Why Do Cruise Ships Sail Under Foreign Flags?
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If you’ve taken a cruise or visited a cruise port, you’ve likely noticed that most cruise ships fly the flags of countries like Panama, Liberia, or the Bahamas. Sailing a cruise ship under foreign flags provides financial, legal, and practical benefits compared to registering the vessel in the United States.
According to Cruise Lines International Association, over 90% of commercial vessels that call in U.S. ports fly foreign flags.
This article will explore why do cruise ships sail under foreign flags and the benefits for cruise lines and passengers.
Why Do Cruise Ships Sail Under Foreign Flags?
Cruise ships often sail under foreign flags to benefit from more relaxed laws and regulations. This practice, known as operating under a “flag of convenience,” allows cruise lines to take advantage of favorable rules for employment, taxes, insurance, construction, and maintenance.
Since cruise ships frequently travel between numerous countries, it makes sense for cruise lines to register their vessels in nations that provide operational benefits.
That’s why you see so many American and European cruise lines register their vessels in other countries.
Common foreign flags include Panama, Bermuda, and the Bahamas.
A significant factor is the Passenger Vessel Services Act of 1886, which restricts passenger ships from flying the U.S. flag unless they are U.S.-built, owned, and operated. U.S.-flagged vessels must comply with stringent employment and tax laws and use an entirely American crew. This law also mandates that only U.S.-flagged vessels can transport passengers directly between U.S. ports, compelling foreign-flagged ships to stop at a foreign port, like Nassau or Canada, before returning to the USA.
A short history lesson: The Passenger Vessel Services Act of 1886 forbids passenger ships from sailing under the U.S. flag unless the vessel is US-built, owned, and operated. Additionally, U.S.-flagged vessels must comply with U.S. employment and tax laws and operate with an entirely American crew.
Undoubtedly, US laws make operating an American-flagged cruise ship very costly.
The law was created to protect the American shipbuilding industry before leisurely cruising. However, its enforcement has a massive effect on the cruise industry.
Only US-flagged vessels can transport passengers directly from one US port to another. As a result, ships registered in foreign countries must call in a foreign port before returning to the U.S.
This restriction is why every Alaskan cruise itinerary includes a call in Canada.
Benefits of Foreign Flags
In this section, we’ll discuss several benefits of registering cruise ships in foreign countries. Many of the benefits provide cost savings to the cruise line and allow them to keep prices low for guests.
Employment
One of the primary reasons cruise ships sail under foreign flags is the employment benefits of hiring a global workforce. Registering ships in countries like Panama, Liberia, and the Bahamas allows cruise lines to employ crew members worldwide, significantly reducing labor costs.
For example, according to Business Insider, the median annual earnings of cruise ship workers are around $16,000.
In contrast, U.S.-flagged ships must hire an American workforce, which has higher wage costs. The U.S. Department of Transportation reports that wage expenses for U.S.-flagged ships are 5.3 times higher than those for foreign-flagged vessels.
In addition to lower wages, international crew members work long hours with minimal breaks and fewer days off than their American counterparts. This flexibility in working hours allows cruise lines to operate more efficiently and cost-effectively.
It’s common to find that musicians, performers, and officers come from higher-wage countries like the U.S., Canada, or Europe. In contrast, the rest of the crew come from countries with lower wage standards, creating a diverse yet economically advantageous workforce.
Taxes
Another primary reason cruise ships fly under foreign flags is to take advantage of substantial tax savings.
Taxes, alongside employee wages, are among cruise lines’ largest expenses. A cruise ship’s tax rate is determined by its country of registry. By registering their ships in foreign countries, cruise lines can save millions of dollars in taxes.
For instance, Section 883 of the Internal Revenue Code exempts the gross income derived by foreign corporations from the international operation of ships or aircraft for U.S. federal tax, provided the registered country offers similar exemptions to U.S. vessels and specific ownership criteria are met.
This practice is not limited to the ships themselves; many major cruise lines are also incorporated as foreign entities to benefit from lower tax rates.
Here’s a look at where major cruise operators are registered:
- Royal Caribbean Group: Registered in Liberia, based in Miami, Florida.
