        
  TITLE:     Maritime Law Exemption: Exemption Provides Limited       
Competitive Advantage, but Barriers to Further Entry under U.S.  
Flag Remain							 
     DATE:   02/27/2004 
  SUBJECT:   Competition					 
	     International relations				 
	     Marine transportation operations			 
	     Maritime law					 
	     Monopolies 					 

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GAO-04-421

United States General Accounting Office

GAO

Report to the Chairman, Committee on

               Commerce, Science, and Transportation U.S. Senate

February 2004

MARITIME LAW EXEMPTION

Exemption Provides Limited Competitive Advantage, but Barriers to Further Entry
                             under U.S. Flag Remain

                                       a

GAO-04-421

Highlights of GAO-04-421, a report to the Chairman, Committee on Commerce,
Science, and Transportation, U.S. Senate

No large U.S.-flagged cruise ships (ships registered in the U.S. that are
U.S.-built, U.S.-owned, and U.S. crewed) are in operation. Foreignflagged
vessels cruising to foreign ports serve most of the U.S. demand for
cruises. However, Norwegian Cruise Line (NCL) recently obtained an
exemption from U.S. maritime law to operate three foreign-built ships
under the U.S. flag in Hawaii. Cruise lines and others have raised
concerns over the advantage the exemption might confer to NCL, since
foreign-flagged competitors are unable to offer the same itineraries due
to the Passenger Vessel Services Act (PVSA), which prevents foreign
vessels from transporting passengers solely between U.S. ports. Concerns
have also been raised over the effect this exemption might have on future
attempts to grow the U.S.-flag cruise vessel fleet, since potential
U.S.-flag competitors would need to build ships in the United States,
presumably at higher cost.

GAO was asked to (1) review the original intent of the PVSA and rulings
and decisions regarding it, (2) determine if the exemption will affect the
implementation of the PVSA or other maritime laws, (3) assess the
potential effects of the exemption on competition and entry into the U.S.
domestic cruise market, and (4) assess the potential economic effects of
granting other cruise lines similar exemptions.

The Departments of Homeland Security and Transportation generally agreed
with the findings in this report.

www.gao.gov/cgi-bin/getrpt?GAO-04-421.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact JayEtta Hecker at (202)
512-2834 or [email protected]

February 2004

MARITIME LAW EXEMPTION

Exemption Provides Limited Competitive Advantage, but Barriers to Further Entry
under U.S. Flag Remain

The original intent of the PVSA, enacted in 1886, was to protect the U.S.
maritime industry from foreign competition by penalizing foreign vessels
that transport passengers solely between U.S. ports. However, several
rulings and decisions interpreting the PVSA have allowed itineraries for
foreign cruise vessels between U.S. ports that were previously restricted.
For example, voyages by foreign vessels between two U.S. ports that
include a distant foreign port, and round trip voyages from U.S. ports
that include a nearby foreign port and other U.S. ports, do not violate
the PVSA.

NCL's exemption will likely have little impact on how the PVSA or other
maritime laws are administered or interpreted because it is specific to
three NCL vessels and cannot be applied to any other vessels in any other
areas.

The exemption effectively gives NCL a monopoly on interisland Hawaiian
cruises-providing consumers with itineraries that were previously
unavailable. However, NCL will likely have little power to raise prices on
these itineraries because of competition from other vacation options.
Because NCL is able to operate foreign-built ships in Hawaii, the
exemption provides an additional obstacle for any potential U.S.-flag
competitor to enter that market, since that competitor would need to build
the ship in the United States at a higher cost. However, independent of
the exemption, there were and still are other substantial obstacles for
any potential U.S.-flag cruise vessel due to the higher capital and
operating costs (e.g., labor costs) associated with the U.S. flag, as
compared with existing foreign-flag cruise vessels offering itineraries
through a foreign port.

Granting additional exemptions to ease entry into the domestic trade could
lead to benefits for port cities, U.S. seamen, and consumers; however, it
is unclear how many cruise lines would choose to enter even if they were
permitted to operate foreign-built ships under the U.S. flag, because of
the higher operating costs associated with a U.S.-flag carrier operating
in domestic itineraries and because of uncertain market conditions.

NCL's Exclusive Hawaiian Itinerary Compared to Itineraries for
Foreign-Flag Vessels

Contents

  Letter

Results in Brief
Background
Intent of PVSA Was to Protect U.S. Maritime Transportation

Industry, but Rulings and Decisions Have Expanded Itineraries for Foreign
Cruise Ships

Interpretation and Enforcement of the Exemption Will Likely Have Little
Impact on the Implementation of the PVSA and Other Related Laws

Exemption Allows NCL to Offer Exclusive Domestic Itineraries and Creates
an Additional Barrier to U.S.-Flag Entry, but It Could Generate Economic
Benefits

Unclear if Granting Other Cruise Lines Similar Exemptions Would Lead to
Entry by Other Cruise Lines and Resulting Economic Benefits

Agency Comments and Our Evaluation 1 4 6

10

13

16

27 31

Appendixes

Appendix I:

Appendix II:

Appendix III:

Scope and Methodology

Other U.S. Laws Applicable to U.S.-Flag Vessels on Wholly Domestic Cruises

NCL's Operations Will Subject Them to the Application of U.S. Tax, Labor,
and Other Laws Unlike Other Foreign Cruise Lines that Serve the United
States

GAO Contacts and Staff Acknowledgments

GAO Contacts
Staff Acknowledgments

32

35

35

37 37 37

    Table   Table 1: Key Rulings and Decisions that Have Changed the Types 
                                                                        of 
                       Itineraries Foreign Vessels Can Operate Out of U.S. 
                                        Ports                              13 
Figures  Figure 1: Percent of Passenger Embarkations/Disembarkations at 
                               North American Ports by Major Cruise Lines, 
                                 July-September 2003                        7 
             Figure 2: NCL's Exclusive Hawaiian Itinerary Compared with    
                    Hawaiian Itineraries of Foreign-Flag Vessels           18 

Contents

Figure 3:	Comparison of Estimated Construction Costs to Complete Project
America Vessel in a U.S. Shipyard and a Foreign Shipyard 21

Figure 4:	Examples of Itineraries between U.S. Ports for Foreign-Flag
Vessels that Utilize a Nearby Foreign Port 24

Abbreviations

CBP Customs and Border Patrol
DOT Department of Transportation
FTC Federal Trade Commission
MARAD Maritime Administration
NCL Norwegian Cruise Line
PVSA Passenger Vessel Services Act

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
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separately.

A

United States General Accounting Office Washington, D.C. 20548

February 27, 2004

The Honorable John McCain
Chairman
Committee on Commerce, Science, and Transportation
United States Senate

Dear Mr. Chairman:

All of the passengers embarking1 on large cruise vessels2 from United
States ports, about 6.5 million in 2002, went aboard foreign cruise
vessels.
The three major carriers in the cruise industry, Carnival Cruise Lines,
Royal
Caribbean Cruises, Ltd., and Norwegian Cruise Line (NCL) are all foreign
corporations operating foreign-built vessels, registered under foreign
flags
with predominantly foreign crews. Because trips from and between U.S.
ports that do not include a stop at a foreign port are prohibited for
foreign
flag vessels, these vessels must include at least one foreign port in
their
itineraries to serve consumers out of U.S. ports.

Wholly domestic itineraries are reserved for U.S. vessels by the Passenger
Vessel Services Act (PVSA)3 and U.S. vessel documentation laws.4 For
example, ferries providing transportation in U.S. ports and steamboats
providing service along the Mississippi are U.S.-built vessels, registered
under the U.S. flag.5 The PVSA penalizes foreign vessels that provide
transportation between U.S. ports, at $300 per passenger transported. U.S.
vessel documentation laws have established the requirements vessels must

1As defined in 19 C.F.R. 4.80a, "embark" means a passenger boarding a
vessel for the duration of a specific voyage, and "disembark" means a
passenger leaving a vessel at the conclusion of a specific voyage.

2In the context of this report, we are defining a "large" cruise vessel as
one that has at least 800 passenger berths. This is consistent with S.
127, legislation introduced in 2001 to stimulate the U.S.-flag cruise
vessel industry, in which eligible vessels were those that contained no
fewer than 800 passenger berths. Other U.S.-flag passenger vessels,
including ferries, steamboats, and small cruise vessels, serve a market
that is fairly distinct from the market served by large cruise vessels,
according to an official at the Passenger Vessel Association.

346 U.S.C. App. 289.

446 U.S.C. Chapter 121.

5According to a 2000 Department of Transportation survey, ferries carried
about 113 million passengers in the United States in 2000.

meet in order to operate under the U.S. flag and operate in domestic
trade.6 These laws require that U.S.-flag vessels providing transportation
between two U.S. points must be U.S.-built, owned by U.S. citizens, and
operated with U.S. crews. However, no large U.S.-flag, overnight,
ocean-going cruise vessels are currently in operation, and no large
passenger liners have been built in the United States since 1958. American
Classic Voyages, which filed for bankruptcy in 2001, was the last company
to operate large overnight cruise ships under the U.S. flag, offering
itineraries among the Hawaiian Islands since the late 1970's.

