Was the FEMA Deal Good for Anyone?

Now a few weeks later, there is a rising chorus voices led by a few in Congress, and picked up by a spate of newspapers and TV shows, that look at the price and decide FEMA overpaid and Carnival is getting rich at taxpayer expense. Some also see "cruise" and equate that with the pampering service they see in cruise line ads. And finally, adding to the chorus are the unhappy passengers who had their cruises canceled.

The problem is that there is a bit of truth in what everyone is saying, but there are other parts of the issue that they either overlook (never let the truth get in the way of a good story) or haven’t yet come across them. Those are the pieces we are going to add to the story in this article.

First, we can answer the question posed in the title, very easily for one group of people. For the currently less-than-capacity crowd of people staying aboard the ships think it is truly a good deal. They appreciate having a dry bed to sleep in, a roof over their heads, air conditioning, clean drinking water and very good food (although not as fancy as you have on a cruise). They clearly think the deal was a good one.

Then there’s the issue of FEMA. Did they overpay? Maybe, but that’s something that can be debated by politicians for years. It’s not even clear if it was a good idea to use the cruise ships for this purpose. They aren’t hotels, and the operational (remember how strict environmental laws are cruise ships) and legal issues associated with this (they are foreign-flagged vessels owned by foreign corporations normally operated outside US waters, but now will be sitting and providing services inside the US for six months) are quite different and more complex than operating a hotel which FEMA might fully book. Aside from that, the accommodations are not necessarily built for people to spend six months living there.

In any case, FEMA needed these beds on short notice, for a relatively long period, so wherever they went, they’d probably have to pay a premium. It’s always going to be a question of worth, and only the buyer can really answer that.

It’s much like an individual buying a cruise over New Year’s Eve. That week, the price may be $2,000 a person, but the following week, the price is only $1,000. Some people are going to look at that price difference and not buy it, saying it’s not worth that much more to go on New Year’s Eve. Others are really going to want to go that week, and to them, it’s worth it. Either way, Carnival has set the price, and no one really has to buy the cruise if they don’t want to. Likewise, if FEMA thought the price was too high, they could have figured out something else to meet their housing needs; they have in the past.

Another way to look at it would be to see if Carnival made an excessive amount of money on the deal. If they did, it probably wasn’t really a good deal for FEMA.

First, it might be helpful to look at how Carnival was awarded the FEMA contract. FEMA issued a list of their requirements, and, according to the Washington Post, they received bids from 13 ships (ships, not companies - apparently, each ship was viewed as a separate contract). Because of the urgency of the situation, they were only given a day to do this. Only four bids met FEMA’s requirements (the three Carnival ships and the ferry, Scotia Prince, which were all awarded contracts). Among other things, FEMA was requiring meal service, snacks, linen and maid service, medical services and prescription refills. (What? No free soda with dinner?) One would also assume that FEMA also had some sort of pricing in mind. Since only four met FEMA’s needs, that means nine others did not, so it’s hard to see how this could entirely be characterized as the "sweetheart deal" for Carnival as many of the newspaper articles seem to be calling it. They give the impression that FEMA went only to Carnival, Carnival named a price, and FEMA said they’d pay it. In actuality there was a bidding process, although because of the situation, with thousands of people expected to be overwhelming shelters, the process was accelerated, but nine other ships were also entered into the bidding process.

People have seen that $236 million figure, and because that’s a lot of money, they assume Carnival is gouging. First of all, the $236 million figure is a bit misleading. It’s actually consisting of two things: $192 million that is actually contracted for the ships and their normal operation, and then up to $44 million for extra expenses that they may incur as the contract proceeds which would be expenses outside what they would plan. (An example would be the cost of moving two of them from Galveston to New Orleans, which wasn’t planned.)

In the news reports of late, there is criticism based on a comparison to a $599 cruise rate that they see in Carnival’s advertising. Of course they divide the $236 million by the 7,000 passengers and then again by the number of weeks and come up with some $1,200 per week figure as evidence that FEMA is being gouged. For anyone who knows anything about buying a cruise, right there, that calls into question the credibility of everything those congressmen and reporters are saying. When was the last time you actually bought a 7-day cruise for $599? Yes, those rates are out there, booked far in advance at off-peak times and for minimum cabins. They could hardly be viewed as the average price Carnival sells a cabin for over the period from September to March, some of which are peak travel times, and most of which are never sold at the $599 rate.

