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As 1994 drew to a close, the tidal wave of political change brought by the November congressional and statewide elections swept across the nation and its maritime industry. Since the Shipping Act of 1936, Washington has played a critical role in the way the U.S. maritime industry does business, especially with reference to its Operations and Construction Differential Subsidy programs and its Department of Agriculture PL-480 Food Aid and Cargo Preference programs. With a new Congress, many people are hoping that some useful change will emerge from inside the Washington Beltway that will revolutionize—or at least evolutionize—national maritime industry policy. Current federal policy defines neither a minimum workable commercial fleet, nor the role that the maritime fleet should play in the framework of national defense policy.
For years, shipping industry, shipyard, and labor lobbyists have been speaking out for their respective interests, and virtually no reforms have been accomplished, because the group never could reach a consensus on national maritime policy. Now we have a Congress with an alleged aim to deregulate, reinvent, and reform the government process. Will this mean the abolition of familiar maritime •ndustry icons such as the Merchant Marine and Fisheries Committee, the U.S. Maritime Administration, and the Federal Maritime Commission? Republicans are now in power in Congress, but it will take a joint effort by both parties to implement real regulatory reform. Without it, the business will continue to flag out, internationalize, and seek the lowest common denominator of cost and regulation—and the country will risk gradually losing its maritime heritage, experience, global influence, and industrial skills.
Looking toward broader horizons, 1994 saw world trade continue to grow, at about 3% annually. Japanese and European industrial markets are recovering from their recent slumps, and the U.S. economy is on the upswing. China is emerging as a new force in world trade. These developments should signal some market improvement for container carriers, as well as for the coal, iron ore, and
Washington has played a critical role in the U.S. maritime industry, especially with reference to its subsidy and cargo programs. Today, the Department of Agriculture’s Food Aid and Cargo Program—which reserves a portion of foreign food aid and other government-controlled cargoes for U.S.-flag ships—is under fire because of the high cost differential between U.S.- and foreign-flag carriers.
petroleum carrier markets. All shipping markets—container, tanker, drybulk, passenger, and vehicle carriers—enjoyed continued modest recovery during 1994.
Environmental rules, such as the Coast Guard’s regulations for the Oil Pollution Act of 1990 and Certificates of Financial Responsibility for tankships, were implemented late in 1994, as well as other measures introducing stricter state control at U.S. ports aimed at intercepting marginal ships with records of safety problems.
There were major changes within the industry during 1994, and we can expect still more in 1995. Shipping in general has become more efficient and productive, getting more work done with fewer people. Information technology has improved the ability of the industry to perform at all levels. For example, 15 years ago, distribution costs—including inventory costs—were 14% of our gross domestic product. In 1994, distribution costs fell to 9.8%, according to Cass Information Systems of St. Louis, Missouri, and should fall to 9% by the end of the century. The industry, slow to change in the past, has made itself much more efficient during the past few years and should continue to do so.
What we have seen, and will continue to see, in the maritime industry is reinvestment in sophisticated ships and systems by experienced operators who are willing to be part of an evolving industry process, regardless of the policy and regulatory environment in Washington. The industry’s biggest headache is overcapacity, or overtonnaging, which can destroy the economic life of even the most efficiently run shipping company. Control of the U.S. maritime industry in the years ahead will belong to those who plan for change.
Status of the Industry
According to the U.S. Maritime Administration (MarAd), in 1994, the U.S. fleet consisted of 340 commercial oceangoing ships. This fleet transports 4% of U.S. global trade. The balance is carried by internationally flagged ships. The total world merchant fleet numbered 81,000 seagoing vessels.
In 1994, the Clinton administration backed a $1 billion ship operating subsidy program. This would have been funded by an increase in shipping taxes on all vessels calling at U.S. ports. The major U.S. recipients of operating subsidies are Lykes Lines, Brookville Shipping, Vulcan Carriers, Chestnut Shipping, Farrell Lines, Waterman Steamship Corporation, and ten other carriers, for a subsidized U.S.-flag fleet of about 50 ships.