NCL was recently granted a legislative exemption7 from the U.S.-built
requirement of U.S. vessel documentation law to operate three
foreign-built cruise ships in limited domestic itineraries under the U.S.
flag.8 These ships must meet all other requirements to operate under the
U.S. flag, including U.S. ownership requirements and operating with a U.S.
crew. NCL has created a U.S. subsidiary, NCL America, to meet the U.S.
ownership requirements to operate U.S.-flag vessels in domestic trade.9
Because the U.S.-built requirement is waived and the vessels will be
operating under the U.S. flag, these ships will be considered qualified to
operate in the domestic trade. These ships are therefore unaffected by the
restrictions of the PVSA. However, the exemption limits the markets these
ships may serve. NCL is required to keep the ships in "regular service" in
Hawaii and is restricted from using the exempted vessels for transporting
passengers to ports in the Caribbean, the Gulf of Mexico, or Alaska.10 NCL
is scheduled to begin service in Hawaii in July 2004.

6Foreign-built vessels can be registered under the U.S-flag to operate in
international trade, although these vessels must still meet the ownership,
crewing and any other requirements of U.S. vessel documentation laws.

7P.L. 108-7.

8Two of these ships were partially constructed in the United States as
part of "Project America," while the third ship will be an existing
foreign-built vessel. "Project America" was a loan guarantee provided by
the Maritime Administration for American Classic Voyages to build two
large cruise vessels in a U.S. shipyard for use in Hawaii. American
Classic Voyages went bankrupt and NCL purchased the partially built
vessels.

946 U.S.C. 12102.

10"Regular service" is defined in the exemption as the "primary service in
which the ship is engaged on an annual basis."

Cruise line officials and others have raised concerns over the exemption.
The exemption potentially confers a market advantage to NCL, since other
foreign-flag competitors are unable to offer the same itineraries as NCL.
This exemption may also affect any future attempts to grow the U.S.-flag
cruise vessel fleet. As you requested, this report discusses (1) the
original intent of the PVSA and how rulings and decisions regarding the
act relate to its original purposes; (2) how the exemption provided to NCL
may affect the future implementation of the PVSA, U.S. vessel
documentation laws, or the Jones Act; 11 (3) the potential effects of the
exemption on competition in the passenger cruise industry and entry into
the U.S. domestic cruise market under the U.S. flag, and the exemption's
broader economic effects; and (4) the potential economic effects of
granting other cruise lines similar exemptions.

To address the original intent of the PVSA, rulings and decisions
regarding the act, and how the exemption might affect the future
implementation of the PVSA or other cabotage laws, we reviewed and
analyzed the PVSA, its amendments and legislative history, U.S. vessel
documentation laws, the exemption given to NCL, and other related laws,
regulations, administrative rulings, and judicial decisions. We also
interviewed officials from the Maritime Administration (MARAD), Customs
and Border Protection (CBP), and the U.S. Coast Guard responsible for
implementing and interpreting these laws and regulations. To address the
potential economic effects of the exemption on competition and entry, and
the potential effects of additional exemptions, we reviewed existing
studies examining competition and the economic impacts of the cruise
industry; and we also interviewed officials from cruise lines, cruise
industry associations, union organizations, and ports; representatives
from the shipbuilding industry; and other stakeholders. In addition, we
analyzed available data on capital and operating cost differentials
between U.S.-flag and foreign-flag cruise vessels to determine the extent
to which foreign-flag vessels have a cost advantage. Since most of these
data are proprietary, we were unable to independently verify them because
we have no authority to require access to the underlying data. However, we
applied logical tests to the data and found no obvious errors of
completion or accuracy. Along with our use of corroborating evidence, we
believe that the data are sufficiently reliable for our use. We conducted
our work from August 2003 through February 2004 in accordance with
generally accepted government

11The Jones Act restricts foreign vessels from moving cargo between U.S.
ports. 46 U.S.C. App. 883.

auditing standards. Appendix I contains more information about our scope
and methodology.

Results in Brief	The original intent of the PVSA, enacted in 1886, was to
protect the U.S. domestic maritime transportation industry from foreign
competition; however, the PVSA does not apply to many of the cruises out
of U.S. ports because they are international in nature, i.e., from a U.S.
port to foreign destinations. Over time, several rulings and decisions
interpreting the PVSA have expanded possible itineraries for foreign
cruise vessels between U.S. ports. For example, a 1985 federal regulation
allows foreign vessels to make round trips from a U.S. port and make stops
at other U.S. ports along the itinerary, with passengers allowed to leave
the ship and go ashore, so long as a foreign port is included in the
itinerary; and passengers do not leave the trip at one of the intermediary
ports. For example, foreign vessels may provide cruises originating in a
U.S. port such as New York, stop in several U.S. ports along the eastern
seaboard, make a stop in Bermuda or Canada, and return to New York without
violating the PVSA. However, from offeforeign vessels are st ring
whollyill prevented domestic itineraries.

The exemption allowing NCL to operate foreign-built ships under the U.S.
flag in wholly domestic itineraries will likely have little impact on how
the PVSA, U.S. vessel documentation laws, or the Jones Act-which restricts
foreign vessels from transporting cargo between U.S. ports-are
administered or interpreted. The exemption is specific to the vessels that
NCL will be operating, and does not amend the PVSA, U.S. vessel
documentation laws, or the Jones Act, for future implementation of these
laws regarding other vessels. In the past, Congress has passed several
exemptions from the PVSA, allowing foreign vessels to serve particular
regions of the United States, and exceptions to the Jones Act are
numerous. These types of specific changes to one law have historically not
had any impact on other laws. For example, one exemption from the PVSA
allows Canadian vessels to transport passengers between the New York ports
of Alexandria Bay and Rochester, but foreign vessels are still prohibited
from transporting cargo between these ports by the Jones Act.12

1246 U.S.C. App. 883.

The exemption gives NCL a monopoly on the wholly domestic interisland
Hawaiian cruise market and provides consumers with the option for Hawaiian
itineraries that have been unavailable since American Classic Voyages'
bankruptcy. Foreign vessels operating in Hawaii are required to stop at a
foreign port; and because of Hawaii's geographic isolation, these vessels
need to sail several additional days, precluding them from offering
itineraries that compare with NCL's. Regardless of its advantageous
position, NCL will likely have little power to charge higher prices for
its exclusive itineraries because of the competition it will face from
cruise itineraries offered by other lines that still include Hawaii,
similar types of cruises in other areas, and land-based vacations in
Hawaii and elsewhere. In addition, because NCL is able to operate
foreign-built ships in Hawaii- which are less expensive than ships that
might be built in U.S. shipyards- the exemption could provide an obstacle
for any potential U.S.-flag competitor to enter that market. However,
independent of the exemption, there were and still are other significant
obstacles for any potential U.S.flag cruise vessel due to higher capital
and operating costs, such as higher labor costs, associated with operating
under the U.S. flag, as compared to existing foreign-flag cruise vessels
running itineraries through a foreign port. NCL's exemption also provides
some potential economic benefits, including jobs for the U.S. maritime
sector, and tax revenue.

Granting additional exemptions easing entry into wholly domestic trades
could lead to employment and tax benefits for ports and port cities, the
merchant marine, and consumers; however, it is unclear how many cruise
lines would choose to enter wholly domestic trades-even if they were
permitted to operate foreign-built ships under the U.S. flag-because of
the higher operating costs associated with a U.S.-flag carrier operating
in those trades, such as higher labor costs, and because of uncertain
market conditions. Any entry that might occur could lead to some economic
benefits, such as additional cruise itineraries for consumers, increased
business in U.S. ports, and additional U.S. jobs in the maritime sector.
However, most cruise ships can avoid the higher labor costs associated
with following U.S. labor laws and requirements by operating under a
foreign flag and including a nearby foreign port in their itinerary.
Because of the close proximity of foreign ports to the coastal regions of
the United States, there are few domestic itineraries that would likely be
attractive to cruise lines. Hawaii's relative isolation and the long
sailing times associated with including a foreign port make it a uniquely
attractive market segment for an all-domestic itinerary; however, entrants
with similar exemptions would have to compete with an established
competitor, NCL, for limited capacity and unknown demand. Two cruise lines
we spoke with said they

would consider entry with similar exemptions on routes in Alaska or on
short coastal routes. However, even these attractive markets have factors
deterring U.S.-flag operations. For example, in Alaska, foreign vessels
making trips out of Vancouver, Canada, may still have a considerable cost
advantage. In addition, because similar exemptions to the U.S.-built
requirement would allow vessel operators to build cruise ships abroad for
domestic use, the potential for the U.S. shipbuilding industry to regain a
share of the cruise vessel market would be negated.

The Departments of Homeland Security and Transportation commented on a
draft of this report. Both agreed with the findings of the report and
provided technical comments that have been incorporated where appropriate.

Background	Over time, cruising has developed into a highly concentrated
industry with three primary carriers. At the end of September 2003, two
companies, Carnival Cruises Lines and Royal Caribbean Cruises, Ltd.,
controlled 86.4 percent of the market in North America, with NCL being the
next largest cruise provider, holding a little less than 9 percent of the
North American market. (See fig. 1.)

Figure 1: Percent of Passenger Embarkations/Disembarkations at North
American Ports by Major Cruise Lines, July-September 2003

Note: Other brands under Carnival included here are Princess Cruises,
Holland America Line, and Cunard Cruise Line. Celebrity Cruises is
included under Royal Caribbean. "Other Cruise Lines" includes Disney
Cruise Line and Crystal Cruises.

These companies are foreign-owned and operate foreign-built vessels.
Carnival Cruise Lines is incorporated in Panama with its North American
ships flying the Bahamian or Panamanian flag. Royal Caribbean is a
Liberian corporation, with ships flying the Bahamian or Norwegian flag.
NCL is a subsidiary of Star Cruises, a Bermuda corporation headquartered
in Hong Kong, with its ships in North America flying the Bahamian flag.

