If you were a shipping company investor, manager, board member, employee, insurer, or regulator operating in the U.S. maritime environment, in all probability, 2001 started with a certain amount of potential. The millennium ended on a modest note of optimism, with freight rates in the container, oil tanker, and some bulk trades all showing signs of improvement. But as the year began, the worldwide economy already had started to drift into recession. Freight rates and cargo demand began to soften. A number of carriers felt the squeeze of overcapacity during the first six months. Investors have found themselves locked in a business in which profits are increasingly elusive. Return on capital employed—the sum of equity and loans minus cash—for many first-class companies in the shipping sector has averaged less than 5%.
The terrorist attacks of 11 September, with the ensuing psychological impact and the already existing economic recession, pushed many shipping companies to the brink. The most visible and dramatic consequences fell on the passenger-carrying segment of the industry. First came the airlines, which in a matter of weeks saw several well-established national carriers either have to declare insolvency or receive massive emergency governmental loan guarantees to survive.
Passenger ship operators were next. Many were hit with immediate trip cancellations and a huge decline in forward bookings. U.S. operator American Classical Cruises was forced into insolvency. The net result was the collapse of many marginal cruise operators, their ships and crews idled at lay-berths with nearly zero prospects for future employment. Many ships were placed for liquidation sale or sold for scrap. A number of larger, better financed cruise operators were able to survive, but they paid a huge price, losing half of their market capitalization.
Companies operating in the liner container trades, oil and parcel tankers, and bulker trades experienced the same negative market forces, which exerted great pressure on freight rates. Ships were withdrawn from service and laid up to reduce capacity.
All told, very few if any companies in the North American and even the larger global markets were able to overcome these overwhelmingly negative market forces, and as 2001 ended, still more warning signs emerged. The Bush administration announced its plan to end Title XI shipbuilding loan guarantees. Large commercial banks declared they no longer were interested in writing ship mortgages. And for a number of well-respected shipping companies, an end-game of mergers, acquisitions, or disinvestments were announced, with an increasing number of ships being sold or scrapped.
Status of the U.S.-Flag Industry
The U.S.-flag deep-sea cargo-carrying fleet, according to the U.S. Maritime Administration, includes some 559 vessels (plus commercial vessels owned by the government and dedicated to or used for military sealift or national defense commitments) in the following categories:
- Oceanborne—315
- Great Lakes—71 (some vessels are laid up/not trading)
- Government owned—173 (includiing National Defense Reserve and Ready Reserve Fleets)
U.S. Maritime Administration
The U.S. Maritime Administration (MarAd) operates with a budget of $212 million. Approximately half ($97 million) is allocated to operations and training of merchant marine officers through support of the federal and state maritime academies. Another $99 million is allocated for maritime security, for which MarAd manages the Ready Reserve and National Defense Reserve Fleets for the Navy. The balance of the budget is for ship disposal and scrapping (132 ships have been designated for disposal) and loan guarantees.
Military Sealift Command
Military Sealift Command (MSC), under the command of Navy Rear Admiral David L. Brewer III, operates a fleet of about 110 ships in its active global service pattern in support of various military clients. Ninety-two ships are held in reduced operating status, ready to sail on short notice. MSC will take delivery of four fast combat support ships for the Naval Fleet Auxiliary Force, a T-AKE dry cargo/ammunition ship, and the last of a series of 14 landing ships-medium (rocket) (LSMRs).
MSC ships are organized in six operating groups:
- Naval Fleet Auxiliary Force (33 ships)
- Special Mission (30 ships)
- Prepositioning (36 ships)
- Sealift (27 ships)
- Ready Reserve Force (90 ships)
- Introduction (19 ships)
The Ready Reserve Force fleet is under Department of Transportation/MarAd ownership and maintenance when inactive, but is controlled by MSC when activated and operational.