When questioned about the price they are charging FEMA, Carnival is not bashful about saying they are making a profit on the charters, but they have also said repeatedly the price was calculated to be "impact neutral" on their earnings, meaning that the bottom line from the charters is going to be no more or no less than they would have made with the ships had they kept them in regular operation over the period. They took into consideration everything: loss of onboard revenue, gain from operating with fewer employees, gain for use of less fuel, loss from higher waste disposal, docking fees, you name it and they’ve calculated it in.

Evidence came of how sure they are of their figures during the conference call for financial analysts regarding their third quarter earnings and guidance on expected fourth quarter earnings. When questioned by one of the analysts about if they had adjusted their estimates due to the charters and how much, the answer was that they made no adjustments; those are the same figures as if the ships would have been in regular operation. There would be differences in line items, they said, but the bottom line will be the same. Again they went through a discussion of how carefully they had calculated the pricing of their bid to make it "impact neutral" on their earnings.

At one point, they were asked how they could be so sure of the prices for which they would be able to sell their cabins in the next quarter. That was easy, they said. They were virtually sold out, with very little empty space for the rest of the year and the first quarter of next year. They already knew how much they had sold those cabins for. (Regular readers know that has been an ongoing theme of these calls. In each call lately they report that the next quarter is virtually sold out and the following one has very little space left to sell.)

Carnival Corp Chairman Micky Arison made another very telling statement when analysts kept asking questions about the details of the charters. He pointed out that the charters represent "a very small part of our business." Those are three of Carnival’s smallest and oldest vessels. The Carnival Cruise Line brand itself operates 21 ships. The entire company is currently sailing a fleet of 79 ships. Last year, Carnival Corp had revenues of $9.727 billion. He is right; $192 million (or even $238 million) is a very small part.

How can we be sure they are telling the truth about that? Well, it’s illegal for corporate officers to make knowingly false statements about the company’s financial picture to mislead investors. In addition to talking about these things in the media, they laid all this out in a conference call for the financial analysts from the country’s largest brokerage firms. There has been a small but steady stream of corporate executives going to jail of late for misleading investors as to their company’s earnings. One has to assume the Carnival executives don’t want to join that stream.

All things considered, this doesn’t appear to be a really good deal for Carnival - especially when one other factor is considered. (Not a bad deal for Carnival - as they’ve said, "neutral.") That factor is customer goodwill.

Carnival said that the charters would displace 100,000 passengers already booked on the ships. They went into this knowing that for most of them, Carnival had nothing else to offer them except a refund and a small goodwill gesture to incentivize them to come back to Carnival in the future. Carnival hoped the customers would accept they were giving up their vacation plans so those who had lost everything in the hurricane and flooding would have a place to live temporarily.

In most cases, there was no comparable ship and itinerary to offer. Where there was, comparable cabin types weren’t necessarily available, and when they were, the space was so limited that pricing had usually risen well beyond what the customer had paid if they booked months earlier.

This is one place where we feel Carnival failed and really should have done better for their customers, especially the ones who were scheduled to sail very soon. Many people’s vacation dates cannot be changed on short notice, and Carnival, who has long had an overall reputation of being fair to their customers and looking at individual situations, should have been somewhat more willing to make those sailing relatively soon a little more whole.

On the other hand, in fairness to Carnival, had they been willing to lower prices for these displaced passengers, that would have created more demand for the limited availability there was, and there probably would have been more unhappiness because some people got to travel and some didn’t. It just seems that Carnival should have been willing to offer something more to those scheduled to sail within a month.

It was a tough position for Carnival to be in, but they made their decision, and some customers may not come back. Those positions and decisions are part of being in business.

So was the FEMA deal good for anyone? The only winners we see are the people on the Gulf Coast who are sleeping aboard Carnival ships tonight, who, if they weren’t there, wouldn’t have anywhere else to go. For that, at least, everyone - FEMA, Carnival, and the displaced passengers - can feel proud.