Throughout 1995, the U.S. maritime industry was swept along on currents of unprecedented change. U.S. waterborne imports and exports posted another year of impressive gains, rising from 893,780,000 metric tons in 1994 to 953,504,000 metric tons in 1995, and the growth of world trade is expected to continue over the next 12 months. But while the adage “A rising tide lifts all ships” may have the statistical ring of truth in the context of maritime trade, there were some in the U.S. maritime industry for whom the tide did not come in.
As yet another year slipped over the horizon, virtually no significant shipping reforms have been accomplished, in large part because of the fratricidal differences among the industry groups. Often performing in an atmosphere of mutual name-calling, they cannot reach agreement on comprehensive national maritime policy reforms. As the industry’s U.S.- flag infrastructure erodes further each year, its ability to mount comprehensive and effective lobbying and public information campaigns also declines. There is a definite lack of public understanding regarding the importance of maritime issues to the national economy.
One result is that the traditional, even ancestral, U.S.-owned, -manned, and -operated fleet is disappearing. In the face of this decline, a different kind of maritime industry has evolved.
Fifteen years ago, many shipping lines had joined in Federal Maritime Commission-approved Section 15 Agreements, under which their ships and combined carrying capacity were rationalized and employed along various U.S. trade routes. The objective was to obtain economies of scale in marketing and operations, to spread the risk of capital investment over a broader investment base to support the cost of vessel replacement. These agreements gradually passed out of favor in the 1980s, as lines returned to independent operations to pursue the new mantra of “returning to core business operations.” Now, just a decade later, it’s back to the future, with a new crop of carrier mega-alliances and joint commercial operations that are bigger than ever.
Issues such as training, quality assurance, and the costs and risks of imposing major structural changes on industry workers also have forced major changes in the way the shipping business is being operated. More work is getting done with fewer people. Information technology has improved the industry’s ability to perform at all levels, both afloat and ashore, but it also has placed new performance demands on mariners and managers.
The at times overheated and overblown rhetoric used to state the claims of maritime industry and cargo-interest advocates may play well in Washington, but the industry’s fundamental problems are not being solved by these seemingly endless debates. The U.S. maritime industry’s biggest headaches continue to be overcapacity, excessive taxes and regulations, and unlimited exposure to legal liability (compared to our competitive trading partners). These conditions can destroy the economic life and place serious disincentives in the path of even the most efficiently run company. It is no longer a big surprise when traditional U.S. maritime companies “flag out.”
Status of the Industry
In 1995, the U.S.-flag merchant fleet consisted of slightly more than 300 commercial oceangoing ships, which transport less than 4% of U.S. global trade. More than 30 aging tankers, bulk carriers, and breakbulk liner vessels were lost from the U.S. register. This fleet provided an employment base for about 10,473 mariners in 1995, compared with 11,560 in 1994. The U.S.-flag fleet is projected to decline to about 47 oceangoing vessels by 2005, provided Congress passes a new maritime subsidy program. If it does not, the U.S.-flag deep-sea fleet might face total extinction.
In addition, traditional U.S.-flag liner operators such as American President Lines, Lykes, and SeaLand have flagged out their new containerships to the Marshall Islands, making good on their warning that failure to enact maritime reform would force them to register internationally to stay competitive. Pacific-Gulf Marine also has requested MarAd approval to reflag one of its vessels.
There has been some U.S. commercial shipyard activity, with two commercial oceangoing ships under construction and four tankers undergoing modernization. Orders for up to nine Jones Act product tankers also are under negotiation.
The major U.S. recipients of operating differential subsidies are American President Lines, Atlas Marine Corp., Lykes Lines, Brookville Shipping, Chestnut Shipping Co., Farrell Lines, Waterman Steamship Corp., First American Bulk Corp., Lachmar, Mormac Marine Transport, and Ocean Shipholdings, for a subsidized U.S.-flag fleet of about 34 ships, down from 50 ships last year.
Table 1 shows some of the leading publicly traded, U.S.-based maritime shiftping companies’ operating results for 1994-95, according to information published in the 1 January 1996 Forbes.
U.S. Shipping Trade Patterns
Liners. The chronic overcapacity of ships and container capacity on most liner trade routes continued in 1995. Freight rates still are under continuous heavy pressure. We may see rate wars in 1996 and possibly some mergers among lines.
The trade lanes between the United States, Australia, and South America, as well as the Pacific Basin, showed continued growth and increased service capacity by liner operators (see Table 2).