Maritime Security Program
The Maritime Security Program (MSP) 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 per ship per year until 2005, subject to annual appropriations by Congress. The owner-operators of the 47 ships currently in the MSP Fleet are:
- American Ship Management/APL, 9 containerships
- Automar International Car Carrier, 3 roll on/roll off ships
- Maersk Line, 4 containerships
- OSG Car Carriers, 1 roll on/roll off ship
- Central Gulf, 3 roll on/roll off ships
- Waterman Steamship, 3 lighterage aboard ships (LASHs), 1I roll on/roll off ship
- First American Bulk Carrier, 2 containerships
- First Ocean Bulk Carrier, 3 containerships
- U.S. Ship Management (formerly Sea-Land), 15 containerships
- E-Ships (formerly Farrell Lines/P & 0), 3 containerships
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 it is enacted by Congress.
Mergers and Acquisitions
About $800 billion in merger and acquisition activity was done in 2001 within the U.S. and international maritime industry. Some highlights:
Exxon merged with Mobil
BHP merged with Billiton
Chevron merged with Texaco
BP/Amoco merged with ARCO
V Ships acquired Acomarit
Teekay acquired Bona and UNS
NYK merged with Showa Lines
P & O Princess Cruises probably will be acquired by either Carnival Cruise Line or Royal Caribbean Line
Market conditions during the first half of 2002 have shown some incremental improvement, but pressure on freight rates and excess shipping capacity are indications that additional mergers and acquisitions will take place throughout the rest of the year.
Voluntary Intermodal Sealift Agreement
When combined with the Maritime Security Program operators, the 53 participants in the Voluntary Intermodal Sealift Agreement (VISA) program have been able to offer the Defense Department additional sealift capacity as follows in 2001:
- Roll on/Roll Off—13 ships
- Container Roll on/Roll off—7 ships
- Containership—78 ships
- LASH—4 ships
- Bulk—7 ships
- Integrated Tug and Barge (ITB)—1 ship
These 115 ships offer a total intermodal capacity of 167,644 20-foot equivalent units (TEUs).
Liner Trades
The major container carriers have created alliances along major transatlantic, north-south U.S., and transpacific trade routes to pool ships, containers, and terminals, as well as to rationalize carrying capacity. They share terminals and space on board their vessels but advertise, set prices, and market independently. Together, the five groupings in Table 3 account for more than half of the U.S. container market.
Freight rates declined on the major transatlantic (Trans-Atlantic Conference Agreement) and transpacific (Transpacific Stabilization Agreement) routes. Volume in terms of TEUs carried and freight rates declined throughout the year. Some conference carriers will attempt to reverse this decline in 2002 with a series of rate increases or freight surcharges.
Passenger Ships
Construction of new mega-sized passenger ships is continuing, although the business recession and post-9/11 shocks to passenger travel and tourism have compelled many companies to slow the pace of new construction and delivery of vessels in an effort to allow the industry to get back on its feet. Several new and spectacular ships and cruising concepts will be introduced during 2002, such as ResidenSea condominium ownership afloat. If demand for current and future cruise bookings can be rebuilt slowly, the passenger ship industry should stabilize, if the economy does not slide further. Advance bookings in 2002 already have shown signs of recovery, based on pricing incentives offered by major cruise lines.
In a well-publicized takeover battle, the highly competitive acquisition bids by Carnival Cruise Line ($926.2 million net income in 2001) and Royal Caribbean Line ($254.5 million net income in 2001), both based in Miami, of P & O Princess Cruises (based in London) will go down as one of the largest shipping deals in history. Carnival has offered a package approaching $5 billion in stock, subject to regulatory approvals. Company shareholders will vote on the proposals by midyear.
The largest cruise lines, measured by market capitalization in 2001, were:
- Carnival Cruise Line
- Royal Caribbean Cruise Line
- P & O Princess Cruises
- Norwegian Cruise Line (acquired by Star Cruises in 2000)
- Tankers, Bulk, and Specialized Carriers
About 90% of U.S. international maritime trade tonnage is carried by bulk carriers, oil and chemical tankers, and other specialized carriers.
