Cruises fail to buoy the Port

Chip Henkel is stocking his warehouse with champagne, beer and liquor these days — thousands of cases.

He's hiring seven new workers.

And he's bracing for months of mayhem.

As the Alaska cruise season gets under way, his company, Fairn & Swanson, is among those scrambling to supply the glittering ships with millions of dollars of goods, from aperitifs to wild salmon.

"It takes everything we've got to pull this thing off," warehouse manager Henkel says of the struggle to keep the burgeoning cruise business supplied. For the next six months, "I'm on call every weekend."

With some 350,000 passengers expected at Seattle's piers this year, 2005 will easily top the record 281,000 cruise visitors logged last year. Tourists are expected to pour more than $208 million into the local economy and support some 1,700 direct and indirect local jobs, according to a Port of Seattle study.

But much of this economic prosperity is sailing right past the Port itself.

Not only does the Port not make money on its new cruise business, it loses millions of dollars a year, once the cost of building the terminals is taken into account.

"There isn't a way in the world, if you take into account the capital investments, that it does make money," says Mic Dinsmore, the Port's chief executive.

Instant industry

The cruise business pulled into Seattle abruptly over the past few years. Back in 1999 it was a dot on the horizon, logging about 3,300 passengers compared with nearly half a million in Vancouver, B.C.

But since 2000, when Seattle opened its first big cruise terminal at Pier 66, the business has jumped ever year, creating a visible industry in Elliott Bay and stealing thousands of tourists from its northern competitor.

Seattle's success is owed partly to travelers' desire for a U.S. destination after the 9/11 attacks. But equally important was the Port's timely decision to get into the business. It has spent $36.8 million on two cruise terminals, Pier 66 and the newer Terminal 30, opened in 2003.

But as passenger numbers rise, the Port still isn't seeing much operating profit. Last year, for example, it took in $2.8 million in revenue, including dockage fees charged when ships dock, and passenger fees charged each time tourists get on or off a boat. After paying overhead and other expenses, the Port earned $170,000 in operating income from the cruise business.

If depreciation and interest expense are taken into account, however, the Port lost $4.1 million — or about $14 per passenger.

This year, operating income is expected to rise to $915,000. Despite hosting thousands more visitors, the Port still expects to lose $3.2 million, after overhead, interest and depreciation.

Harsh accounting

Port officials say such accounting is unduly harsh. Depreciation, which is deducted as a cost under standard accounting rules, ironically penalizes the Port for building new terminals, they say. And since it isn't a cash charge, it shouldn't count in calculating cruise-terminal performance.

By the same token, the Port doesn't count interest expense on the cruise terminals, since they were financed with public money raised from the King County property-tax levy, not bonds like many Port projects.

However, the Port itself assigned a capital cost when figuring out whether building the cruise terminals made financial sense. And it saw a lot of red ink. Those projections for Terminal 30, which has two cruise piers, showed 12 years of losses. Pier 66, which has just one pier, never recovers its costs.

"It isn't that we're throwing money away," said Port Commissioner Patricia Davis, who is up for election this year. "We don't always make money after depreciation. The one thing we do try to do is cover our operating costs."

She predicts overall Port investment will be "the question of the year" in the November elections for three of five commission seats. "If people say, 'Don't make that investment,' then we might as well close up and go home."

The cruise business isn't unique: Other Port businesses, such as its cargo operations, also lose money, when interest and depreciation are considered.

But the Port's mission of building the economy requires that investment — and public subsidy — to generate jobs, they say.

"As economic engines go in this region, few compare with what the Port produces," Dinsmore says. "This year alone we'll invest almost three-quarters of a billion dollars in building economic vitality. Take away the ability of the Port to do that and we would look different as a region in a very, very negative way."

Local jobs and wages

Indeed, on that level, the cruise business generates substantial returns. A study commissioned by the Port showed 1,732 jobs tied directly or indirectly to the cruise business last year, up 660 jobs from 2003. Those jobs produced $59 million in wages and another $5.8 million in tax revenue. All told, the cruise business pours $208 million into the local economy, or about $740 per passenger.

The jobs and income go to people like Henkel at Fairn & Swanson. The distributor of tax-free liquor, wine and tobacco, near Boeing Field, sends out more than 10 semitrucks a week, each loaded with nearly a thousand cases. About five trucks go to Seattle and the rest to Vancouver, the original source of Fairn & Swason's cruise business, Henkel says. He is hiring seven workers for the warehouse, bringing the total to 12.