While there are several U.S. companies in the cruise industry, such as
Disney and Radisson Seven Seas, these companies also elect to operate
foreign-built vessels under a foreign flag in order to operate under the
same capital and operating cost structure as their foreign competitors.
Currently, there are no large U.S.-flag cruise ships in operation, and no
large new cruise ships have been built in the United States since 1958.
This use of foreign-built ships is largely due to the higher costs
anticipated when building a ship in the United States, rather than in
shipyards in Italy,

Germany, and elsewhere that have the infrastructure, expertise, and
economies of scale for this segment of the market.13

Over the past decade, several bills have been introduced into the U.S.
Congress with the objective of stimulating the development of a U.S.-flag
fleet and growth in the domestic cruise ship trade, the travel industry,
and port cities, although none have been enacted. Generally, these bills
would have allowed foreign ships either to operate in the domestic trade
or to be reflagged with the U.S. flag under certain specified conditions.
For example, the U.S. Cruise Vessel Act (S. 127),14 introduced in 2001,
would have allowed U.S.-owned, foreign-built cruise ships to enter the
domestic market for a limited time if the operators agreed to build
replacement vessels in the United States. This law was designed to allow
new companies to enter the domestic market with existing vessels and
immediately increase the size of the U.S. commercial fleet, thus providing
new jobs for merchant mariners. Under the proposal, these foreign-built
cruise ships would have been required to fully comply with all applicable
U.S. laws, regulations, and tax obligations.

Many federal agencies oversee U.S. maritime policy. For example, in the
Department of Transportation, the Maritime Administration's (MARAD)
primary mission is to strengthen the U.S. maritime transportation system-
including infrastructure, industry, and labor-to meet the economic and
security needs of the nation. MARAD also seeks to ensure that the United
States maintains adequate shipbuilding and repair services, efficient
ports, and effective intermodal water and land transportation systems.
MARAD programs are designed to promote the development and maintenance of
an adequate, well-balanced, U.S. merchant marine. MARAD originally
financed two of the ships that NCL will be operating in the Hawaiian
Islands through MARAD's Title XI loan guarantee program under a project
known as "Project America," that provided loan guarantees to help
construct two new cruise vessels for American Classic Voyages in a U.S.
shipyard for use in the Hawaiian Islands. Congress also granted American
Classic Voyages a monopoly in the Hawaiian market for the life of the
vessels. However, American Classic Voyages filed for bankruptcy in 2001,
and the partially completed hull of one ship and parts for the other were

13Several foreign shipyards have received substantial government subsidies
over the years to help develop this industry.

14In addition to S. 127, two other similar bills have been introduced, S.
1510 and S. 2507.

purchased by NCL for $29 million.15 Subsequent to the purchase, NCL
obtained the exemption, allowing them to complete these ships in a foreign
shipyard and still operate them in Hawaii under the U.S. flag.16

The Coast Guard and Customs and Border Protection (CBP), within the
Department of Homeland Security, are generally responsible for
administering and enforcing maritime laws and U.S.-flag requirements,
including the PVSA and U.S. vessel documentation laws, as well as the
Jones Act.17 The Coast Guard handles documentation requirements for
U.S.-flag ships-such as determining whether vessels meet the U.S.ownership
and crewing requirements in order to operate under the U.S. flag-and
U.S.-built requirements in order to operate in domestic trade. Through
this process the Coast Guard provides endorsements to vessels defining the
type of trade in which they are allowed to engage, e.g., foreign trade,
domestic trade, or fishing. The Coast Guard also conducts quarterly
inspections on all vessels embarking passengers at U.S. ports. CBP also
has a role in administering the PVSA, such as publishing rulings on the
legality of proposed itineraries. CBP also has civil enforcement authority
under the PVSA, with the ability to levy penalties on any passenger vessel
operators engaging in service in the domestic market without the relevant
Coast Guard endorsements. The current penalty that can be levied against a
ship operator for a violation of the PVSA is $300 per passenger.

The Federal Trade Commission (FTC) is responsible for ensuring that the
nation's markets are vigorous, efficient, and free of restrictions that
harm consumers. The FTC exists to protect consumers by enforcing federal
consumer protection laws and conducting economic research and analysis to
inform all levels of government. In this regard, FTC conducted an analysis
of competition in the cruise market and the potential competitive affects
of a merger between two of the largest cruise lines and issued its

15The partially completed vessels cost $23 million, while the construction
plans cost $6 million.

16The first vessel scheduled to be completed under the exemption, the
Pride of America, was damaged in the shipyard causing its completion to be
delayed. NCL has announced that the existing foreign-built ship that it
was allowed to reflag under the U.S. flag, the Pride of Aloha, may take
the place of the Pride of America on its scheduled cruises, subject to
MARAD approval.

1746 U.S.C. App. 883.

report in October 2002.18 After FTC's study of the cruise market, in April
2003, Carnival Corporation acquired P&O Princess Cruises. Prior to the
acquisition, Carnival Corporation was already the world's largest cruise
company; after the acquisition, Carnival Corporation became even larger,
with 13 separate brands, 66 cruise ships and 17 more on order, and
combined annual revenues of $6.9 billion.

Intent of PVSA Was to Protect U.S. Maritime Transportation Industry, but
Rulings and Decisions Have Expanded Itineraries for Foreign Cruise Ships

In 1886, Congress passed the PVSA to protect the U.S. domestic maritime
transportation industry from foreign competition. To provide this
protection, it penalizes foreign vessels that transport passengers solely
between U.S. ports. Many cruises provided by foreign vessels are to
international destinations and, therefore, are not affected by the PVSA;
however, several rulings and decisions interpreting the PVSA have expanded
possible itineraries for foreign cruise vessels between U.S. ports that
were once restricted. For example, rulings and decisions have found
circumstances where voyages between two U.S. ports by foreign vessels do
not violate the PVSA when the primary purpose of the voyage is to visit
foreign ports. In addition, rulings and decisions have allowed foreign
vessels to visit several U.S. ports on an itinerary, so long as a foreign
port is included and the vessel disembarks its passengers at the port of
embarkation. In these circumstances, the voyages in question are not
considered to be domestic transportation between two U.S. points.

Original Intent of the PVSA The PVSA was originally designed to prevent
U.S.-based vessels from Was to Preserve and Protect facing strong
competition in the domestic transportation market from the U.S. Domestic
Maritime maritime nations, such as Great Britain and Canada. Specifically,
there was

a concern about competition from Canadian vessels that were transporting

Industry	passengers across the Great Lakes. The PVSA originally stated "no
foreign vessel shall transport passengers between ports or places in the
United States, either directly or by way of a foreign port, under a
penalty of $219 for

18Statement of the Federal Trade Commission Concerning Royal Caribbean
Cruises, Ltd./P&O Princess Cruises plc and Carnival Corporation/P&O
Princess Cruises plc, FTC File No. 021 0041, October 4, 2002.

19This amount was later increased by law to $200 per passenger in 1898 and
administratively to $300 in 2003 by CBP pursuant to the Federal Civil
Penalties Inflation Adjustment Act of 1990. 19 C.F.R. 4.80.

each passenger so transported and landed." Congress originally thought
that the $2 penalty per passenger would discourage this practice.

Some industry associations and U.S. courts view the PVSA, U.S. vessel
documentation laws, and the Jones Act, as serving other purposes,
including providing a ready fleet in times of national defense, sustaining
a U.S. merchant marine, and supporting the U.S. shipbuilding industry.
U.S. courts have said that the PVSA and the Jones Act have helped to
secure the national defense by maintaining, "a merchant marine of the best
equipped and most suitable types of vessels sufficient...to serve...in
time of war or national emergency."20 Because vessels in the domestic
trade must be U.S.crewed, labor groups view the laws as protecting jobs
for the U.S. merchant marine. According to data supplied by MARAD, over
1,000 passenger vessels are operating under the U.S. flag, employing U.S.
seamen, including ferries, steamboats, and small cruise vessels; however,
the last large U.S.-flag overnight cruise vessels ceased operations when
American Classic Voyages declared bankruptcy in October of 2001. In
addition, because the PVSA and the Jones Act protect the domestic maritime
transportation market for U.S.-built ships, they also support U.S.
shipyards. While several U.S. shipyards routinely build passenger vessels
for U.S.-flag operators such as ferry operators and steamship operators,
U.S. shipyards have not built large overnight, ocean-going cruise ships,
and the last large passenger liner built in the United States was
completed in 1958.

Legal and Administrative Rulings and Decisions Have Expanded Itineraries
Foreign Vessels Can Operate

Several administrative rulings and judicial decisions have identified
limited exceptions to the PVSA that allow certain vessel operations
between U.S. ports by foreign passenger vessels. One significant
decision-which has allowed passenger travel between U.S. ports by foreign
vessels as long as a distant foreign port is included-was a 1910 Attorney
General opinion. This opinion states that an around-the-world cruise that
started in New York and touched numerous foreign destinations and ended in
San Francisco did not violate the PVSA because the voyage could not be
considered domestic trade.21 The Attorney General made this determination
on the supposition that the purpose of the trip was not to travel from one
U.S. port (New York) to another (San Francisco), but to travel to
different locations around the

20American Hawaiian Cruises v. Skinner, 713 F. Supp. 452, 457 (D.D.C.
1989). 21The Cleveland, 28 Op. Att'y Gen. 204 (1910).

world. In 1940, a federal court also found that the transportation of
passengers on a foreign vessel from New York to Philadelphia that stopped
in a foreign port was not "detrimental to the coast wise monopoly sought
to be assured to U.S. vessels."22 The court said this was not a violation
of the PVSA because the vessel, which was originally scheduled to return
to New York, was forced to dock at the Philadelphia port because it was
carrying perishable cargo, requiring passengers to disembark in
Philadelphia. The court found that it was not the purpose of the trip to
transport passengers from New York to Philadelphia.

