The U.S. Merchant Marine and Maritime Industry in Review

By Robert H Pouch

You invariably welcome the moment when your ship puts to sea. Left behind is the perceived commotion and many distractions of the "people from shore." The constant buzz of news and rumors, politics, deficits, regulatory inspectors, terminal operators, and the confused state of the maritime industry are left behind once the ship clears port. Out here, you lead a fairly predictable daily existence. The ship's crew is a team. Everyone has a job to do. There is a positive atmosphere on board.

Meanwhile, back on shore, the U.S. maritime industry during 1996 was at war with itself. The shipping community is significantly smaller than it was a decade ago. Many lines have been forced to close, sell their ships, or merge. The reengineering, rightsizing, and outsourcing of management functions continues.

The quest for profitability and organizational restructuring is ongoing in an industry that generally has not been able to produce commercially acceptable returns in recent years. Numerous strategic moves were made to establish business alliances among companies that hitherto were competitors. The objective: to survive the fierce pricing battles brought on by overcapacity.

The world commercial fleet has been plagued by overcapacity problems for more than a decade. Too many new ships are being built. Older ships are not being sent to the scrap yards fast enough. The huge surplus has kept ocean freight rates low. Lines are spending billions to renew fleets and increase capacity, but investing in capacity doesn't necessarily mean that it will be used.

In 1996, there were 80,676 commercial vessels-476,000,000 gross registered tons-in service worldwide; 1,437 new ships were built and placed in service. By comparison, 455 ships deemed excess or overage were demolished. This is an increase in scrapping over 199518.3 million deadweight tons (DWT) (8.8 million in tankers) versus 16.8 million DWT (12 million in tankers)-but it still is not sufficient to compensate for the number of new and larger ships now under construction. Thus, we can expect to see a continuation of low freight rates on most ocean trade routes.

World trade is expected to continue to grow. Total value went from $1,310 billion in 1995 to $1,389 billion in 1996, and the rate of increase for 1997 is projected at 4-7%. Still, this will not be enough to absorb the excess capacity facing all sectors of the maritime shipping market, bearing in mind that the U.S. economy is now operating close to capacity. Look for the Far East and Southeast Asia to be the leaders in trade and growth in gross domestic product during the next five years.

Status of the Industry

In 1996, there were 281 privately owned commercial oceangoing ships trading in the U.S.-flag fleet. Of these, 48 ships operated by 17 companies received an operating subsidy. The U.S. flag fleet continues to experience a gradual decline, and the United States is just one of many industrialized nations to witness the erosion of its national merchant fleet. Japan, for example, has seen its fleet shrink from 1,000 oceangoing vessels (and 30,000 mariners) in 1985 to fewer than 200 vessels (and 8,000 mariners) in 1996.

The U.S. fleet provided an employment base for about 9,300 seagoing personnel in 1996, compared with 11,500 in 1995. A total of 2,764 marine officers in training were enrolled at the combined federal and state maritime academies. Shore based employment during 1996 included 44,100 in shipyard production and repair and 22,837 longshoremen and allied crafts.

The Maritime Security Program provides for 47 U.S.-flag, militarily useful ships to receive ten-year subsidy payments amounting to $2.3 million per ship the first year and $2.1 million for nine consecutive years, subject to annual appropriation of funds by Congress. The major U.S. recipients in 1996 were:

  • American President Lines
  • Sea-Land
  • Crowley American Transport
  • Maersk Line, Ltd.
  • Overseas Shipholding Group Car Carriers
  • Central Gulf/Waterman Steamship
  • Lykes Lines
  • Farrell Lines

Apart from these recipients, very few U.S.-flag vessels are expected to remain in international trade, because of cost differentials and lack of incentives for owners to remain under U.S. flag. Presently, the U.S. fleet transports less than 3% of U.S. global trade. In addition, the domestic product tanker fleet is expected to decline from 68 ships in 1995 to 33 ships by 2005 and down to 15 ships in 2015.

Liner Trade

The chronic overcapacity of containerships on most liner trade routes continued in 1996, with ships running at between 59% to 71% of capacity. There are about 3,000 pure containerships in service. The world shipyard order book for the construction of 556 new containerships in 1997 is equivalent to 22% of the existing fleet.

P & 0 Lines, now merged with Nedlloyd, placed the largest-ever containership order for six 6,674-TEU ships at Ishikawajima-Harima Heavy Industries in Japan.

