Changes coming to Alaska and Hawaii; Puerto Rico loses a long-time carrier.
The face of U.S. domestic shipping will change as a result of the announcement in November by Horizon Lines, the largest Jones Act container carrier, that it will be broken up and sold off in pieces.
Horizon said it would end its service between the U.S. mainland and Puerto Rico at the end of 2014 “due to continuing losses without the prospect of future profitability,” sell its Hawaii service to Pasha, and have Matson acquire what remains of the company, including its Alaska service.
Horizon was the only company with container liner services on all three of the major domestic noncontiguous routes between the mainland and Alaska, Hawaii and Puerto Rico. It traced its roots to Sea-Land Service, the original container service started by Malcom McLean in 1956. Sea-Land entered the Puerto Rico trade in 1958; Alaska in 1964; and Hawaii in 1987.
Some shippers felt a change in control of Horizon’s service was inevitable.
“It was just a question of whether there was going to be a white knight or they would be cut apart as they eventually were,” said Brad Dechter, president of DHX, a large freight consolidator in the Hawaii trade.
“The sale of Horizon Lines was not unexpected, they have been operating in an insolvent condition and incurring operating losses for the past three years or so. It was really only a matter of time before this kind of action would have to be taken. Horizon’s primary problem was operating very old containerships,” said Mike Hansen, president of the Hawaii Shippers Council and a long-time advocate of reforming the Jones Act, a regulation that governs domestic shipping.
“With the cost of U.S. newbuildings now five-times that of constructing comparable ships in South Korea and Japan, Horizon could not afford to build new Jones Act ships to continue as an operating company,” he said.
Hansen said Horizon’s exit will cause an erosion of competition at the margins through further industry consolidation and make the trades less subject to competition.
Alaska state Sen. John Coghill said, “Horizon has done us well, so the open question is do we get the same benefit of service” from Matson, when it takes over the Horizon service between Tacoma and Anchorage?
Dennis Watson, spokesman for the U.S. Surface Transportation Board, said while the federal agency does require tariffs to be filed for common carrier transportation in the noncontiguous domestic trades, carriers do not have to get the agency’s approval for mergers or sales of domestic shipping companies.
Dechter said his doubts about the viability of Horizon date back to when it became an independent company.
Sea-Land was acquired by the CSX railroad in 1986. In 1999, CSX made the decision to divide the company into three parts, selling off its international shipping business to Maersk at the end of that year, creating Horizon in 2001, and disposing of its international marine terminal business to DP World in 2005.
A majority stake in Horizon was sold to the Carlyle Group in 2003 for $300 million, which in turn sold it to the private equity firm Castle Harlan in 2004 for $650 million. It went public in 2005, and Dechter feels the company had too much debt from the start.
Puerto Rico’s Loss. Four liner carriers remain in the Puerto Rico trade with Horizon’s exit: Sea Star Line, Crowley, Trailer Bridge and National Shipping Co. of America.
Horizon, Sea Star, and Crowley were all charged with taking part in a price-fixing scandal that resulted in criminal fines from the U.S. Justice Department and half a dozen shipping executives being sent to jail. Millions of dollars were also paid to settle lawsuits from shippers.
Because of Horizon’s precarious financial condition it was given preferential treatment—in April 2011 the Justice Department reduced a $45 million fine against the carrier related to the conspiracy to $15 million and allowed it to stretch payments over a five-year period.
Despite this and a reorganization that gave nearly all of the company’s equity to debt holders, the company has not recovered financially—it had a loss of $18.3 million in the first nine months of this year and losses in each of the prior five years that totaled $445 million.
In addition to higher costs for shippers, the price fixing may have kept in operation services that otherwise would have been unviable.
Trailer Bridge, a container-on-barge operator that, like Sea-Land, was started by McLean and pioneered the use of 53-foot containers, was never implicated in the price-fixing scandal. Despite the lower cost of operating a tug-barge service, it ended up having to file for reorganization under Chapter 11.
Trailer Bridge is now 47.3 percent owned by Seacor. It remains to be seen if the demise of Horizon will create any new opportunities for Trailer Bridge.
The two largest players in the trade—Sea Star and Crowley—are building new LNG-fueled containerships for the Puerto Rico trade. Sea Star’s ships are scheduled for delivery in 2015 and 2016; Crowley’s ships, which will also have the ability to carry roll-on/roll-off cargo, will come into service in 2017.
Despite that new tonnage, some shippers think there could be a short-term lack of capacity.
