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AA deal in reverse

Written by editor

The government and two cruise corporations – Royal Caribbean Cruises Limited and Carnival Corp – are in negotiations to extend a more than US$34 million guarantee from both lines to land passengers in

The government and two cruise corporations – Royal Caribbean Cruises Limited and Carnival Corp – are in negotiations to extend a more than US$34 million guarantee from both lines to land passengers into the island.

It is the opposite of the American Airlines deal, where the government pays the airline for missed passenger targets. Instead, these two cruise corporations, the biggest in the world (controlling 80 per cent of cruise travel), will pay government for missed passenger targets.

“We are now wrapping up these negotiations,” William Tatham, head of cruise shipping at the Port Authority of Jamaica (PAJ), told the Business Observer in an interview.
“We are following the same format of guarantees as before.”
“The last contract signed between the two companies guaranteed over US$34 million to the government over the life of the contract (five years),” noted Tatham. “The next contract, the PAJ is looking to extend the length of the contract, therefore giving even greater certainty for the future.”

Under that agreement, Carnival must bring in at least 500,000 passengers and Royal Caribbean 430,000 annually.

“Actually, Carnival and Royal Caribbean guarantee Jamaica 930,000 passengers per year under the existing contract,” Tatham explained. “In exchange for passenger guarantees, both companies enjoy a reduction of the facility fee which is traditionally U$15 per head. So if they don’t meet their targets they still have to pay as if they did.”

The PAJ contract was seen as a pioneering one, and was duplicated in other ports in the Caribbean, but it appears that the airline industry has it in reverse. In response to the controversial issue, Tatham said: “The airline industry is a fragile industry, that has had difficulties over the years. They are two different industries. One is a travelling resort and the other provides transportation to your resort. And Jamaica is a strong marquee cruise destination; they need us and we need them.”

The negotiations with Royal Caribbean are now in the final stages, and discussions with Carnival, whose contract ends later this year, are underway. Royal Caribbean’s contract actually ends next year but due to a joint venture to build a new cruise port in Falmouth, negotiations were brought forward. The Falmouth pier is to be completed in 2010 and will accommodate the largest cruise ship in the world which will carry 6,400 passengers. That ship called Oasis of the Sea is presently under construction.

The government had never had to call on the guarantee, as the ships have achieved targets. However, last year was worrying, as there were some ships that were diverted to the Mediterranean, which led to a fall in cruise arrivals from 2006’s record.

“It’s in times like these that such contracts come in handy. Because we knew at least that we were going to have a certain number of passengers,” he explained. “So no matter how bad things got, we knew they wouldn’t have pulled out of the Jamaica.”

Jamaica landed some 1.1 million cruise passengers last year and 2008 should also be flat.

“Historically, in the 80s and 90s , what occurred was an incentive scheme. Where, for example, a cruise vessel achieved a set target of passengers, they would get a rebate on the head tax paid. But when the PAJ took over responsibility for cruise shipping, in 2001, we took a different approach to the contract. And we felt the rebate system did not allow for the private sector and government to plan for the future, as there was no minimum passengers guarantee,” said Tatham.