Intent of PVSA Was to Protect U.S. Maritime Transportation Industry, but Rulings and Decisions Have Expanded Itineraries for Foreign Cruise Ships

In 1886, Congress passed the PVSA to protect the U.S. domestic maritime  transportation industry from foreign competition. To provide this  protection, it penalizes foreign vessels that transport passengers solely  between U.S. ports. Many cruises provided by foreign vessels are to  international destinations and, therefore, are not affected by the PVSA;  however, several rulings and decisions interpreting the PVSA have  expanded possible itineraries for foreign cruise vessels between U.S. ports  that were once restricted. Interpretation and Enforcement of the Exemption Will Likely Have Little Impact on the Implementation of the PVSA and Other Related Laws

The exemption granted to NCL to be able to operate in Hawaii will likely  have little impact on how the PVSA, U.S. vessel documentation laws, or the  Jones Act are implemented by CBP and the Coast Guard. In addition, the Coast Guard deals with vessels on a case-by-case  basis; and this exemption is specific to NCL’s three vessels and cannot be  applied to any other vessels in any other trades. However, prior to the exemption there were  already substantial barriers to U.S.-flag entrants into domestic trade due  not only to higher capital costs, but also to higher operating costs  associated with the U.S. flag. Exemption Adds to Existing Barriers for Potential U.S.- Flag Market Entry

NCL has a large capital cost advantage over potential competitors, who  might attempt to build ships entirely in the United States for operation  under the U.S. flag because the exemption permits NCL to complete  construction of its U.S.-flag ships in a foreign shipyard at a lower cost than  a comparable ship built in a U.S. shipyard. Figure 4 shows examples of cruise itineraries  between U.S. ports that foreign-flag vessels can offer. The availability of  foreign-flag service on U.S. itineraries that include a foreign port-of-call  reduces the likelihood that potential U.S.-flag carriers can offer competitive  prices because U.S.-flag ships have higher capital and operating costs than  foreign-flag ships. In addition, if NCL is unable to operate successfully  under the U.S. flag in Hawaii, possibly the most desirable market protected  under the PVSA, there will be further disincentive for any other cruise line  to attempt to operate under the U.S. flag, thus limiting the potential  development of the U.S.-flag cruise vessel fleet. Unclear if Granting Other Cruise Lines Similar Exemptions Would Lead to Entry by Other Cruise Lines and Resulting Economic Benefits

Granting similar exemption to ease entry into the domestic trade could lead  to additional benefits for ports and port cities, the merchant marine and  consumers; however, it is unclear how many cruise lines would choose to  enter if they were permitted to operate foreign-built ships under the U.S.  flag. Both  departments generally agreed with the findings in the report and provided  technical clarifications, which we incorporated as appropriate. To determine the potential effects of the exemption on competition in the  passenger cruise industry, entry into the U.S. domestic market, the  exemption’s broader economic effects, as well as the potential effects of  granting similar exemptions, we reviewed studies on the economic impact  of the cruise industry and competition in the industry and conducted  interviews with officials from several cruise lines, industry associations,  and a full range of cruise industry stakeholders, analysts, and experts. These U.S. laws do not usually apply to foreign-flag cruise lines because  their itineraries are in international waters, either because they include a  distant foreign port if they are traveling between U.S. ports, or a nearby  foreign port if the voyage is a round trip from one U.S. port, and thus  international rather than U.S. laws apply.
Why GAO Did This Study

No large U.S.-flagged cruise ships (ships registered in the U.S. that are U.S.-built, U.S.-owned, and U.S. crewed) are in operation. Foreignflagged vessels cruising to foreign ports serve most of the U.S. demand for cruises. However, Norwegian Cruise Line (NCL) recently obtained an exemption from U.S. maritime law to operate three foreign-built ships under the U.S. flag in Hawaii. Cruise lines and others have raised concerns over the advantage the exemption might confer to NCL, since foreign-flagged competitors are unable to offer the same itineraries due to the Passenger Vessel Services Act (PVSA), which prevents foreign vessels from transporting passengers solely between U.S. ports. Concerns have also been raised over the effect this exemption might have on future attempts to grow the U.S.-flag cruise vessel fleet, since potential U.S.-flag competitors would need to build ships in the United States, presumably at higher cost. GAO was asked to (1) review the original intent of the PVSA and rulings and decisions regarding it, (2) determine if the exemption will affect the implementation of the PVSA or other maritime laws, (3) assess the potential effects of the exemption on competition and entry into the U.S. domestic cruise market, and (4) assess the potential economic effects of granting other cruise lines similar exemptions. The Departments of Homeland Security and Transportation generally agreed with the findings in this report.

What GAO Found

The original intent of the PVSA, enacted in 1886, was to protect the U.S. maritime industry from foreign competition by penalizing foreign vessels that transport passengers solely between U.S. ports. However, several rulings and decisions interpreting the PVSA have allowed itineraries for foreign cruise vessels between U.S. ports that were previously restricted. For example, voyages by foreign vessels between two U.S. ports that include a distant foreign port, and round trip voyages from U.S. ports that include a nearby foreign port and other U.S. ports, do not violate the PVSA. NCL's exemption will likely have little impact on how the PVSA or other maritime laws are administered or interpreted because it is specific to three NCL vessels and cannot be applied to any other vessels in any other areas. The exemption effectively gives NCL a monopoly on interisland Hawaiian cruises--providing consumers with itineraries that were previously unavailable. However, NCL will likely have little power to raise prices on these itineraries because of competition from other vacation options. Because NCL is able to operate foreign-built ships in Hawaii, the exemption provides an additional obstacle for any potential U.S.-flag competitor to enter that market, since that competitor would need to build the ship in the United States at a higher cost. However, independent of the exemption, there were and still are other substantial obstacles for any potential U.S.-flag cruise vessel due to the higher capital and operating costs (e.g., labor costs) associated with the U.S. flag, as compared with existing foreign-flag cruise vessels offering itineraries through a foreign port. Granting additional exemptions to ease entry into the domestic trade could lead to benefits for port cities, U.S. seamen, and consumers; however, it is unclear how many cruise lines would choose to enter even if they were permitted to operate foreign-built ships under the U.S. flag, because of the higher operating costs associated with a U.S.-flag carrier operating in domestic itineraries and because of uncertain market conditions.