The U.S. maritime industry continued along its relentless path of consolidation and mergers during 2000, while at the same time responding to growth forces in all sectors of international import and export trade. So, while the number of companies doing business contracted, the size of ships, quantity of cargo carried, new ships on order, and volume of cargoes handled at ports and terminals all registered impressive increases, despite the slowdown in the economy, which affected the equity and industrial markets, particularly in the fourth quarter.
What patterns of investment appeared in the ownership and operation in the maritime industry? What is their significance to the country's transportation systems?
There used to be a colloquial term in the shipping industry—jumbo-ization—and that is precisely what is happening today. Just when it looked as if 6,000 TEU (20-foot standard container equivalent unit) containerships were the ultimate in container vessel economies of scale, there are reports that 10,000-15,000 TEU ships are being designed. This economy of scale concept took on more importance in 2000 because fuel prices increased, driving the search for ever more efficient carrying capacity per unit of fuel cost per mile.
The trend that has continued among developed industrial nations is the "flagging out" of most international shipping fleets to open-registry countries. Whole sectors have been outsourced to the lowest common denominator of cost (lowest wages, fees, and taxes) countries (see Table 1). For example, ships under the flags of European Union countries accounted for 32% of the world fleet in 1970, but in 1997, that number had fallen to 12%, a figure that has remained steady over the past few years.
Among containership lines, Asian ship owners have shown spectacular growth, operating about 50% of all containerships.
Status of the U.S. Maritime Industry
The profile of the U.S.-flag deep-sea fleet includes about 312 vessels (164 in commercial service) in the following categories:
- Maritime Security Program ships—47
- Tankers—102 (96 tankers, 6 integrated tug/barges)
- Containerships—24
- Chemical carriers—8
- Integrated tug and barges—5
- Sulfur/asphalt carriers—6
- Breakbulk geared—8
- Passenger—1
- RO/ROs—5
- Military Sealift Command—42
- Ready Reserve Force—90 (mostly in inactive status
Military Sealift Command
On 12 October 2000, while on a refueling stop in Aden, Yemen, the USS Cole (DDG-67) sustained an attack by terrorists, who exploded a bomb against her hull, killing 17 crew members, injuring 39 others, and severely damaging the ship. Only heroic efforts by her crew over the course of many days in adverse conditions saved the ship from sinking. The Military Sealift Command (MSC) chartered a specialized commercial heavy-lift ship, the MN Blue Marlin, to bring the Cole back to Pascagoula, Mississippi, where she will undergo $240 million in repairs at Ingalls Shipyard.
MSC, under the command of Navy Vice Admiral Gordon S. Holder, operates a fleet of 118 civilian-crewed ships in its global service pattern in support of its various military clients. Its ships are organized into the following operating groups:
- Naval Fleet Auxiliary (33 ships)
- Special Mission (30 ships)
- Prepositioning (36 ships)
- Sealift (27 ships)
- Ready Reserve Force (90 ships)
- Ship Introduction (19 ships)
The Ready Reserve Force fleet is under Department of Transportation/Maritime Administration (MarAd) ownership and maintenance when inactive, but is controlled by MSC when activated and operational. It has been reported from time to time that MarAd is a target of possible reorganization, which essentially would eliminate the agency and transfer its shipping, mortgage financing guarantee, and promotional functions to other governmental departments.
In 2000, MSC transported more than five million tons of ammunition and petroleum products, such as jet and marine fuels, and more than one million tons of dry cargo, such as military and civilian equipment and household goods and supplies, in support of U.S. military activity abroad. It also participated in logistics exercises, training operations, and humanitarian efforts to mariners and refugees in emergency situations. Over the years, the Army, Marine Corps, and Navy have carried out plans to construct and control their own fleets of vessels and now rely less on the commercial fleet (primarily chartered containerships operating under the Maritime Security Program) for their transport requirements. This trend will continue as the U.S.-flag commercial fleet shrinks.
The Maritime Security Program (MSP), which expires in 2005, provides for a maximum of 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 thereafter, subject to annual appropriations by Congress. The owner-operators of the 47 ships currently in the MSP fleet and their total subsidies are:
- American Ship Management/APL—9 ships, $18.9 million
- SeaLand—15 ships, $31.5 million
- Automar/ARRC—3 ships, $6.3 million
- Maersk—4 ships, $8.4 million
- Overseas Shipholding—1 ship, $2.1 million
- Central Gulf—3 ships, $6.3 million
- Waterman Steamship—4 ships, $8.4 million
- First American Bulk Carriers—2 ships, $4.2 million
- Lykes Lines/FABC—3 ships, $6.3 million
- E-Ships (formerly Farrell Lines)—3 ships, $6.3 million
Reflecting the growing international pattern of shipping, two-thirds of the MSP subsidies are paid to U.S. operators on behalf of non-U.S. owner lessees or charterers. A new bill, the National Security Sealift Enhancement Act, with tax incentives, is designed to supercede the MSP, if enacted by Congress.
