FreightWaves Classics articles look at various aspects of the transportation industry’s history. If there are topics that you think would be of interest, please send them to fwclassics@freightwaves.com.
The many industries that make up the world of freight have undergone tremendous change over the past several decades. Each week, FreightWaves explores the archives of American Shipper’s nearly 70-year-old collection of shipping and maritime publications to showcase interesting freight stories of long ago.
In this week’s edition, from the June 1986 issue of American Shipper (virtual pages 18-20), FreightWaves Flashback looks back at Liberia’s fight to hold its position as a leading flag of convenience as competition increases.
How the business of running a flag of convenience is becoming more difficult and less profitable.
The business of operating a flag of convenience, like a lot of other enterprises associated with ocean transportation, is becoming more difficult and less profitable. But the troubles afflicting maritime industries in traditional seagoing nations have also had the effect of increasing the total tonnage registered under convenient flags. The result: a proliferation of open registries and stiff competition among them for new customers.
The latest evidence of this comes in a recent announcement by Liberia that it will slash the costs of registering vessels there. As the market leader among open registries, Liberia has the most to lose from the increasing competition and has already suffered a loss in market share. The loss comes at a time when open registries as a group are increasing their share of the world fleet and the total amount of tonnage appears to be leveling off.
Liberia’s loss of market share — down now to about 14% of world tonnage from a high of 20% in the late ’70s — is Panama’s gain.
Panama has grown from a market share of about 2.5% in the early ’70s to 10% in 1985, according to statistics compiled by Lloyd’s Register of Shipping. If present trends continue, according to the Liberian Commissioner of Maritime Affairs Philip Bowen, Panama will overtake Liberia as the largest open registry in 1988 or early 1989.
Market segmentation
One of the reasons for this, according to Bob Olson, secretary to the Liberian Shipowners Council, is that the Liberian flag is traditionally associated with oil tankers while the Panamanian flag is more usually associated with dry bulk ships. Some 70% of the tonnage registered in Liberia is tanker tonnage, he said.
The scrapping of large oil tankers in recent years accounts for most of the tonnage lost to Liberia since 1979, Olson added. And while the world’s tanker fleet was declining, the dry bulk sector was undergoing a rapid expansion. The owners of these vessels preferred the Panamanian registry overwhelmingly. The Panamanian registry has also become the flag of choice for the owners of cruise vessels, another sector that has seen growth in the 1980s.
New players
But the challenge to Liberia goes beyond these broad trends in the shipping industry.
Specifically, a real competition among the open registries has emerged. While Panama and Liberia together still account for the vast majority of the tonnage under flags of convenience, other nations have recognized that operating an open registry is a relatively simple and painless way of generating foreign exchange.
The most successful of these new entrants has been the Bahamas. The Bahamian registry first came to prominence in 1980 when shipowners using the Liberian flag were made uneasy by political events in the tiny West African country.
The safety and stability of Liberia was called into question by a coup that put an end to Africa’s longest-lived democratic government. When the coup’s leader, Samuel Doe, invited newspaper and television reporters to witness a mass execution of members of the overthrown government, the uneasiness grew.
The Bahamas thus became an English-speaking alternative to Liberia. Several large oil companies, including Exxon, are keeping parts of their fleet in the Bahamian registry now. Indeed, some of Exxon’s plans illustrate the problem the Liberian flag has.
Bob Kluthe, public affairs adviser for Exxon, told American Shipper that the oil fleet will be reducing the number of flags under which it operates in the course of the next year. Specifically, Exxon will take six vessels out of the Panamanian registry and re-flag either in Liberia or the Bahamas. So Liberia is losing business it might otherwise have gotten to the upstart Bahamian flag.
Crowded field
While Liberia, Panama and the Bahamas are the largest open registries, other countries are present in the market. Most of these have small market niches but do manage to contribute to the competitive atmosphere.
Olson at the Liberian Shipowners Council listed these other nations as flags of convenience: Bermuda, Cayman Islands, Cyprus, Gibraltar, Honduras, Lebanon, Malta, Singapore and Vanuatu.
As an example of how some of these countries have specialized, the Honduran registry exists largely for the convenience of one U.S. company. United Brands, which is the successor to Standard Fruit & Steamship Co., keeps some banana boats under the Honduran flag.
The flags of Malta and Gibraltar have been criticized as being dumping grounds for substandard Greek-owned ships.
Some circumstantial evidence to support this charge comes from the Secretariat on the Memorandum of Understanding on Port State Control, a European group that monitors the safety of vessels.
The secretariat reports that delays or detentions of vessels in European ports because of safety problems are more common with ships flying flags of convenience.
The secretariat’s 1984-85 annual report listed 18 countries with poor safety inspection records and seven of them were in the list of flags of convenience provided by Olson at the Liberian Shipowners Council. The four countries holding the worst records were Malta, Honduras, Lebanon and Gibraltar.
Liberia was not on the list. Indeed, Liberia likes to think of itself as the “Rolls Royce of free flags.” It has the most rigorous vessel inspection program of any of the open registries and has a better safety record for 1985 than the world average. The vessel inspection program was initiated and strengthened following some well-publicized ship disasters in the 1970s, Olson said.
Olson commented that the recent reduction in registration fees by Liberia represents that country’s willingness to compete with other flags. But this competition will not extend to loosening safety standards, he said.
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