One notable exception in the general softness in freight rates was the transatlantic route between the United States and North Europe, where the Transatlantic Conference Agreement (TACA) was able to stabilize rates in 1995 and obtain a modest rate increase in 1996. Ocean freight rates still are under continuous heavy pressure elsewhere, however, particularly in the transpacific to Far East trade lane, where a fierce rate war has erupted. We can expect to see more rate wars in 1997, as new and larger ships and expanded alliances among carriers increase the economies of scale and competitive forces at play in the marketplace. Look for more mergers among competitors on the same or contiguous trade routes, with pricing becoming more volatile.

Smaller carriers may find it difficult to survive, unless they have a specialty or niche market position, some of which have been quite profitable. Wilhelmsen Lines, for example, acquired and integrated its operations with NOSAC Lines in 1996 and has earned significant returns on their specialized roll-on/roll-off fleet.

In 1995, we saw the first service alliances being formed in many of the major liner trade routes. Now, these alliances take different forms, but in general, they involve multicarrier rationalization of ships, ports, and terminals; joint service; and slot charter and container-sharing agreements. They exclude marketing and sales, leaving the carriers free to compete on price and customer service. Similar cooperative working agreements have sharpened the overall service profile of many containership lines, while controlling costs and some of the market risk.

The most notable new alliances in 1996 were the merger of P & O Containers (England) and Nedlloyd Lines (Holland). Hanjin Shipping Co. (Korea) launched acquisition talks with DSR Senator Linie (Germany) and Canadian Pacific/CP Ships, owner of Canada Maritime and Cast, which made an offer to buy Lykes Lines.

Tankers, Bulk and Specialized Carriers

It is estimated that there is a 10-25% excess capacity of tankers and bulk carriers in the world market at any given time. In 1996, 311 new bulk carriers were added to the world fleet, and total ships on order is approximately 13% of the existing fleet. The status of this bulk fleet currently stands at 250 million deadweight tons, up from 241 in 1995.

Scrapping of overage ships increased by 1.5 million deadweight tons in 1996. A total of 8.8 million deadweight tons of tankers were scrapped, but this level of demolition still is not enough to stimulate a rate recovery in the market.

The International Association of Independent Tanker Owners launched a campaign for uniformity in the regulation of tanker operations, primarily as a result of concerns over liability resulting from the Oil Pollution Act of 1990, which was passed in the aftermath of the MIT Exxon Valdez grounding and oil pollution in Alaska. The association recently has criticized the lack of uniform marine safety practices at U.S. ports and terminals.

This campaign did not receive a particularly warm reception from its target audience because of some unfortunate foreign-flag tanker accidents in U.S. coastal waters involving, for example:

  • A loaded inbound crude oil tanker that collided with another anchored gasoline tanker near Ambrose Light Station
  • A ramming of the Ambrose Light Tower on a clear night with unlimited visibility by another fully loaded tanker
  • A collision with and total destruction of the Savannah Light Tower

These casualties drew more attention to shipboard navigational (human) error, rather than to the port-related marine safety regulatory problems perceived by the owners association. In any event, recent court rulings tend to support the concept of states' rights when it comes to safety of navigation and protection of the environment, which is a set back to the association's publicity efforts.

Inland Waterway Transportation

The nation's barge traffic is confined mostly to North-South riverine routings throughout the country, carrying bulk commodities such as coal, grains, steel, and petroleum products. In 1995, the system suffered from extensive flooding on the Mississippi and Missouri Rivers. Business conditions improved in 1996. Corn, soy, and grain exports were strong, as were coal and steel shipments.

In July, a new series of U.S. Coast Guard safety rules was implemented for towing vessels in the wake of the 1993 derailment of an Amtrak train by the tug Mauvilla, which had become lost in fog. Under the new regulations, towboats must now be outfitted with radar, searchlights, radio, compass, and other navigational gear, and their crews must demonstrate proficiency in their use.

American Commercial Barge Line, a unit of CSX, is the nation's largest inland barge operator, with 3,500 barges and 120 tugs.

Shipbuilding and Ship Repair

The U.S.-sponsored OECD Shipbuilding Trade Agreement to end shipbuilding subsidies was signed in Paris in 1994, but enactment still is being held up by Congress. Because this is an executive agreement, ratification by both houses of Congress is required before the President can sign it into law. The American Shipbuilding Association opposes ratification.

