How To Profit Off a National Calamity

June 19, 2008

AP PhotoThe heartrending images of flooded Iowan towns remind us all too clearly of the aftermath of the most expensive hurricane of modern times, Katrina – New Orleans under water, thousands homeless, the death toll rising hourly. The urge to help is strong. Katrina, however, is a reminder that some may see an opportunity for profit in the midst of calamity.

Within hours of the devastation wrought by Hurricane Katrina in 2005, Carnival Cruise Lines faced its own problem. Three of its ships, Ecstasy, Sensation, and Holiday, were based on the Gulf Coast, at New Orleans, Mobile and Galveston. Carnival, the world’s largest and richest cruise line, which brought in $10 billion in revenues the year before, stood to lose the average $29 million in profits it made for each ship in its line. Sure, two thousand people lost their lives and the nation suffered $81 billion in damage, but these were profits Carnival was worried about. What to do?

Luckily, Carnival had powerful friends. Within days, and while New Orleans was still under water, the federal government announced that Carnival was contributing three cruise ships (you guessed it – Ecstasy, Sensation and Holiday) to help house Katrina victims and rescuers. The Associated Press reported that FEMA officials had “asked Carnival” if their ships could be used as emergency shelters, and Carnival “accommodated” the government.

Well, not exactly. Here’s what really happened. On August 31, two days after Katrina’s landfall, Carnival turned to its advertising agent Ric Cooper, CEO of Cooper & Hayes in Coral Gables, Florida, for help. Coincidentally, Mr. Cooper was a major contributor to state and national Republicans, including the re-election campaign of Florida Governor Jeb Bush. Carnival’s CEO, Micky Arison (#55 on Forbes billionaire list at $5.8 billion), also was a big contributor to Republican politics. Why not see if the government might bail Carnival out and pay for use of its troubled cruise ships? Ric Cooper immediately called his good friend Governor Bush with the idea, who in turn promised he would immediately contact his good friend Michael Brown, FEMA Director and “Principal Federal Officer” in charge of relief efforts. Governor Bush assured Mr. Cooper that “Mike will respond quickly.”

Bush obviously knew the FEMA Director well, because “Brownie” did exactly that. Within just two hours of receiving Gov. Bush’s email, he promised “Ric” that he would follow up on “Jeb’s” idea (everyone was obviously on a first name basis). The FEMA Director then made direct contact with the President of Carnival and “facilitated the award.” Two days later, the military signed a six month $236 million contract with Carnival to supply the three cruise ships as temporary housing.

How was this number arrived at? Well, the government (i.e., you the taxpayer) agreed to reimburse Carnival for the revenue Carnival would have made from ticket sales if these three ships operated at full capacity during those six months. But even that wasn’t generous enough. The government (you) also agreed to include in the contract the lost casino and alcohol revenues Carnival would have made on the fictitious party-going passengers. All of this adds up to a cost of more than $300 per person for each night’s lodging (a lot more expensive than the $599 per person cost of a “7 Day Western Caribbean Cruise from Galveston”) . But don’t stop there. What about the federal income taxes Carnival would have to pay for these U.S. operations (you see, Carnival doesn’t normally have to pay such taxes since their normal operations are not technically in the U.S.)? Not to worry. The contract included $35 million to reimburse Carnival for these taxes.

Just so we’re clear on this, let’s understand that these were three ships that likely would have lost considerable sums of money in the aftermath of Katrina. Instead, Carnival maintained its profit position on these ships during this time of national emergency by using your money. And what profits! In 2005, a Carnival cruise ship made an average yearly profit of $29 million. These three ships, however, made an average yearly profit of $41 million per ship. That’s quite a return on your political contributions.

Oh, by the way, during this entire time, the Greek government was offering the use of two of its own cruise ships as a charitable donation to the rescue and recovery efforts. No thanks, said FEMA.

Still, the Carnival ships did a great service didn’t they? Well, sort of. It turns out that during the six months of the government contract the three ships were never used to full capacity. Far from it. Only 70% of the available cabin berths were used for rescue workers and the homeless. At this occupancy rate, Carnival was receiving $1,840 per week for each person housed during the six months. That was a lot better than the $599 per week Carnival would have gotten with paying customers. As far as we know, however, Carnival never offered to reduce the contract amount to make up for this windfall profit resulting from partial occupancy.

So, Carnival “accommodated the government?” Hardly. And where’s the outrage? The Republican led Congress in 2006 showed little interest in investigating such waste and corruption surrounding Katrina. It was left to the minority staff of Congressman Waxman of the Committee on Government Reform to ask questions about the contract and ask Governor Bush about his role in all of this. Eventually, the minority staff wrote a 2006 report about this and other egregious examples of “Waste, Fraud and Abuse in Hurricane Katrina Contracts,” and the issue then disappeared from public view. Wow! I’ll bet Carnival was really contrite. I’m sure, however, that its post-Katrina corporate profits of $5 billion make it feel much better.

We used to prosecute war profiteering. Isn’t there such a thing as “catastrophe profiteering”?