Tankers. The Oil Pollution Act of 1990 requires that all single-hulled tankers trading in the United States be phased out (or converted to double hull) by the end of 2004. This is expected to have a major impact on both U.S. tankers and tank barges. The demand for domestic tank carrying capacity is projected to increase through 2010, but the present capacity will decline drastically commencing in 2003 unless additional ships are built or converted. Without new construction, domestic carriers fear that Congress will be pressured to waive the Jones Act requirement for U.S.-flag tankers in the domestic trades.
Worldwide Bulk Coal Trade. The United States is the world's leading producer of coal. Worldwide production is estimated at 3,646,000,000 metric tons, with the United States producing about 916,000,000 tons.
Bulk Carriers. The United States has maintained its commanding market presence in the export of grains, including corn. The volume of grain trade remained about the same in 2001 as in 2000. All of these cargoes, except for modest tonnages of Public Law 480 and Aid cargoes carried on U.S.-flag vessels, are carried by internationally flagged ships.
Roll-on/Roll-off Ships (RO/ROs). The RO/RO ships operators, whose business primarily is arranged through long-term contracts for the transport of finished automobiles and automobile components and parts, has evolved into a complex logistical support operation for about a dozen major automobile manufacturing giants and/or their subsidiaries and affiliates of shippers of heavy industrial vehicles and machinery. The shrinkage in the customer base of these lines has come about as a result of the mergers within the automobile and truck manufacturing industry. The major operators of specialized roll-on/roll-off ships and their estimated market share are shown in Table 6.
Shipbuilding and Ship Repair
Far Eastern yards, principally in Japan and South Korea, with 40% and 30% of the market share, respectively, are the entrenched leaders in securing new commercial shipbuilding orders for tankers, bulk carriers, and containerships. China also is developing its shipbuilding capacity rapidly. Yards in Finland, Italy, and France have captured a major share of contracts to build new passenger ships.
The major industrial shipbuilding and repair yards in the United States are:
- Newport News
- Northrop Grumman/Litton/Ingalls
- General Dynamics/Electric Boat
- Bath Iron Works
- Avondale Shipyards
- National Steel
- Kvaerner (formerly Philadelphia Naval Shipyard)
- McDermott Shipbuilding
- Atlantic Marine Shipyards
- Norfolk Shipbuilding & Drydock
- Halter Marine Group
- Baltimore Marine Industries (formerly Bethlehem Steel Shipbuilding, Sparrows Point Yard)
Most of the large U.S. yards specialize in construction of military vessels. A few have obtained commercial orders for passenger, tanker, and RO/RO ships.
Many smaller shipyards service the Jones Act trade and the repair and specialty markets, including large yacht and offshore supply vessels. Many, including companies such as Derecktor Shipyard, Trinity Shipyards, and Washburn and Doughty, also have developed advanced production techniques and offer high quality and competitive pricing worldwide. The larger U.S. yards are not perceived as being cost effective when compared to European and Far Eastern yards because of labor costs and a lower level of technology and productivity. In spite of this, U.S. yards have a reputation for building high-quality, durable vessels.
The 120-acre historic Quincy Shipyard near Boston was purchased by Massachusetts Heavy Industries (MHI) with a view to renovate and operate the facility as a modem shipyard, following significant political pressure by state legislators, using MarAd Title XI 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 $38-million investment.
Casualties and Losses
Bulk carriers headed the list of ships that sank in heavy weather during 2001, as summarized below:
- Leader L. Sank on 23 March 2000 with the loss of 18 crewmembers 400 miles northeast of Bermuda. The 23-year-old panamax bulker experienced cracked shell plating in her no. 4 hold, which loosened the hatch cover and led to further flooding of the vessel.
- Treasure. Sank on 14 June 2000 6.5 miles off Cape Town, South Africa. All crew members were rescued. The 18-year-old ship, with a cargo of iron ore, suffered hull plating damage in hold no. 4, with subsequent lifting and loss of the hatch cover.