Table 1: U.S. Transportation Companies’ Operating Results 1993-1994
12 Month 12 Month 12Month
Company |
| Return on Equity | Return on Capital | Sales | % Profit |
CSX | '93 | 12.1% | 6.6% | $8,870 B | 4.1% |
Sea Land | '94 | 1 7.7% | 8.6% | $9,383 B | 6.0% |
Alexander | '93 | 11.45% | 6.0% | $ 869 M | 7.4% |
& Baldwin | '94 | 13.0% | 6.3% | $1,124 B | 6.7% |
Overseas | '93 | 0.4% | 1.9% | $ 386 M | 0.8% |
Shipholding | '94 | 0.2% | 1.9% | $ 353 M | 0.3% |
American | '93 | 14.5% | 9.2% | $2,502 B | 2.8% |
President | '94 | 13.1% | 8.7% | $2,791 B | 2.6% |
Carnival | '93 | 20.3% | N.A. | N.A. |
|
Cruise | '94 | 22.4% | 15.8% | $1,542 B | 20.2% |
Tidewater | '93 | 6.0% | N.A. | N.A. |
|
Oil Services | '94 | 5.3% | 5.7% | $ 508 M | 5.8% |
Industry |
|
|
|
|
|
Average | '94 | 16.1% |
|
|
|
P/E Ratio | '95 | 12.2% (estimated) |
|
|
Source: Forbes magazine, 3 January 1995
Table 2: Top Ten Containership Carriers Serving the United States
Vessels Owned Total TEU Line or Leased Capacity
Maersk | 92 | 176,614 |
China Ocean | 130 | 160,000 |
Evergreen | 51 | 145,425 |
NYK | 68 | 129,044 |
Sea Land | 85 | 100,000 |
K Line | 45 | 98,353 |
P & O | 36 | 95,200 |
Nedlloyd | 61 | 92,300 |
Hanjin | 36 | 87,466 |
Med. Shipping | 65 | 83,393 |
Source: Journal of Commerce
. __
Unfortunately, maritime reform was not forthcoming, and major carriers such as American President Lines, Sea Land, and Lykes moved ahead with their plans to seek approval from MarAd to transfer some of their existing container vessels out of the U.S. registry (probably to the Marshall Islands) and to build new ships under foreign registry overseas. These actions are necessary to enable carriers to operate on the same economic basis as their competitors.
According to Containerization International, the cargo container fleet expressed in twenty-foot equivalent units (TEUs) headquartered or managed in North America for 1992-1994 (including both leasing companies and shipping lines) was:
>• Mid-1992: 2,739,190 (U.S.) out of 7,320,400 (worldwide) TEUs >• Mid-1994: 3,962,628 (U.S.) out of 8,339,432 (worldwide) TEUs ► Change: 144.7 (indexed to 1992100.0), which is slightly ahead of the true growth in worldwide container volumes
The maritime shipping industry has been in a long cycle of depression, but some observers believe there is hope for cautious optimism in 1995. Median equity return was 7.5%, and growth in world trade is expected to be 3%. As the world fleet of bulk carriers and tankers continues to age, more vessels will be scrapped. Containership operators have continued their pattern of overton- naging the trade routes on which they operate, either individually or via joint-venture or space-sharing agreements. Efforts to manage rates and control capacity by artificial means, such as the Trans-Atlantic agreements are being met with opposition on antimonopoly grounds.
U.S. Shipping Trade Patterns > USD A Food Aid Cargo Program. For years, a portion of USDA foreign food aid and other government-controlled cargoes (including Department of Defense, Agency of International Development, and Energy Department) has been reserved for U.S.-flag ships. This program is considered to be another way to assist U.S. ship owners with their higher operating expenses compared with their foreign competitors. The USDA pays for the food grains and products shipped, as well as for their transportation costs. This program has come under attack from a number of areas. The USDA published the following rate differentials between U.S.- and foreign-flag carriers to illustrate just how high the U.S.-flag rates had climbed during 1991-1993:
U.S.-Flag Foreign-Flag
Ship Type________ Cost__________ Cost
Bulk Carriers | $69.38/ton | $39.44/ton |
Tankers | $67.12 | $44.97 |
Tug/Barge | $67.24 | None used |
Liners | $143.89 | $81.91 |
> Liners. Overcapacity of ships and carrying capacity on most liner trade routes continued in 1994. Freight rates have increased on some major trade lanes, but they are under continuous pressure. The 1994 Maritime Research Inc. weekly freight index began in January 1994 at 240 and ended the year at 295.
