BUSINESS STRUCTURES (The
Midnight Buffet)
Disney, Virgin and Ritz-Carlton have
each structured their entry into the
cruise market differently. Disney
took the traditional approach with a
significant capital investment to own
its ships and set up a separate cruise
organization with marketing, sales, hotel
operations and ship/technical operations
distinct from Disney’s other operating
businesses. This approach is operationally
complex and involves a unique set of
regulatory and legal rules and standards
foreign to most hospitality organizations.
Virgin Voyages has been funded by
Bain Capital. Reportedly, Virgin has
contributed its brand and management
efforts in exchange for equity in the
cruise company, which operates as
a stand-alone entity, and a licensing
fee. The capital for Ritz-Carlton
Yacht Voyages was provided by the
private equity firm Oak Tree Capital
Management (as reported by Oak Tree).
Ritz-Carlton will receive a licensing fee,
oversee the hotel and spa operations
of the ships and provide marketing
and sales functions (which will take
advantage of its past guest lists and
rewards program). It is unclear whether
the technical and navigational aspects of
the ships will be managed by a third-
party ship management company or
whether the owner entity will operate
the ships themselves. Regardless,
Ritz-Carlton will not be involved in the
technical and navigational management
functions of the ships. The use of ship
management companies and third-
party ownership is very common in the
shipping and cruise industry and is very
similar to the structures used in the
hotel industry.
National Geographic has entered into
a pure licensing agreement and sells
cruises through its travel services group.
The simplest structure for an existing
brand to enter the market is very similar
to the model used in the hotel industry.
A third party will provide the capital
for and own the ships and will most
48 ILHA
likely hire the technical management
company to operate the ships. The
brand company will either: (1) time
charter (i.e., lease the ship with the
owner maintaining responsibility for
the navigation, technical management
and maintenance of the ship); or (2)
simply license its name and contract
to market and sell the passenger
accommodations. The brand can either
operate the onboard hotel, food, and
beverage and entertainment itself or
outsource the hotel management of the
ships. Variations of these structures have
been used in the creation of some of the
industry’s most successful luxury and
expedition cruise products.
Additional ownership structures
have been utilized on a limited basis.
Luxury ships currently operate with
condo-type ownership structures.
Vacation ownership of cruise ships is
recognized under the Florida Vacation
and Timesharing Act. Cabin blocks on
existing cruise lines and ship charters
have been utilized as product offerings
by vacation clubs.
MINIMIZING RISK (Batten Down the
Hatches)
The simple structure adopted by Ritz-
Carlton best minimizes the business
risk involved in entering the cruise
industry. The capital investment is
obtained from private equity or other
private investors. Private equity
funds have been enamored with the
industry, in no small part due to highly
successful cruise industry private
equity investments in recent years.
Several of those investments have
achieved very successful exits recently.
In a number of jurisdictions, owning
ships has considerable tax benefits,
including accelerated depreciation,
that also attract investors to this asset
class. If structured correctly, current
U.S. law (Section 883 of the Internal
Revenue Code) exempts cruise lines
that own and operate ships engaged in
international commerce from tax on
income “effectively connected” to the
operation of those ships. This exemption
includes income earned from itineraries
that start and end in U.S. ports, provided
the voyage includes international ports
of call. Most U.S.-based cruise lines only
pay taxes on the income derived from
land tours occurring in the U.S. These
tax benefits are achieved through a
combination of incorporation in certain
favorable jurisdictions and registration of
the ships in favorable jurisdictions that
have treaties with the U.S. or provide
similar tax benefits to U.S.-registered
ships. The tax structures are too complex
to cover in this article but meeting the
requirements is typically achievable.
A number of businesses and investment
funds have business models based on
the ownership of ships that are leased
or chartered to operating companies.
SunStone Ships, located in Miami,
currently owns 14 ships and has three
expedition ships under construction in
China. It owns the ships and provides
technical and navigational management
through an affiliate and offers hotel
management through a separate
affiliated ship management company.
SunStone does not own or operate
the ships under its own brands but
exclusively for third parties that market
and sell the accommodations under
various brands. V-Ships Group, based
in Monaco, has managed technical and
navigational operations for some of the
world’s top luxury cruise brands and
hundreds of ships, including passenger
and cargo under such management.
The use of ship management companies
to operate ships for third parties
that sell transportation on the ship is
extremely common in both the cargo
and passenger shipping industries.
The operation of a cruise ship is very
complex from an engineering and marine
perspective. In addition to the navigation
and propulsion of a massive ship, the
operation involves electrical generation
and distribution equivalent to that of a
small city, sewage and waste treatment,
water treatment, HVAC and the hotel,
catering and entertainment operations
of a large resort at sea. The difficulty
of operating an economically scaled