Virginia tourism officials attracted cruise ships to Hampton Roads for a dozen years, until the last cruise line abandoned Virginia in 2013. The local competitor is primarily Baltimore, the regional competitor is New York, but Florida is the primary location for cruise ship home ports on the East Coast.
Baltimore is a shorter drive for passengers coming from the population centers in the Northeast; Norfolk is closer to Bermuda, the Bahamas, and various other resort destinations. Norfolk tourism officials argued "what tourist wants to spend an extra six hours sailing through the cold Chesapeake Bay during a winter cruise when they could be sitting in deck chairs, holding drinks with little umbrellas and basking in 80-degree warmth in the sunny Caribbean?" (Answer: tourists from Ohio, Pennsylvania, New Jersey, and Maryland who hate driving on I-95 through DC/Northern Virginia, and then on I-64 through the Hampton Roads Bridge-Tunnel to get to Norfolk.)
Why do Virginia officials want cruise ships to dock at Virginia ports? In addition to the fees and wages paid to port-related employees, there's plenty of spending money in the pockets of passengers. Baltimore receives up to $1 million in economic benefits for each cruise. When a cruise ship with 500-2,000 passengers docks and the average tourist spends $100 or so in town... you can see why Virginia officials are willing to build facilities to stimulate more cruise ships to visit Hampton Roads. Extra business from tourists generates more sales/meals tax revenues for local governments.1
Deciding where cruise ships should dock in Hampton Roads involved competition between Newport News and Norfolk. On December 7, 2000, the USS Wisconsin took up residence next to the Nauticus museum in Norfolk harbor. At that time, the Nauticus dock could handle only afternoon visits from cruise ships. Overnight cruises to the Caribbean used the Newport News Marine Terminal, across Hampton Roads. Newport News officials loved the income associated with the cruise business - after all, the tourists required minimal services but contributed substantial tax revenue to the city. However, the Newport News Marine Terminal was busy handling cargo; it could not accommodate more cruise ships.
While the state's Virginia Tourism Corporation studied how to attract more cruise ship visits to the state, the Newport News Industrial/Economic Development Authority studied how to ensure those ships continued to stop in Newport News. However, Norfolk was also angling for a larger slice of the tourism pie as well. By 2002, the cruise ships were docking at a temporary facility at Town Point in Norfolk, on the other side of Nautilus from the USS Wisconsin.
Separate juridictions within Hampton Roads area competed with each other for the cruise ship business, but regional cooperation to draw tourism to Hampton Roads is also common. Elected officials in Tidewater will all nod their heads and agree in public that it's great to have tourists in the area, and officials from Virginia Beach to Willianmsburg will jointly celebrate the Hampton Roads region as a destination to visit. Community leaders all know that the travel and tourism-related businesses in both North Hampton Roads and South Hampton Roads will benefit, if the cities/counties combine efforts to convince visitors to come to the Hampton Roads region rather than go to the North Carolina beaches, Richmond, Atlanta, etc.
For example, the HarborLink ferry connected Nauticus in Norfolk and the Virginia Air and Space Center in Hampton starting in 1992. It was sponsored by the Norfolk Convention and Visitors Bureau and the Hampton Convention and Visitors Bureau. Visitors who stay long enough to see *both* communities were likely to spend the night and buy meals at various restaurants in the region. In one effort to attract business, HarborLink advertised "Make total purchases of over $100 in Hampton and return trip to Norfolk is free."2 However, HarborLink was discontinued in 2002, when it became clear that tourist and commuter traffic would remain insufficient to cover costs.
Cooperation on regional tourism can increase sales tax revenues across the Hampton Roads region. However, Hampton Roads is a collection of competing, as well as cooperating, jurisdictions. At some point, political lines dividing jurisdictions on the regional map become critical.
When the cameras are turned off, it's natural for local elected officials to direct their staff to ensure sales taxes from tourists are returned to a particular local jurisdiction. Newport News tax revenue does not fund Norfolk schools, and Norfolk taxes do not support services in Newport News. If the local sales tax collections are high, then the local property tax rate can be kept low and the local voters can be kept happy.
It matters where tourists actually spend their money. A percentage of the state sales tax goes back to the jurisdiction - not the region - where the tax revenue was collected. Meals taxes and occupancy taxes on hotel rooms are local taxes. Though some of that revenue may be dedicated to the regional tourism organizations, most is used primarily for providing services (especially schools, fire, and police) in one jurisdiction.
Local officials need local (as well as state and Federal) revenue to pay teachers, maintain government buildings, etc. When tax revenue is credited to one particular jurisdiction, then voters in that particular city/county can receive good services from their local government along with a low property tax rate. If the City of Poquoson does not get business from cruise ships docking in the City of Norfolk, then landowners in Poquoson may have to pay higher property taxes than landowners in Norfolk.