In 1995 we saw service alliances formed in many major liner trade routes. These alliances take different forms, but in general they involve multicarrier rationalization of ships, ports, and terminals, joint-service agreements, and slot-charter and container-sharing agreements. Similar cooperative working agreements have sharpened the service profile of many containership lines, while controlling costs and some of the market risk. Proposed alliances/consortia, with their estimated market share, are:
Atlantic Ocean Area Service Alliances
• American President, Mitsui/OSK, Orient Overseas, Nedlloyd
• NYK, Neptune Orient, Hapag-Lloyd, P & O Container
• SeaLand, Maersk
• Hanjin, DSR, Senator, Cho Yang
Total Estimated Market Share: 54%
Pacific Ocean Area Service Alliances
• American President, Mitsui/OSK, Orient Overseas, Nedlloyd
• NYK, Neptune Orient, Hapag-Lloyd, P & O Container
• SeaLand, Maersk
• Hanjin, DSR, Senator, Cho Yang
Total Estimated Market Share: 59%
Total containership capacity is on the increase: number of ships on order is up 66.4%; TEU container capacity has increased 41.0%. Many companies are calculating that trade to China, India, Southeast Asia, Eastern Europe, and South America will continue its phenomenal growth and that the trade lanes will be able to absorb the growth in vessel and container capacity.
Intermodal Cargo. This area has played an increasingly important role in the nation’s $400 billion transportation business. Major ($1 billion) investments and service improvements by railroads such as Burlington-Northern Burlington Santa Fe and major ocean carriers have improved service levels and cost. The number of containers moved intermodally in the United States by rail and ship for 1995 was 3.6 million, compared with 4.5 million in 1994 and 3.7 million in 1993. While intermodal rail transport faces stiff competition from truckers, it is a system that increases in value to shippers every year.
Tankers, Bulk, and Specialized Carriers. President Bill Clinton signed legislation that ended the ban on export of Alaskan oil in 1995, on the condition that shipments be made on U.S.-flag vessels. Unfortunately, the relatively small size of available U.S.-flag tankers and the crew cost differential, compounded by high regulatory compliance costs, leave in question exactly how much oil actually will be shipped. Boston-based U.S. mutual fund investment company Fidelity made investments totaling $142 million in several Swedish tanker and shipping concerns, including a 23.5% stake in ICB Shipping. U.S. money manager Tiger Management also took a position in Bergesen of Norway, which merged with LPG carrier Havtor.
One could not do justice to the bulk markets without studying what is happening in China, the world's largest rice and wheat producer and the second-largest producer of coarse grains. With the population of China expected to reach 1.3 billion in 1996, shipments of agricultural items, including fertilizers, should increase dramatically. It is estimated that China will import 14 million tons of grain in 1996 and more than 2 million tons of enhanced fertilizers. These trends point to continuing strong grain export markets from the United States in 1996.
There has been a continuing trend toward scrapping overage ships and vessels unlikely to withstand rigorous port state inspections, but it has not been significant enough to stimulate a rate recovery in the market. Major charterers often speak of a dedication to quality, but some do not appear to be willing to pay for it, as long as they still can find freight rates from shipowners of superannuated vessels that undercut the rates charged for more modern vessels. For example, for a 30,000-ton bulk carrier (built 1970), the differential between "high commercial standard operator and "lowest cost" operator is $188,500 per year, or 13% of annual operating costs. For a 40,000-ton product tanker (built 1980), the differential between "high commercial standard" operator and "lowest cost" operator is $237,250 per year, or 15% of annual operating costs. (Source: OECD, Paris.)
As is the case with liners and tankers, there continues to be an oversupply of bulk carriers, which holds rates down.
Inland Waterway Transportation. The major inland waterway systems connecting shippers from the Great Lakes to the Gulf via the Missouri and Mississippi river systems had a tough start to the year. Grain and other cargoes were affected by severe flooding on the Missouri and Illinois rivers (necessitating emergency repairs by the U.S. Army Corps of Engineers), halting shipments for more than a month and stranding more than 2,000 barges. Nevertheless, the market recovered, and there were record corn, soy, and grain harvests last year (20 million tons), boosted by strong coal and steel shipments on the river system, which was good for towing company profits. Operators have been getting about $14.45 per ton for barge transport of grain from Chicago to New Orleans.
The huge size of inland river tows generally is not appreciated. Sites range from 20 to 25 barges on upstream tows and 32 to 35 barges downstream, being pushed by tugs of up to 10,500 hp. New “super jumbo” barges (260 feet x 52.5 feet) are starting to replace older barges.
Ingram Barge Company ordered 100 new open hopper barges from Avondale Shipyards and 20 hopper barges from Jeffboat and Trinity Shipyards.
