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The Nation | SUNDAY REPORT

Taxpayer Going Down With Ship Project

Critics say pork- barrel subsidies to cruise line stick U.S. with $221-million tab.

December 09, 2001|MARK FINEMAN | TIMES STAFF WRITER

The December 2000 launch of its newly acquired foreign-built ship, the reflagged Patriot, for a San Francisco to Hawaii cruise was a washout. Hundreds of travel agents were stranded when the ship failed a U.S. Coast Guard inspection in Los Angeles. Some steered their business elsewhere.

A Times travel writer who cruised on the Patriot in February praised the nine-deck vessel as "a great expectation" with a genuine Hawaiian feel when she boarded, but concluded that the cruise "doesn't live up to its Hawaiian itinerary."

And when the company canceled several scheduled winter cruises on its newly launched Cape May Light, Florida-based industry analyst Raymond James & Associates said, "Consumer demand for the new Delta Queen brand may be softer than anticipated."

There were clear signs in the company's filings with the U.S. Securities and Exchange Commission during the months before the Sept. 11 attacks that American Classic and Project America were in serious financial trouble.

As early as last December, American Classic reported, the company used new government-backed loans to pay other federally guaranteed loans that came due. In July, it had to refinance an additional $50 million in Maritime Administration-guaranteed loans. In August, the company reported an operating loss of $32.4 million for the first six months of this year, compared with $7.5 million in losses during the same period of 2000.

An Aug. 20 report on the company by the Raymond James research firm said the company was short on cash and was a "risky" investment.

Also looming was a prolonged dispute between American Classic and Northrop Grumman over delays and large cost overruns in the cruise ships' construction.

Eight days after the Sept. 11 attacks, the Maritime Administration and the two companies signed a detailed, six-page agreement settling the conflict. The restructuring agreement extended Northrop Grumman's delivery dates for the two ships until 2004 and 2005 and required Northrop Grumman and American Classic each to commit more than $40 million in additional capital to cover the cost overruns.

Under the original project agreement, Northrop was merely the contractor; it committed no equity to the ships. The Sept. 19 agreement required the shipyard to pay for part of its own cost overruns.

American Classic filed for bankruptcy on Oct. 19, listing assets of just $37.4 million and a total debt of $547.3 million.

Work on the ships has stopped while the agency and Northrop Grumman wrangle over how to salvage a half-built cruise ship and a billion-dollar project that now appears to have no takers.

"Unfortunately, to date the U.S. Maritime Administration has decided not to continue the guaranteed funding necessary for the construction of the ships. So it is with sincere regret and a deep feeling of disappointment that we discontinue work on this contract," a Northrop Grumman statement said.

The agency countered that it "previously made a proposal to Northrop Grumman that would have allowed continued [loan-guarantee] funding. The Northrop Grumman Corporation has rejected this proposal."

Neither side would provide further detail.

McCain Calls for Administration Probe

McCain weighed in again after the bankruptcy in an Oct. 26 letter to the Transportation Department's inspector general, calling on him to review the Maritime Administration's handling of the cruise ship project and "determine what immediate actions the Department of Transportation and [the agency] can take to safeguard" taxpayer dollars at risk.

The inspector general's office recently announced that the probe is underway.

Citing Project America's problems, McCain also urged the administration to scrap the loan-guarantee shipbuilding program. Mitchell E. Daniels Jr., director of the White House Office of Management and Budget, agreed. He called the program "an unwarranted corporate subsidy" and pledged a zero-budget request for it next year.

Yet the latest appropriation bill that emerged from the House-Senate conference committee in mid-November approved $30 million in shipbuilding loan guarantees in the year ahead.

And in a statement last Thursday, Inouye said he has no regrets over the cruise ship project, referring to it as "a law that I am proud to have championed. . . . Until the terrorist attacks hit American soil, Project America appeared to be working as planned."

But the government hasn't come away totally empty-handed.

The government was ordered to take possession of the Independence as the vessel's secured creditor, under a ruling by U.S. Bankruptcy Judge Erwin I. Katz.

American Classic had asked the court to order the government to take possession of it, because the company still owes the government more than $24 million for the ship's refurbishing, had no buyer for it and was paying costly maintenance fees.

"The only likely buyer would be for scrap value," the company told the court. "As such, the debtors estimate the value of the S.S. Independence to be $1 million to $3 million."

*** UNPUBLISHED NOTE ***

Samuel Zell is also referred to as Sam Zell.

*** END NOTE ***

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