Two regulations and rulings by CBP23 have also contributed to expansion of
the number and variety of itineraries in which foreign-flag vessels can
engage, from and between U.S. ports. First, based on the 1910 Attorney
General Opinion, CBP, in its regulations, interprets the PVSA to allow a
foreign vessel to embark passengers at one U.S. port and disembark
passengers at a different U.S. port, so long as the vessel makes a port of
call at what the regulations define as a "distant foreign port,"24 such as
Aruba or Curacao. Second, a 1985 CBP regulation allows round-trip cruises
from a U.S. port, that touch on a "nearby foreign port"-defined by the
regulation as such places as Canada, Mexico, or Bermuda-to visit other
U.S. ports and allow passengers to go ashore temporarily, as long as they
return to the ship.25 For example, foreign vessels can embark passengers
in New York, make a quick stop in Canada or Bermuda, then cruise to
several other U.S. ports and return to New York without violating the
PVSA. CBP's decision to allow these types of itineraries was based on the
supposition that the PVSA put some U.S. ports at a disadvantage in
competition for tourist business. In its response to opposing comments,
CBP stated that it is "of paramount importance in this area to consider
the primary object of passengers in taking a voyage," citing both the 1910
Attorney General Opinion and the 1940 court case as the authority for
doing so. Table 1 summarizes these key rulings and decisions regarding the
PVSA.

22United States v. Honduran S.S. GRANADA, 35 F. Supp. 892, 894 (E.D. Pa.
1940).

23These decisions were made under the previous guise of CBP, the Customs
Service, within the Department of the Treasury.

24A "distant foreign port" is defined by 19 C.F.R. 4.80a as being any port
that is not a "nearby foreign port," which is defined as being any port in
North America, Central America, the Bermuda Islands, or the West Indies.

2550 Fed. Reg. 26981, July 1, 1985.

 Table 1: Key Rulings and Decisions that Have Changed the Types of Itineraries
                 Foreign Vessels Can Operate Out of U.S. Ports

28 Op. Attorney Gen. 1910 Allowed passenger travel between U.S. ports by a
foreign vessel. The circumstance was an around

the-world cruise that started in New York and ended in San Francisco.
Because it was deemed that the ship was not engaged in domestic trade, it
was not considered a violation of the PVSA.

T.D. 55147(19) of June 1960 Allowed passengers traveling on foreign
vessels to temporarily disembark at ports in the U.S. provided 3, 1960 (95
Treasury that the passengers and the vessel do not remain in port beyond
24 hours (the "24-hour rule"). Decisions 297)

T.D. 68-285, 33 Fed. 1968 Introduction of the distant foreign port
exception. A foreign-flag cruise ship may transport passengers Reg. 16558,
November between two U.S. ports only if a call is made at a distant
foreign port. See 19 C.F.R. 4.80a(b)(3). 14, 1968

                             This decision allows round trip cruises from a   
T.D. 85-109, 50 Fed. 1985 U.S. port, that touch on a nearby foreign port,  
                             to visit                                         
                             other U.S. ports and allow passengers to go      
Reg. 26981, July 1,       ashore, thus revoking the "24-hour rule." See 19 
                             CFR                                              
                             4.80a(b)(2). "Nearby foreign ports" include all  
                             foreign ports in North America, Central America, 
                             Bermuda, the West Indies (except Aruba, Bonaire, 
                             and Curacao) and the U.S. Virgin Islands. See 19 
                                           C.F.R. 4.80a(a)(2).                

Source: GAO.

Interpretation and Enforcement of the Exemption Will Likely Have Little
Impact on the Implementation of the PVSA and Other Related Laws

The exemption granted to NCL to be able to operate in Hawaii will likely
have little impact on how the PVSA, U.S. vessel documentation laws, or the
Jones Act are implemented by CBP and the Coast Guard. NCL's exemption is
from the U.S.-built requirement of U.S. vessel documentation laws, which
allows NCL to operate foreign-built ships under the U.S. flag in limited
domestic itineraries. Therefore, the PVSA will not apply to these vessels,
as the PVSA only penalizes foreign vessels carrying passengers between
U.S. ports. In addition, the Coast Guard deals with vessels on a
case-by-case basis; and this exemption is specific to NCL's three vessels
and cannot be applied to any other vessels in any other trades.
Furthermore, although Congress has enacted several specific exemptions to
the PVSA, allowing foreign vessels to serve particular regions of the
United States; no previous exemption has had an impact on the
implementation of any other related laws. Exemptions have also been
allowed under the Jones Act with no corresponding impact on the PVSA.

The NCL Exemption Did In 2003, Congress effectively gave NCL an exemption
from U.S. vessel Not Amend the PVSA but Is documentation laws in order to
operate certain foreign-built passenger an Exemption from the U.S.-vessels
in a limited domestic area. Specifically, NCL is allowed to operate

the two Project America vessels completed in a foreign shipyard and
toBuilt Requirement of Vessel reflag one additional foreign-built ship
under the U.S. flag, in "regularDocumentation Laws service" in Hawaii.
These ships are not required to meet the U.S.-built

requirement in order to provide service in these limited domestic
itineraries and are considered qualified for this purpose; therefore, they
are not subject to penalties under the PVSA, since the PVSA only applies
to foreign vessels carrying passengers between U.S. ports.

The exemption requires that NCL operate these ships in regular service, as
defined in the exemption as the "primary service in which the ship is
engaged on an annual basis," between the islands of Hawaii and
specifically prohibits NCL from transporting paying passengers to ports in
Alaska, the Gulf of Mexico, or the Caribbean. There may be some ambiguity
on what NCL's obligations are for providing regular service to the
Hawaiian Islands, as the exemption was silent on service to the East and
West coasts, and therefore NCL is not prohibited by the exemption from
providing some service to these destinations, as long as the regular
service requirement is met. 26 CBP officials declined to speculate on how
the regular service provision might be enforced if there is a challenge to
the itineraries that NCL operates. Several maritime lawyers we spoke with
suggested this requirement might be interpreted to mean that at least 51
percent of the individual vessel's operations must be conducted in Hawaii.
NCL officials told us, however, that their current plans are to use these
vessels in the Hawaiian Islands year round.27

26The planned initial voyages of NCL's first ship to be deployed under the
exemption, the Pride of Aloha, are on all-domestic itineraries outside of
Hawaii between Los Angeles and San Francisco. These voyages are known as
repositioning cruises, where a ship will take passengers on cruises while
on its way from a shipyard or another trade to its home port. In the case
of Pride of Aloha, NCL plans to make some initial cruises on the west
coast before heading to Honolulu, Hawaii, and beginning interisland
cruises.

27While NCL is not legally restricted from offering cruises on the East
and West coasts, as long as the exempted vessels are in regular service in
Hawaii, they are not likely to use the exemption to offer non-Hawaiian
itineraries for several reasons. From a market perspective, other possible
itineraries, for which analysts expect demand to be limited, are
relatively close to foreign ports and thus can be served by foreign-flag
ships with lower costs. From a business perspective, NCL owns two other
large U.S.-built cruise ships, the Independence and the United States,
which each carry more than 1,000 passengers, and would likely test the
markets with these ships to avoid deploying too much capacity on
itineraries with unknown demand. Moreover, using these ships would
eliminate the need to challenge the regular service definition tying the
exempted ships to Hawaii.

The NCL Exemption Should Not Affect Future Implementation of the PVSA,
U.S. Vessel Documentation Laws, or the Jones Act

All of the allowances and restrictions of the exemption are specific to
the two Project America vessels and the additional vessel to be reflagged
by NCL and do not amend the PVSA or U.S. vessel documentation laws. Coast
Guard officials stated that they have already confirmed that the vessel
NCL has under construction, and the second vessel NCL intends to construct
abroad, are the vessels referred to in the exemption; and NCL has already
identified the vessel to be reflagged; therefore, the allowances of the
exemption apply only to the three vessels. Coast Guard and CBP rulings
regarding these laws are made on a case-by-case basis; and because the
exemption is unique to the identified vessels, it should create no
precedent on the implementation of these laws regarding other vessels.
NCL's exemption does not allow for further exemptions for other foreign
cruise lines to be able to operate foreign-built vessels in Hawaii or
anywhere else in the domestic trade. Additional legislation would be
required to allow for any further domestic operations by foreign-built
vessels.

