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By Robert H. Pouch
At Bowling Green Park, a small oasis located at the very end of Broadway in New York City, one can see the ancestral roots of the United States’s rich maritime heritage. Within a radius of 100 yards or so are the former magnificent office buildings and lobbies of the United States Lines (now a Citibank branch office) and Cunard Lines (currently a post office), and offices of present-day operators such as Farrell Lines, Central Gulf Lines, and Waterman Lines.
But perhaps most significant among the shipping industry landmarks in downtown Manhattan is the U.S. Custom
At times lacking in energy and ingenuity, the U.S. shipping industry showed encouraging signs of life again in 1990. Among the U.S. shipyards doing well is Aluminum Boats in New Orleans (inset). For Operation Desert Shield, Mar Ad successfully reactivated Ready Reserve Force ships like this one.
House, one of the outstanding examples of Federal architecture in the country. After years of near abandonment and neglect, this building is being painstakingly restored and has become a national historic landmark as well as a functional federal building once again.
At the entrance to the Custom House is an imposing bronze memorial plaque, erected in honor of the men and women who served in the U.S. Merchant Marine during the World Wars. It is ironic, but perhaps symbolic of the times, that a new bronze plaque has been placed next to that memorial announcing the new home of the U.S. Bankruptcy Court.
It is difficult for anyone with an interest in the U.S. maritime industry not to observe with some anguish the images this scene conveys.
Last year was yet another one of statistical decline of most leading indicators used to track the performance and financial condition of the U.S. Merchant Marine and maritime industry. Nevertheless, if we deliberately focus on the positive aspects of the U.S. maritime industry, there are some interesting and positive trends that have gradually been developing during the past year or so. These are worthy of attention because they demonstrate that U.S. maritime companies willing to innovate have been able to open new markets in the business. The major developments and trends follow.
Liner Operators
U.S.-flag liner operators started off 1990 in fairly good shape. However, as international developments unfolded, many operators ended the year with losses once again. This situation was caused not only by a continuing excess of shipping and container capacity, but also by the Middle East crisis, which imposed sharply increased fuel costs on liner operators. In addition, almost all U.S. carriers operate with dollar tariffs, yet significant portions of their expenses are paid out in foreign currencies. Consequently, many operators have sustained losses on foreign exchange.
These factors, coupled with adverse tax and other governmental policies on ship operators, have combined to provide a number of serious obstacles and disincentives in the path of a return to profitable operations for a majority of U.S.- flag liner operators. In this vein, Lykes Lines broke ranks with many of its industry colleagues late in 1990 and proposed that the Maritime Administration (MarAd) give it authority to acquire foreign-built ships for its fleet in the future. MarAd had previously given such authority to Mormac Marine, which would have allowed it to purchase foreign-built tankers while it continued to operate U.S.- flag vessels.
On the positive side, major carriers such as SeaLand and American President Lines have made investments in upgrading their fleets, container equipment, land-based support equipment, and customer services. These companies have rationalized their operations, continued to improve their services, and are well positioned to move ahead when there is some element of stability in the liner sector.
The fundamental problem facing liner operators is a failure to establish successfully a stable and profitable pricing structure. This situation has developed in spite of the fact that many operators belong to freight conferences that allow them to set rates with relative immunity from the antitrust laws. This internecine warfare within the industry has been self-destructive and has precluded any possibility for a comprehensive national maritime policy to be established.
Shipbuilding
In the past we have heard much about the lack of competitiveness of U.S. shipyards. While this has generally been true, especially with reference to the larger industrial yards, things started to change in 1990, and there are some clear trends that indicate that new opportunities may be available to U.S. shipyards in the future.
There are two reasons. First, the number of large shipyards worldwide that are engaged in both new construction and repair work has been declining over the
U.S. shipyards may rise again, because of escalating costs elsewhere and the declining value of the dollar. In addition to Norfolk’s Norshipco— shown here—and Aluminum Boats, Moss Point Marine in Mississippi and the Walker Boat Yard in Kentucky have recently won contracts and built world-class vessels.
past two years. Second, shipyard labor costs in major industrial centers such as Japan, Korea, Portugal, Germany, and elsewhere have risen significantly.