“Somebody is going to have to pick up a lease on a ship; it’s not enough steel,” said Robert Browne, president of Aqua-Gulf Transport, the largest non-vessel-operating common carrier in the Puerto Rico trade. He thinks somebody is going to have to continue to operate one of the Horizon ships.
“That will stop the screaming, because there will not be enough slots. It is going to be a long year,” he predicted.
Jorge M. Canellas Fidalgo, immediate past-president of the Puerto Rico Chamber of Commerce, was of two minds. There could be a reduction of competition or higher prices “if other players do not come to Puerto Rico soon,” but on the other hand, he said due to economic woes in Puerto Rico, inbound shipments of goods have dropped.
Manuel R. Reyes Alfonso, executive vice president of the Puerto Rico Chamber of Food Marketing, Industry and Distribution, believes Horizon’s exit will lead to less competition and higher prices.
“It has already started. Puerto Rico is served only from three ports in the mainland: Houston, Jacksonville and Philadelphia,” he noted.
He said National Shipping, which serves the island from Houston, raised bunker prices to reflect the need to use ultra-low sulfur fuel in the so-called emission control area within 200 miles of the U.S. coast after Jan. 1. National Shipping is raising its bunker charge from $840 per container to $1,030 per container for cargoes between Houston and San Juan.
With Horizon ending service between Philadelphia and San Juan, Reyes said Crowley will use a larger barge on its service between Pennsauken, N.J., and San Juan, but he added “it will still not be enough for the current volume,” which could result in price increases.
“But our biggest concern as a food association is that barges are not an ideal substitute for ships when transporting perishables because of longer travel times which could force some shipments to take land routes to Jacksonville, adding even more costs,” he said.
Reyes said some members of his association are concerned about the power Sea Star and Crowley will have “to influence competition in our internal market.”
He noted “rates do vary depending on private negotiations with shippers. The food industry in the island is very competitive, has very low margins and obviously deals with perishables. This means that private rate negotiations with shipping lines could be a critical factor for companies to be able to compete. Priority for containers transporting perishables when there is limited space could also be critical and gives shipping lines incredible power over the food industry.”
Hansen thinks with the introduction of the expensive new Sea Star and Crowley containerships, it will make it difficult for Trailer Bridge to compete.
“The trade to Puerto Rico is just a little too far from the U.S. mainland for tugs and barges to compete effectively—that’s why Crowley is switching from barges to ships. The withdrawal of Trailer Bridge would establish the ‘Alaska Model’ [where container carriage is dominated by just two players] in the Puerto Rico trade,” he said.
Pasha Steps Up. Horizon said it will sell its Hawaii operation to Pasha for $141.5 million. Pasha is a family-owned company with a long history in the automobile logistics business.
Under the terms of the agreement, Pasha will acquire certain subsidiaries of Horizon, constituting substantially all of Horizon’s Hawaii trade-lane business, including four Jones Act containerships.
Pasha operates trucks to haul vehicles and has marine vehicle terminals at San Diego and Grays Harbor in Aberdeen, Wash. It also does vehicle processing in ports such as Baltimore; Portsmouth, Va.; and Port Manatee, Fla. It also operates a breakbulk and container terminal in the Port of Los Angeles.
In 2005, Pasha entered the shipping business between Hawaii and San Diego by putting into service the Jean Anne, a new ro-ro ship it had built by V.T. Halter in Pascagoula. Miss.
It followed that success by ordering a new ship, the Marjorie C, that will carry not only ro-ro cargo but also up to 1,500 TEUs of containers. That con-ro ship was originally slated to enter service in late 2014, but Pasha said it now expects it to enter service in early 2015.
As this issue of American Shipper went to press, Pasha provided little details about its future plans for the Hawaii trade.
Hansen said with just the one con-ro ship Pasha would not have become a major player in the Hawaii container trade because of limited capacity. But he said Pasha’s carriage of motor vehicles over the past five years has brought new competition to the trade. If Pasha acquires Horizon’s container terminal in Honolulu Harbor, that would make its operation more efficient.
One senior liner executive questioned whether Pasha might be biting off more than it can chew given its limited experience in the container business and age of Horizon’s fleet, but others warned against underestimating the company.
“I think they will do fine,” Dechter said. “You always have those concerns, but when you look at Pasha and how they have evolved and grown, they’ve always been able to stand up and get the job done. So, I have less concerns about them than anyone else that could have come in.”
Dechter added he has been unhappy with Horizon, alleging the company had back-solicited business from some of his customers and the terminals Horizon used were difficult to work with.
“This gives Pasha a chance to go in with a clean slate,” he said.
