Flag of Convenience on Cruise: You’ve probably noticed that most ships fly a foreign flag if you’ve ever taken a cruise or visited a cruise port.
Over 90% of commercial ships that make port calls in the United States fly foreign flags, according to the Cruise Lines International Association.
This article will discuss the benefits for cruise companies and the reasons why cruise ships fly foreign flags.
What Does a Ship’s “Flagged” Status Mean?
Every commerce ship is required by international law to register with a nation. The “flag state” of the vessel is the nation in which it is registered.
If you’ve been to a port, you’ve probably seen that ships usually bear the name of a nation or large city on the back in addition to their name. The name, sometimes referred to as the ship’s “flag state,” indicates the nation in which the vessel is registered.
You may be surprised that the nation in which merchant ships are homeported or where their operator is registered exempts them from registration requirements.
The vessel’s registration determines its “nationality.” Flagging a vessel is possible in any nation that permits its registration.
The same nation as their homeport or the nation that operates them doesn’t need to register ships.
The flag state of the ship also has regulatory authority over it. Maritime law requires the flag states to carry out routine inspections, provide environmental and safety protection certificates, and certify the crew and equipment of the ship.
The flag state’s legislation resolves private maritime disputes.
Any nation that permits their nationals to travel also permits ships flying the flag to visit.
Why Do Cruise Ships Fly Foreign Flags While at Sea?
Cruise liners fly foreign flags to take advantage of laxer laws and regulations. Cruise lines can benefit from more advantageous regulations on employment, taxes, insurance, building, maintenance, and other areas when operating under a foreign flag.
Ships are global; over their lifespan, they frequently cruise between several dozen countries. It makes sense to register vessels in other nations that offer operational advantages due to their global character.
This approach is referred to as flying a “flag of convenience.”
Many large companies frequently register in one country while conducting their main operations in another.
Bermuda, the Bahamas, and Panama fly common foreign flags.
A brief history lesson: passenger ships are not permitted to sail under the American flag unless they are American-built, owned, and operated. This is due to the Passenger Vessel Services Act of 1886. In addition, all-American crews and adherence to US employment and tax regulations are requirements for vessels flying the US flag.
Furthermore, the only ships authorized to carry passengers directly between U.S. ports are those flying the US flag. Ships registered in foreign nations are therefore required to make a port call there before sailing back to the United States. This explains why so many ships go to Canada or Nassau.
The US government passed the laws to protect American shipbuilding jobs and keep out foreign competitors.
Nevertheless, operating cruise ships under the American flag is expensive due to these limitations.
Employment
The capacity to hire workers anywhere in the world is one of the primary reasons cruise ships operate under foreign flags.
Business Insider reports that the median yearly salary for employees on cruise ships is approximately $15,000.
Crew workers work infamously long hours with few days off, despite receiving free lodging and food.
The law requires US-registered ships to employ US residents.
On cruise ships, crew members come from all around the world. A large number of members are foreign nationals.
On the other hand, it is typical to discover that the officers, musicians, and performers are from nations like the US, Canada, or Europe, where salaries are higher.
Because it enables them to offer cheaper wages than they would otherwise pay U.S. residents, cruise lines use international crew members. A U.S. Department of Transportation study states that the cost of wages for ships flying the US flag is 5.3 times greater than that of ships flying foreign flags.
When you cruise, you won’t realize it, although employees in comparable occupations frequently receive varying pay depending on where they are from.
International crew members might also put in more hours with fewer breaks and vacation days.
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Taxes
The ability to save money on taxes is one of the main motivations for cruise ships operating under foreign flags.
Furthermore, it extends beyond the ships that operate under foreign flags. Many significant cruise lines establish themselves as foreign companies to benefit from reduced tax rates.
One of the biggest costs for cruise companies, along with personnel compensation, is taxes. Cruise lines can reduce their tax liabilities by millions of dollars by registering their ships in foreign nations.
Cruise companies use Section 883 of the Internal Revenue Code as a tool to exclude the gross income derived from the international operation of ships or aircraft from their overall gross income.
Stated differently, foreign-owned cruise lines are free from federal tax in the United States provided they meet certain ownership requirements, receive income from ship operations, and the registered country grants comparable exemptions to those applicable to American vessels.
The main cruise lines are registered at this location:
- The Royal Caribbean Group has its headquarters in Miami, Florida, and is registered in Liberia.
- Two lists exist for Carnival Corporation and plc. While Carnival plc is established in the United Kingdom.
- The corporation is headquartered in the United States and incorporated in Panama.
- Operating out of the United States, Norwegian Cruise Line has its registered office in Bermuda.
- The biggest private cruise line is MSC Cruises. Its headquarters are in Switzerland.
- Headquarters for Virgin Voyages are located in Plantation, Florida.
Insurance and Operating Expenses
It may surprise you to hear that there are advantages associated with foreign flags for the building, upkeep, and insurance of the vessels.
A cruise ship needs to be built in the United States to fly the American flag. This is problematic since American shipyards are not very experienced in building cruise ships. Ships for the military and commerce are the main products of US shipyards.
The majority of cruise ships are built in Europe.
The requirement that repair, servicing, and refitting be done at an American shipyard applies to warships flying the US flag as well.
