Secret of Carnival’s unsinkable business model: free coast guard rescues & no taxes

It would seem like terrible timing to have to report earnings the day after announcing trip-ending malfunctions on two of your ships, and a month after an onboard fire has left one ship adrift in the Gulf of Mexico, with its passengers mired in their own waste for days on end.

And yet, your stock stays afloat. Sure, it opens down 4.7% on the news about the cancelled ships. But it bounces more than half-way back after you announce your first-quarter earnings. And this even though you lowered your earnings guidance for the rest of 2013.

Such is your good fortune if you are Carnival Cruise Lines. One reason the company recovered so easily from its recent disasters is that cruise vacationers have proven to be a forgetful lot—and expedient. Promotions usually win them back after catastrophes; the company indicated in its earnings call yesterday that booking volumes recovered only three weeks after the stranding of the Triumph in the Gulf of Mexico. (It did however take the industry longer to recover from the tragedy of the Costa Concordia, also owned by Carnival, which capsized just over a year ago off the Italian coast with 32 deaths.)

But another key reason is that Carnival has a terrific business model. For one thing, even though it’s headquartered in Miami, it’s incorporated in Panama.

“It is subject to no US labor wage laws. [Carnival has] also escaped US safety occupational hazard safety laws,” James Walker, a maritime lawyer who represents clients seeking legal action against the cruise line industry, told Quartz. “This gives it tremendous advantage over any other form of transportation or hospitality or entertainment business here, all of which have the labor, wage or tax consequences of being a US business.”

That also makes its shipping business exempt from US federal income taxes (as well as from a variety of taxes in other countries in which it operates).

Now, not paying taxes would be great for any business, but it’s a jackpot when you get as much back from the taxpayer as Carnival, as Senator John D. Rockefeller IV pointed out on Twitter:

.@USCoastGuard responded to 90 incidents with Carnival ships in 5yrs- with passengers onboard. This needs to change http://t.co/HaswHUtXZM

— Jay Rockefeller (@SenRockefeller) March 14, 2013

The senator got into more detail in a letter to Carnival CEO Micky Arison (pdf), noting that the US Coast Guard and the US Navy report that the costs of responding to the 2010 Carnival Splendor incident were $1,541,904.53 and $1,884,376.75, respectively. The Coast Guard tallied its costs in the Triumph fiasco at $779,914.26. “Given that you reportedly pay little or nothing in federal taxes, do you intend to reimburse the Coast Guard and the Navy for the cost of responding to either the Carnival Splendor marine casualty or the Carnival Triumph marine casualty?” wrote Rockefeller.

Cruise Ship Marine Casualties

Rockefeller attached a list (pdf) from the US Coast Guard tracking Cruise Ship investigations since 2008. Here’s a segment of the list from February 2012, minus the latest incidents, with the Carnival incidents highlighted in yellow. (Princess Cruise Lines and Holland America Lines, or HAL, are also Carnival brands.)

Cruise Ship Marine Casualties

That’s quite a track record. “”It’s the consequence of not being regulated under a true safety administration of any kind,” Walker says. Some attribute the unusual spate of incidents to management problems at Carnival.

A representative for the company cautions against over-generalizing. ”Each of these situations was different,” Vance Gulliksen, Senior PR manager at Carnival, told Quartz. “All modes of transportation, including cruise ships, have strong overall safety records but sometimes technical issues such as the one Carnival Dream is experiencing will occur from time to time.”

 This story originally appeared on Quartz, a Skift content partner.
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