Before September 11, 2001, the Virginia Port Authority started to plan a major upgrade of the Newport News Terminal. The Virginia Port Authority is a state agency, so it could not arbitrarily provide state funding for Newport News while ignoring potential other sites. The state agency had to focus on regional cooperation, and could not select a "winner" in a competition for building infrastructure to attract cruise ships without documenting its reasons.
Taking advantage of that delay, Norfolk built temporary facilities and obligated local funds to draw cruise ships to the other side of the harbor in 2002. In 2004, Norfolk committed $36 million in city funds to build the permanent Half Moone Cruise and Celebration Center next to Nauticus. The Virginia Port Authority contributed an additional $5 million for improving the piers and other infrastructure. The city calculated that it would have to almost double the number of people choosing Norfolk as their port of embarkation for a cruise, but decided it was a good risk.3
The $36 million Half Moone Cruise and Celebration Center on Town Point opened in April, 2007. It operated as part of the city-owned Nauticus science and technology center and maritime museum, together with the USS Wisconsin battleship.
After 9/11, cruise ship companies found mid-Atlantic ports to be competitive to the traditional ports in Florida because customers were more willing to drive than fly to catch a cruise ship. Norfolk was not the only mid-Atlantic option, however. Half Moone Cruise and Celebration Center initially attracted business away from Baltimore, a competing port of call for cruise ships - but Baltimore required an extra day of sailing up the Chesapeake Bay, when customers on cruise ships want to travel out into the Atlantic Ocean. In addition, the Norfolk cruise terminal was designed to attract trade shows, parties, exhibitions, and other events that would draw people to the city and its downtown.4
Local officials justified constructing the new cruise ship terminal by claiming taxes generated by more tourists would pay for most of the cost, and the taxpayers of Norfolk would not be stuck with the bill. Cruising was projected to be an economic "driver" for the Norfolk economy, though the business has its ups and downs. Back in 2003, one local official estimated the new terminal would need 150,000 passengers annually to be cost-effective. In 2008, 28 cruise ships "called" at Norfolk and brought over 100,000 passengers, but in 2009 that dropped to 17 ships bringing just 64,000 passengers.5
The Virginian-Pilot newspaper reported in 2008, "while the Half Moone produces enough revenue to offset its operating expenses, it is falling short of covering its annual construction debt payment, according to financial information provided by the city."6
The mathematics of calculating economic benefits from tourism can be confusing, based on various assumptions about business with/without the Half Moone Cruise and Celebration Center. The loss of Royal Caribbean business after 2010 made the business risk of Norfolk's investment even more clear.7
Royal Caribbean stopped splitting its business 50-50 between Baltimore and Norfolk, and moved all sailings to the Maryland port after 2010. However, Norfolk was able to generate more cruise ship visits from the rival Carnival Cruise Line. Carnival scheduled 7 port visits to Norfolk in 2011, 9 visits in 2012, and 11 visits in 2013. Even with port-of-call visits to Norfolk from four other ships in 2012, however, the passenger count was less than 1/3 of the once-anticipated 150,000 cruise passengers annually. In 2011, only 37,000 passengers sailed from Norfolk on a cruise.8
only Carnival Cruise Line scheduled cruises that launched from Norfolk in 2012 and 2013, and the only destination was the Bahamas
though other companies visited with port-of-call stops
In contrast, Baltimore's cruise terminal was operating at full capacity in 2013. Cruise ships started using Baltimore as a port after the 2001 terrorists attacks in New York City. Customers wanted to drive rather than fly to get on their cruise ship, so suddenly smaller ports on the Atlantic Ocean coastline were able to compete with Florida and New York for cruise ship business. In 2006, Baltimore spent $13 million to convert a paper warehouse into a cruise terminal, moving the passenger travel business away from the cargo business.
Baltimore successfully supported year-round cruising by Carnival Cruise Lines starting in 2009, and considered building a second cruise terminal in 2011. In 2013, there were two trips a week. Each Saturday, a Royal Caribbean ship loaded 2,200 passengers, followed the next day by an equally-large Carnival Cruise Line ship. After reaching maximum capacity for weekend sailings (one ship on Saturday, one on Sunday), Baltimore began exploring whether recruiting a third company to sail sometime between Monday-Friday would expand the overall business, or simply shift customers from the weekend trips and undercut the existing cruise lines.9
The market for cruising is not infinite, and customer preferences change over time. There are limits on demand, no matter how much the supply of cruise terminals might increase.
