BUSINESS

Underwater profits

THERESA TEDESCO May 9 1988
BUSINESS

Underwater profits

THERESA TEDESCO May 9 1988

Underwater profits

BUSINESS

The 46-passenger Atlantis IV submarine floats idle in the Pacific Ocean off the coast of Hawaii. The 65-foot vessel, built by Vancouverbased Sub Aquatics Development Corp. last year, docked in the port of Konan five months ago carrying its maker’s great expectations of tapping into the growing tourist market for passenger submarines. But Atlantis IV is bogged down in bureaucratic red tape—the first casualty of the battle for sea-lane supremacy that three Vancouver-based submarine manufacturers are waging. Their aim is to lock up a market share in tourist-clogged tropical ports. For about $60 a ride, the large-scale passenger boats located off several Caribbean islands—as well as the indoor lagoon at the giant West Edmonton Mall—submerge customers for one-hour tours. Said Dennis Hurd, president of Sub Aquatics: “Everybody laughed. It took a while to get people’s heads around the idea that you could do something like this.”

Canadian companies are pioneers in the construction and operation of oceanfaring tourist submarines. Since 1986 Sub Aquatics has operated four 28-passenger models daily near Georgetown, Grand Cayman, Bridgetown, Barbados and St. Thomas in the U.S. Virgin Islands. And Sub Aquatics spokesmen say that its subs have carried about 200,000 passengers since then. But the company’s dominance is being threatened by at least two other B.C. companies that

are preparing to enter the market. And already there have been victims of the fight for control of the submarine tour market. The U.S. Maritime Administration Act requires that all vessels operating in U.S. coastal waters be built by Americans and be at least 75 per cent owned and operated by nationals. That rule has created problems for the Canadian companies who looked to exotic southern waters for the bulk of their business.

The Atlantis IV is a victim of the U.S. marine law—and the escalating battle to maintain a market share. Although Americans own the $3million vessel, Sub Aquatics was planning to operate its submarines from its Vancouver base.

The company, which has enjoyed a monopoly in the submarine tour industry for almost three years, is now faced with competition from two other Vancouver firms—Tropical Submarine Safaris Ltd. and Hyco Technologies Corp. As a result, Sub Aquatics asked Washington for an exclusive exemption to allow the Canadian firm to operate the vessel while Hurd sought Hawaiian partners to comply with the rules.

But that, in turn, led Tropical Subma-

rine to hire a Washington lobbyist to oppose its competitor’s application. Tropical vice-president Robert Sommers said that Hurd was seeking an exclusive exemption by arguing that his company was the official builder of tourist vessels. Sommers insisted that he was fighting the application to prevent Sub Aquatics from shutting his company out of the market completely. And after four months of idle existence and political disputes, Sub Aquatics announced that it was abandoning its request for exemption and that it is reorganizing its corporate structure to comply with the U.S. law.

Tropical’s future could depend on how quickly its competitor can reorganize. The company, which is listed on the Vancouver Stock Exchange, does not yet operate submarines of its own. Its founder, Gary Lyman, took a tour on Sub Aquatics’ Atlantis I in St. Thomas and was so impressed that he set out to purchase a vessel of his own. When he met resistance from Sub Aquatics, he enlisted the help of Vancouver-based International Submarine Engineering Ltd. (ISE) to design and build a similar tour submarine.

As a result, ISE—the première Canadian submersible builder—is assembling Tropical’s first tourist submarine, the $2.2-million 36-passenger Odyssey, which is expected to be completed and delivered in the fall. Port Moody, B.C.-based ISE has built more than 160 unmanned submersibles for military and industrial use. As well, it manufactured the four tourist submarines operating in West Edmonton Mall.

But Tropical officials say that they have plans to operate as a franchise business. The company will sell its submarines to potential operators at cost, in addition to $307,000 for setup, operations, marketing and maintenance assistance. As well, Tropical will collect a royalty of up to eight per cent. Already the company has broadened its reach: it has sold franchises in the Netherlands Antilles and is negotiating another one with an Australian interest.

Sub Aquatics operates within a more strictly regulated system. Said Hurd: “We will not sell a submarine outright.” To that end, Hurd devised a franchise plan that will allow the company to increase its cash flow because it could raise royalty fees to about $370,000 a year for each vessel franchised. Each 46passenger sub has a price tag of $3.2 million, a seven-per-cent revenue royalty for operation and maintenance plus another two-per-cent royalty for the company’s optional marketing package. Said Hurd: “The plan ensures that we will be around 15 years from now when the guy calls for a part.”

Although Sub Aquatics’ and Tropical’s business philosophies differ, their vessels have similar physical characteristics. The 65-foot submarines have a cylindrical middle section, which forms the seven-foot-high passenger compartment. There are two rows of seats with a porthole in front of each seat. The top and bottom of the vessels contain a 72hour emergency air supply, ballast tanks and batteries for the electric motors.

Because each company’s subs look and operate so much alike, both companies agree that dominance in the industry will determine who survives—profitably. Sub Aquatics’ Hurd says that although he is acutely aware of the threat of increased competition in the industry, he is confident that few will survive. Said Hurd: “It is an industry that is protected by the very high cost of entry.” He added that the high start-up and maintenance costs of about $3.7 million are a deterrent to risking flooding the market.

But that prospect has not deterred another Vancouver company that is preparing to enter the field. Hyco Technologies is assembling two transparent submarines made from pressure-resistant acrylics. The first vessel, which will seat seven passengers, is not expected to be completed until next March, while the second, a 46-passenger version, is planned for October, 1989.

Ironically, although Hyco is relatively new to the commercial passenger submarine, it has a long and respected history in building submarines for industrial use. During Western Canada’s booming oil years in the 1970s, Hyco built twoand three-man subs for the offshore oil industry until they were replaced by widespread use of unmanned vessels. As a result, the company went into receivership in 1978, later to be resurrected in 1986 by a group of investors to design and operate passenger submarines. And now they hope to stay afloat in an industry that makes its profits under the water.

-THERESA TEDESCO with BRIAN BURTON in Vancouver

BRIAN BURTON