Shipbuilding and Ship Repair. Ratification of the U.S.-sponsored OECD Shipbuilding Trade Agreement was signed in Paris in 1994. Enactment has been held up by Congress, with action anticipated in 1996. Because this is an executive agreement and not a treaty, ratification by both houses is required before the president can sign it into law.
In the meantime, there has been marketing activity and requests for proposals or quotations by foreign and Jones Act operators for new Title XI construction in U.S. yards. Title XI financing allows a shipowner to obtain loans guaranteed by the full faith and credit of the U.S. government. In 1993, it was opened to foreign shipowners wishing to build in U.S. yards with foreign registry. Total approvals approximates $800 million, with close to $1 billion in guarantees available. There are more than $3 billion in pending applications on file.
The cost for new ship construction of a 40,000-ton product carrier is about $42 million in a U.S. shipyard, compared with about $32 million in a foreign yard.
Maritime Legislation and Reform. Congress has the following reform bills to consider during the 1996 session:
Ocean Shipping Reform Act was scheduled to replace the Shipping Act of 1984 and terminate or reorganize the Federal Maritime and Interstate Commerce Commissions in 1995. Opponents were able to delay the bill, but it may be reintroduced in 1996 and has the support of the National Industrial Transportation League.
The Jones Act also has become a high- profile element in the maritime reform debate. On the books since 1789, the Cabotage Law established restrictions, as defined in the present Jones Act (1920), that are designed to protect our coastal shipping and shipbuilding industries and encourage a national-flag merchant marine. Opponents argue that the protection afforded by the Jones Act restricts competition and artificially increases shippers’ costs. They want to end U.S. shipyard construction and U.S. citizenship restrictions on Jones Act trade. Their proposal, the Coastal Shipping Competition Act, would end the Jones Act requirement for U.S.-built and -flagged vessels in the internationally accessible domestic and noncontiguous trades. World Trade Organization negotiations in Geneva also could endanger the Jones Act.
It is estimated that more than 1,800 companies doing Jones Act-related business in 42 states could be adversely affected by a repeal or substantial amendment of its provisions.
Passenger Ships. The North American market continues to be the world’s largest and most profitable for luxury cruising vessels. However, the 35-year-old SS Independence and SS Constitution, modernized in 1995 and now cruising in the Hawaiian Islands, are the last remaining oceangoing passenger liners left under U.S. flag.
Internationally flagged, and often U.S.-based and publicly owned, cruise and gaming ship operators and marketers such as the Miami-based Carnival Cruise Lines, Celebrity, Costa, Royal Caribbean, P & O, Cunard, Walt Disney, Marriott, Delta Queen Steamboat, and Hilton have developed and served the U.S. market with a variety of ultramodern passenger vessels on both the high seas and inland waters. Many new megaliners have been ordered by cruise lines to serve this market. In 1995, deep-sea passenger ship carrying capacity increased by more than 10,000 passenger berths, and another increase of more than 21,000 berths is expected during the next two years.
With heavy investments at shipyards in Finland, Italy, France, Germany, and Japan, industry leader Carnival Corporation—with 1994 sales of $1,623 billion—is poised to solidify its leadership position by investing more than $2.5 billion and bringing a minimum of 16,026 berths into the market during the next two years with huge vessels, including the new M/V Imagination and M/V Inspiration, with accommodations for 3,400 passengers, and the soon-to-be-delivered Carnival Destiny.
Celebrity Cruises’ new $320 million M/V Century—the first of a three-vessel, $1 billion expansion plan that will increase that line’s capacity from 3,800 to Caribbean market, with some of the vessels transferring to the Alaska trade during the summer months.
Maritime Personnel, Human Factors, and Safety. There is rising concern in maritime safety circles that the training of mariners and ship safety must be given greater priority in the future. The International Maritime Organization has revised the Standards of Training, Certification, and Watchkeeping Convention, which is due to take effect in February 1997. The International Safety Management Code becomes effective in 25 months. These new standards, however, do not address the serious global shortage of trained mariners. For more than two decades, ship owners have been flagging out, replacing more expensive and well-trained mariners with cheap labor, sometimes with questionable qualifications and licenses.
Downsizing and reengineering within companies has stripped out entire layers of experience and marine-management skill. This has created almost grotesque deficiencies in the competency of some personnel systems and draws attention to the need for improved quality of training. For example, editorials and reports from Lloyd’s List point out that companies that claim to “enhance business performance by optimization of marine assets versus marine risk” might score points at board meetings, but they induce despair among those who have to man the ships, who face “the awesome risk, and knowledge that if they let their guard slip for a few minutes, it could be one of their ships ashore, gushing oil over the ‘natural resources’ and summoning up the battalions of lawyers who will keep them all in court the remainder of their working lives.”
