- Before getting too far, it’s important to understand what exactly it means for a vessel to be “flagged.”
- What might surprise you is that ships don’t have to be flagged where they are homeported.
- Since ships are international in nature, it makes sense to flag them in areas that are most friendly to their needs.
- This practice is what’s known as using a “flag of convenience.”
A recent news article published in Cruzely, written by Tanner Callais, brings to shore about why cruise ships sail under foreign flags.
What It Means for a Ship to be “Flagged”
Think of it as a driver’s license. If you live in Florida, your driver’s license shows that the state has qualified you to drive, even if you are on the road in California.
What might surprise you is that ships don’t have to be flagged where they are homeported. In fact, for some vessels like cargo ships, this would be impossible as they are always on the move. Even cruise ships sail from port to port, and often change homeports throughout the year. Having to change the flag state regularly for a ship that sails around the world would be unfeasible.
Since ships are international in nature, it makes sense to flag them in areas that are most friendly to their needs. This practice is what’s known as using a “flag of convenience.” It’s similar to the way that many corporations in the United States are located in Delaware, despite possibly having limited operations there.
In the case of vessels like cruise ships and cargo ships, the best options for them are typically smaller nations such as Panama, the Bahamas, Malta, and Liberia. For example, as of a few years ago about 8,600 ships were flagged in Panama according to BBC.com, compared to about 3,400 in the United States.
Why Cruise Ships Are Almost Always Foreign-Flagged
To be sure, there are plenty of reasons large and small that one country might be better than another for registry purposes.
Cruise Lines International Association told USAToday that factors include “the capabilities of the flag to deliver the services needed; representation and reputation of the flag in the international shipping community; the performance of the flag state, which dictates how a ship is prioritized by port states; the pool of seafarers able to meet the needs of the flag; and the flag’s fees/charges and taxes.”
Biggest factor in flagging ships
But when it comes to flagging ships, one thing stands out as the biggest factor: lower costs. Specifically, the cost of crewing the vessel and costs of operating the ship can be much higher in the United States versus some foreign countries.
Crew Costs Make a Difference
According to a report from the U.S. Department of Transportation that explored the costs of operating a foreign-flagged merchant ship versus U.S. merchant ships, the average daily crew cost for U.S.-flagged ships was approximately 5.3 times that of foreign-flagged vessels.
Now, this report didn’t look specifically at cruise ships — after all there is only one major cruise ship that is flagged in America, so it’s difficult to get enough data to compare.
Daily crew cost 5.3 times that of foreign-flagged vessels
According to a report from the U.S. Department of Transportation that explored the costs of operating a foreign-flagged merchant ship versus U.S. merchant ships, the average daily crew cost for U.S.-flagged ships was approximately 5.3 times that of foreign-flagged vessels.
Now, this report didn’t look specifically at cruise ships — after all there is only one major cruise ship that is flagged in America, so it’s difficult to get enough data to compare.
Operating Costs & Insurance Are Other Factors
Take maintenance and repairs. In 2010 testimony to the House of Representatives, Maritime Administrator David Matsuda pointed out that U.S.-flagged ships are hit with a 50% ad valorem duty on repairs done in a foreign shipyard. The U.S. Department of Transportation said that a staggering 89% of those it surveyed said that this duty “negatively impacts their decision to flag under the U.S. registry.”
Insurance and liability is another factor to consider. With thousands of passengers and crew on the ship at any time, incidents are bound to happen. And according to the Department of Transportation, insurance costs can be four to five times higher in the United States compared to foreign registries. The reason? The report points to increased liability costs associated with personal injury for U.S. carriers.
Taxes and Foreign Cruise Companies
While being foreign-flagged doesn’t hurt, the tax benefits — especially federal income taxes — seem to be a big reason cruise companies are incorporated in foreign nations, instead of the United States.
Carnival Corporation is incorporated in Panama. Royal Caribbean Group is based in Liberia. And Norwegian Cruise Line Holdings is in Bermuda. Since the cruise companies are actually foreign entities, it makes sense they would fly under a flag other than the United States.
The Drawbacks of Not Being Flagged in the United States
There are rules regarding the itineraries of foreign-flagged cruise ships when sailing from the United States. You’ll notice that cruise ships make a stop in a foreign port before returning back to the U.S. Laws surrounding the carrying of passengers on foreign-flagged ships mean that you can’t take a cruise with stops only in the United States.
Because of this rule, it was actually the Canadian government that first put an end to the Alaskan cruise season in 2020. Canada banned large ships from docking in their ports.
What Foreign-Flagging Means for Passengers
On the positive side, cruising is known for being affordable, and that is obviously tied to the costs to operate the ship. If it is less expensive for a cruise ship to operate under a foreign-flag, then it allows for less expensive cruise fares than otherwise. Where else can you get a week-long trip to the Caribbean, all your food and entertainment included, and not break the bank?
But there is a negative aspect. Although rare, accidents and crime can occur on a cruise. Here, the legal situation can get complex. Everything from where the ship sailed from, where the incident occurred, and where the ship is flagged can all have an impact on how the incident is handled. Thankfully, this impacts relatively few passengers, but for those it does affect, the consequences can be frustrating.
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Source: Cruzely
