LUXURY CRUISES POUR $1.5 BILLION INTO PRIVATE ISLANDS, BEACHES

(Bloomberg) -- If you own paradise, you can profit off of it.

That’s why cruise lines have spent at least $1.5 billion since 2019 to expand or improve private stops in the Caribbean, according to Bloomberg calculations. Combined, they’ve amassed at least 15 islands and beaches spanning 5,200 acres across the Bahamas, Belize, Dominican Republic, Haiti and Mexico.

Carnival Corp., Disney Cruise Lines, Norwegian Cruise Line, MSC Cruises and Royal Caribbean Cruises are in the race for land. Royal Caribbean’s so-called Perfect Day at CocoCay, a private island 55 miles from Nassau where 9,500 ship passengers a day can spend money on hot air balloon rides and zip-lines, delivers 40% returns on investment or more, according to an estimate by UBS analyst Robin Farley.

“The No. 1 reason people cruise is for the destinations,” said Jay Schneider, Royal Caribbean’s chief product innovation officer. “So we create destinations.”

However, the land acquisition is now sparking a shift. Caribbean nations — which for decades have offered tax breaks and prime locations for cruise giants’ private destinations — are stepping up to fight for a fairer share.

The Bahamas recently took a stand when Royal Caribbean set its sights on Paradise Island, a legendary getaway known for its celebrity appeal and setting for films like James Bond’s Casino Royale.

The government initially offered a sweetheart deal, leasing seven acres of public beach for just $140,000 a year. Public outcry and a change in government in 2021 led to a renegotiated deal. In the end, Royal Caribbean agreed to give the government a stake in the project, and a 1% cut of future revenue for tourism projects like restoring downtown Nassau. Bahamian investors will also be able to invest — along with the government — to own as much as 49% of the project. The size of the government’s stake will depend on the assessed value of the public land.

Labor Minister Pia Glover-Rolle, a self-proclaimed cruise enthusiast, helped secure 200 jobs for Bahamians at the new beach club.

“I got married on a cruise,” she said. “I’ve been on two cruises this year. I know the industry well.”

Even still, the Paradise Island deal is a win for Royal Caribbean. Private island and beach stops helped revive cruise lines from the horrors of the pandemic, when deadly Covid-19 outbreaks aboard ships led the world to shut down cruising for more than a year. They’ve become a lynchpin of a cruise line machine — Royal Caribbean, Carnival and Norwegian raked in $44 billion of revenue and gross profits of $19.1 billion in total last year.

As other once-popular destinations like those in the Red Sea and Russia have been scrapped because of conflicts, the Caribbean has become that much more crucial to cruise lines’ bottom line. In March, however, Royal Caribbean halted cruises to Haiti — where it used to bring thousands of passengers a week to its private peninsula — citing security concerns. Rising gang violence had forced the US to evacuate much of its embassy.

Securing a coveted location on Paradise Island, just a few hundred feet from downtown Nassau, addressed another concern for Royal Caribbean. The cruise line considered the city’s port area to be outdated and lacking appeal for its passengers.

“We don’t want to replace Nassau as a port of call, but instead we want to provide another option,” said Schneider.

It’s understandable why so many tourism-dependent nations long agreed to these deals: Last year, ships carried a record 31.7 million passengers worldwide, surpassing pre-pandemic levels for the first time. The Caribbean now accounts for about 55% of Royal Caribbean’s passenger capacity. That translates into millions of visitors who will spend money on food, souvenirs and activities during their excursions.

It’s also hard to overstate the weight cruise lines carry in the Caribbean. At $37 billion — the largest of any cruise line — Royal Caribbean’s market value is almost three times the size of the Bahamas’ economy.

“These companies, they’re monoliths,” said Gail Woon, executive director of Earthcare, a Bahamas-based environmental advocacy group that opposed plans by Disney and Royal Caribbean to create private enclaves.

Take the deal that Disney hammered out in 2019 to build Lighthouse Point on a swath of Eleuthera Island in the Bahamas, surrounded by waters rich in endangered staghorn and elkhorn corals and migrating sharks, bonefish, grouper and snapper.

Conservationists urged Disney to build in a more traveled part of the Bahamas, where ships and waves of passengers wouldn’t run through such sensitive areas. Disney prevailed, promising to invest up to $400 million in a massive complex that includes a half-mile pier, cabanas and splash pools and will create 150 jobs. The government exempted Disney from paying taxes on everything from revenue to fuel and water.

In exchange, Disney donated 192 acres, valued at $6.3 million, to the government for the creation of a protected area. It also agreed to pay $1,000 per year, per-acre of seabed that it uses, and pledged to increase its ports of call to Nassau and Freeport by at least 30%, among other perks.

Disney declined to comment.

Carnival’s portfolio of six private destinations shows the myriad ways that they can be run. In Half Moon Cay, a small private island about 100 miles southeast of Nassau, Carnival controls “the whole aspect of it,” said CEO Josh Weinstein. That includes the shore excursions, the food and beverage outlets, and more. There, the cruise line pays a per-person tax to the Bahamian government.

The company is also building Celebration Key on Grand Bahama Island, near the city of Freeport, where it will partner with the local community to run the destination rather than doing so on its own. Instead, Bahamians will run food and beverage outlets and shore excursion opportunities. “We’re creating over 1,000 jobs,” Weinstein said.

Some Caribbean countries have been attempting to form a bloc to negotiate better terms from cruise lines since the 1990s, but those efforts have failed.

That’s why the Paradise Island deal stands out. It took years of negotiations, a review of documents and interviews with people involved in the process shows.

First, Royal Caribbean spent $50 million to buy private beach front parcels, including homes once owned by Nicolas Cage and the late Richard Harris.

Then, cruise line executives had to go up against Toby Smith — a tenacious, Bahamian-born former trader at a local hedge fund — who has spent 12 years trying to build his own, $3 million beach club.

In January 2020, the government agreed to lease him five acres of Paradise Island. In exchange, Smith committed to restore the abandoned, 200-year-old lighthouse at the entrance to the Nassau Harbor. But after Smith secured his deal, the Bahamian government agreed to lease Royal Caribbean seven acres of Paradise Island, from the harbor to the sea, for 25 years, according to a copy of the agreement seen by Bloomberg.

Smith, standing amid the decaying limestone walls of the lighthouse, says he was astounded. Initial surveys showed Royal Caribbean’s parcel of public land overlapping much of his planned beach club, he said. Plus, Royal Caribbean wouldn’t have to pay per-visitor fees or restore the lighthouse. Royal Caribbean executives deny there’s an overlap in the final agreement.

He is now petitioning the UK Commonwealth’s high court, the Privy Council, to hear his case after losing a lawsuit accusing the government of breaking his lease.

Meanwhile, Royal Caribbean, with the government’s blessing, is moving forward.

In late April, top cruise line executives lined up next to Prime Minister Philip Davis, donning hard hats and colorful shirts, to break ground on Paradise Island. Sometime next year, an average 2,000 passengers a day will be ferried to the island to enjoy what the company promises will be the “ultimate beach day.”

“I moved heaven and earth for this dream, me a Bahamian entrepreneur,” Smith said. “But then a foreign company came in and took it away from me.”

--With assistance from Anna J Kaiser and Chloe Whiteaker.

(Updates in paragraph 7 with further detail of Royal Caribbean's deal for its Paradise Island beach club.)