Even quality certification cannot prevent casualties simply by placing shrink- wrapped pallets of forms, manuals, and training videos on board every ship. There is a limit to what rationalized, hardworking crews of 15 or so people can do to keep a 60,000-ton ship running 24 hours a day without facing exhaustion or burnout. With a worldwide projected shortage of up to 400,000 officers, the time has come for shipping companies to invest in mariner training based on continuing education. The United States is fortunate to have excellent maritime academies to market and serve a training requirement that will be sorely needed. For example, Maine Maritime Academy is working on the development of a new generation of advanced computer-based training systems for delivery on board ship to meet these needs.
We do not need another spectacular maritime casualty to tell us what we already know: ships plying U.S. trade routes need to have mariners on board who meet practical and verifiable training standards. Shipping companies must stand behind their marine personnel with proper training and support to restore a sense prestige to their profession.
Ports and Harbors. Ports on the Atlantic, Gulf, and Pacific coasts began to brace themselves for consolidation among carriers. Lines are attempting to reduce the number of ports on a vessel’s itinerary and focus on fewer, larger “megaload centers” at port facilities that are closest to large population centers and the seacoast, for quick vessel turnaround. Most ports are managed by quasi-governmental, state, or bi-state port authorities, which operate on a not-for-profit basis and obtain construction funding for various transportation facilities through the public sale of bonds.
As the popularity and usage patterns of certain ports shift, former marine terminal sites probably will be rezoned from industrial into living, shopping, and parkland uses. This allows for the “highest possible development use” and, not coincidentally, the highest possible property assessments for local governments.
By far the most serious crisis facing U.S. ports continues to be the inability to obtain dredging permits. Shipowners and U.S. port interests, who have invested billions in new ships and facilities, are frustrated over the extremely long delays in obtaining dredging permits caused by environmental concerns over how to safely dispose of the dredged material, some of which contains minute trace amounts of dioxins and other contaminants. The traditional method of disposal was to dump them at sea, which costs about $5 per ton. Alternate upland disposal costs about $100 per ton.
Ship operators, port authorities, federal agencies, states, and environmental interests have been working together to create a national policy on harbor dredging permits, to keep our ports working safely, but progress has been slow.
The nation’s five leading ports in terms of container cargo volume handled are:
Port TEUs Handled in 1995
Shipping and Defense/Military Sealift Command (MSC). With the steady decline of militarily useful and available commercial U.S.-flag ships, the Navy and MSC have developed extensive plans to employ their own MSC-controlled and -operated ships, as well as the Ready Reserve Fleet, to respond to routine and emergency—or surge—military transport requirements. The number of such ships likely will continue to grow.
MSC is the nation’s largest operator of deep-sea shipping, as well as a regular charterer of cargo space on many U.S.-flag carriers. The MSC-controlled fleet includes:
- Ready Reserve Fleet: about 92 ships
- MSC Fleet: about 128 ships (owned and on charter)
- New Ships Under Contract/Construction: About 20 ships
- Transfers/Conversions: About 17 ships
- Civilian Mariners: About 5,132
MSC has experienced steady growth in its mission and responsibilities, and with that growth have come increased management challenges. Recently, the General Accounting Office completed a year-long investigation that criticized MSC’s ability to develop internal management controls, prevent fraud and abuse, supervise repairs, and obtain proper security classifications for some of its seagoing personnel. Given the age. mix, and technical complexity of its ships and the generally declining pool of experienced personnel on board ship and at repair facilities, it does not come as a surprise that MSC could encounter problems. For example, problems always have existed in MSC contracting with the private sector, where MSC has control of some older, complex, maintenance-intensive vessels that are increasingly costly to operate and maintain and even harder to find spare parts for. With the procurement system’s mandated focus on competitive bidding and lowest price and dependence on year-to-year congressional funding, a case can be made that not enough priority is given to total customer satisfaction, operational competence and performance, maintenance and quality assurance in the procurement process.
The winds of change are blowing throughout the maritime industry. We have seen the demise of some legendary shipping companies with 100-year traditions, yet we also have witnessed the spectacular growth of highly developed- publicly traded companies. The industry is becoming increasingly internationalized, with a tendency toward greater cooperation between government and private sectors, and international trade and markets are continuing to grow.
We have to hope that with the new capital investment, companies will pay more attention to personnel training safety, and the care and careers of the mariners entrusted to sail the new ships.
Robert Pouch, a graduate of the Maine Maritime Academy, is director of the Board of Commissioners of Pilots of the State of New York and is a consultant for Barber International a/s.