A 50% ad valorem duty is levied on any repairs made in a foreign shipyard. This is an incredibly hefty charge, given that ship maintenance can run into the hundreds of millions of euros.
Emergencies could occur at any time, even if the owner of the vessel intended to have all maintenance and service done in American shipyards.
If it is not safe to sail back to America for repairs, a foreign shipyard will have to service the ship. The cruise line will be subject to a 50% ad valorem duty after completing foreign repairs.
Lastly, liability and insurance represent additional significant costs for cruise lines. Cruise lines must be ready for anything that might happen because thousands of guests and workers are on board at any given moment.
The Department of Transportation claims that the expense of liability and insurance is four or five times greater for vessels flying the US flag.
Marriages Regulations
Cruise lines aren’t simply infatuated with wedding costs. Travelers who are willing to spend more than usual make numerous cabin reservations during weddings. Consider drink packages, slot machines, in-room meals, and reservations for specialist restaurants.
It can be less expensive to have a wedding on a cruise ship than on shore. Furthermore, there’s no better backdrop, atmosphere, or wedding photos than those taken at sea.
You can choose between being married at the port or on the ship in the majority of cruise lines.
Cunard Line moved all of its ships’ registrations to Bermuda in 2011 so that their captains could wed couples while at sea.
In 2017, following Malta’s legalization of same-sex unions, Celebrity Cruises registered every ship there. Celebrity Cruises can allow same-sex weddings on board their cruise ships by utilizing Malta as a flag of convenience.
Cons of Using Convenience Flags
Floating under the radar of convenience has its consequences.
The coronavirus outbreak made abundantly clear the disadvantages of foreign flags.
The worldwide health crisis caused an industry-wide stop in sailing operations, forcing cruise lines to abruptly cease operations. For cruise operators—many of whom were struggling to make ends meet—the halt meant little to no income.
The government did not include cruise lines in bailouts and subsidies because they were foreign-owned, even though they assisted many other companies like hotels and airlines.
Foreign companies used the cruise lines to evade taxes and comply with US employment regulations, which also prevented them from being included in a bailout plan aimed at saving domestic companies.
To remain solvent during a nearly two-year break in sailing operations, cruise lines had to issue enormous amounts of shares, take on more debt, and scrap older ships.
You might also have noticed that cruise ships always dock in a foreign nation. Although this makes sense for itineraries in the Caribbean, the Mediterranean, and Australia, it may seem strange that sailings from Alaska to New England invariably stop in Canada.
One special provision of the U.S. Passenger Vessel Services Act prohibits foreign-flagged ships from carrying people from one U.S. port to another.
The Act states that only vessels flying the US flag may transport people directly between U.S. ports. Before returning passengers to the United States, ships flying foreign flags are required to make a stop at a “distant foreign port.”
Because of this, practically all cruise itineraries that leave from and return to the United States need to make a port stop abroad.
Before sailing back to the United States, Alaskan cruises make calls at Victoria or Vancouver, Canada, and New England sailings make calls at Bermuda or Eastern Canada.
During typical sailing hours, cruise lines experience a small inconvenience due to this need. But when the Canadian government decided to keep the ban on cruise ships in place, it meant that cruise ships could no longer go on itineraries that included Alaska.
The US Centers for Disease Control had revoked the “No Sail Order,” but Canadian ports were still off-limits to Alaskan sailings. Several popular cruise itineraries were essentially suspended until the prohibition on Canada’s ability to receive calls was lifted in 2022.
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How Can a Cruise Ship Fly a Flag of Convenience?
It is surprisingly easy to register and receive a flag of convenience.
Closed Registries
Ships flying the national flag must be registered in a closed nation.
Ship registrations with closed registries are the most prevalent. Most cruise companies avoid closed registries because of their restrictions and higher operating costs.
Open Registries
Nearly anybody can register a ship in a nation with an open registry, and there aren’t many limitations or rules.
In certain nations, registering a ship only requires completing an online form.
Are There Any Cruise Ships Flying the US Flag?
As of this writing, Norwegian Cruise Line’s Pride of America is the only cruise ship flying the US flag.
American Classic Voyages placed the initial order for the ship using loans from the US government. The Mississippi shipyard put Pride of America’s construction on hold after the owner filed for bankruptcy.
To recover its funds, the US government decided to sell the ship. Finally, NCL granted permission for construction to continue in Germany while flying the American flag.
The ship is excused from calling at foreign ports before returning to the United States. Because of this, Pride of America is the only cruise ship that operates Hawaiian sailings all year round.
When Did International Flags Begin?
The 1920s saw the first appearance of foreign-flagged ships. In 1920, prohibition laws went into effect, making it illegal for passenger ships to offer alcohol.
The law significantly reduced the competitiveness of American passenger ships compared to foreign cruise ships that were still permitted to sell alcohol to passengers.
Cruise ships register in foreign nations with permissive drinking regulations to avoid prohibition laws.
Beyond just providing booze, there were other advantages to sailing under a foreign flag. Ship owners had access to less expensive labor, less regulations, reduced taxes, and more.
Even after the lifting of prohibition in 1933, many cruise lines continued to fly foreign flags.
Prohibition served as a sort of catalyst for the rise of flags of convenience.