After Royal Caribbean withdrew its ships that sailed from Norfolk to to Bermuda after 2010, Norfolk was handicapped by Carnival's decision to sail primarily to the Bahamas from Norfolk. Customers could cruise to just one destination from Nofolk, but could sail to a variety of interesting locations from competing ports at Miami, Fort Lauderdale, Orlando (Port Canaveral), Jacksonville, Charleston, Baltimore, New York, and Boston.
Norfolk spent $36 million on its Half Moone Cruise and Celebration Center. Other cities proposed to out-compete Norfolk by constructing more expensive facilities.
To attract cruise-oriented tourists, a group in Savannah, Georgia proposed to build an $88 million cruise ship terminal. A consultant claimed that Savannah could attract over 100 ships with 50,000 passengers by 2015. Unless customer demand climbed by 50,000 people stating to cruise, or 50,000 customers took one more cruise each year, Savannah would meet that "rosy scenario" target only by pulling cruise ship sailings away from existing East Coast ports.
If 2,500-passenger ships used the Savannah terminal, only 20 sailings would be required to handle the projected number of passengers. Increased capacity at Savannah would be a clear threat to Norfolk's ability to generate revenue from the Half Moone terminal, but city officials also recognized that competing ports would threaten Savannah's ability to attract 50,000 passengers. In June 2013, the Savannah City Council unanimously stopped further investment in the project; the investment was judged to be too risky to justify the public investment.10
Norfolk was not alone in its failure to maintain its initial business levels, after building a cruise terminal. Cruises from Philadelphia started in 1998, expanded as New York cruise ships shifted to new sites after 2001, and peaked in 2006 with 35 sailings. The Delaware River Port Authority invested $21 million to build a cruise terminal (advertised as "CruisePhilly - America's Berthplace") at Philadelphia Navy Yard, but abandoned it in 2010. Just two cruises were scheduled from Philadelphia in 2011, in part because the Delaware Memorial Bridge blocked the 5,000 passenger mega-ships from sailing up the Delaware River.11
Similarly, Mobile built the $20 million Alabama Cruise Terminal in 2004. It made a profit hosting ships from the Carnival Cruise Line, until the company relocated its ships to New Orleans in 2011. Like Norfolk, Mobile sought to rent the cruise terminal for weddings, conferences, and other events unrelated to passenger ship travel, to generate some income and help pay off the bonds sold to finance construction of the facility.12
Royal Caribbean pulled its business out of Norfolk in 2010, and then Carnival Cruise Line announced it would would stop using Norfolk as a home port after October, 2013. In 2014, local officials expected cruise ships would continue to tie up at the terminal on stopover cruise calls, making short visits to Norfolk as a ship cruises between other ports. However, stopover cruise visits do not generate the same level of economic benefits as home port operations, since customers on stopovers will not stay in local hotels before/after cruise sailings.
Carnival announced in 2013 that it would abandon Baltimore and Boston as well, scheduling no new visits to those ports after the 2013 season. Carnival's cruise ship Glory shifted its homeport sailings from Norfolk (and Boston) to Miami. Carnival's Pride moved from Baltimore to Tampa, starting in 2014.13
The cruise line blamed Federal regulations issued by the Environmental Protection Agency (EPA), which required ships to use low-sulfur fuel to reduce sulfur emissions to 1,000 parts per million (0.1% of volume), starting in 2015 within the North American Emission Control Area approved by the International Maritime Organization. That limit was designed to reduce particulate matter (PM) and sulfur oxide (SOx) emissions by more than 85 percent, from ship engines burning traditional high-sulfur (3%) heavy fuel oil. The regulation implemented the "MARPOL" treaty (technically, Annex VI to the International Convention for the Prevention of Pollution from Ships).14
cruise ships use fuel oil to power their engines, and US controls on air quality are applied within the North American Emission Control Area
The boundaries of the North American Emission Control Area are close to the Florida shoreline, since the extent of the US claim to an Exclusive Economic Zone (EEZ) is constrained by the presence of counties such as the Bahamas and Cuba in that part of the Atlantic Ocean. The North American Emission Control Area extends for 200 nautical miles off Virginia, however, so the EPA regulation provided a clear economic advantage to cruise ship ports in Florida.
Cruise ships sailing out of Florida ports could switch to traditional heavy fuel oil, a cheaper energy source, shortly after leaving port. The United States's claim of offshore waters is limited by the nearby presence of Cuba and the Bahamas, so the North American Emission Control Area boundaries are not 200 miles offshore. The extra costs for low-sulfur fuel was calculated to be somewhere between $7/day and $19.50/day. The faster opportunity to switch to lower-cost, high-sulfur heavy fuel oil for most of a voyage could dramatically reduce operating costs for a cruise ship carrying 2,500 passengers.15
Separate from the costs of air quality regulations, there was a fundamental geographic reason to abandon Norfolk - not enough people live within a 6-hour drive, compared to the competition.