At the same time, the value of the dollar has declined. This puts U.S. labor costs on parity with other competing countries, assuming equal efficiency and productivity . . . and removal of direct or indirect governmental subsidies.
For example, one yard, Aluminum Boat in New Orleans, now part of the Trinity Group, has been winning contracts in international competition for several years to provide cargo transport and crew boats to BarWil Agencies for their operations in places such as Singapore, Indonesia, Gibraltar, and the Middle East. Moss Point Marine (Pascagoula, Mississippi) has also constructed vessels under EximBank loans; these were built to U.S. American Bureau of Shipping specifications, U.S.-flagged, promptly reflagged foreign, and exported for overseas operations. Twenty-three vessels have been built in U.S. yards and put into international service by these highly competitive yards, and the reputa-
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tion, quality, price, specifications, and performance of these vessels are world- class. Another example is the Walker Boat Yard (Paducah, Kentucky), which constructs tugs and barges, primarily for use on inland waterways such as the Mississippi River.
The challenge for the U.S. shipbuilding industry in the 1990s is to find some
methodology to study the major changes taking place in the market, and then join forces to acquire, perhaps by joint venture, a state-of-the-art shipyard facility in the U.S. Gulf. The goal would be to pool the best marine construction skills and design and engineering talent. World- class ships at competitive prices should be the result.
Syndicated Investors _______
The newest breed of shipowners and investors to sweep into the U.S. market on a large scale during 1988-1990 is called syndicated investors.
Many new companies were formed, with shares underwritten and offered for sale to the public by major investment banking concerns including Citibank, Smith Barney, and Merrill-Lynch. The objective of these companies has been to purchase good-quality second-hand ves- I sels, mostly tankers and bulk carriers, at low prices. With generally improving freight markets and bulk rates, the theory driving the investment has been to operate the ships for one to three years under the assumption that second-hand prices would rise—a reasonable expectation, given general inflation and the increased cost to replace ships, especially tankers.
In such event, the companies would have experienced a positive asset play, thereby allowing them to sell off or liquidate their fleets at significant profit. A number of companies have been successful in this business, including Nor- tankers, Inc.; the Bergvall and Hudner companies; Global Ocean Carrier Ltd.; Loews, Inc.; and Lexmar, which began to experience some financial problems late in the year as both freight and second-hand-sale markets began to soften.
Independent Ship Managers
In both the U.S. and international markets, there has been an increased trend for investors to separate asset management from operational management and hire professional managers to operate their ships.
There are hundreds of ship managers offering services worldwide, with a broad scope of personnel and technical services. The range of quality and proficiency of ship managers has varied widely.
Because of the aging of the world fleet, shortage of skilled mariners, increasing environmental concerns, and international oil-pollution events, several of the world’s largest ship managers, known as the Group of Five (Barber International,
Wallem, Denholm, Columbia, and Hanseatic, with a combined managed fleet of 800 ships), established a Code for Ship Managers late in 1990. The purpose was to set standards for operation, training, safety, and maintenance of the vessels they operate under management contract. The code, which will be administered by certificates issued by Lloyd’s, Germa- nischer Lloyd, and Det Norske Veritas, W'H provide a standard of quality and operation in an industry that is largely Unregulated. This has been viewed by the maritime industry and marine insurers as a welcome development in an otherwise chaotic marketplace. The Group of Five ■ntends to expand its membership during 1991.
Operation Desert ShieldlStorm
Iraq’s invasion of Kuwait illuminated many deficiencies—not only within the U S. Merchant Marine, but also in the lack of a national maritime policy. Late m the summer of 1990, the mobilization °f ships called for by President George Bush brought to swift reality a scenario *hat had hitherto only been imagined in Planning documents used for training exercises in agencies such as MarAd and the Naval War College.
Within a few weeks of the mobiliza- t'on, most of the Navy’s fast sealift vessels and MarAd’s more modern Ready Reserve Force (RRF) ships were called into activation. While there were many anxious moments, most of the ships were activated, much to the credit of MarAd’s overall planning capability for such a contingency, as well as the efforts of the ship operators, shipyards, and seafarers who managed to get the major part of a mothballed fleet of mostly overage ships lfom the backwaters of the several Na- t'onal Defense Reserve Fleet sites into shipyards for activation, and then out onto the high seas. It turned out to be a very creditable performance, given the circumstances.