U.S. Maritime-Oriented Companies
A summary of some of the leading publicly traded North American-based maritime-related companies' 2000 financial results is shown in Table 3. Although these companies are traded on the U.S. stock exchanges and are publicly held, many of their ships are registered overseas (see Table 4).
As was the case in many areas of public investment, the market capitalization of transportation companies rode the roller coaster of scary surges and dips as stock valuations gyrated in 2000. The publicly traded passenger ship sector, including Carnival and Royal Caribbean, took a beating because of perceived overcapacity, as well as safety concerns and the collapse of two lower-priced operators in the market, but has begun to recover.
Canadian Pacific, the rail, hotel, and shipping conglomerate, announced plans to publicly float off and list its corporate divisions separately, in an effort to maximize perceived shareholder value. TOSCO was acquired by Phillips Petroleum, and United Parcel acquired the Fritz forwarding companies and expanded into the consolidation, forwarding, and logistics service businesses.
Liner Trade
Corporate mergers among liner companies continued in 2000, although the pace was slower than in 1999, Some of the main acquisitions in 2000 were:
- Maersk acquired SeaLand
- Sud Americana de Vapores acquired Norasia
- CP Ships acquired TMM/Americana and CCAL
- P&O Nedlloyd acquired Farrell Lines and Harrison Lines
- Crowley acquired Marine Transport
- ODPR purchased Fred Olsen cargo liner interests
The container carriers have created alliances along major transatlantic, north-south American, and transpacific trade routes in an effort to pool ships, containers, and terminals as well as to rationalize carrying capacity. There are four big alliances:
- Grand Alliance
- New World Alliance
- United Alliance
- COSCO-K Line/Yangming Alliance
Freight rates held steady or increased on the major transatlantic (Trans-Atlantic Conference Agreement) and transpacific (Transpacific Stabilization Agreement) trade routes, and increased volume has enabled ocean carriers to achieve improved results on routes where trade has been strong. This reverses a trend of the past when carriers would attempt to increase rates but then give back almost all of their increases in negotiations.
A number of major carriers placed orders for new (up to 7,000 TEU) containerships at Far East shipyards. With world trade growth estimated to double over the next five years, and with further contraction of carriers, there is cause for some optimism that the next generation of big, modern containerships might be timed right to earn reasonable profits.
Construction of new megasized passenger ships will continue, and over the next five years, the major companies will bring another new generation of ships into the marketplace. Investors were very concerned about a cooling economy and overcapacity and excessive competition from lower-priced operators. As a result, both Carnival and Royal Caribbean lost up to half of their market capitalization when stock prices dropped in 2000. They began to recover later in the year, when competitors such as Premier Cruise and Commodore Cruise Lines went out of business and/or experienced vessel casualties, including the sinking of the P/V SeaBreeze I off Norfolk.
With the introduction of innovative new ships and strong market demand, as well as continued merger and acquisition activity, the passenger ship industry is in a good position, if the economy does not slide into recession.
The largest cruise lines, measured by market capitalization, in 2000 were:
- Carnival
- Royal Caribbean
- P&O/Princess
- Star Cruises
- Norwegian Cruise Line (acquired by Star Cruises in 2000)
- American Classic Voyages
- Royal Olympic
There is little doubt that intense competition and rising fuel costs caused several passenger ship operators to fail during 2000 and others to see their share prices decline. In addition, an ongoing federal investigation into alleged pollution violations involving Carnival, Royal Caribbean, and Norwegian Cruise Lines indicates possible underlying problems in the acceptance of a corporate safety culture within some of the large operators—for competitive or other reasons. That is why state and federal government efforts on navigational safety and protection of the environment have received such high priority in the United States, and we undoubtedly will see more such actions in Europe and elsewhere following the series of groundings and ship losses with oil pollution during 2000.
Tankers, Bulk & Specialized Carriers
Tankers. Owners and charterers of tankers were pleasantly surprised during 2000 with higher freight rates across the board. Spot charter rates for very large crude carriers surged from about $20,000 per day in 1999 to $75,000 in 2000. Some of the rate improvement came about as a result of the phase out of single-hull tankers and a general move toward chartering new tankers of higher quality following events such as the sinking of the Erika off the coast of France and the serious technical and safety deficiencies found on the TOSCO-chartered Neptune Dorado in San Francisco.