In addition, this exemption will likely not have any legal impact on the
Jones Act and its restrictions on shipping cargo between U.S. points.
Although interest groups and labor organizations link the PVSA and the
Jones Act philosophically, as being parallel laws for passengers and
cargo, respectively, numerous amendments and changes have been made to
each law that have not affected the other. For example, in 1920, the PVSA
was modified to allow permits to be issued for the transport of passengers
by foreign vessels to or from Hawaii, which lasted for 2 years.28
Furthermore, an exception to the PVSA was made in 1938 to allow for the
transport of passengers by Canadian vessels between the New York ports of
Rochester and Alexandria Bay.29 More recently, Congress passed the Puerto
Rico Passenger Ship Act, which allows vessels not qualified to engage in
the domestic trade to carry passengers between U.S. ports and Puerto Rico
and between Puerto Rico ports.30 None of these exemptions has had an
impact on transporting cargo, which would fall under the jurisdiction of
the Jones Act, or on justifying the transportation of passengers outside
the specific scope of the exemption. Furthermore, the rulings and
decisions discussed earlier that have allowed foreign-flag vessels to
transport passengers from and between U.S. ports, if a foreign port is
visited, do not extend to freight

28P. L. No. 66-261, ch. 250, sec. 22, 41 Stat. 988, 997 (1920).
2946 U.S.C. App. 289a.
3046 U.S.C. App. 289c.

transportation. For example, a foreign ship can pick up passengers in New
York, travel to Paris and pick up passengers there, and return to Boston
to disembark the passengers without violating the PVSA; however, the same
ship cannot take freight cargo from New York, pick up additional cargo in
Paris, and drop off the cargo in Boston without violating the Jones Act.

Exemption Allows NCL to Offer Exclusive Domestic Itineraries and Creates
an Additional Barrier to U.S.-Flag Entry, but It Could Generate Economic
Benefits

The exemption allows NCL to offer exclusive all-domestic itineraries in
Hawaii because no other large U.S.-flag passenger ships currently offer
such service, and no other foreign-built ships can offer all-domestic
itineraries. However, despite this advantage, NCL will likely have limited
ability to exert pricing power on its exclusive itinerary because it will
still have to compete with other vacation options. In addition, NCL's
exclusive right to operate foreign-built ships in U.S. domestic trade
creates an additional obstacle for any large cruise lines attempting to
compete in the domestic market under the U.S. flag. NCL is able to
complete building the ships abroad at a lower cost than they could be
completed in the United States, while any would-be entrant into the
domestic market would have to build a ship in the United States and would
therefore face a higher capital cost structure than NCL. However, prior to
the exemption there were already substantial barriers to U.S.-flag
entrants into domestic trade due not only to higher capital costs, but
also to higher operating costs associated with the U.S. flag. Potential
economic benefits from the exemption include expanded choice of cruise
itineraries for consumers, enhanced sustainability of competition in the
industry, employment growth, and generation of tax revenues. These
benefits are contingent on NCL's continued U.S.-flag operations, which
analysts speculate might not be able to compete successfully with
lower-cost, foreign-flag operations.

Exemption Gives NCL Exclusive Hawaiian Itineraries but Confers Limited
Pricing Power

As previously mentioned, the exemption allows NCL the exclusive right to
operate certain foreign-built, U.S.-flag ships on wholly domestic Hawaiian
itineraries. No other large U.S.-flag passenger vessels currently operate
in domestic trade; and foreign-flag, foreign-crewed cruise ships cannot
offer wholly domestic itineraries because of the PVSA. Therefore, although
the exemption does not explicitly exclude any carriers from offering these
itineraries, no other carriers are able to offer the same itineraries. In
addition, prior to obtaining the exemption and prior to the bankruptcy of
American Classic Voyages, NCL already had an exclusive itinerary stopping
at Fanning Island, in the Republic of Kiribati, the closest foreign port
to Hawaii. NCL's agreement with Fanning Island for exclusive access,31
which lasts for a limited period, already gave NCL the ability to offer
7-day Hawaiian cruises, not feasible for other cruise lines that must
include a farther foreign port, like Vancouver, Canada, or Ensenada,
Mexico, which are 4 to 6 days sailing time to Hawaii. Figure 2 compares
NCL's exclusive 7day domestic itinerary, scheduled to be available in the
summer of 2004, with Hawaiian itineraries of foreign-flag vessels.

31NCL may grant other cruise lines the rights to stop at Fanning Island,
and it has already done so for Radisson Seven Seas and Crystal Cruises and
has permitted Hapag Lloyd rights for cruises next year.

Figure 2: NCL's Exclusive Hawaiian Itinerary Compared with Hawaiian
Itineraries of Foreign-Flag Vessels

Because NCL has the ability to offer unique Hawaiian Island itineraries
without including foreign ports, NCL's interisland cruises on its exempted
ships will allow cruisers to spend more daytime hours in ports than other
existing Hawaiian Island cruises. NCL's proposed itinerary for wholly
domestic Hawaiian cruises includes 59 daytime hours in port; however,
NCL's current 7-day cruise, which includes a stop at Fanning Island,
offers only 28 daytime hours in ports.32 In general, the greater number of
hours in port is seen as more appealing to consumers.

While NCL can operate exclusive itineraries, the exemption likely conveys
only limited pricing power to NCL, even in the absence of another cruise
line offering identical itineraries. According to a comprehensive cruise
market analysis conducted by the FTC in 2002, a single cruise itinerary
does not constitute a market; rather, competitive conditions should be
assessed in the context of a market that includes all vacation options or,
minimally, all other cruise options. Therefore, although no cruise lines
will

32We calculated daytime hours in port by adding the number of hours
between 6 A.M. and 6 P.M. that the vessel is scheduled to be in port.

compete directly on the domestic itineraries, NCL will continue to face
competition from comparable vacation options, such as land vacations and
similar cruises in different geographic areas. NCL will also compete with
foreign-flag vessels that operate with lower costs on other itineraries
that include Hawaii. Those foreign-flag vessels could offer a lower price
than NCL, which would make any theoretical attempt at a price increase by
NCL unsustainable.

One of the reasons for FTC's broad market definition is its finding that
cruise passengers are highly sensitive to price changes. In other words,
an attempt by a cruise line to raise prices above competitive levels
likely results in significantly fewer bookings. NCL anecdotally confirmed
this finding, citing a decline in its bookings following an attempt to
raise prices by about 3 to 4 percent on its 2003 Norwegian Star, 7-day
Hawaiian-Fanning Island itineraries-which had no competition from any
other cruise line on the same itinerary-after showing strong sales during
2002. From the outset, over a year from sailing dates, sales were slower
than in 2002 for the same cruise, and NCL was forced to reduce its prices
to fill the ship, resulting in approximately 8 percent lower revenue
yields by the sailing date on the 2003 cruises compared with the 2002
cruises.33

33NCL made no attempt to control for other factors that may have caused
slower or reduced bookings in 2003. We confirmed the initial raise in
price and subsequent reversion to the old base price.

Exemption Adds to Existing Barriers for Potential U.S.-Flag Market Entry

NCL has a large capital cost advantage over potential competitors, who
might attempt to build ships entirely in the United States for operation
under the U.S. flag because the exemption permits NCL to complete
construction of its U.S.-flag ships in a foreign shipyard at a lower cost
than a comparable ship built in a U.S. shipyard. Unless they also receive
an exemption from the U.S.-built requirement, cruise lines entering the
domestic market would have to build their ships in U.S. shipyards or
refurbish an existing U.S. built vessel overseas.34 Such building costs,
based on estimates from Project America, compared with contract costs for
foreign-built ships, would likely be much higher. For example, we compared
the contract cost to construct the first Project America ship with the
total projected cost for NCL's Pride of America, built from the partially
U.S.-built hull of the first Project America ship now being completed
overseas. The Project America contract cost was between 35 and 54 percent,
or $140 to $190 million, higher than total cost projections to complete
the Pride of America in a German shipyard, as shown in figure 3.35 The
disparity is likely even larger because the actual costs of the Project
America ships were expected to exceed the contract costs.36 Incorporating
adjustments to the Project America contract costs, the cost differential
ranges from 71 to 95 percent higher, or $284 to $334 million higher.

34NCL purchased the only other large U.S.-built cruise vessels, the United
States and the Independence, and has plans to refurbish them.

35NCL's Pride of America is expected to cost between $350 million and $400
million dollars, including the portion NCL paid for the hull of the ship.
These figures are commensurate with costs for similar size vessels built
entirely in foreign shipyards for other cruise lines. The cost
differential range reflects the low and high Pride of America estimates,
compared with the construction contract cost in American Classic Voyages
SEC filing for the Project America ships. All values were adjusted to 2003
dollars.

36We used the total project cost on MARAD's Title XI loan guarantee
application documentation for these calculations. The total project cost
may reflect adjustments to initial contract costs and may include ship
costs not paid directly to the shipyard, including independent design and
inspection contracts, interest paid to lenders during construction, and
supplies purchased by the ship owner directly.

Figure 3: Comparison of Estimated Construction Costs to Complete Project
America Vessel in a U.S. Shipyard and a Foreign Shipyard

Cruise officials and shipbuilders state that U.S. construction costs are
higher than foreign construction costs because U.S. shipyards have not
developed technical capability, a reliable supply chain, and economies of
scale to build cruise ships competitively. According to one shipbuilder we
spoke with, while U.S. shipyards are experienced at building complex cargo
and military vessels, cruise ships require wholly different construction
techniques; and U.S. shipyards have not developed certain technical
capabilities. One official asserted that U.S. shipyards might become
competitive if they partner with foreign shipyards to learn the latest
technology. In addition, officials from the American Shipbuilders
Association acknowledge that, while U.S. shipyards currently have the
ability to build the hull and superstructure of a cruise ship, unlike
European shipbuilders, U.S. shipbuilders do not have established and
reliable supply chains for certain materials and other structures on a

cruiseship, which are critical to efficient and timely completion of
cruiseships.37 These officials said that they expect that the capital cost
differential would be negligible if the U.S. shipbuilding industry grew
and realized economies of scale; however, such growth seems unlikely given
the current lack of demand for U.S.-built cruise ships and concerns about
technical capabilities and undeveloped supply chains. Moreover, ships must
be built in order for economies of scale to be realized, so the first
ships that would have to be built for any would-be U.S.-flag operation
will likely have higher capital costs than NCL's vessels.