The controversial Trans-Atlantic Agreement, now reorganized and renamed Trans-Atlantic Conference Agreement (TACA), was successful in raising freight rates, setting inland rates, and limiting ship capacity on the U.S.-Europe route. This action has enabled lines to increase rates and has helped eliminate the staggering losses experienced from 1985 to 1993. However, in October 1994, the European Commission (EC) declared that the original conference was illegal. To make matters worse, the Federal Maritime Commission launched an investigation into the conduct of the conference to determine if it was operating contrary to the standards of the 1984 Shipping Act. The battle lines are now drawn between the European Union and TACA lines over the ruling, which has outlawed TACA on the grounds that its actions to set inland tariffs and manage vessel capacity violate EC anticompetition/antitrust laws. The TACA lines are challenging this ruling in the European Court of Justice, a process that' may take years to resolve.
The trade lanes between the United States and South America, as well as the Pacific Basin, showed growth potential and increased service capacity by liner operators.
In many major liner trade routes, rationalization of ships, joint-service agreements, slot charter agreements, and similar cooperative operating agreements have sharpened the service profile of many containership lines, while controlling costs and some of the market risk.
The General Accounting Office claims this program has cost $3.5 billion over the past five years, while saving 6,000 seafaring jobs from 1989 to 1993—for a total cost of about $116,000 for each seafarer.
> Tankers, Bulk and Specialized Carriers. The market for bulk cargoes continued at less than satisfactory levels during 1994. Freight rates recovered somewhat, with the 1994 Baltic International Freight Futures Market Index rising from 1200 in January 1994 to 1800 by year’s end. The dry cargo and tanker trades, however, have been suffering from continued
Newport news shipbuilding
overcapacity, with overage tonnage reluctant to leave the market.
If conditions are going to improve in 1995, more tankers and bulkers (those in excess of 20 years) will have to be scrapped. There has been a continued gradual trend in this direction, but it has not been significant enough to stimulate a rate recovery in the market. Charterers have not been willing to pay a premium for high-quality modern vessels. As a result, many overage, grossly unsafe ships are still sailing the high seas.
^ Shipbuilding and Ship Repair. In 1994, Ihe spotlight was focused briefly on the 50th anniversary of the Normandy invasion and the miracle of U.S. shipbuilding and logistics that made it possible. Dur- Wg World War II, the maritime commission operated 24 shipyards, employing 650,000 industrial workers. U.S. yards huilt 4,368 oceangoing merchant ships, with a record 14 Liberty ships launched >n just one day on 27 September 1941. We saw the Liberty ships and Victory ships briefly illuminated in the news, without really understanding the role U.S. shipyards and the merchant marine played Jn bringing about revolutionary changes >n ship design, construction, and opera- hon. For example, it was during this time that all-welded fabricated steel assembly and construction systems were pioneered by U.S. shipyards as stronger and niore labor-efficient compared with riveted steel construction. As a result, production hours to build a Liberty ship dropped from 700,000 to 350,00 hours. Record construction time for a Liberty ship was four days for assembly and com- tnissioning in seven days.
With so many major U.S.-flag operators leaving the U.S. registry, the future looked dim for U.S. shipyards until Newport News Shipbuilding announced that 't had completed negotiations with Eletson (Greece) to construct two product [ankers (with an option for four), financed ln part by MarAd Title XI loan guaranis. This order has ignited hope that U.S.
yards, having for years built ships mostly to military specifications, have acquired the necessary technology to market and build commercial vessels competitively. Mercedes Benz is establishing an auto manufacturing plant in Tuscaloosa, Alabama, justified by competitive U.S. labor rates and productivity.