About 90% of U.S. international maritime trade tonnage is carried by bulk carriers, oil and chemical tankers, barges, and other specialized carriers, and demand for imported oil increased substantially in 2000.
Bulk Carriers. The United States has maintained its commanding market presence in the export of grains, wheat, and soybeans. The volume of wheat, corn, and grains trade remained about the same in 2000 as in 1999, although the quantities shipped by sea declined as a result of an increase in cross-border grain traffic between Canada and Mexico.
RO/RO Ships. RO/RO ship operators, whose business principally is long-term contracts for the transport of finished automobiles and auto components and parts, have evolved into a complex logistical support operation for about a dozen major automobile manufacturing giants and/or their subsidiaries and affiliates. The shrinkage in the customer base of these lines has come about as a result of the mergers among the automobile and truck manufacturing industry. The major operators of specialized RO/RO ships are:
- NYK Line—20%
- Wallenius Wilhelmsen Lines—20%
- Mitsui-OSK Line—15%
- K Line—15%
- Hyundai Merchant Marine—12%
- Hoegh Ugland Auto Liners—9%
- Others—9%
Shipbuilding and Ship Repair
Japan and South Korea are the entrenched leaders in securing new shipbuilding, with 40% and 30% of the market, respectively. Tankers and bulk carriers account for the majority of the orders, followed by container and passenger vessels.
The major industrial shipbuilding and repair yards in the United States are:
- Newport News Shipyard
- Litton/Ingalls
- General Dynamics/Electric Boat
- Bath Iron Works
- Litton Avondale
- National Steel Co.
- Kvaerner Shipyard (formerly Philadelphia Naval Shipyard)
- Baltimore Marine Industries (formerly Bethlehem Steel Shipbuilding Co., Sparrow's Point, Maryland)
- Alabama Shipyards
- Norfolk Shipbuilding & Drydock Co.
Most of the large U.S. shipyards specialize in construction of military vessels, although a few have obtained commercial orders for passenger, tanker, and RO/RO ships.
Many smaller shipyards service the Jones Act trade and repair and specialty markets, including large yachts and offshore supply vessels. Many, including such companies as Derecktor Shipyard, Trinity Shipyards, and Washburn and Doughty, have developed advanced production techniques and offer competitive worldwide pricing and high quality. The larger yards are not perceived as being as cost competitive as European and Far Eastern yards because of labor costs and a lower level of technology and productivity. In spite of the cost disadvantages, U.S. yards have a reputation for building high-quality, durable vessels.
The historic Quincy Shipyard near Boston, a 120-acre facility, was purchased by Massachusetts Heavy Industries, with a view to renovate and operate the facility as a modern shipyard, using MarAd- guaranteed funds. MHI Shipbuilding LLC went into bankruptcy, and on 21 October 2000, MarAd issued a notice of public sale in an attempt to recover its investment by selling the property.
Scrapping, Disposal, and Losses
One method of diagnosing the health (or possible ills) of the maritime industry is to examine the number of vessels in the world fleet sold for demolition or lost through casualties at sea.
Scrapping and Demolition. In 2000, 30.7 million deadweight tons of ships were sent for demolition. Of this amount, 16.7 million deadweight tons were tankers. This high level of scrapping activity also has triggered a number of new construction orders for replacement vessels, with tanker deliveries up by about 50%, and with shipyards booked over the next few years.
Following the tragic loss of the tanker Erika and the Premier Cruise Lines vessel SeaBreeze I, as well as a number of other well-publicized ship casualties around the world, considerable attention and pressure was focused on problematic ships and/or operators, particularly with respect to tankers, by port, law enforcement, and environmental agencies.
Casualties and Losses. Maritime ship casualties and their causes continue to receive a high degree of public scrutiny, in part because the National Transportation Safety Board, U.S. Coast Guard, and other safety agencies have the technical ability to analyze accidents and focus on exactly what combination of weather, technical, or human factors contributed to the probable causes of mishaps. The industry has come a long way since the days of the sinking of the coal carrier Marine Electric in 1983 and the SS Poet in 1980, when ship owners, managers, the Coast Guard, and classification societies were more flexible about interpreting and enforcing regulations, and perhaps more yielding to economic pressure than they are today.