While the exemption affords NCL a capital cost advantage over would-be
entrants, acquiring financing for U.S. ship construction may not be any
more difficult because of the exemption. In theory, financiers would be
less willing to provide financing for capital costs to an operator who
will compete in a market with an existing competitor who has a lower
capital cost structure. However, industry financial analysts we spoke with
said that acquiring financing was equally difficult prior to the exemption
because of the presence of competing lower-cost, foreign-flag cruise lines
and would not necessarily be more difficult once NCL begins providing
U.S.-flag service in the Hawaiian Islands. Furthermore, an official from
the Office of Ship Financing within MARAD said that, while theoretically
the NCL presence in the U.S. domestic market could affect decisions about
applications for new vessels, they have not seen and do not expect to see
any impact from the NCL exemption. They said that they receive so few
applications for large cruise ships that they are unable to determine if
the number of applications has declined because of the NCL exemption.
Furthermore, no applications for financing of large cruise ships have been
denied or withdrawn because of the NCL exemption or NCL's expected
presence in the U.S. domestic market.

37Late delivery of cruise ships can be very costly to the cruise
companies, as they book cruises over one year in advance and would have to
refund customers if a ship was not ready to set sail on its intended date.

Prior to the NCL exemption, cruises offered by lower cost foreign-flag
vessels already limited the likelihood of cruise lines entering the
domestic market. With the possible exception of Hawaii, the close
proximity of foreign ports-of-call in Canada, Mexico, Bermuda, and the
Caribbean allows foreign-flag ships to serve U.S. cruise demand without
meeting the requirements of operating under the U.S. flag and adding
significant time or fuel costs to the voyages. Figure 4 shows examples of
cruise itineraries between U.S. ports that foreign-flag vessels can offer.
The availability of foreign-flag service on U.S. itineraries that include
a foreign port-of-call reduces the likelihood that potential U.S.-flag
carriers can offer competitive prices because U.S.-flag ships have higher
capital and operating costs than foreign-flag ships. In addition to higher
ship construction costs discussed earlier, according to an industry trade
organization, wage costs on U.S.-flag ships could range between 30 and 100
percent higher than wage costs for a similar foreign-flag ship due to
compliance with U.S. labor laws that require minimum wage, overtime
compensation, payment of social security tax, and protection and indemnity
coverage, which do not apply to foreign-flag vessels. According to NCL
officials, wage costs for their U.S.-flag operations will be 100 to 150
percent higher than wage costs for their foreign-flag operations.38 Cruise
officials also stated that due to regulations pertaining to overtime and
labor requirements for U.S. seafarers,39 they would likely have to hire
more U.S. workers at higher wages to serve the same number of passengers.
Finally, U.S.-flag ships are liable for corporate income taxes, while
foreign-flag ships typically incorporate in countries where their income
is tax-exempt, resulting in an additional cost advantage for foreign
vessels. See appendix II for additional information on laws that apply to
U.S.-flag ships.

38Data on labor costs are scarce, and available data are difficult to
compare across vessels because of variations in worker productivity,
on-board amenities, and level of service provided on various vessels.
While not entirely comparable, we did check these estimates against
estimates of U.S.-crewing costs provided by a small U.S.-flag passenger
vessel operator and foreign-crewing costs provided by a potential entrant
into the cruise industry and found U.S. labor costs to be approximately 70
percent higher.

3946 U.S.C. 8104.

 Figure 4: Examples of Itineraries between U.S. Ports for Foreign-Flag Vessels
                       that Utilize a Nearby Foreign Port

Potential Economic Benefits May Result from the Exemption

Exemption Generates New Cruise Itineraries for Consumers

Several economic benefits might be generated as a result of NCL's
exemption. These benefits include expanded consumer choice, continued
competition in the industry, employment growth and generation of tax
revenues.

The exemption expands consumer choice by allowing NCL to offer previously
unavailable cruise itineraries. Hawaiian interisland cruises without a
foreign port-of-call have not been available to potential cruisers since
2001, when American Classic Voyages filed for bankruptcy. As previously
noted, following the exemption, NCL will operate exclusive interisland
Hawaiian cruises on certain U.S.-flag ships. These new interisland cruises
will be provided by cruise ships offering many of the amenities previously
available only on foreign-flag ships.

Exemption Could Improve NCL's Competitive Position in the Highly
Concentrated Cruise Industry

The exemption could improve NCL's position relative to its competitors in
the highly concentrated North American40 cruise market. According to MARAD
data from July to September of 2003, Carnival and Royal Caribbean control
a combined 86.4 percent of the North American cruise market, while NCL is
the third largest firm with 8.8 percent of the market.41 NCL's ability to
offer unique domestic itineraries, primarily in Hawaii, affords NCL an
opportunity to further differentiate itself from its primary competitors.
NCL's differentiation is important because it provides travel agents with
an incentive to sell NCL's products. Officials from the American Society
of Travel Agents and cruise lines agree that recommendations by travel
agents play a significant role in determining which cruises customers
choose to buy. While the share of airline and land vacation purchases made
through travel agents has declined in recent years, travel agents still
sell approximately 90 percent of all cruises. If NCL only offered the same
itineraries as Carnival and Royal Caribbean, travel agents may have an
incentive to discontinue sales of NCL products, because travel agents are
paid commissions that often increase with the number of cruises sold on a
particular cruise line. Without travel agents endorsing its products, NCL
could have difficulty competing with Carnival and Royal Caribbean.
However, the unique Hawaiian cruise products that NCL can now offer help
NCL to continue to be the third major firm in the market. If there are
only two major players in a market, there is a much higher probability of
the two firms coordinating higher prices, thus hurting consumers. The
recent acquisition of P&O Princess Cruises by Carnival Corporation
resulted in a reduction from four major competitors to three. The FTC's
decision to not challenge the merger stated that a reduction from three to
two major competitors would likely be more problematic for consumers.42

40As defined by FTC, the North American cruise market includes all cruises
marketed to North Americans. The cruises in this market primarily operate
in or around North American waters.

41Under the FTC's 1992 Horizontal Merger Guidelines, a market is
considered highly concentrated when the Herfindahl-Hirschman Index, or
HHI, exceeds 1,800. Using these MARAD data, the HHI for the North American
cruise market would be over 4,000.

42According to the FTC statement, "Absent extraordinary circumstances,
there is a strong presumption that a three-to-two merger of significant
competitors in a properly delineated relevant market is likely to harm
consumers. In this situation, however, there are now four major firms and
a "fringe" of other competitors." See Statement of the Federal Trade
Commission Concerning Royal Caribbean Cruises, Ltd./P&O Princess Cruises
plc and Carnival Corporation/P&O Princess Cruises plc, FTC File No. 021
0041.

Other Potential Effects of the Exemption Include Employment Growth and Tax
Revenues

NCL's operations resulting from the exemption will create jobs on the
exempted ships and where it offers itineraries, and they will likely
increase tax revenue. According to NCL's analysis of the Hawaiian market,
its expanded operations will generate about 2,400 full-time shipboard jobs
and additional shoreside employment in Hawaii. This estimate seems
reasonable, because NCL must hire at least 800 U.S. employees per ship for
three ships, as well as additional land-based employees. Some of these
jobs might be transfers of jobs from other states to Hawaii and, thus,
would not represent new benefits to the U.S. economy. An NCL consultant
estimates total annual tax revenues from the exemption operations to be
$126.5 million, including employee income taxes and social security taxes,
airfare taxes, and customs, immigration and ship passenger taxes.43 In
addition, NCL's U.S. subsidiary, NCL America-which will operate the
exempted ships in order to meet the U.S.-ownership requirements needed to
register the vessels under the U.S. flag44-will be liable for corporate
income taxes on any profits it earns; and it will be subject to the
payment of employer payroll taxes in Hawaii.

NCL estimates passenger expenditures will bring an additional $355 million
annually to the regions where NCL operates. This value assumes that all
vessels operate at full capacity. These passenger expenditures represent a
net benefit to the U.S. economy only when these passengers choose the
domestic NCL cruise over a foreign vacation or other foreign spending. To
the extent that the passengers' alternatives were a different U.S.
vacation or other discretionary spending in the United States, then this
expenditure figure only represents a transfer of revenues to the region
where the cruise is operating from other U.S. regions.

Realization of Economic Benefits Is Largely Contingent on NCL's Continued
U.S.-Flag Operations

Most of the benefits described above will materialize only if NCL
continues to operate cruise ships under the U.S. flag. However, as noted
above, industry analysts question NCL's ability to operate the interisland
Hawaiian cruises profitably. Analysts speculate that these cruises might
not be profitable since they will still have to compete with foreign-flag
cruises with significantly lower operating costs than NCL, though on
different itineraries. Analysts also expressed concern that NCL is
deploying too

43This estimate does not include corporate income taxes NCL would be
liable for on income earned on these domestic routes.

