Carnival Glory
by James A. Bacon
Norfolk city officials are worried that Carnival Cruise Lines, the only cruise line serving Hampton Roads, may not schedule any departures from the port in 2014. The Miami-based company confirmed that it is reviewing the 2014 deployment of several ships, including the Carnival Glory, the only ship with scheduled sailings from Norfolk this year. A decision is expected by the end of this month.
We should all hope that Carnival decides to stick with Norfolk. It creates a significant recreation option for Virginians and others within easy driving distance. Personally, I’ve never taken a voyage out of Norfolk but it’s an alternative I would willingly consider if my wife and I were in the mood for an indolent vacation experience.
The Half Moone center
But Carnival’s indecision is an object lesson to activist city governments. The City of Norfolk invested $31 million (supplemented by $5 million from the Virginia Port Authority) building the Half Moone Cruise and Celebration Center next door to Nauticus, Norfolk’s maritime museum, in 2007, according to the Virginian-Pilot. The facility took a blow when Royal Caribbean changed the homeport of its Enchantment of the Seas from Norfolk to Baltimore. The loss of Carnival Glory would leave Half Moone without regularly scheduled visits, although other lines occasionally make “port of call” stops there.
The motive behind the investment was to stimulate economic development. Cruise ships reportedly contribute $1 million per stop in economic activity (although it’s not clear how much of that is spent locally). Also, the Half Moone center nicely complements the existing Nauticus Museum and U.S.S. Wisconsin on the Norfolk waterfront. But $31 million is a big financial risk for the City of Norfolk to take.
According to the City of Norfolk’s 2012 Comprehensive Annual Financial Report, in 2007 the city issued $32.4 million in variable-rate, 30-year General Obligation bonds to fund the project and pay bond-financing costs. As of June 30, 2012, $30.3 million in principle remained outstanding and was included in the city’s debt. The mechanism for calculating the variable interest rate is indecipherable except to anyone with a background in bond finance but was reported to be 0.22% at the end of FY 2012. With the recent run-up in interest rates on bonds, that figure is likely much higher today.
Alas, the odds of Carnival re-booking with Norfolk look dicey. News broke today that Carnival CEO Micky Arison has relinquished his position after some highly publicized mishaps aboard its ships damaged the brand, contributing to declining bookings and revenues. Writes the Wall Street Journal: “The company plans to increase its marketing budget to win back customers but executives say it could take two to three years for the Carnival brand to fully recover.”
Here are specific questions the Virginian-Pilot needs to ask city officials: (1) How much revenue does the Half Moone need to generate in order to break even operationally, (2) how much revenue does it need to generate in order to offset the city’s interest and principle payments, (3) how much revenue has the facility actually generated, and (4) how big will the cash drain be if Carnival bails? If city officials are mum, then it’s Freedom of Information Act time. Here’s the philosophical question Norfolk residents need to ask themselves: Does city government have any business gambling on an inherently volatile and risky industry like cruise lines?
