Norfolk’s Cruise-Line Gamble Could Turn up Snake Eyes

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 Halfe Moone center
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?

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14 responses to “Norfolk’s Cruise-Line Gamble Could Turn up Snake Eyes”

  1. DJRippert Avatar

    You should go to Baltimore before you decide that Norfolk has spent too much money. The Inner Harbor of Baltimore turned a seedy strip club laden area famous for “The Block” into a tourist hot spot. The old baseball stadium on 33rd St was relocated to the inner harbor and a new football stadium for the Super Bowl champion Ravens was built right next door. The Baltimore Aquarium has become a “must see” tourist destination – even for tourists in Washington, DC.

    Meanwhile, areas of the city like Hampden (where I lived in the early 80s) have transformed into exactly the kinds of walkable communities you aspire to see in Richmond.

    Jim – you can have a modern city with walkable communities and you can have small government. You just can’t have both.

  2. Breckinridge Avatar

    I had occasion recently to drive down Sixth Street in Richmond and recalled the late lamented Sixth Street Marketplace. And that idea was a whole lot less risky than a cruise terminal. But the street is back to being a street.

    Yes, Baltimore’s cruise business is a booming success and Baltimore’s was also FIRST — leaving Norfolk with the leftovers under the best of circumstances. The two cities are virtually side by side, and Baltimore is far closer to real population centers and major airports. I’m sure there were rosy market studies to persuade the city leaders in Norfolk. And they were bogus.

    Not sure I accept the premise that you need Big Brother, tax-funded investments in favored businesses and the heavy hand of government to create walkable communities. I don’t see how those conditions created Ghent in Norfolk or the Fan in Richmond. High gas prices and gentrification did more.

    1. DJRippert Avatar

      You need density to create walkable communities. Manhattan is one giant walkable community (or a contiguous series of walkable communities) because of density.

      Ghent is more of a concept than a political division so precise definitions are hard. How about these zip codes to define Ghent – 23517, 23510, 23507, 23502. That’s about 37,000 people at a density about 1.5X the average density of Norfolk overall. More interesting, Ghent has a much higher median income.

      Ghent is the home to four major medical facilities including the Eastern Virginia Medical School. EVMS is a great example of public – private cooperation and the ability of an initial entity to establish a cluster. EVMS was authorized by the General Assembly in 1964. Private donations of $17M had been collected before the first class started in 1970. In 2008, the Commonwealth of Virginia approved capital outlays to expand the student body at EVMS.

      EVMS is a major employer in the region. With 1,386 full-time employees, EVMS is among the 25 largest non-federal employers in Hampton Roads. EVMS generates high-quality jobs. EVMS full-time employees earn an average of $73,874, compared to the regional average of $45,000. (Source: Wikipedia)

      So – what came first – EVMS (and the related cluster businesses) or the walkable community?

      1. Ghent dates back decades, long before EVMS. It’s an awesome neighborhood. One reason the neighborhood has such a high average income is that it is seen as a desirable location to live. The location near major employment centers is a big bonus. But so is the “walkability” factor. The restaurant/boutique strip along Colley Ave. is extremely popular. If I lived in Hampton Roads, Ghent is where I’d first look for a place to live.

        1. DJRippert Avatar

          Many cities and neighborhoods date back decades, yet few are walkable today. Anacostia in Washington, DC is one example.

          Why has Ghent remained walkable while the remainder of Norfolk is (presumably) less so?

          The restaurant / boutique shop along Colley Ave is an outgrowth of the high wages paid by local businesses – particularly the medical cluster centered around the Eastern Virginia Medical School.

          This is a “chicken and egg” debate. I see the establishment of business clusters paying above average wages as the means by which quaint neighborhoods remain intact through the ups and downs of urbanism and urban flight. I further believe that businesses and talented employees can be attracted to a particular neighborhood through the actions of government. In the case of Ghent, the establishment and funding of eastern Virginia Medical School probably played a big part in keeping that walkable neighborhood intact. In the case of Washington, DC the building of the convention center and bringing the Verizon Center from the Maryland suburbs to the city played a major role in the rehabilitation of several neighborhoods in the city. The establishment of Nationals Park is doing the same for another neighborhood.

          I am unsure what you think causes Ghent to be a great, walkable neighborhood while other neighborhoods in Norfolk are not great, walkable neighborhoods.

          A pearl grows from an original grain of sand inside an oyster. I believe that civic action often is the grain of sand that eventually becomes a pearl of a community. Government can’t simply make a walkable community but it can give it a push.

  3. larryg Avatar

    Baltimore also has BWI – a major international-scale airport and I’m betting that major taxpayer dollars are involved in the airport and the harbor.

    I do not pretend to understand how all of this works but it seems to me that the private sector is not going to put their money into the infrastructure and related environment if govt is willing to do it – as a economic development initiative. And just like with private sector ventures – there is risk involved even if you do it right – and it’s also possible – to do it money-down-the-drain wrong.

    We say govt is a “corrupt failure” when they engage in such ventures that fail but we don’t seem to have the same view of “failed” private entrepreneurial efforts – but I do start to veer off here a bit.

    down our way, we just had an action by our BOS to forgo BPOL taxes and thousands of dollars in permit fees if a company located here for at least five years with at least 50 employees making at least 50K each. (they have a claw-back if the company fails to perform per the agreement).

    but the point is – that govt does get involved in these ventures and they use tax dollars and govt-built infrastructure as de-facto venture capital.