4446 U.S.C. 12102.

much capacity for the uncertain Hawaiian market demand. According to
Cruise Lines International Association, Hawaiian cruises generated only
about 3 percent of the business in the North American cruise market in
2002. NCL plans to grow the Hawaiian market by 23 percent each year for
the next 5 years, resulting in Hawaiian destinations comprising 6 percent
of the North American cruise market by 2007. This plan is quite
aggressive, considering that industry trade groups expect the cruise
market in general to grow 10 percent each year. If NCL is not profitable
operating the exempted vessels in the United States, analysts speculate
that NCL will seek government approval to reflag the vessels and operate
them in foreign trades. NCL could continue to serve the Hawaiian market
with the reflagged vessels, if the itinerary included a stop at Fanning
Island or another foreign port. In this case, the exclusive interisland
cruise options for consumers would no longer be offered, jobs for U.S.
crew and the associated tax revenue would be lost, and NCL would not be
liable for U.S. corporate income tax. In addition, if NCL is unable to
operate successfully under the U.S. flag in Hawaii, possibly the most
desirable market protected under the PVSA, there will be further
disincentive for any other cruise line to attempt to operate under the
U.S. flag, thus limiting the potential development of the U.S.-flag cruise
vessel fleet.

Unclear if Granting Other Cruise Lines Similar Exemptions Would Lead to
Entry by Other Cruise Lines and Resulting Economic Benefits

Granting similar exemption to ease entry into the domestic trade could
lead to additional benefits for ports and port cities, the merchant marine
and consumers; however, it is unclear how many cruise lines would choose
to enter if they were permitted to operate foreign-built ships under the
U.S. flag. For certain unique itineraries, where foreign vessels cannot
easily operate with a nearby foreign port, such as in Hawaii, one-way
cruises in Alaska, or short 3 to 4-day itineraries on the east or west
coasts, some potential exists for U.S.-flag ships to enter the market.
However, there are substantial disincentives to operating under the U.S.
flag due to (1) operating cost differentials between the would-be
U.S.-flag entrant and foreign-flag ships that still offer somewhat similar
itineraries, but include a foreign port, (2) labor conditions and ship
requirements, and (3) uncertain market conditions. Moreover, entry from
additional ships exempt from the U.S.-built requirement could have a
negative impact on the U.S. shipbuilding industry and small U.S.-flag
cruise ships, though these impacts are likely to be minimal if the
U.S.-built requirement is waived only for large cruise ships.

Additional Benefits Could Result from More Entry into the Domestic Markets

Ports and port cities, the merchant marine, and consumers could benefit if
additional exemptions to the U.S.-built requirement led to new entrants
providing U.S.-flag cruise service. Additional domestic cruises could
create more activity for the ports and result in more jobs and increased
spending in port cities. U.S.-flag ships also would employ U.S. seamen,
adding to the base of trained maritime employees who could serve the
country in a time of emergency. Moreover, potential entrants could offer
more cruise options and new itineraries to consumers. For example, a 1997
study conducted for the California State Tourism Board found that with
similar exemptions to operate foreign-built vessels under the U.S. flag,
cruise lines could offer cruise itineraries on the California coast to
smaller ports, such as Santa Barbara and Monterey, resulting in more
tourist dollars in those areas.45 However, if new domestic cruises
primarily replaced existing foreign-flag service, with minor itinerary
changes caused by eliminating foreign portsof-call, the benefits to ports,
port cities and consumers might be minimal. On the east coast, for
example, Carnival currently offers cruises on a foreign-flag
ship-round-trip from New York including stops in Boston, Massachusetts;
Portland, Maine; and Canada. If U.S.-flag vessels replaced the
foreign-flag vessels offering east coast cruises and had itineraries
running from New York to Portland without the stop in Canada-but including
the same ports-of-call as the former Carnival cruise-ports, port cities
and consumers would experience very little additional benefit from these
cruises. Additional cruises to U.S. ports that foreign-flag vessels
continue to serve and cruises to different U.S. ports than foreign-flag
vessels currently serve are the only source of benefits to ports, port
cities, and consumers.

Even with Exemptions from the U.S.-Built Requirement, Other Substantial
Barriers to Entry Might Limit the Number of Potential Entrants into the
Domestic Cruising Market

While some potential benefits exist, industry officials said that most
cruise lines are not likely to enter the domestic market, even if they
could build ships outside of the United States because of operating cost
differentials, different ship standards, and uncertain market conditions.
As previously noted, U.S.-flag operating costs are significantly higher
than foreign-flag operating costs. The wage differential is so great that
an official from one cruise line stated that the cruise line would prefer
to employ foreign workers for any non-U.S. domestic itineraries offered on
a U.S.-flag ship.

45"Economic Impact of Proposed Changes to the Passenger Services Act,"
prepared by Applied Development Economics for the California State Tourism
Board. (Berkeley, CA: 1997.)

The official noted that it would be difficult to hire a separate seasonal
U.S. crew to work on a U.S.-flag ship, which may operate domestic
itineraries only at certain times of the year. U.S.-flag cruise ships also
must meet U.S. building standards, which sometimes conflict with
international standards. For example, an industry official cited different
wiring configurations required on U.S. ships. One cruise line official
stated that the cruise line he represents would not specially build a ship
to comply with U.S. standards only to be able to operate the ship in
domestic trade, given the existing operating cost differentials.
Furthermore, cruise officials and industry analysts question whether
U.S.-flag operations can be profitable since lower cost foreign-flag ships
can serve similar itineraries and demand is unknown for domestic
destinations.

Despite all the expected difficulties and disadvantages, representatives
of two cruise lines said they would explore entry into some domestic
markets if they were given exemption from the U.S.-built requirement.
According to these representatives, they would consider testing the
Alaskan and Hawaiian markets, and short coastal cruises because of their
unique attributes. In Alaska, one-way cruises are popular and currently
cannot be offered from a U.S. port, such as Seattle, due to the PVSA. In
Hawaii, the nearest foreign port adds at least 2 days of sailing time to
the itinerary. Short coastal cruises on the east or west coasts are
attractive because including a foreign port would lengthen the cruise.

However, even these attractive markets have factors deterring U.S.-flag
operations. Foreign-flag ships currently serve the one-way Alaskan trade
embarking in Vancouver. These operators would still have a competitive
advantage over U.S.-flag operators granted an exemption from the U.S.built
requirement and operating out of Seattle. While consumers might face an
added land transportation cost to depart from Vancouver rather than
Seattle, foreign-flag operators would continue to have a significant
operating cost advantage over U.S.-flag ships and thus might offer lower
prices. The price advantage of the foreign-flag ships is likely to offset
the cost disadvantage to consumers of departing from Vancouver. Moreover,
according to one industry analyst, the Port of Vancouver might respond to
potential competition from the Port of Seattle by lowering its port fees
to retain firms operating less costly foreign-flag ships.

Hawaii's long distance from most foreign ports creates an especially
attractive opportunity for entry under the U.S.-flag, but potential
competitors would have to compete with an established operator, NCL, for
unknown demand. In addition to NCL's ability to offer wholly domestic

cruises in Hawaii with the exemption, it has had an exclusive arrangement
for its ships to stop at Fanning Island, the closest foreign port to
Hawaii. With this exclusive agreement NCL has been able to garner the
largest market share of the Hawaiian trade. NCL intends to run three
U.S.-flag ships and one foreign-flag ship regularly in Hawaiian
itineraries. As noted previously, some industry analysts do not think
consumers in the Hawaiian market can support NCL's capacity increase;
therefore, success might be difficult for any additional companies
entering the market. In fact, one cruise line we spoke with is uncertain
about continued operations, given the sales performance of its initial
entry into the Hawaiian market.

Finally, while short 3- or 4-day cruises along the east or west coasts of
the United States may hold some attraction for would-be entrants, these
cruises could still face lower cost competition from foreign vessels
offering similar itineraries with a foreign port included. In addition,
while there are some smaller U.S. passenger vessels offering short coastal
cruises, the potential demand for these cruises may not be substantial
enough to sustain large cruise ships.

Similar Exemptions Could Negatively Affect U.S. Shipbuilding Industry and
Small Passenger Vessels

Granting other cruise lines exemptions to the U.S.-built requirement
without strict tonnage requirements could negatively affect the U.S.
shipbuilding industry. If exemptions were granted only for large,
overnight cruise vessels, the U.S. shipbuilding industry would face
little, if any, impact given that no such ship has been completed in the
United States since 1958. However, if the exemptions were broader,
including small passenger ships, U.S.-flag operators of small cruise ships
might purchase less expensive ships from foreign shipyards, exposing U.S.
shipyards to foreign competition that is not subject to the same laws,
regulations, and taxes.

Another potential adverse effect of similar exemptions is the shift of
passengers away from small U.S.-flag cruise lines to domestic cruises on
larger U.S.-flag ships built in foreign shipyards. Small U.S.-flag vessels
are built in the United States and operate under all U.S. laws. A major
shift in their customer base could disrupt this segment of the cruise
industry and negatively affect the shipyards that build these small
vessels. However, industry analysts suggest that there is a very small
likelihood that similar exemptions would affect the small cruise vessels
because they serve different segments of the market. Small vessel
operators view their products as boutique cruises, as compared to
mass-market cruises on large

vessels. These boutique cruises are often shorter voyages, including calls
in small ports that large cruise ships cannot access due to their size.

Agency Comments and Our Evaluation

We provided the Departments of Homeland Security and Transportation
with draft copies of this report for their review and comment. Both
departments generally agreed with the findings in the report and provided
technical clarifications, which we incorporated as appropriate.

We are sending copies of this report to the appropriate congressional
committees and to the Secretaries and other appropriate officials of the
Departments of Homeland Security and Transportation. We also will make
copies available to others upon request. In addition, the report will be
available at no charge on the GAO Web site at http://www.gao.gov.