Pasha has not yet detailed its plans, but Horizon currently operates three sailings a week between Honolulu and three West Coast ports: two sailings a week from Los Angeles and one each from Oakland and Tacoma, Wash. The company also offers inter-island barge service in Hawaii.
Gary North, currently executive director of the Hawaii Harbor User Group and a former Matson executive, said, “I think Pasha has been a viable player here in Hawaii; it really makes good sense that they acquire Horizon and expand their footprint in Hawaii. They are a well-run company. Horizon and Matson have been stabilizing forces in Hawaii relative to our harbor and our harbor situation.”
Cost Of Paradise. “What we need is more competition,” Hansen said. “We need cheaper ships, so we get more competition.”
U.S. laws, including the Jones Act, require cargo moving between Hawaii, Alaska and Puerto Rico to be transported in ships built and registered in the United States, have crews in which officers and 75 percent of the unlicensed crew are U.S. citizens, and 75 percent of the ownership is in U.S. hands.
Hansen’s group would like to see exemption from the U.S.-build requirements in the noncontiguous trades, believing this would help bring down the cost of transportation of goods to Hawaii. He said 2012 Bureau of Economic Analysis data showed the cost of living in Hawaii was 17.2 percent higher than on the U.S. mainland. And he noted in the second half of 2013, the monthly cost for a family of four with a thrifty meal plan in Hawaii was $1,066.22, compared with a national average of $633.90, according to the U.S. Department of Agriculture.
He said there are three major national defense arguments often advanced by proponents of the Jones Act: the ships used in domestic transport could be used for sealift in times of war; building ships help preserve the shipyard industrial base; and the ships provide employment for merchant mariners who would be needed during national emergencies.
But he contends the noncontiguous jurisdictions—Alaska, Hawaii, Puerto Rico and Guam—bear a disproportionate burden of those goals, as “about half of the 92 self-propelled ships over 1,000 gross tons in the Jones Act are fully employed in the noncontiguous trades.” The four locations only have about 6 million residents, or 2 percent of the nation’s population of 316 million.
(Guam is exempt from the build-America requirement of the Jones Act, but Hansen said its location “effectively shackles” it to the requirements for ships serving Hawaii.)
Hansen would like to see the build-America requirement eliminated so that there was more competition in the trades. His views are shared by a number of national leaders, including Sen. John McCain, R-Ariz., who once again called for reform of the Jones Act in December during a speech at the Heritage Foundation.
On Jan. 1, new regulations went into effect requiring ships trading within 200 miles of the coast of the U.S. mainland and Hawaii and Alaska and 50 miles off Puerto Rico to burn fuel with a sulfur content of no more than 0.1 percent compared to 1 percent previously, or alternately to clean emissions with a scrubber.
Those regulations are particularly important for the domestic shipping industry because its vessels spend so much time hugging the coasts and use much more expensive low-sulfur fuel.
The U.S. Environmental Protection Agency was granted approval at the International Maritime Organization to exempt Horizon’s 10 steamships built between 1968 and 1980 from that requirement until 2020. (Its three diesel-powered vessels in the Alaska trade are subject to the rule.)
Horizon said the steamships could not “safely burn 0.1-percent sulfur content fuel oil.”
Like Sea Star and Crowley in the Puerto Rico trade, Matson announced in November 2013 that it had ordered two new ships that will have dual-fuel engines capable of burning liquid fuel or LNG. The two 3,600-TEU containerships will be built by Aker Philadelphia Shipyard and are expected to be delivered in the second half of 2018.
Horizon had also planned to convert at least two of its steamships so they could burn LNG, but it is not clear if Pasha will move forward with that idea.
The U.S. Maritime Administration had said it would provide Horizon with $900,000 to “assist in conversion and monitoring” of the conversion to LNG, but with the company’s recent breakup, the agency is now looking at other options for testing LNG as a marine fuel.
Rare Opportunity. “The acquisition of Horizon’s Alaska operations is a rare opportunity to substantially grow our Jones Act business,” said Matt Cox, president and chief executive officer of Matson. “Horizon’s Alaska business represents a natural geographic extension of our platform as a leader serving our customers in the Pacific. We expect this transaction to deliver immediate shareholder value through earnings and cash flow accretion via significant cost and operating synergies.
“We are also encouraged,” he continued, “by the long-term prospects of the Alaska market, which mirrors Hawaii in many operational ways, despite different underlying economic drivers.” Matson said there is about an 80 percent overlap with Matson’s Hawaii customers such as the military, national retail chains, and the Postal Service.