Bijan Khorrami, chief executive at Floral Masters, a Seattle florist, is stocking up on tulips, snapdragons and other blooms for the 1,200 bouquets his business provides every week to the Holland America and Norwegian cruise lines. The biggest arrangements, 3 feet tall, cost the lines $150 each, he says. He adds six or eight full-time temporary workers to his staff of five to work the cruise season.

"They have no choice but to use local businesses," Khorrami says of the cruise lines. "They either have to load up over here or in Juneau, and things are 10 times more expensive over there."

For dock workers, the cruise season will create up to 100,000 hours of well-paid work this year, the Port said. When cruise ships are docked at all three Seattle piers, they'll provide work for 210 Longshore workers.

Local tour operators and retail businesses say the picture for them is less rosy. Many cruise passengers are picked up by buses at the airport and taken directly to the ships, avoiding hotel stays and trips to Pike Place Market.

"The thing about the cruise business is that it's not a huge generator of economic activity," says commissioner Alec Fisken. "It's summer weekends and a lot of people flying in and flying out. Compared with Fishermen's Terminal, it's a lot less profitable."

Davis says the tourist trade is a boon precisely because the visitors don't stay. "They come happy, they spend money, they leave happy," she says. "We don't have to build more roads, more sewer lines, more houses."

Northern exposure

Seattle's rival cruise port in Vancouver, B.C., doesn't publish its financial details as openly as Seattle. Spokesman Greg Wirtz said Vancouver makes a profit even after accounting for interest and depreciation. Vancouver also makes payments in lieu of taxes, or PILT, to the city.

"We've always been able to make money," Wirtz says. "Our business sectors like cruise, container, bulk — all are expected to generate a positive return. Even after paying back PILT, they have a positive bottom line."

One difference between Seattle and Vancouver has to do with the way fees are collected. Vancouver operates its two cruise terminals itself, and collects harbor dues, passenger and dockage fees. Last year, it said, the income totaled nearly $9.7 million, on about 460,000 passengers.

Seattle outsources operation of its cruise facilities to a private company, Cruise Terminals of America (CTA), a partnership of General Steamship Agencies, SSA Marine and Columbia Hospitality.

CTA keeps 45 percent of the gross revenue from passenger and harbor fees, and 75 percent of the net profit from fees.

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Seattle also doesn't charge harbor dues, which brought Vancouver about $644,000 last year.

Vancouver collects a passenger fee of $8.85 each time a passenger boards or gets off a ship — slightly higher than Seattle's $7.50 fee.

Some commissioners say they think Seattle could charge more, especially given that tourists spend $1,700 or more for a weeklong cruise in a cabin with a balcony and the lines are profitable. Cruise operator Carnival, which owns the Princess and Holland America lines that call in Seattle, earned a net profit of $1.85 billion last year.

"Why should the taxpayers of King County subsidize Carnival?" Fisken says. "They do fine on their own."

Bargaining power

Cruise lines say fees usually are a minor factor in choosing major ports of call. Alaska is a popular and profitable destination, and cruise lines are putting a big share of their ships in Seattle even though overall costs in Seattle are higher than Vancouver.

Cruise bookings filled up several months early this year, with much of the space in July and August already taken. The rise in demand came despite a price increase of 10 percent or more from last year, though prices are still lower than they were before 9/11, says Charlie Ball, senior vice president of Princess Cruises.

"Passenger fees certainly are a factor, but mostly it's our perception of what the customer is looking for," Ball says.

Ball says a cruise line might switch destinations among cities in Alaska if fees were to rise substantially. (Alaska residents next year will vote on a ballot initiative seeking a $50 passenger fee and requiring cruise ships to obtain wastewater discharge permits, share gambling profits and pay state taxes.)

But Seattle's location and convenience make it tough to steer around. "Seattle's more expensive than Vancouver," when labor costs and passenger fees are factored in, Ball says. "But it's not so significant that we would make a decision based on that."

Dinsmore notes Seattle has doubled its passenger fee since 2000, and says further increases could drive cruise ships out. "Raising fees substantially is not an option," because of competition, Dinsmore says. "I wish it weren't so, but it is."

Fisken disagrees. "I think it's more likely Vancouver would raise its rates," he said. "I don't see any reason why the cruise lines can't pay the cost of the docks."

Alwyn Scott: 206-464-3329 or ascott@seattletimes.com