- Carnival Corporation & plc: Dual listed; Carnival Corporation is incorporated in Panama and headquartered in the U.S., while Carnival plc is based in the U.K.
- Norwegian Cruise Line: Registered in Bermuda and operates out of the United States.
- MSC Cruises: The largest private cruise line based in Switzerland.
- Virgin Voyages: Headquartered in Plantation, Florida.
These strategic registrations allow cruise lines to significantly reduce their tax liabilities, ensuring they remain competitive and profitable in a demanding industry.
Operating Costs and Insurance
The benefits of foreign flags extend to the construction, maintenance, and insurance of cruise ships. A cruise ship must be built in the United States to sail under the U.S. flag.
The requirement that cruise ships be US-built poses a challenge since U.S. shipyards have limited experience constructing cruise ships. U.S. shipyards primarily focus on commercial and military vessels and lack experience building massive passenger vessels.
Consequently, most cruise ships are constructed in European shipyards, known for their expertise in building large cruise ships.
US-flagged vessels must also perform maintenance, servicing, and refitting at American shipyards. Any repairs completed in a foreign shipyard incur a 50% ad valorem duty—an extraordinarily high fee considering that ship maintenance can cost hundreds of millions of dollars.
The maintenance requirement adds significant operational costs and logistical challenges. It becomes incredibly costly in emergencies where a ship cannot safely return to the U.S. for repairs, forcing the cruise line to pay the hefty duty on foreign repairs.
Insurance and liability costs are another major expense for cruise lines.
With thousands of passengers and crew members aboard, cruise lines must be prepared for a wide range of potential incidents. According to the Department of Transportation, insurance and liability costs for U.S.-flagged vessels are four to five times higher than those for foreign-flagged ships.
Increased operational and insurance costs further incentivize cruise lines to register their ships under foreign flags, allowing them to benefit from lower expenses while maintaining operational efficiency.
Weddings/Regulations
Weddings are a significant revenue generator for cruise lines. And it’s not just the revenue generated by the ceremony. Weddings attract large groups of guests who tend to spend more on drinks, food, and upsells.
Passengers attending weddings often purchase drink packages, participate in gambling, order room service, and make reservations for specialty dining, all contributing to the cruise line’s profits.
Most cruise lines allow couples to marry on the ship or at a port of call, adding flexibility to the planning process. The country registry determines the legality of weddings at sea.
In 2011, Cunard Line reflagged its ships to Bermuda, enabling its captains to officiate weddings at sea. This strategic move allowed Cunard to offer onboard weddings, where it previously couldn’t.
Similarly, in 2017, Celebrity Cruises registered its fleet in Malta following the country’s legalization of same-sex marriage. By adopting Malta as a flag of convenience, Celebrity Cruises can offer same-sex weddings on its ships, expanding its appeal and inclusivity.
These examples illustrate how cruise lines utilize foreign registrations to enhance their service offerings and capture a larger share of the wedding market, further boosting their profitability and service offerings.
Drawbacks of Using Flags of Convenience
Sailing under a flag of convenience isn’t without its drawbacks, which became especially apparent during the coronavirus pandemic. The global health crisis forced an industry-wide pause in sailing operations, leading to a significant halt in revenue for cruise operators. Many cruise lines struggled to stay afloat as they faced nearly two years without their primary source of income.
While industries like hotels and airlines received government bailouts and subsidies, cruise lines were excluded due to their foreign status.
Cruise lines operate as foreign entities to avoid U.S. taxes and employment laws, which makes them ineligible for bailout packages designed to support domestic businesses. During the prolonged pause in operations, cruise lines had to issue large amounts of stock to remain solvent, take on additional debt, and scrap older vessels.
The financial struggle would’ve been avoided for cruise ships if they registered in the United States.
Another downside is that foreign-flagged cruise ships must stop in a foreign country before returning to the U.S. You may have noticed that every Alaska and New England itinerary includes a call at a Canadian cruise port.
The U.S. Passenger Vessel Services Act requires cruise lines to call in a foreign port, as it prohibits foreign-flagged ships from transporting passengers directly between U.S. ports.
