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

By Robert H. Pouch

Orders for all kinds of new commercial cargo and passenger ships are at their highest level since the mid-1970s. These ships will enter service over the next three years. On the other hand, the world ship fleet now in service is aging rapidly. There are far too many 25-year-old tankers and bulk carriers in service—overage and sometimes substandard ships that should be scrapped. Experts predict that by 2000, 41% of the world tanker fleet will be 20 years old or more, and 29% of that segment will be 25 years or older.

It has been almost a decade since the Exxon Valdez grounded in Prince William Sound. The maritime industry does not need another highly publicized shipping casualty to overshadow the gains it has made in improving worldwide operating standards and the major new investments it has made in equipment, crew, and systems; yet overage vessels, frequently staffed by "lowest common denominator of cost" international crews, are an Achilles' heel. Clearly, more older ships need to be withdrawn from service and scrapped. Along U.S. coasts in 1998, there were far too many close calls, with older ships experiencing steering and engine failures and other casualties. Pressure to improve safety and quality in maritime operations must be maintained.

The economies of scale in today's maritime industry can be seen in the growth of ship sizes since World War II. The largest modern containerships and tankers are capable of lifting 100,000 tons of containers or 300,000-500,000 tons of crude oil, helping to support the amazing growth in world trade that has developed over the past 50 years. Table 1 tracks the development of ship design and size.

The trend toward larger and larger ships has begun to test some limits, not the least of which is the depth of ports and berths around the world capable of serving these vessels. Yet, the projected growth of world trade seems to indicate that the construction of larger ships is justified, if overbuilding does not occur.

Status of the U.S. Maritime Industry

In 1998, the U.S. Maritime Administration reported that there were 281 privately owned, and 192 U.S.-government owned commercial oceangoing ships in the U.S. flag fleet. An additional 33,000 cargo-carrying barges and 8,000 tugs, ferries, and passenger vessels were engaged in the domestic (Jones Act) trade, i.e., coastal and in rivers, sounds, and bays.

The United States is the world's largest trading nation, accounting for nearly 20% of world oceanborne trade, yet the U.S. flag merchant fleet operating in international markets has continued its annual decline. Its market share of cargo carried dropped to below 3% in 1998; continuing the steady erosion of the past 25 years. The decline stems from the fact that overseas flag operators, using low cost international personnel, continue to enjoy significantly lower operating costs, taxes, capital costs, and crewing expenses, with less governmental regulation and costly litigation. This places a formidable obstacle in the path of anyone considering an investment in U.S.-flag ships.

Under the Maritime Security Act of 1996, 47 militarily useful ships operated by 17 companies were authorized to receive an operating subsidy under a program to retain U.S.-flag and citizen crewed vessels. The ten-year program provides for payments amounting to $2.3 million per ship for the first year, and $2.1 million for nine consecutive years, subject to annual appropriations by Congress. In fiscal year 1998, $64.5 million was appropriated. The major U.S. recipients of operating subsidies in the Maritime Security Program, successor to the Operating Differential Subsidy Program, are:

  • American President Lines (acquired by Neptune Orient Lines)
  • Sea-Land
  • Crowley American Transport
  • Maersk Line, Ltd.
  • Overseas Shipholding Group Car Carriers
  • Central Gulf/Waterman Steamship
  • Lykes Lines (acquired by C-P Ships)
  • Farrell Lines

Other than these Maritime Security Act cargo ships, relatively few U.S.-flag vessels are expected to remain in international trade.

Military Sealift Command

Part of the Navy, the Military Sealift Command (MSC) is among the world's largest shipping entities, and operates publicly owned as well as chartered ships:

  • Naval Fleet Auxiliary—ammunition ships and fleet oilers
  • Special-Mission Ships—oceanographic survey, missile-range instrumentation, and dual-band radar ships
  • Prepositioning Ships—14 long-range medium-speed combat transports

MSC transported more than 5 million tons of petroleum products and I million tons of dry cargo in 1998. It also participated in a number of logistics exercises and operations, and extended humanitarian efforts to nations crippled by the autumn 1998 hurricanes in the Caribbean and Central America. In line with military downsizing and consolidation, MSC closed its facilities in Bayonne (moved to Norfolk) and Oakland (moved to San Diego).

U.S. Transportation Companies

Table 4 offers a summary of the 1998 financial results of some of the leading publicly traded, North American-based maritime-oriented companies.