> Passenger Ships. North America is the world’s largest and most profitable market for luxury cruising vessels. There are only two oceangoing cruise vessels left under U.S. flag, (the Independence and Constitution, cruising in the Hawaiian Islands), but international and U.S.-based and -owned cruise ship operators and marketers have developed the U.S. cruise market with a variety of ultramodern passenger vessels to serve every segment of the market.
In addition, the newly developed gambling-boat industry (featuring short hauls and even some vessels that never leave the dock) has boomed over the past few years. Marketing studies indicate that there are tens of millions of people in the United States who intend someday to take a cruise. For the passenger ship industry, this is a ripe marketplace just waiting for expansion, and they are ready with an ambitious shipbuilding program. The following is a partial list of passenger ships on order and scheduled to be placed in service:
► 1995: Silver Wind, Regent Sky, Legend of the Seas, Crystal, Symphony,
Newport News Shipbuilding’s successful negotiations with the Greek firm Eletson to build two product tankers of their environmentally advanced Double Eagle design has sparked hope that U.S. yards may now have the necessary technology to market and build commercial vessels competitively.
Imagination, Sun Princess, and Century
► 1996: Splendour of the Seas, Inspiration, Costa Line (unnamed), Veendam, Celebrity Cruises (unnamed), Carnival Cruises (unnamed), Royal Caribbean Lines (unnamed)
► 1997: Royal Caribbean Lines (unnamed), Dawn Princess, Grand Princess, Celebrity Cruises (unnamed)
Billions of dollars are being invested in the cruise industry, with the majority of orders being placed at shipyards in Finland, Italy, France, Germany, and Japan. In the rush to bring ever more sophisticated cruise liners to the market, the newest passenger mega-liners will be in the 100,000-ton size, led by industry giants Royal Caribbean, Carnival, Princess, and Cunard. Orlando-based Disney, a newcomer to the trade, is planning a two- ship fleet.
North America is the largest and most profitable market for luxury cruising vessels, and billions of dollars are being invested in this market. Kloster Cruise’s 76,049-ton Nomay, pictured here, currently is the largest liner operating, but other industry giants have plans for 100,000-ton mega-liners.
U.S. shipyards have not been able to compete for passenger vessel construction contracts, with reported price differentials of 75% for U.S. construction.
^ Maritime Personnel and Quality Assurance. A number of maritime accidents caused primarily by crew error continued the industry and regulatory focus on the “human factor.” The high-profile deep-sea casualties, including the M/T Braer, VLCC Mimosa, the bulker Derbyshire, and the passenger ferry Estonia, prove there is still much work to be done in maritime safety. Another accident (which nearly paralleled the September 1993 collision of a tug with an Amtrak railroad bridge, derailing the Sunset Limited and killing 47 persons) occurred in December 1994, when a barge loaded with gasoline collided with a CSX-owned railroad bridge in Mobile, severing their only rail link to New Orleans.
These accidents further elevated public consciousness and have put pressure on the Coast Guard and ship operators to monitor and develop new personnel-training standards for ships’ crews. It is clear that cutting costs and lowering professional standards is no longer acceptable. For example, Congress has drafted a bill with industry cooperation that would require the Coast Guard to develop new training and licensing requirements for marine personnel in the towing industry, such as requiring towboat operators to get basic training in radar usage.
In a recent study, Mercer Management Consultants found that most towing vessel casualties are caused by wheelhouse Personnel errors: 58% of 13,154 accidents from 1981 to 1990. Problems included operator errors, errors in judgment, failure to account for current, failure to ascertain position, and failure to pay proper attention. The National Transportation Safety Board also has noted that the most common causes of marine accidents involve improper (excessive) speed and a failure of communication among and between bridge personnel. As a result, the Board has stressed the need for enhanced bridge resource management, especially on vessels operating in confined waterways. We will witness more emphasis on quality assurance when standards come out of the 1995 diplomatic conference on The Standards of Training, Certification, and Watchkeeping, which is expected to call for an end to the indiscriminate employment of poorly trained international crews.