This is even more significant given the fact that Congress had slashed funding liom $210 million in fiscal year 1989 to °nly $91 million in fiscal year 1990. ^his, in turn, eliminated much of the Maintenance funds earmarked for the RRF, most of which is on five-day readies status.
^ National Maritime Policy
There has probably been no better opportunity since the end of World War II f°r the United States to finally come to its senses and recognize that national secu- nty interests demand the creation of a national maritime policy. In the past there have been conferences, calls by industry and labor, and presidential commissions for such a policy, but nobody ever seems to do anything about it. In 1989 the United States’s fleet lost about a million tons of shipping, and in 1990 it lost about three-quarters of a million tons, continuing its gradual pattern of decline. In the meantime the U.S. Navy was forced to go out on the open market and charter dozens of foreign-flag ships for Operation Desert Shield/Storm, mostly roll-on/ roll-off units, which carried about half of the mobilization cargoes from the United States to the Middle East.
While the Marines were supported by a dedicated fleet of prepositioning ships, the Army had no such dedicated vessels for Desert Shield/Storm and had to rely on Ready Reserve Force and Military Sealift Command vessels, most of which had to be activated from layup status. Because of lessons learned, it would be reasonable to assume that in the future the Army will demand dedicated fleet assets of its own to avoid the delays experienced as a result of inadequate congressional funding of the existing regional relay facility, and because of the lead-time needed to activate ships in a declining ship-repair environment.
The Oil-Pollution Act of 1990
Congress enacted oil-pollution legislation during 1990 as a consequence of the Exxon Valdez accident and a series of other oil-pollution incidents around the country.
This legislation and similar state statutes provide for unlimited civil liability in the cleanup of oil pollution from vessels as well as criminal liability for negligent acts that result in oil spills. Ship owners and operators are now required to pay more attention to environmental and safety concerns.
The Coast Guard has overall responsibility for cleanup coordination, but individual states may also intervene. The American Petroleum Institute has made a major commitment to establishing a nationwide oil-spill control and cleanup capability.
In some circles, these new laws, and others that are being considered, are regarded as hysterical responses by government officials, way out of proportion to circumstances. The world tanker fleet is overage, but Congress and the states cannot legislate their intentions to make oil- spill accidents go away. Industry and government need to work cooperatively rather than as adversaries to achieve safety and environmental improvements.
There will be an increased cost for the construction of new tankers and implementation of the new compliance measures. However, it is useful to remember that oil-pollution accidents from ships are relatively rare; the majority of pollution originates from shore sources, including factories, tank terminals, and pipelines.
Conclusion
The year 1990 produced mixed results for the U.S. Merchant Marine and the maritime industry. Without a doubt, there has been a continued retrenchment. We see a continuation of companies pulling out of the market, unable to cope with the changes that are taking place not only in the United States but in the entire international shipping market.
In the liner sector, the overtonnaging is particularly troublesome. There are too many lines and too many container slots being offered; the only way for competitors to grow is by taking market share away from somebody else. This costs more to accomplish, and profit margins are lower than they ordinarily would have been.
Our maritime industry has been unable to cope with many of the changes in the markets. Too many of the players, including investors, management, labor, and government, have been inflexible. With a few exceptions, there has been a general unwillingness to plan for the future and a failure to note the changes in the international markets (of which the United States is an integral part).
A workable national policy that would establish a base case for recognition of the national security interest and a national maritime policy would go a long way toward responding to all these changes and charting a new course so that we no longer have to react after someone (be it Saddam Hussein or somebody else) has done something to change the marketplace.
The U.S. maritime industry faced major challenges in 1990. In many cases the response was positive; there have been new initiatives and glimpses of the ingenuity that used to characterize the industry. It is hoped that more positive signals will come the U.S. Merchant Marine’s and maritime industry’s ways in 1992 and the rest of the decade.
Robert Pouch is president of Barber Ship Management-New York, a division of Barber International, which manages a fleet of 180 commercial vessels. Mr. Pouch served in the U.S. Naval Reserve as a commissioned officer in positions involving Naval Control of Shipping, Military Sealift Command, and amphibious warfare. He is a graduate of the Maine Maritime Academy.