FastShip Atlantic, a start-up company in Alexandria, Virginia, has developed and tested designs for a containership capable of crossing the Atlantic Ocean in 100 hours. If financing can be found, the company plans to build and place a ship in service by 1999.

The U.S. Maritime Administration's Title XI financing program allows a ship owner to obtain loans covering 87.5% of construction costs, guaranteed by the full faith and credit of the U.S. government. In 1993, the program was opened to foreign ship owners wishing to build in U.S. yards with foreign registry. The total amount of Title XI loan approvals exceeds $800 million, with close to $1 billion in guarantees available. There are more than $3 billion of pending applications on file, including the Phoenix World City mega-passenger ship project, whose $1 billion application was rejected.

Maritime Regulatory Reform

Reform efforts have centered on recent attempts to deregulate the liner shipping industry by eliminating the Federal Maritime Commission. Under the Shipping Act, shipping lines are permitted to establish conferences, which can act together to set rates, and receive antitrust immunity. In spite of this privilege, which enables them to capture very large market shares, the lines continue to engage in almost suicidal rate competition, and in many cases, lose money. Some container carriers also wish to enter into capacity management programs, which would give the lines even more market control. It is unlikely that capacity management schemes will win official approval.

Ocean Shipping Reform Act

Crafted by the National Industrial Transportation League of big cargo shippers with the help of Sea-Land, this bill originally was intended to replace the Shipping Act of 1984 and terminate or reorganize the Federal Maritime and Interstate Commerce Commissions in 1995. The bill was not enacted in 1996. Essentially, the big industrial cargo shippers wanted confidential shipping contracts. Some major lines are willing to give it to them, provided the lines can retain the liner conference system and antitrust immunity. However, many port authorities, some individual lines, and maritime labor grew increasingly uncomfortable over the scheme and succeeded in having the measure shelved. Expect another try by proponents in 1997.

The Jones Act

First enacted on 1789, the Jones Act and a companion law, the Passenger Shipping Act of 1896, are designed to protect our domestic coastwise shipping and shipbuilding industries and to encourage a national-flag merchant marine for defense purposes.

Recently, adversaries of the Jones Act (the Jones Act Reform Coalition) have claimed that the protection it affords does nothing more than restrict competition and markets and artificially increase shippers' costs. Their proposal would abolish the requirement for U.S.-built and -flagged vessels in the internationally accessible domestic and noncontiguous trades, i.e., Puerto Rico, Hawaii, and mainland ocean ports.

Opponents of the Passenger Shipping Act assert that this law costs the nation billions of dollars and thousands of jobs. Almost all of the lucrative Alaskan cruise business, for example, is home ported in Vancouver, British Columbia, because of U.S. cabotage restrictions. As a result, the neighboring port of Seattle is unable to compete for this business.

Jones Act-related business is conducted in 42 states. This represents a large community of cargo shippers as well as marine operators who have a stake in, and could be affected by, a repeal of or substantial amendment to its present restrictive provisions.

The Maritime Cabotage Task Force claims that the Jones Act provides a level playing field for operators in U.S. domestic commerce and shipbuilding and provides for a measure of military security through its base of maritime employment.

Passenger Ships

As with other sectors in maritime shipping, passenger ship operators have continued to place orders for many new ships. Each new vessel placed into service seems to break a world record for size and luxury, with the latest leviathans exceeding 100,000 deadweight tons.

In their book Selling the Sea, Carnival President Bob Dickinson and Professor Andy Vladimir have researched, documented, and described the phenomenal growth of the North American passenger cruise market, which features excellent U.S. port facilities, airline connections, and access to outstanding scenic venues from the Caribbean to the Gulf of Mexico and all the way up to Canada and Alaska. Internationally built and flagged, and often U.S.-based and publicly owned, cruise and gaming ships have developed and serviced the U.S. cruise and afloat hospitality market with a variety of ultramodern passenger vessels on both the high seas and inland waters.