^ Ports and Harbors. Ports on the Atlantic, Gulf, and Pacific coasts continue to provide some of the world’s best maritime and inland transport facilities, and almost all handled more cargo during 1994. Most ports are operated by state or bi-state port authorities, which operate on a not-for-profit basis and obtain construction funding through the public sale of bonds. Competition among neighboring ports and states to attract cargo and shipping lines is very intense, and so is investment in modernized port infrastructure—the most modern container cranes, rail sidings and transfer points to handle intermodal cargo, refrigerated cargo, automobiles, etc.
The most serious problem facing U.S. ports continues to be unreasonable limitations and consequent costly delays placed on dredging permits as a result of environmental, federal, and state requirements. Ship owners and U.S. port interests, who have invested billions in new ships and facilities, face lengthy delays because of environmental concerns over how to safely dispose of the dredged material, some of which contains trace amounts of dioxins and other contaminants. The traditional method for disposing of dredging spoils was to dump them at sea, but this practice has been discontinued. Instead, spoils are either placed in subaqueous borrow pits and covered with clean sand or pumped into upland reclamation areas. Either way, obtaining permits and conducting dredging operations has become a painfully slow and increasingly expensive process at many U.S. ports.
The nation’s leading ports in terms of container cargo volume handled are:
Port | TEUs Handled in 1994 | Change from 1993 |
Long Beach | 1,428,889 | 28% |
Los Angeles | 1,316,406 | 9% |
New York | 1,037,215 | 7% |
Seattle | 702,274 | 23% |
Oakland | 649,366 | 15% |
Charleston | 479,558 | 11% |
Norfolk | 430,171 | 8% |
Miami | 373,200 | 8% |
Tacoma | 373,157 | (9%) |
Savannah | 313,330 | 3% |
In general, the nation’s ports have been intensely service oriented and have succeeded in becoming more efficient and productive.
► Shipping and Defense. The Navy’s movement toward relying more on its own supply ships and chartered vessels under its direct control continued during 1994, although not without some problems. The process of federal procurement of shipping services always has been somewhat problematic and contentious. Military Sealift Command’s (MSC’s) role as the largest U.S. largest ship owner/operator places it in a unique position of operating both as owner of its own ships with their own dedicated crews and as a purchaser of similar services from civilian companies via charters and operating contracts through competitive bidding procedures.
For example, problems have arisen in MSC contracts with the private sector where MSC has control of older, complex, maintenance-intensive vessels, which are costly both to maintain and to run. The procurement system may not have considered fully just how complex and costly the ships would be, or whether truly qualified personnel with the necessary skills to operate such ships safely would be available from contractors. With the system's mandated focus on lowest bid, a case can be made that not enough attention is focused on operational competence, maintenance, and quality assurance. Casualties, off-hire, and claims have resulted.
For example, MSC is facing a major claim on its contract for the operation and maintenance of nine Sealift-class tankers. Following a two-year investigation, the Senate Subcommittee on Oversight of Government Management discovered serious safety and environmental problems that may cost MSC up to $70 million to correct, to restore the ships to a standard satisfactory to their owners at the conclusion of their charters. It is generally understood in the industry that government contracts for the operation of ships focus on successful continuous operation at the lowest possible cost, with insufficient emphasis on maintenance and preservation of the ships, their machinery, and supporting operating systems. With the decline in the number of skilled mariners and repair facilities, MSC should search for more practical ways to operate and maintain their vessels.
Conclusion
The maritime industry faced yet another challenging year in 1994, but ended with some gains as a result of worldwide economic recovery. On balance, 1994 brought about what many feel may be a turning point: U.S. maritime policy will change course, and government support programs may be left behind in favor of increasing free market behavior or deregulation in the nation’s key transportation trades, putting to rest the historic and frequently well-documented notion that a strong national maritime policy and U.S.-flag merchant marine is a cornerstone for our nation’s defense.
Robert Pouch, a 1962 graduate of the Maine Maritime Academy, is administrator and secretary of the Board of Commissioners of Pilots of the State of New York and is a consultant for Barber International a/s, which manages a diversified fleet of 175 vessels engaged in international trade. He has spent his entire career in the maritime industry.