Nevertheless, the regular and repeated appearance of problematic and/or substandard ships with numerous safety and personnel deficiencies at U.S. harbors and ports all over the world still is a very serious issue. A few examples will highlight the depth of the problem:
- The Polembros Shipping Company tanker M/T Neptune Dorado (84,711 DWT, Singapore registry, built 1985) was chartered by TOSCO to carry 580,000 barrels of Australian crude oil for delivery to the TOSCO refinery in San Francisco. On arrival, the ship was boarded by a U.S, Coast Guard marine inspection team, which found 30 separate safety and environmental deficiencies, including numerous oil leaks, a defective ship's sanitation system, and a faulty inert gas ventilation system. In addition, numerous cracks in the ship's steel compartments allowed the crude oil cargo to seep into the ballast tanks, creating a serious hazard of explosion. The ship's captain, operator, and owner entered guilty pleas to federal felony charges, and on 19 December 2000, paid $2.5 million in fines and penalties for deliberately concealing the dangers inherent in their vessel from the Coast Guard.
- The DIS Progress Shipping Company's Freja Jutlandic (built 1982) was detained in Baltimore, when the Coast Guard detected a breach in the hull and oily water leaks. The owner and master are facing criminal charges and fines.
- The tanker Highland Faith (Panamanian registry) arrived in New York Harbor in heavy weather during the winter of 2000. The ship immediately was detained for deficiencies including cargo leaking into the ballast tanks and temporary repairs made with rubber and cement that were not reported to authorities in accordance with SOLAS regulations.
- The Atlantic Container Lines container-RO/RO vessel Atlantic Conveyor (built 1984) was detained by the Coast Guard in New York. Cracks in her main deck and fractures in the steel amidships side shell plating were discovered, as well as on the coamings, decks, and bulwarks.
- The bulk carrier Bled (built 1983) was detained in Chesapeake, Virginia, by the Coast Guard because the master had failed to carry out and log mandatory safety tests, failed to notify the Coast Guard of irregularities, and failed to maintain or repair faulty navigation equipment. In addition, the ship's officers were not aware of and did not have the necessary understanding of the owner's safety management system under the ISM Code.
- The bulk carrier Ayogalusena P (built 1972) was held by the Coast Guard for two weeks in New Orleans because the owners maintained no records for the ship's life-saving equipment. In addition, numerous pieces of piping and machinery had excessive oil and water leaks. Also, crew certificates were noted to be either expired or falsified, and the ship's radio safety certificate could not be found.
- The bulk carrier MN Kouros V struck the Ambrose Light Tower at the entrance to New York Harbor on 22 January 2001, severely damaging the tower and extinguishing the light and other electronic systems. The tower had had to be replaced before, after being struck in October 1996 by the TOSCO-chartered MIT Aegeo.
When large vessels strike major navigational aids in open water, it raises questions regarding the training, experience, and qualifications of the mariners who are serving on board.
How is it possible for vessels with so many deficiencies to be approved for charter to major U.S. oil companies and refiners, companies that ought to have internal safety standards and controls? The answer probably is that ship owners may either intentionally misrepresent or conceal the condition of their vessels, or that charterers are willing to overlook the substandard quality of certain vessels to attain the most economic charter terms for the carriage of their oil.
Ship Finance and Investment
It is difficult to obtain financing for the construction of some new ships. In spite of the importance of international world trade, many banking organizations have avoided loaning money to shipping companies to mortgage new ships because of the risk and the long-tail reputation that unsuccessful or substandard owners have cast over the business. This negative stereotype has made it difficult to attract investment. In fact, very few major investment banks assign analysts to follow the shipping industry.
Shipping finance has been carried out in large part by a number of specialist or boutique investment firms. About $4.0 billion worth of high-yield (junk) bonds covering the financing of new and secondhand vessels have been issued, at coupon rates ranging from 7.75% to 12.5%, and yields ranging from 8.99% all the way up to 43.42%, with an average yield of 33.25%, according to information published in the 23 February 2001 Tradewinds, a weekly shipping paper based in Oslo, Norway.
Shipping is a very risk-oriented business, and the bond yields for this sector carry a very high differential, or spread, as illustrated in Table 8.
Jones Act Trade
Jones Act and related shipping business, or coastwise (cabotage) trade, is conducted in 42 coastal and inland river states and tributary rivers, bays, and sounds. First enacted in 1789, the act essentially reserves domestic maritime trade to U.S.-flagged, -crewed, and -built ships. The act affects a large community of cargo shippers as well as marine operators. Fifty-five other maritime nations have cabotage and related laws of similar substance.
In May 1998, a congressional resolution attracted 240 sponsors supporting continuation of the act, and there appears to be little sentiment in Congress for any major reform or amendments.
Great Lakes Shipping
The maritime industry serving Lakes Superior, Michigan, Huron, Erie, and Ontario (sometimes called America's fourth coast) via the Saint Lawrence Seaway and River consists mainly of U.S.- and Canadian-flagged self-unloading bulkers, which are committed (in order of tonnage carried) to transporting iron ore, stone, gypsum, low-sulfur coal, cement, limestone, salt, grain, sand, and various liquid bulk cargoes. Much of this trade is carried between U.S. and Canadian ports on the Great Lakes.