While tourism is a primary driver of the Hawaiian economy, the energy business is key to growth in Alaska, Matson noted in a call with securities analysts.
Jeff Hull, a Matson spokesman, said the company is interested in retaining many of the Horizon employees involved in the Alaska business.
“I can’t say that everybody who has a job today will continue to have a job, but we are looking at taking over what we consider to be a fairly successful operation and we’re going to deploy the same ships, the same port rotation—so a lot of the infrastructure will stay in place and human resources as well,” he said.
John Parrott, president of Totem Ocean Trailer Express, said the Alaskan economy did well in the economic downturn, better than the nation as a whole and he added there is a high degree of optimism about the outlook for further oil exploration in the state, as well as potential construction of a gas pipeline from the North Slope to a LNG plant and tanker terminal on the Kenai Peninsula.
With an estimated cost of $45 billion to $65 billion, if the gas pipeline ever comes to fruition, it would be one of the world’s largest natural gas development projects.
And that’s just one of many proposals having to do with Alaskan gas.
Bill White, a researcher at the office of the federal coordinator at the Alaska Natural Gas Transportation Projects, wrote that the proposals are “as plentiful as cottonwood seed in the June air.”
For example, there are proposals to liquefy gas from Prudhoe Bay and truck it south to energy-hungry Fairbanks, or alternately liquefy gas from the Kenai Peninsula and truck it north to Fairbanks.
Parrott said optimism about the future of the Alaskan trade is reflected in the decision to convert Totem Ocean’s two “Orca Class” ro-ro ships that operate between Tacoma and Anchorage with LNG fuel, as well as other investments being made by sister companies in the Saltchuk conglomerate.
He said his company’s ro-ro/trailer ships are versatile, able to carry not only domestic truck trailers and containers on chassis but flatbed trucks loaded with cargo; cars or any sort of cargo with wheels or tracks.
Cox said Alaska, like Hawaii, depends on domestic shipping companies to provide “reliable, superior and timely container cargo service as part of vital supply lifelines — hallmarks of the Matson brand.”
Kevin Sterling, a managing director at BB&T Capital Markets, believes Pasha and Matson are paying reasonable amounts for the former Horizon businesses.
“In my opinion, Matson is getting the jewel of the Horizon franchise, which is Alaska,” he said. He noted Matson will acquire Horizon’s three youngest vessels and said, “I think there is good customer overlap and synergies.”
Wells Fargo said in a research note that Matson “paid retail,” adding that while Wall Street “will likely have a positive initial reaction to this deal, we think it’s pretty expensive.”
Horizon has three D-7 diesel-powered ships operating in the Alaska trade; they were built in 1987 and have capacities of 1,668 TEUs. Wells Fargo said Matson “should get 10 years out of them.”
Also, Matson will keep one of the Horizon steamships as a reserve vessel.
Horizon and Totem Ocean have similar market shares and also face some competition in the summer months from barge services,
In addition to Anchorage, Horizon called the ports of Dutch Harbor and Kodiak, which are big southbound markets for fish and other seafood.
Matson said it plans to spend $18-24 million (or $6 million to $8 million per ship) to install scrubbers on each of the Horizon ships so they can comply with the new IMO emission control requirements.
Critical to both Matson and Totem Ocean is the future of the Port of Anchorage.
In November, Dan Sullivan, Anchorage’s mayor, selected a plan for modernizing the city’s port.
The Port of Anchorage has been working on a plan to renovate for 18 months after wresting control of the project from the federal government.
The city said the federal government botched a planned expansion, and is suing it in the U.S. Court of Federal Claims over what it alleged was MarAd’s “breach and complete abdication of its contractual responsibilities” as manager of a port improvement project.
Sullivan said management of the project was “not handled competently” and the city is now pursuing a scaled-back improvement project to make the port seismically sound.
Lindsey Whitt, the port’s director of external affairs, said every year the port is spending $1.5-3 million on repairs, putting cathodic protection on some of the 1,400 pilings and this work is “really just a Band Aid—it does not make it any more sound.”
The plan the port has approved will build a new dock further from the shore so larger ships can be accommodated. Whether bigger ships will come to the trade in the immediate future is not clear, Whitt said, but added the project is being built for the next 75 years.
Parrott agreed that the berths at Anchorage are at the end of their life and need to be renewed.
He said the city’s plans “look pretty good and are doable,” noting the port is critical to the state with about 70 percent of cargo moving to and from Alaska today transiting the port.
This article was published in the January 2015 issue of American Shipper.
