The competency of the crews is a major advantage of using the U.S. flag fleet when shipping goods around the world, but cost is a major drawback, according to Scott Mogavero, global logistics and planning manager at General Electric.
Mogavero spoke about his experience using U.S. flag carriers last week at the U.S. Maritime Administration’s National Maritime Strategy Symposium in Washington, D.C., telling the audience having to use the U.S. Export-Import Bank when shipping goods on U.S. flag carriers is a major disadvantage.
“It is not that we don’t want to use U.S. flag, it’s not that we don’t want to use Ex-Im Bank, it’s that we are competing against all the other companies that are selling our product and are using other ECAs (Export Credit Agencies) to close their deals and be competitive and sell their power.”
Mogavero said his company shipped 1.5 million cubic meters of equipment for the power industry alone from the U.S. in 2013, but less than 4 percent — 55,000 cubic meters — was carried by U.S. flag carriers. Seventy percent of that 55,000 cubic meters was mandated to move on U.S.-flag ships because the cargo was financed with loans from the U.S. Import Export Bank.
GE spent $1 billion on logistics just in its power business, he said, not including other business lines such as healthcare, oil and gas, and aircraft engines that the company is involved in. U.S. carriers were only able to get a sliver of G.E.’s business even though the company opens its business to bid from both U.S. and foreign carriers.
Last year, Mogavero said, GE had four cargoes bumped from U.S.-flag vessels by the Department of Defense.
“We are not too happy about that,” he said. “When you are paying the rates that you sometimes do pay for U.S. flag, you don’t feel like being second tier.
“If commercial industry is where your opportunity is for growing, I think you need to make the customer, the shipper, feel important,” he told the symposium, though he added, “I do understand the need for national security in our armed forces, so I am not picking on the Department of Defense.”
Speaking as a member of the Exporters Competitive Maritime Council, Mogavero said, “Today, U.S. flag is seen as a group of carriers that we have to use. I think in order to be successful moving forward you need to be seen as a group of carriers that you want to use.”
The power equipment that GE exports moves on breakbulk vessels, and Mogaero said the key considerations when booking freight are environmental health and safety, compliance, quality, delivery and price.
“Saving a penny doesn’t mean as much to us as getting our assets to our customers so that they can build their power plant and generate power,” he said.
Mogavero emphasized the importance of on-time delivery, noting that a one-day delay in delivery of a power plant can cost GE as much as $150,000 in liquidated damages.
Mogavero said that most of the company’s customers are in growing, complex markets that include countries such as Algeria, Argentina, Brazil and Turkey.
“We don’t know where our next job is going to come from, but it certainly is not in our backyard, so it is not easy for us to move these assets from location to location.”
Selling a power plant, he said, is like building the George Washington Bridge — “you only get to build one every 50, 100 years. … Every opportunity is vital to us, to be able to close the deal, be competitive, and it is a really cut-throat market.”
Paul Vicinanzo, acting division chief for the Office of Acquisition and Assistance in the Transportation Division at the U.S. Agency for International Development (USAID), said his agency ships about 1.5 million tons each year. Two thirds of those shipments are bulk grain, with the other third representing packaged food aid.
“What our program requires is not unlike the commercial business world: regular, viable, modern and consistent services offering predictable rates,” he told attendees. “That formula creates confidence in both the transportation schedules required by our programs and the ability for us to accurately budget our continuing limited dollars.”
He says in the parts of the world where U.S. flag companies provide a complete and robust bulk or liner service, they are an excellent option “primarily because they have deep knowledge of our programs going on 60 years and our programs can be unique.
“Where the American flag falls short, in our opinion, is when cargo moves to segments of the world where they do not offer regular service. Unfortunately, that includes, at this time, a fairly large segment of the globe,” he said. He contrasted East Africa, where bulk and liner operators offer what he said was “solid and reliable service,” with West Africa, where he said there was no “true American flag liner service, and we have a substantial amount of cargo that goes there.”
USAID provided $1.55 billion in emergency aid and $427 million in development aid in fiscal year 2012, he said, with 81 percent of the emergency aid and 83 percent of the development aid going to Africa. Similar amounts of aid went to Africa in fiscal year 2013.
Adam Yearwood, assistant for sealift and mobility in the Office of the Secretary of Department of Defense (DoD) noted the U.S.-flag fleet has always played a critical role in sustaining the military, including forces in Iraq and Afghanistan, and in the retrograde and redeployment of the armed forces from those conflicts.
The U.S. Merchant Marine is important because meets the needs of the military for both ships and mariners, he said. Without it, the military “cannot respond to contingencies.”
The Department of Defense is both the largest U.S. flag shipper and employer of U.S. merchant mariners, and spends $2 billion on ocean liner services annually. The military also charters vessels to move bulk petroleum and other cargo.
“It would be nice if we had a larger commercial sector using the U.S. flag fleet,” he noted. “We want to see the other side of that sector grow.”
Absent war, he noted that most of the cargo the military moves is for “sustainment” and moves on regularly scheduled services to many routine places, but that there are some cargo moving to “remote and austere locations” such as Guantanamo Bay without commercial services. He also noted that the military often has a need to move outsize and heavy cargo.
The government shippers within the Department of Defense include the Army, Navy and Air Force, the Defense Logistics Agency, and soldiers shipping household goods and vehicles. The military operates under the 1904 Cargo Preference Act, which requires all military cargo to move on U.S.-flag vessels.
He also noted that responding to “contingencies” can be challenging and is unlike the commercial sector where shipments are fairly predictable.
The Department of Defense has a fleet of 60 sealift ships, mostly maintained by MarAd, and Yearwood said ability to crew those ships is dependent on a healthy U.S. merchant marine.
The Voluntary Intermodal Sealift Agreement, gives the military assured access to commercial flag U.S. ships in the event of an emergency, and includes the 60 ships that receive subsidies under the Maritime Security Program to offset the higher cost of operating U.S. flag vessels.
Explaining the criteria the Department of Defense has as a shipper, he pointed to the need for carriers to meet required delivery dates, and flexible capacity and capability.
As examples of the kind of flexibility that the government requires, he pointed to the need for carriers to carry government-owned containers, “overdimensional” cargo, and provide alternative routes, such as the “northern distribution network,” which provides an intermodal route for goods moving into Afghanistan from the north as an alternative to moving goods through Pakistan.
Yearwood said the U.S. flag carriers have been “outstanding” in their ability to meet the needs of the military, giving defense cargo preference over commercial shippers. Department of Defense cargo is seldom “rolled” to later voyages.
Rising costs and consolidation in the U.S. flag fleet have been a challenge for the military, he said. “Not unlike a commercial shippers, we are looking for best value and best service. Competitive rates are important, especially with a constraining DOD budget,” he said.
The Department of Defense has introduced a policy called “better buying power,” which seeks to achieve greater efficiency and productivity in defense spending through promoting competition, providing incentives for productivity and innovation, and eliminating bureaucracy.
Shippers air U.S. flag concerns