CSX, the parent of Sea-Land, has been reported to be considering the sale of its shipping business. One idea would be to split the company into three entities-marine terminals, domestic trade lanes, and international routes—and sell the pieces. With the company's acquisition of ConRail, it is speculated that ocean transportation may not fit with CSX's long-term plans. Profitability, according to The Journal of Commerce, has been under pressure.

Liner Trade

Overcapacity of containerships and carrying capacity on most liner trade routes continued during 1998, as a result of the Asian and South American financial crises, adverse weather in Central America, and an influx of new containerships entering service. However, all ocean carriers did benefit from reduced fuel prices, as crude oil prices dropped to close to $10 per barrel.

This tough market environment has triggered a number of business strategies aimed at controlling operating costs and distributing the high capital costs of ship construction and ownership over a broader base. The result: shipping alliances among lines, which are evolving into global service providers. There is a continuing pattern of sales and mergers, to stem the flow of red ink in the financial reports of many lines caused by depressed freight rates.

C-P Ships/Canadian-Pacific has been a trendsetter in acquiring shipping companies that have been traditional niche operators, forging them into a unified cost structure while maintaining their individual market identities. It believes that this method of operation will allow the organization to stay light on its feet. C-P Ships now owns Canada Maritime, Cast Line, Contship Container Line, Ivaran Line, Lykes Line, Australia New Zealand Direct Line, and a joint venture service with TMM/Mexican Line. There should be many more such consolidations in the liner sector during 1999, after deregulation becomes effective on 1 May.

The industry already has seen liner alliance "partners" underquoting each other in competition to book the same shipper's cargo on the same ship, so it should come as no surprise when "ocean shipping reform" and deregulation mold a market similar to the airline industry, where passengers on the same aircraft discover that they each paid a different price for the flight.

Passenger Ships

The passenger ship segment of the maritime industry has grown significantly during the past year, with the large players becoming more dominant. In the early 1990s, the three largest cruise operators had a 36% market share. Today, they own 70% of the market, and are among the few who are able to afford the new mega-ships costing in excess of $400 million each. All of the major players are building bigger, more grandiose, more efficient ships, and all have instilled a top-down safety culture within their fleets and personnel systems. As with the rest of the maritime industry, supply is leading demand, although fleet cabin occupancy was 80% in 1998, and the hot new ships ran at 100%.

Carnival Cruise Lines (market capital $16.3 billion), based in Miami, controls about 35% of a worldwide cruise market estimated to be worth $10 billion in annual sales. With 42 ships and more than 45,000 berths, the company has invested $3 billion for ten new ships, which will be delivered before the end of 2003. Carnival has the lowest cost structure and strongest balance sheet in the business. Its recent acquisition of Cunard Lines was accompanied by an announcement of its intention to start a project to build a new Queen Mary, a high-end luxury liner.

Royal Caribbean (market capital $3.8 billion), also Miami based, and now owner of Celebrity Cruises, controls 25% of the market. It operates 17 ships with 31,000 berths, and has ordered six new ships.

The coasts of North America—from the Saint Lawrence River, Halifax, all the way around to Alaska—are among the world's prime cruising grounds, offering spectacular scenery and weather-friendly itineraries. An overwhelming preponderance of cruise embarkations are made from Florida, on the East Coast, and from Vancouver, on the West Coast.

More than 5 million passengers embarked on cruises last year, and the fleet sailed at nearly 91% of capacity. Market analysts have estimated that less than 10% of the North American population has ever made a cruise. The goal of the cruise lines is to tap that market of first time vacation cruisers, lure repeat customers with a high standard of accommodation, meals, and service, and of course attract passengers from other countries to cruise from U.S., Canadian, and Mediterranean ports.

The new ships coming into service now feature many technological advances, such as diesel-electric power plants and Azipod electric azimuthing (rotating) propulsion systems. General Electric has marketed low-emission gas turbine power plants. These systems add speed, are more economical, make the ships more maneuverable, and reduce exhaust emissions.

Tankers, Bulk & Specialized Carriers

It is important to recognize the role of the liquid and dry bulk (nonliner) transportation sectors in U.S. maritime commerce. About 90% of U.S. maritime trade tonnage is carried by bulk carriers tankships, barges, and other specialized carriers.