To comply with the law, foreign-flagged cruise ships must stop at a “distant foreign port” before returning to the U.S. This law means Alaskan cruises must call in Victoria or Vancouver, Canada, and New England sailings often stop in Bermuda or Eastern Canada.
This requirement is a manageable inconvenience during regular sailing times.
However, the situation became problematic when the Canadian government extended its ban on cruise ships during the pandemic. Even though the U.S. Centers for Disease Control had lifted its “No Sail Order,” Alaskan sailings were effectively halted until 2022, when the Canadian government lifted its sailing ban and allowed cruise ships to call in Canadian ports.
These challenges underscore the trade-offs involved in flying a flag of convenience, and the risks highlight the trade-offs that cruise lines face when choosing to operate under foreign registrations.
Why Do Cruise Ships Have To Be Registered To A Country?
Cruise ships are legally required to register with a country, a process known as “flagging.” This registration assigns the ship a nationality and subjects it to the laws and regulations of that country. The country of registration is known as the flag state.
The flag state governs the ship’s inspections, certifications, and enforcement of international maritime laws. They also ensure accountability for the vessel’s safety, environmental standards, and labor practices.
How Can a Cruise Ship Fly a Flag of Convenience?
The registration process for obtaining a flag of convenience is surprisingly simple.
Closed Registries
Countries with closed registries require that ships be owned and/or constructed by the country to sail under its flag. These registries are the most common type of ship registration but are also the most restrictive. Due to stringent regulations and labor standards, they often lead to higher operating costs. Many cruise lines avoid registering ships under closed registries to evade these additional expenses.
Open Registries
In contrast, countries with open registries allow almost anyone to register a ship with minimal restrictions and regulations. This flexibility makes it much easier and cheaper for cruise lines to register their vessels.
For instance, in some countries, the registration process can be as straightforward as filling out an online form.
Open registries attract ship owners by offering lower taxes, reduced regulatory burdens, and lenient labor laws. Popular countries for such registrations include Panama, Liberia, and the Bahamas, all known for their streamlined processes and favorable conditions for ship operators.
Are There Any U.S. Flagged Cruise Ships?
At this time, there is only one large U.S.-flagged cruise ship: Norwegian Cruise Line’s Pride of America. Pride of America offers year-round itineraries around the Hawaiian Islands without calling in a foreign port, a distinction made possible by its U.S. registration.
The history of Pride of America is quite interesting.
American Classic Voyages originally ordered the ship and was partially funded through U.S. government loans. However, construction was halted when the company declared bankruptcy. After filing for bankruptcy, the vessel was sold to Norwegian Cruise Line (NCL). NCL negotiated an exemption allowing the cruise ship to complete construction in Germany while maintaining its U.S. flag status.
Thanks to its U.S. registration, Pride of America is not subject to the Passenger Vessel Services Act, which requires foreign-flagged ships to make a stop in a foreign port before returning to the U.S. This allows Pride of America to offer exclusive inter-island cruises in Hawaii without needing to call at a foreign port.
Other cruise lines offer Hawaiin sailings as part of repositioning cruises so that they can call in Canada, New Zealand, or Australia to comply with the Passenger Vessels Act.
In addition to Pride of America, smaller U.S.-flagged vessels, primarily operated by American Cruise Lines and Lindblad Expeditions, such as the American Constitution and National Geographic Quest, offer coastal and river cruises within the United States.
When Did Foreign Flags Start?
Foreign-flagged vessels first appeared in the 1920s. Under the prohibition laws that began in 1920, passenger vessels could not legally serve alcohol.
Without the ability to offer alcohol, American passenger ships had a competitive disadvantage over foreign cruise ships. To continue serving alcohol onboard and remain competitive, American cruise ships began registering in foreign countries with more relaxed drinking regulations.
The benefits of sailing under a foreign flag extended beyond serving alcohol. Ship owners found they could take advantage of lower taxes, fewer restrictions, and access to cheaper labor. These financial and operational incentives made foreign registration increasingly attractive.
Although prohibition ended in 1933, many cruise companies continued to fly foreign flags to maintain these economic advantages. This practice, known as operating under a “flag of convenience,” has continued to evolve, allowing cruise lines to minimize costs and maximize operational flexibility.