- Kamikawa Maru. Sank on 12 September 2001 in the southern Atlantic Ocean off Brazil. The 15-year-old Cape-size carrying a full cargo of iron ore lost hull plating and her no. 3 hatch cover in foul weather, causing the holds to flood. Nine crew members were lost.
- Christopher. Sank on 23 December 2001 150 miles off the Azores with the loss of all 27 crew members. The 18-year-old ship, with a cargo of coal, suffered damage to the no. I hatch in heavy weather.
- In addition, the sinking of the Erika and the subsequent oil spill off the coast of France, the sinking of the levoli Sun, and the breaking in half of the Kristal have begun to focus the attention of regulators, including the International Maritime Organization (IMO) on the issues of overage ships, the strength of original construction, maintenance, operator quality, and crew training.
Ship Finance and Investment
During the past year, the number of commercial and investment banks providing financing for international shipping ventures has declined. The Bank of New York, JP Morgan Chase Bank, Viking Finance (Zurich), Daimler Chrysler (Debis), and KBC (Luxembourg) have decided to leave the ship finance sector because the return on capital and requirements of capital adequacy no longer meet internal corporate guidelines. The Bank of International Settlements is expected to publish new rules requiring increased capital reserves against shipping-type loans. Referred to as the Basel 2 Requirements, the regulations are expected to increase the cost of shipping loans. On the other hand, Boeing Capital Corp. announced its entry into the business of leasing and financing ships and oil rigs.
Lazard Freres discontinued its index of high-yield shipping company bonds because half of the firms carried on the listing defaulted on their obligations. There initially were 27 companies on the index, with about $45.5 billion in bonds issued. Only 15 companies not in default remained when the index was extinguished.
U.S. Title XI Loan Guarantee Program
Each year, Congress has authorized MarAd to guarantee loans to commercial shipbuilders. The Bush administration has attacked these guarantees, which have a high default rate, as a kind of corporate welfare. More than $2 billion in loan guarantees have been authorized. Opposing the termination of Title XI financing are legislators from the U.S. Gulf and other states in which large subsidized shipyards are located. Title XI projects that have received MarAd approval for 2001 include:
- Rowan Companies-offshore drilling rig, $187.3 million
- Vessel Management Services-2 tug/barges, $58.7 million
- Vessel Leasing-170 covered hopper barges, $43.5 million
- Kvaerner Shipbuilding-containership, $37.5 million
- Great Pacific NW Cruise Line-cruise ship, $35.5 million
Two large passenger vessels ordered by American Classic Cruises for service in the Hawaiian Islands cruising trade fell into default when the company declared bankruptcy.
Jones Act, Passenger Vessel Act, and Towing Vessel Act
Jones Act (Title 46 USC App. 883 and Sec. 289) 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 acts essentially reserve domestic maritime trade to U.S.-flagged, crewed, and built ships. The Jones 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.
A group of U.S. Jones Act trade ship owners who sponsor the Maritime Cabotage Task Force, claim 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 wanted to reform the act and open some U.S. coastal trade to foreign shipping, believing that cargo interests were paying premium freight rates unnecessarily. The General Accounting Office weighed in on the side of the reform proponents; however, a congressional resolution in May 1998 supporting continuation of the Jones Act attracted 240 sponsors, and there appears to be little sentiment in Congress these days for making any major reforms or amendments.
The Great Lakes
The maritime industry serving Lakes Superior, Michigan, Huron, Erie, and Ontario via the Saint Lawrence Seaway and River is served mainly by a fleet of U.S.- and Canadian-flagged vessels know as self-unloading bulkers. Their main trade (in order of tonnage carried) is transporting iron ore, stone, gypsum, low sulfur coal, cement, limestone, salt, grain, sand, and various liquid bulk cargoes between U.S. and Canadian ports on the Great Lakes. There are about 71 U.S.-flagged vessels used in the bulk trades. They generally are 600 to 1,000 feet in length, displacing up to about 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. They will receive a new training vessel, the M/V Persistent, from MarAd in 2002.