Most companies engaged in the transport of dry and liquid bulk cargoes encountered worsening market conditions in 1998, as a result of the crisis in Asia and plummeting freight rates. The average daily rates for Panamax bulk carriers, for example, have declined from $14,000 in 1995 to $6,000 in 1998. Standard & Poors downgraded Alpha Shipping, Osprey, and Pacific & Atlantic companies. The February 1999 failure of Alpha Shipping to meet its debt obligations ($175 million in junk bonds issued 11 February 1998 with a coupon of 9.5% and yield of 17.13%) is an early warning signal that some owners may be undervalued and overextended, and will not be able to meet their loan obligations.

Such market conditions undoubtedly will stimulate further consolidation and downsizing in the industry. In the oil industry, we are seeing the consolidation of Amoco and BP, Total and Pertafina, and Exxon and Mobil. In the bulk trades, Mitsui-OSK Lines has merged its bulkers into a pool with Navix, which was formed from the earlier merger of the dry cargo ships owned by Yamashita-Shinnihon Lines and Japan Line. Overseas Shipholding Group of New York is planning to sell most of its bulk carriers. Prices for new ships actually have declined in Far East yards, because of the weakened currencies in Japan and Korea. There were 484 new bulk carriers on order at the beginning of 1998.

In the tanker trades, financial turmoil in the Far East has depressed the demand for crude oil, the price of which is now around $10 per barrel. Unless there is some change, there will be a tanker recession in 1999. New tanker construction will increase existing capacity by 16%. Four hundred and forty-seven new tankers, totaling 33.7 million deadweight tons, are on the order books, and 45 million deadweight tons of new tankers will enter the market in 1999-2000. Owners can buy new tankers in the 300,000-ton range for less than $70 million.

Scrapping

Ships are sent to the ship breakers, or scrap yards, at the end of their economic or operational lives, typically 20 to 25 years. Most of the large scrap yards are in India, Pakistan, and Bangladesh. Here, the large old ships, empty of cargo and fuel, are run onto the beach at full speed, secured to the shore with cables, and systematically dismantled in just a matter of days. Every single thing on board is saved and recycled or reused, down to the light bulbs. The steel is fabricated into rerolled plate and sold. The engines and auxiliaries are reconditioned, and used in power and industrial plants where possible.

"American ships are the best," noted N. Kumar, spokesman for Gujarat Shipbreakers, in the New York Times . "The materials are of the best quality, maintenance is superior, and their specifications are so darned honest that you know exactly how much steel you're going to get from them. In fact, they're so good, scrapping them makes you want to cry."

In theory, scrapping of older ships should increase; however, in these poor freight markets, many owners may try to keep their older ships running. There are thousands of superannuated tankers and bulkers operating in the 20-25 year age range. Many are operated in substandard fashion. About 8 million tons of bulkers were scrapped in 1998. Only 11 very large crude carriers (VLCCs) were scrapped in 1998. Many more should be.

There is a backlog of 200 U.S. ships, owned by the Navy and Maritime Administration, some of them 50 years old, currently awaiting scrapping.

Shipbuilding and Ship Repair

There are about a dozen major industrial shipbuilding and repair yards in the United States, but that number is shrinking. An additional 260 smaller, privately owned building and repair yards are situated primarily along the Gulf and Atlantic coasts. Some of the major players are:

  1. Newport News Shipyard
  2. Litton/Ingalls
  3. General Dynamics/Electric Boat
  4. Bath Iron Works
  5. Avondale Shipyards
  6. National Steel Co.
  7. Kvaerner Shipyard, formerly Philadelphia Naval Shipyard
  8. Baltimore Marine Industries, formerly Bethlehem Steel Shipbuilding Co.
  9. Alabama Shipyards

Most of the large shipyards specialize in the construction of military vessels. A few have entered the commercial market, and have received orders to build tankers. The smaller yards service the Jones Act trade and specialty markets, including large yachts and offshore supply vessels. Many of the smaller yards have developed advanced techniques and offer competitive worldwide pricing and high quality. The larger yards, however, are not usually perceived as being as competitive. It is strange that U.S. industry can lead the world in designing and building high-tech aircraft, yet lag so far behind in heavy industrial shipbuilding.

