By Hoang Nguyen, Senior Research Associate
On February 12, 2013, the U.S. Coast Guard and the National Transportation Safety Board launched an investigation into the cause of an engine room fire that occurred on the cruise ship Carnival Triumph, which belongs to Carnival Corporation, during a four-day cruise ship. The engine fire, which occurred on February 10, was extinguished by the ship’s fire extinguishing systems. The ship lost power and propulsion after the fire and had to be towed by tugboats to Mobile, Alabama. The purpose of the investigation was to identify the cause and contributing factors that led to the incident. The crew response and effectiveness of the firefighting systems will also be evaluated. On February 18, 2013, investigators reported that the fire may have been due to leaked fuel from a leaking diesel engine line that ignited.
The fire took out the ship’s power and disabled its plumbing systems. This caused toilets to overflow and flooded cabins and passageways. Combined with rotting food, this created putrid conditions that had sickened some passengers. There were reports from passengers of long lines for food and shortages of fresh water. Many were forced to sleep in hallways or outside on the deck to escape the odors and heat below. Passengers were asked to use plastic “biohazard” bags as makeshift toilets. Following the incident, the company announced that all passengers on the ship would receive a full refund for the cruise, travel expenses, reimbursement for all expenses onboard, a credit toward a future cruise, and $500 in cash.
This is not the first time Carnival has been in the spotlight for catastrophes. Most notably, on January 13, 2012, a Carnival cruise ship, the Costa Concordia, ran aground on a sandbar off the west coast of Italy. About 3,200 passengers and 1,023 crew members on board the ship had to be evacuated by lifeboats, helicopters and other ships near the island of Giglio, off Tuscany. Thirty-two people were killed. The ship is currently being salvaged by a crew of 420 workers from 19 countries. Following the disaster, the company offered $14K in compensation to the passengers. The company is currently facing 12 class-action lawsuits related to the Concordia tragedy.
In late February 2012, the Costa Allegra cruise ship, which was from the same fleet as the Costa Concordia, lost power and hundreds of passengers were stranded out at sea in the Indian Ocean for three days in similar conditions experience by those on the Triumph. The loss of power was due to a fire that broke out in a room housing electric generators. There were 636 passengers and 413 crew members on board.
The risk of lawsuits from the most recent incident remains limited, as passengers essentially forgo the right to litigate other than for direct injury or losses due to outright negligence. These disclaimers are written typically into cruise ticket contracts. Nonetheless, the persistent nature of these accidents remains quite troubling, and when coupled with the intensively negative media spotlight, shareholders have cause for concern. It is clear that with each new incident, Carnival does damage to its brand, as it exhibited no effective strategy to deal with the media fallout. Oddly, Chairman and CEO Mickey Arison has been absent as the face of his company. He was only spotted courtside at the Miami Heat game during the most recent crisis, and was remarkably reticent during the sinking of Costa Concordia last year. If these incidents are symptomatic of a larger break down of operational and risk management at Carnival, then Mr. Arison would be well served to develop a strategy that counters the growing negativity surrounding the cruise industry, and his company in particular.
Currently, Carnival’s “C” rating for ESG reflects a moderate long-term sustainability risk, but this recent disaster could result in a downgrade. Carnival’s AGR Rating—a measure of the integrity of accounting and governance practices—is “Average.”