In 1996, deep-sea passenger ship carrying capacity continued to increase, and another increase of more than 15,000 berths is expected during the next two years. Most of the new passenger ship construction and/or conversion takes place at shipyards in Finland, Italy, France, Germany, and Japan. Industry leaders such as Carnival Corporation1996 sales of $2.2 billion, owner/investor in Carnival Cruise Lines, Holland America Line, Windstar Cruises, Seabourn Cruise Line, Air Tours Ltd., Hyundai Merchant Marine, Westours, and reported deal with Costa Line-are continuing to expand planned investments of more than $2.5 billion in new ships, such as the MN Carnival Destiny, with accommodations for 3,400 passengers, which was placed in service in the fall of 1996 for cruising in the Caribbean, and new buildings Carnival Triumph, Paradise, Elation, and a newly constructed sister ship to Carnival Triumph, to be built at Fincantieri Shipyard in Italy.

Maritime Personnel, Human Factors, and Safety

The revised International Maritime Organization's Standards of Training, Certification, and Watchkeeping (STCW) Convention took effect in February 1997. The International Safety Management Code becomes effective in 1998, when training and certification standards for seafarers will be enforced. This is a serious issue, with a projected shortage of experienced officers and ratings anticipated within the internationally flagged fleet. Surprisingly, only 2.5% of the world's fleet has become ISM certified; 20,000 additional ships will have to be certified by 1998; 40,000 by 2002. It is of concern that ship owners have been so slow to pursue certification. They risk loss of insurance or ability to operate.

"Prevention through People" is a system developed within the U.S. Coast Guard, intended to focus on human factors and their role in marine accidents. Generally speaking, American mariners are exceptionally well trained and competent, but with less than 300 commercial oceangoing ships remaining under U.S. flag, the overwhelming majority of large commercial ships trading in U.S. coastal waters are internationally flagged and manned by mariners from the Far East, Asia, and Eastern Europe. Foreignflag ships will not attract well-trained mariners from the developed world as long as their wages and benefits are benchmarked at developing world rates. Seafaring as a profession has dropped to the bottom of the economic scale.

This is an age of high performance standards, quality audits, high levels of demonstrated competence, communication skills, and very sophisticated ships and systems; how is it possible to reconcile these high expectations with Third World employment conditions?

Accident investigators tell us that 80% of all casualties are caused by human error, oftentimes by mariners who fall victim to commercial pressures to curtail essential maintenance or to keep their ships on a tight schedule and ensure prompt arrival at their next ports of callor lose their jobs. In this environment of unlimited liability and increased port state inspection and control, it is extremely important to focus on how the existing pool of maritime personnel can operate more safely. Marine regulatory agencies are correct in focusing on personnel initiatives, rather than searching only to prove negligence, oversight, or incompetence. The proper training and certification of international mariners must be given greater priority in the future.

Ports and Harbors

During 1996, ports on the Atlantic, Gulf, and Pacific Coasts experienced increased trade volumes as a result of better import and export container volumes and increased shipments of bulk commodities such as grain, steel, and oil.

Many container lines are rationalizing their port and terminal services through participation in strategic operating alliances. They aim to reduce the number of ports on a vessel's itinerary and focus on fewer but larger and more productive "mega-load centers" at selected deepwater port facilities located closest to large population centers with first-class truck and rail connections. Lines also are looking for ways to increase the throughput at their container terminals. A recent Mercer Management study reported that some foreign ports are three times more productive in terms of containers handled per acre of terminal space compared with the average U.S. port.

The biggest difficulty facing U.S. ports continues to be obtaining dredging permits for channel and berth deepening because of environmental concerns and hopelessly bureaucratic federal/state dredged material disposal requirements. Ship owners and U.S. port interests, who have invested billions in new larger ships and terminal facilities, have faced extra costs as a result of the long delays in testing material for trace amounts of dioxins and other contaminants.

Shipping and Defense

The Military Sealift Command (MSC) is clearly the nation's largest operator of deep-sea shipping, with a fleet in excess of 130 ships and a seagoing staff of more than 5,000 mariners, as well as being a regular charterer of commercial ships and cargo space. MSC also has operational control of the 93-ship, MarAd-owned Ready Reserve Fleet. The Navy currently has a construction program for 19 large 950-foot roll-on/roll-off supply vessels, which cost $300 million apiece. In addition, the 47 Maritime Security Act commercial vessels-consisting of container, RO/RO, and LASH ships-round out the fleet of auxiliary military supply assets.

Major changes continue to sweep the maritime industry. The bright light on the horizon in this otherwise confusing marketplace is that the world is at peace, and trade is expected to continue to grow.

 

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