    Now I think Jim Bacon is opposed to this kind of thing but it does appear that what Baltimore (the govt) has been doing over the last decade or two has been an explicit strategy to prime with tax money – the economic development pump whereas Va seems a little more reticent ….

    1. BWI does receive significant subsidies from the state of Maryland, according to the Washington Airports Task Force. Add that to Dulles’ cost problems (operating and capital costs are too high, while passenger volume is decreasing). That’s why MWAA and WATF wants the N-S Corridor to bring all those trucks to Dulles air freight operators and to get into the commercial real estate business for non-aviation-related activities.

  4. Peter Galuszka Avatar
    Peter Galuszka

    I have to agree with Don the Ripper here. Jim, you can’t have it both ways — small government with a tourism destination. It’s another Neocon, Libertarian fantasy.

    Baltimore has an obvious advantage — it is much closer to more people. It has a great working tourism harbor, Camden Yards and great restaurants. Norfolk has sort of the same, but on a much smaller scale.Outside of the battleship Wisconsin, there’s not really all that much to see. The Navy has become much less of a tourist attraction after 9-11– don’t try to get within 500 feet of a warship or you may get machine gunned. Restaurants are merely OK. Waterside has been going downhill for years. Virginia Beach is a huge resort place, but it doesn’t really have legs beyond the beachfront. Norfolk has baseball but they ain’t the O’s.

    Baltimore is also a very bluish Democratic city (Nancy Pelosi’s real hometown) and they are not afraid to spend to improve. In Virginia you want your cake and eat it too so long as you don’t pay. No dough. No go.
    It’s a rather basic lesson, Jim. And in the case of Norfolk, where I have lived and worked, there are natural limits.

    1. Neil Haner Avatar
      Neil Haner

      You make a great point about VB. The heart of the Hampton Roads tourist draw is Virginia Beach. I-64 isn’t backing up on a Saturday afternoon because of Norfolk… people want the beach. But the cruise terminal? 20 miles from the Oceanfront. Maybe one day the Tide will go that far (estimates I’m hearing say 2019 may be reasonable), but even then, it’s a 45 minute train ride.

      Bottom line, Norfolk is a very poor “Port of Call” choice, as there are no real tourism attractions close to the boat. As such, the terminal only makes sense as a point of embarcation. But that gets back to nearby populations who will look to Norfolk as a convenient destination, and we’ve already established that it’s really only easy for HR and Richmond, which probably isn’t enough to justify the terminal.

      I hope the folks at Dulles trying to expand its freight services take note here… just because you add a capability to your port, it doesn’t mean the private sector is now going to be jumping to use.

  5. If there are “natural limits” to the Hampton Roads tourism industry, why did Norfolk make an inherently risky $31 million ($36 million if you include the VPA contribution) investment in Half Moone? We don’t know the numbers, but there’s a good chance that the facility is already cash flow negative. If Carnival departs, the odds are overwhelming that it will be.

    That $36 million is money the city could have invested more productively somewhere else.

    1. Breckinridge Avatar

      Yes, and if Norfolk had stockholders, the executives who made a dumb business investment would be punished. Voters seem far more forgiving. Somebody should have looked at Baltimore and said, 1) we ain’t Baltimore and 2) with Baltimore so close, who will come here? But politicians have different risk-benefit calculations than business owners, which is why politicians are so often BAD at this. The should concentrate on creating the environment for entrepreneurs to do their thing.

      1. DJRippert Avatar

        Norfolk wouldn’t last a year as a corporation. Their stockholders and executives would be looking for a buyer from the day they assumed their roles. It is too small to be effective. A larger contiguous entity would buy / merge with Norfolk. Within 10 years the entire Tidewater area would be under one regional corporation / government. Then, you would start to see real progress.

        This is always the problem in Virginia. There are too many counties. There are too many independent cities. The independent cities aren’t tied to any county. Virginia’s organization is perfect … for 1850. And the nanny government in Richmond is too big, too dumb and too corrupt to do anybody any good.

        Norfolk is trying to optimize Norfolk. Chesapeake is trying to optimize Chesapeake. But they are too small. There needs to be an entity that is optimizing the Tidewater region.

        The problems in Virginia are not state-wide. They are not city / county specific. They are in-between. They are regional.

    2. wesghent Avatar

      I didn’t know this conversation was going on; glad to see it. Norfolk’s shortcomings as a city are underreported and underdiscussed in open forum. These bad investments of our public money are results of the usual problems: poor research, closed door decisions, insular mentalities that have been here for generations. Mayor Fraim and cohorts won’t step down after many years, so it becomes personal: if one opposes the status quo, one is the enemy. Much control from old guys who are dying out; only hope is death or revolution of Jefferson’s variety. At age late 70s, I see younger folks as too lazy to be informed, look at data from outside Hampton Roads, and take action. The well-fed have no notion of what it’s like to be poor or disenfranchised. Demise may be deserved.

  6. Peter Galuszka Avatar
    Peter Galuszka

    WHy the $36 million? How the hell should I know? I didn’t make the decision.

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