There have been several major developments during the year:

  • Newport News Shipbuilding proposed joining with Avondale Industries in a merger agreement worth about $470 million. The new company would have 24,000 workers, with about $2.6 billion in sales. In February, General Dynamics offered $1.36 billion in cash for Newport News Shipbuilding.
  • Bethlehem Steel's Sparrows Point Shipyard was purchased by private owners for $16 million, and renamed Baltimore Marine Industries.
  • The Philadelphia Naval Shipyard was purchased by Kvaerner Masa Shipyards for $135 million, and included a package of $429 million in federal, state, and local grants/loans. The yard is expected to employ 700 workers by 2002. One might question why U.S. and local government aid amounting to $600,000 per job was paid, especially when so many other struggling U.S. shipyards now must face competition from this new Finnish/Norwegian shipyard consortium. Perhaps the new technologies and investments planned by the new owners will pay off with significant new orders.
  • Charleston Marine Manufacturing Corp. took over the former Charleston Navy Yard facility and now employs 700 workers. In contrast with the Kvaerner Masa-Philadelphia deal, total state and federal assistance amounted to less than $5 million.
  • The United States gave the International Monetary Fund $17 billion in aid to Korea, which allowed the Korean government to write off the Halla Engineering and Heavy Industries yard's $740 million debt, illustrating that U.S. shipyard subsidies can reach far beyond our borders.

There is a need for competent, cost effective, and competitive U.S. shipyards to service the shipbuilding and repair needs of the marketplace. The recent mergers and investments in U.S. shipyards might help to reshape and rejuvenate this part of the industry.

Ship Finance

During the 1980s, shipping company bankruptcies increased, and many ship mortgages were forfeited, leaving commercial banks such as Citibank as the reluctant owners of a whole fleet of US Lines containerships. With commercial and investment banks now steering clear of ship finance, new players have moved in. Securities firm broker-dealers began to underwrite private debt and equity securities in the form of high-yield (junk) bonds. More than $4.2 billion of junk bonds have been issued, at coupon rates ranging from 9% to 12.5%, and yields ranging from 9% all the way up to 50%. The coming year may see another wave of liquidations and repossessions of ships, as undercapitalized owners fail to withdraw from the business, because they have resorted to financing their operations through the issuance of long-term debt.

The Jones Act, Passenger Vessel Act, and Towing Vessel Act

Jones Act and related business, or coastwise (cabotage) trade, is conducted in 42 states and tributary rivers, bays, and sounds. First enacted in 1789, the act essentially reserves domestic maritime trade for U.S.-flagged, -crewed, and -built ships. The act affects a large community of cargo shippers as well as marine operators.

A group of U.S. Jones Act-trade ship owners, who sponsor the Maritime Cabotage Task Force, claim that the Jones Act provides a level playing field for operators in U.S. domestic commerce and shipbuilding, and a measure of military security through its base of maritime employment and infrastructure. Opponents of the Jones Act wanted to reform it, and to open up some U.S. coastal trade to foreign shipping. The General Accounting Office weighed in on the side of its proponents. A congressional resolution in May 1998 supporting continuation of the Jones Act attracted 240 sponsors, and there appears to be little interest in Congress in reforming the act.

CSX sold two-thirds of its interest in American Commercial Barge Line, one of the largest inland carriers, to the Vectura Group of New Orleans, for $628 million.

Personnel, Human Factors & Safety

In 1998, more than 10,000 deep-sea vessels made at least one call to a U.S. port, and a majority of them made multiple calls. More than 95% of the crews operating those ships came from foreign nations. Recently, the International Maritime Organization has initiated efforts to bring about generally accepted, worldwide standards in watchkeeping and safety on board the international fleet. These efforts show signs of having paid off, as has the Coast Guard's Port State Control and Prevention Through People programs, aimed at reducing maritime casualties and pollution, in cooperation with the marine industry.

With less than 3% of U.S. trade being carried by U.S. ships, however, the focus must continue to be on the international seafarers who crew foreign ships in our waters. In today's tough markets, the pressure to economize, and to go to the lowest common denominator of crew cost is enormous. That is why state and federal efforts concentrating on navigational safety and protection of the environment have received such a high priority.