Maritime Personnel, Safety, and Human Factors
New IMO Standards for Training and Certification of Watchkeepers were to take effect in February 2002. However, tens of thousands of mariners were never trained or certified. IMO and port state regulatory agencies were forced to extend the deadline because of the widespread lack of compliance and the inability to train and certify the mariners in time.
The following large ship management companies supply crew, technical, or management services and operate large fleets of large commercial ships in international trade:
- Barber International/Barber Ship Management (about 230 ships)
- Columbia Ship Management (about 300 ships)
- Denholm-Anglo Eastern Ship Management (about 130 ships)
- Hanseatic Ship Management (about 130 ships)
- V-Ships/Acomarit (about 600 ships)
- Wallem Ship Management (about 130 ships)
Together, these six companies employ within their personnel systems more than 40,000 international mariners and marine technical and management personnel. In general, these companies have made significant investment in training and development of maritime personnel, with generally excellent safety records when measured in terms of reduced off-hire, accidents, and insurance claims. About 30% of the world fleet is managed by third-party ship management firms.
Ports and Harbors
As with the rest of the shipping industry, the number of port and terminal operating contractors and stevedoring companies has been affected by mergers and acquisitions, with a number of international operators expanding into container and passenger ship terminal operations. In terms of TEU volumes handled, the largest operators are:
- Hutchison Port Holdings, Hutchison Whampoa, Ltd. (29 terminals)
- PSA Corp. Singapore (11 terminals)
- APM Terminals (Maersk affiliate, 28 terminals)
- P & 0 Ports (27 terminals)
- Eurogate, Germany (9 terminals)
- Stevedoring Services of America (14 terminals)
- CSX World Terminals (9 terminals)
Together, these companies control close to 40% of global container volume.
Many container shipping companies now are ordering ships in the 9,000-10,000 TEU range, with ship sizes approaching 1,325 feet in length and 171 feet in beam. Maximum drafts are expected to be in the 41-49-foot range. Most ports have plans to seek funding for dredging channels to 45-50 feet, and in some cases, to 52 feet.
The United States continues to be the world's leading maritime and international 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 volume expected to double during this period.
The nation's ten leading ports in terms of container cargo volume handled (in millions of TEUs) are:
- Los Angeles, California 4.80
- Long Beach, California 4.60
- New York, Port of NY/NJ 3.05
- Charleston, South Carolina 1.30
- Oakland, California 1.00
- Seattle, Washington .96
- Hampton Roads, Virginia .63
- Houston, Texas .73
- Savannah, Georgia .73
- Miami, Florida .70
The Port of NY/NJ is the nation's largest port when container, petroleum, and bulk cargo tonnages are combined.
Port Security
Following the terrorist attacks in September, port security became a priority topic. More than 95% of all cargoes coming into U.S. ports are carried by internationally flagged vessels. The task of providing security and establishing systems to detect and interdict maritime terror plots has become the responsibility of the U.S. Coast Guard and Customs Service. Neither service was ever fully funded, staffed, or trained for the level of security that was required and implemented after 11 September. The issue of port and homeland security, with our thousands of miles of borders and coastline and hundreds of seaports, will be receiving considerably more congressional funding and priority during 2002.
Conclusion
In his treatise, The Influence of Sea Power Upon History, Navy Captain Alfred Thayer Mahan's theory for U.S. strategic defense was based on the premise that it is more effective to defend our national interests abroad, rather than on U.S. soil. He was a strong advocate of sea power as a determinant of our nation's strength.
On 11 September 2001, international terrorists, who obtained visas and lived and trained in the United States, planned and carried out an attack on U.S. soil, crashing commercial airliners into the World Trade Center and Pentagon. Mahan's theory was both turned on its head and refreshed. Our military forces were mobilized and sent forward to attack the sources of terror, in Afghanistan and elsewhere. This new war brings new meaning and dimension to homeland defense, maritime security, and sea power.
U.S. military power—supported by the nation's impressive logistical capabilities—has since been applied tactically on land, sea, and in the air against the cauldrons of terrorist activity by the best trained and equipped military people ever to serve our country. God bless them for their service.