As tourists regained their willingness to fly, cruising demand increased at Florida ports and the drive-to-the-cruise-port business declined. Cruise industry officials described Norfolk as a "tweener" port, with nearly all customers driving to the port and minimal traffic flying to Norfolk in order to catch a cruise sailing. Baltimore intercepted the customers from the north who wanted to drive rather than fly to a cruise ship port, while Charleston attracted the customers out of Atlanta and the southeastern United States, leaving Norfolk in-between with inadequate demand to support sailings. Though Norfolk was judged to have a high-quality terminal, it could not generate higher profits compared to cruises from alternative ports.16
The "build it and they will come" approach used by Norfolk was a business risk, undertaken by a local government that issued 30-year General Obligation bonds guaranteed by revenue from Norfolk's taxpayers. The city could have limited its financial exposure by issuing Revenue Bonds, which would have been repaid through revenue generated by the facility (typically the mechanism used to finance new parking garages). However, purchasers of Revenue Bonds would have assessed the long-term business challenges and required a higher interest rate, to compensate for the risk that the revenue from cruise ships over the next 30 years would be inadequate and the city might default on the bonds.17
By building the Half Moone terminal, Norfolk pulled the cruise business away from Newport News for slightly more than a decade, but will pay the costs for 30 years. Back in 2002, local officials were excessively optimistic, with the director of Nauticus predicting:18
Completing the Half Moone cruise terminal in 2007 was part of a conscious initiative by Norfolk officials to invest in infrastructure to revitalize the downtown area, starting in the 1980's with city funding to build the Waterside Festival Marketplace and Town Point park. A 2007 economic analysis, completed before the opening of Half Moon terminal, estimated that investment of $250 million between 1996 to 2006 (including the Cruise Terminal, Nauticus center, and battleship USS Wisconsin) resulted in an additional $18.5 million per year of annual tax revenues from downtown Norfolk residents and businesses.19
The city never had any long-term guarantee that the cruise lines would use the Half Moone terminal long enough to repay the initial capital costs of building the facility. Even the annual operating costs had to be subsidized - the $7.7 million generated by the terminal was not adequate to cover the $9.2 million in operating costs between 2007-2013. However, indirect economic benefits from customer purchases (estimated at $135.50/customer) may have generated sales taxes and boosted property taxes downtown, offsetting some or all of the $1.5 million subsidy by the city.20
Following the announcement that Carnival Cruise Line would stop scheduling cruises after 2013, the local Virginian-Pilot newspaper editorialized that Norfolk needed to develop a new purpose for the Half Moone facility. The newspaper noted that the claims of $61.7 million in economic activity generated by the cruise ship terminal did not translate directly into tax revenue for the city. There were clear economic benefits from cruise ship visits, but primary beneficiaries were local businesses rather than the taxpayers who funded the infrastructure. The paper questioned if the city had received a good return on the investment, and called for efforts to make Half Moone into a profitable/sustainable project rather than keeping it dedicated as a cruise terminal - an "extremely expensive anchor for a nonexistent boat."21
In January 2014, Carnival reversed its decision and announced plans to "homeport" cruise ships in Norfolk again starting in 2015. The company had decided to meet air quality standards by installing scrubbers to reduce the sulfur emitted from the cruise ship smokestacks. That investment reduced the marginal cost of sailing from Norfolk through the wide North American Emission Control Area.
The continued marketing efforts by Norfolk/Virginia officials to retain the cruise business were successful. Carnival returned again to Norfolk in 2016, scheduling a total of 5 trips from Norfolk to the Bahamas and Bermuda. The cruise line committed to offer far more trips out of Baltimore on a year-round basis to more destination, but Virginia retained a toehold in the cruise business.22
on the East Coast, New York and Florida ports dominated the cruise business between 2004-10 and most cruise passengers used Florida ports, leaving other cities (such as Norfolk) to compete for a tiny share of the market
Source: US Maritime Administration - Cruise Detail Table
1. "What Grandeur of the Seas fire means for Port of Baltimore," Washington Business Journal, May 28, 2013, http://www.bizjournals.com/washington/news/2013/05/28/royal-caribbean-cruise-ship-fire-a-hit.html (last checked May 29, 2013)
the Norwegian Cruise Line ship Dawn displays plaques recognizing when it first visited a port, including Norfolk
cruise ship lines can sail away from Norfolk... and never return, since they are not obligated to pay for the Half Moone terminal or other infrastructure constructed to attract ship visits