The following companies each manage and/or crew more than one hundred ships, and are considered leaders in developing advanced personnel systems that emphasize safety and prevention:

  • Acomarit
  • Barber International/Barber Ship Management
  • Columbia Ship Management
  • Denholm Ship Management
  • V Ships/Celtic Ship Management
  • Wallem Ship Management

In February 1999, the 639-foot Japanese dry bulk carrier M/V New Carissa grounded outside the southern Oregon port of Coos Bay. Attempts were made to salvage the ship, but winter gale-force winds made refloating impossible. The New Carissa developed hull cracks and began to leak oil onto adjacent beaches and important oyster and crab fishing grounds. Fearing major pollution if the ship were to break up, a state-federal task force decided to set the ship on fire and burn off as much of the oil as possible within the ship, before the 30-foot swells tore her apart. Navy explosives experts attempted to set fire to the New Cari.ssa, but were successful in burning only about half of her 400,000 gallons of fuel and diesel oil. The U.S. Environmental Protection Agency waived all of its regulations, thereby permitting the Coast Guard to exercise emergency powers and authorize the wreck to be towed out to sea and sunk by the Navy in 9,000 feet of water at the edge of the continental shelf.

When such maritime casualties occur, the National Transportation Safety Board, the Coast Guard, and other state and federal safety agencies frequently discover in their subsequent investigations a history of chronic engine, steering, or maintenance problems with the vessels, and note the lack of adequate crew training and oversight of the ship's personnel and operations by the owners. The New Carissa casualty received extensive media publicity, but it is widely recognized in the industry that casualties of this sort occur in U.S. ports on a regular basis. They seldom are publicized, because of the highly skilled state pilots, docking masters, and Coast Guard personnel who work diligently to manage a surprisingly large number of marine casualties and bring them safely under control before physical damage, personal injury, or oil pollution and adverse publicity can occur. Continuing efforts have been made to improve ship crew performance, communications, and safety awareness within the international fleet during 1998.

The countries with the highest ship loss records (with ships lost per year) are:

  • Panama 18.4
  • Pakistan 7.8
  • Honduras 6.6
  • St. Vincent and Granada 6.4
  • Cyprus 3.8

Ports and Harbors

There are 355 ports and 4,000 marine terminals in the United States. Of these, 150 ports handle 99% of all cargo tonnage. There are more than 25,000 miles of federally and privately maintained navigation channels in the United States, which require periodic deepening and/or maintenance dredging. The Harbor Maintenance Tax, an ad valorem surcharge on exports, was found to be unconstitutional by federal courts.

Port operators are required to make continuous investments in their shoreside infrastructure—piers, cranes, sheds, rail sidings, highway access, etc.—to meet the growing demands of international trade and the ocean carriers that provide the service. The development of local cargo delivery from ports versus intermodal delivery to inland points by rail and truck may have a major impact on port development in the future. Just-in-time, supply chain management and logistics systems, pioneered in Japan, could change the way ports are operated.

The nation's ten leading ports (with channel depth) in terms of container cargo volume handled are:

  • Long Beach, California 76'
  • Los Angeles, California 46'
  • New York/Port of New York/New Jersey 45'
  • Seattle, Washington 175'
  • Oakland, California 42'
  • Charleston, South Carolina 40'
  • Hampton Roads, Virginia 50'
  • Houston, Texas 40'
  • Tacoma, Washington 40-50'
  • Miami, Florida 42'

Conclusion

During 1998, the U.S. maritime industry experienced a series of challenges, triggered first by the economic recession in Asia, then in South America and other emerging markets, followed by a drop in oil demand and prices, and ending with the passage of the Shipping Act of 1998, which will bring the deregulation of liner shipping on 1 May 1999. Continued low unemployment, low inflation, and long-term prospects for growth of international trade were positive factors.

Ocean carriers were battered by weakening freight markets and rates, putting pressure on profits and driving mergers and consolidations. We can expect to see more mergers and alliances among carriers in 1999. There most likely will be some companies that will liquidate and leave the trade, because of high capital costs and interest rates. The ability of carriers to cooperate on intermodal services, equipment control and maintenance, and logistics services to customers will be refined, and cargo liner services will be largely individually negotiated, through direct, confidential contracts.

An enormous capital investment has been made in tankers, bulkers, and passenger and containerships in 1998-1999, yet new construction is not stemming the aging of the fleet, which has the oldest age profile in memory.

The future will belong to those companies with the ability to weather the storms of trade and currency crises, and to innovatively negotiate equitable deals with their customers for value-for-money transportation services in the dawn of the deregulated shipping age.

Robert Pouch , a graduate of the Maine Maritime Academy, has devoted his entire career to the maritime industry. Currently, he is director of the Board of Commissioners of Pilots of the State of New York and chairs the Port of New York/New Jersey’s Military Cargo Task Force. He also has served in the Naval Reserve.

 

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