If you have any questions about this report, please contact me at
[email protected] or at (202) 512-2834. Additional GAO contacts and
acknowledgments are listed in appendix III.

Sincerely yours,

JayEtta Z. Hecker
Director, Physical Infrastructure Issues

Appendix I

Scope and Methodology

To address the original intent of the Passenger Vessel Services Act (PVSA)
and how pertinent rulings and decisions have affected the implementation
of the law, we reviewed the PVSA, its amendments, and its administrative,
legislative and judicial history. We also reviewed several listings in the
Customs Rulings Online Search System to see how the PVSA is currently
interpreted and we conducted interviews with officials from Customs and
Border Protection (CBP) and the Coast Guard responsible for documentation
of U.S. vessels and for enforcing the provisions of the PVSA, U.S. vessel
documentation laws, and the Jones Act.

To ascertain how the exemption provided to NCL might affect future rulings
or interpretations on the PVSA, U.S. vessel documentation laws, or the
Jones Act, we researched the legislative history of the PVSA, its prior
amendments and exemptions, and pertinent CBP rulings to determine what
impact they had on future rulings regarding the PVSA or the Jones Act. We
also reviewed rulings regarding the PVSA to determine if any amendments of
exemptions provided for under the Jones Act had any impact on them.
Finally, we conducted interviews with agency officials about the
implementation of maritime laws.

To determine the potential effects of the exemption on competition in the
passenger cruise industry, entry into the U.S. domestic market, the
exemption's broader economic effects, as well as the potential effects of
granting similar exemptions, we reviewed studies on the economic impact of
the cruise industry and competition in the industry and conducted
interviews with officials from several cruise lines, industry
associations, and a full range of cruise industry stakeholders, analysts,
and experts. To understand the nature of competition in the industry, we
reviewed a merger analysis conducted by the Federal Trade Commission (FTC)
in 2002 that examined, in-depth, competitive conditions in the North
American cruise industry.1 We also interviewed officials and reviewed
internal documents from cruise lines, including Norwegian Cruise Line,
Carnival Cruise Lines, Royal Caribbean Cruise Lines, Radisson Seven Seas
Cruises, Crystal Cruises, the former American Classic Voyages, and
CruiseWest to get their perspectives on the nature of competition in the
industry, the effects of the exemption on competition, and the potential
of various domestic itineraries. We also spoke with several port
authorities, individual U.S.

1Statement of the Federal Trade Commission Concerning Royal Caribbean
Cruises, Ltd./P&O Princess Cruises plc and Carnival Corporation/P&O
Princess Cruises plc, FTC File No. 021 0041.

Appendix I
Scope and Methodology

shipyards, and industry financial analysts for further information on the
broader economic effects of the exemption and the potential effects of
granting similar exemptions. In addition, we gathered information on the
capital and operating costs of foreign-flag vessels as compared with
U.S.flag vessels. Since most of these data are proprietary, we were unable
to independently verify them because we have no authority to require
access to the underlying data. However, we applied logical tests to the
data and found no obvious errors of completion or accuracy. Along with our
use of corroborating evidence, we believe that the data were sufficiently
reliable for our use.

To analyze the effects of the exemption on the potential for entry into
the U.S. domestic market, we spoke with industry financial analysts and
experts, including officials at American Marine Advisors, G.P. Wild, and
J.P. Morgan Chase to obtain perspectives on whether financing for a U.S.
built vessel would be more difficult to obtain now that the exemption has
been granted. We also spoke with officials within the Maritime
Administration to ascertain whether applications or approvals for federal
loan guarantees for building large passenger vessels had waned or would be
more difficult to obtain as a result of the exemption. We also spoke with
officials from the cruise lines and an official representing smaller
U.S.-flag vessel operators to get their perspectives on the potential for
entry into the U.S. domestic cruise market. To determine the extent of
NCL's capital cost advantage under the exemption, we obtained estimates of
the final cost to build the first of the exempted vessels from the General
Disclosure statement under the Stock Exchange of Hong Kong of Star Cruises
Limited, NCL's parent company. We were unable to independently verify
these costs because we have no authority to require access to the
underlying data. However, we confirmed the accuracy of these figures with
officials within NCL and through comparing the figures to publicly
available data on the costs of vessels of similar size completed for other
cruise lines. We then compared these costs to the original project costs
to build the Project America vessels in a U.S. shipyard. We converted all
figures to 2003 dollars using the producer price index for ship and boat
building and repairing prepared by the Bureau of Labor Statistics.

We also obtained additional perspectives on the potential economic effects
of the exemption and of possible additional exemptions from various
industry associations, including the International Council of Cruise
Lines, Cruise Lines International Association, the Passenger Vessel
Association, the American Shipbuilding Association, and the American
Society of Travel Agents, as well as officials from the Maritime Cabotage
Task Force, the

Appendix I
Scope and Methodology

Maritime Trades Departments of the AFL-CIO, American Maritime Officers,
and the Seafarers International Union.

We conducted our work from August 2003 through February 2004 in accordance
with generally accepted government auditing standards.

Appendix II

Other U.S. Laws Applicable to U.S.-Flag Vessels on Wholly Domestic Cruises

NCL's Operations Will Subject Them to the Application of U.S. Tax, Labor,
and Other Laws Unlike Other Foreign Cruise Lines that Serve the United
States

Since NCL's vessels will be undertaking domestic travel under the U.S.
flag, NCL will subject itself to numerous other U.S. laws in the areas of
tax, labor, immigration, environment and the Americans with Disabilities
Act. These U.S. laws do not usually apply to foreign-flag cruise lines
because their itineraries are in international waters, either because they
include a distant foreign port if they are traveling between U.S. ports,
or a nearby foreign port if the voyage is a round trip from one U.S. port,
and thus international rather than U.S. laws apply.

NCL Will Be Subject to U.S. Taxation Laws

Because NCL's U.S.-flag Hawaiian operations-operated by its U.S.
subsidiary NCL America-will be involved in domestic trade, income derived
from those operations would be taxable under the U.S. tax code. The
Internal Revenue Code has special rules for "transportation income." If
the transportation income is attributable to transportation that begins
and ends in the United States, it is treated as income derived from
sources in the United States and therefore fully taxable. If the
transportation begins or ends in the United States, but not both, 50
percent of the transportation income is treated as income derived from
sources in the United States.1 However, the Internal Revenue Code, under
26 U.S.C. 883, also excludes from the gross income of foreign corporations
income derived from the international operation of vessels if their home
countries grant an equivalent exemption from paying taxes to U.S.
corporations. Therefore, the income earned from foreign-flag vessels
operated by foreign corporations operating cruises in the United States
may not be subject to U.S. corporate income tax.

NCL Vessels under the If NCL operates vessels in domestic trade, those
vessels will become Exemption Will Be Subject subject to U.S. labor and
documentation laws, which, among other things, to Several U.S. Labor
require that the officers and unlicensed seamen on a U.S.-flag ship to be

U.S. citizens or documented aliens with permanent residence in the
UnitedRequirements States, and that the crew be subject to minimum wage
and collective bargaining laws. U.S. documentation laws under 46 U.S.C.
8103(a) require

1Internal Revenue Code Sec. 863(c).

                                  Appendix II
                    Other U.S. Laws Applicable to U.S.-Flag
                       Vessels on Wholly Domestic Cruises

that only U.S. citizens serve as the master, chief engineer, radio
officer, and officer in charge on a U.S. documented vessel. Also, each
unlicensed seamen must be a citizen of the United States except that not
more than 25 percent of that number may be aliens lawfully admitted to the
United States for permanent residence. Under the Fair Labor Standards Act,
minimum wage laws would apply to the crew, and they would be allowed to
engage in collective bargaining under the National Labor Relations Act. In
addition, where applicable, higher state minimum wage laws would apply.
For example, U.S.-flag interisland Hawaii cruise operations will be
subject to the state's $6.25/hour minimum wage, which is $1.10 higher than
under federal law. In addition, crewmembers on U.S.-flag vessels are
subject to tax at the federal, state, and local levels.

Foreign Cruise Ships Primarily Adhere to International Construction and
Safety Standards Rather than U.S. Standards

NCL's U.S.-flag ships will have to adhere to U.S. Coast Guard-approved
vessel construction and safety standards. As a general rule, foreign
vessels operating in U.S. waters need only comply with international
construction and safety standards, as opposed to the often more rigorous
U.S. standards. An international treaty, the Safety of Life at Sea
Convention sets forth international construction and inspection standards.
A foreign vessel from a country that is a signatory to the Convention,
would be subject to U.S. inspection only as to the vessel's propulsion and
lifesaving equipment. Finally, according to several industry experts and
representatives, the application of the American's with Disabilities Act
could have significant cost implications for vessels operating in the U.S.
domestic trade because of requirements to make the vessels handicap
accessible. However, NCL executives stated that these requirements would
not add significant costs to their ships, because even their foreign-flag
ships adhere to high standards in this regard.

Appendix III

                     GAO Contacts and Staff Acknowledgments

GAO Contacts	JayEtta Hecker (202) 512-8984 or [email protected] Susan
Fleming (202) 512-4431 or [email protected]

Staff 	The GAO staff that worked on this report dedicate it to their late
colleague, Ryan Petitte, in recognition of the valuable contributions he
made. Other

Acknowledgments	key contributors include Jay Cherlow, Michelle Dresben,
Sarah Eckenrod, Colin Fallon, David Hooper, Ron Stouffer, and Andrew Von
Ah.

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