There are about 70 U.S.-flagged vessels used in the bulk trades. They generally are 600-1,000 feet in length, displacing up to 75,000 tons, according to the Lakes Carriers Association. The Great Lakes Maritime Academy, located in Traverse City, Michigan, offers a three-year program of study to train maritime personnel for careers afloat and ashore on the Great Lakes and beyond. Because of the heavy ice on the lakes from late December through March, shipping interests lobbied successfully for funds to keep the 56-year old Coast Guard icebreaker Mackinaw (WAGB-83) in service until a new $128-million replacement vessel can be constructed.
Safety, Personnel & Human Factors
It is estimated that there are some 60,000 ships sailing in international trade. World shipyard order books are full for the next five years. World trade is projected to grow robustly over the next ten years. Given this pattern of growth, the maritime industry will need to hire, train, and certify up to 100,000 new individuals for jobs in shoreside technical, operational, and managerial jobs. The need for more seafaring personnel will be particularly acute in 2002, when new Standards for Training and Certification of Watchkeepers will take effect.
While tanker pollution events have captured the headlines, the introduction of megasized passenger ships sailing on very tight schedules also is a safety concern. The focus of safety systems on board passenger ships must continue to be directed toward personnel systems and oversight of the internationally sourced seafarers who crew foreign-registered ships in our waters and ports. The competitive pressure to economize, and to go to the lowest common denominator of operating cost is enormous. This should not mean that safety on board and environmental standards should be compromised.
The following large ship management companies supply crew, technical, or management services and operate fleets of at least 100 large commercial ships in international trade:
- Barber International/Barber Ship Management
- Columbia Ship Management
- Denholm Ship Management
- Wallem Ship Management
- V-Ships
V-Ships, which acquired Acomarit in 2000, is the largest ship manager, with about 600 ships and 23,000 mariners in its system.
Ports and Harbors
The United States continues to be the world's leading maritime and trading nation. Two billion metric tons of cargo and 150 million passengers are handled through our ports and waterways. The trend is for continued growth over the next decade, with trade volumes expected to double during this period.
There are 355 freight and passenger ports in the United States; 150 ports handle 99% of all cargo tonnage. There are more than 25,000 miles of federally and privately maintained navigation channels, which require periodic deepening and/or maintenance dredging to allow safe navigation of commercial vessels.
With the projected growth of international trade, there will be an enormous burden on port authorities, the Army Corps of Engineers, and individual states with a stake in international trade to make port terminal, infrastructure, highway, road, and rail system improvements. Some port terminal operators may have to stay open 24 hours a day to meet the demand and help manage gate and terminal congestion if needed improvements are not made.
The Harbor Maintenance Tax, an ad valorem surcharge on exports, was found to be unconstitutional. A recent federal court decision affirmed that ad valorem movies would have to be refunded, but the federal government was not obliged to pay interest on the funds it had collected unlawfully.
The nation's ten leading ports in terms of container cargo volume handled (in TEUs) are:
- Long Beach, California 3,224,027
- Los Angeles, California 3,203,253
- New York, Port of New York/New Jersey* 2,199,478
- Charleston, So. Carolina 1,243,679
- Oakland, California 988,752
- Seattle, Washington 956,633
- Hampton Roads, Virginia 952,856
- Houston, Texas 725,359
- Savannah, Georgia 719,679
- Miami, Florida 683,425
*New York is the largest when bulk and container cargoes are combined.
Conclusion
With economists predicting major and sustained increases in world trade, shipping companies responded in 2000 by planning and/or ordering new tankers, containerships, passenger ships, and bulk carriers in record numbers. How our ports and the connecting infrastructure of interstate highways, intercity roads, and rail systems will handle the growth is a matter of great concern.
The 3 leading deep-sea ports in the United States handled more cargo than the next 12 ports combined. The interstate highway system often is overwhelmed by high-volume traffic. U.S. railroad service, after a wave of mergers, is down to just four major rail companies.
Ships are getting bigger, and their cargo volumes are increasing. The capacity of our road and rail systems, and in some cases, the ability of our ports to obtain more acreage on which to expand and develop more ship berths and upland terminal facilities are in question. Solving this problem will require major investment on a national scale. Who will take responsibility for this investment will be an important issue for discussion and debate at the federal and state governments, port authorities, and among shipping companies if the public interest is to be served.
Robert Pouch, a graduate of the Maine Maritime Academy, has devoted his career to the maritime industry. 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.