How will Horizon’s exit affect the Puerto Rico trade?

How will Horizon’s exit affect the Puerto Rico trade?

Horizon Lines’ exit from the U.S mainland- Puerto Rico trade routes later this year could give the ailing Jones Act lane some much-needed stability by allowing the three remaining major carriers to raise rates.

The trade lane between Jacksonville, Florida, and San Juan, Puerto Rico — the route for most container volume between the U.S. mainland and the Caribbean commonweatlth — has had years of weak rates as four carriers have battled for market share.

Southbound rates are roughly one-third lower than they were five years ago, said an executive actively involved in the trade lane who asked to remain annoymous. Rates from Jacksonville to San Juan range from $2,600 to $3,400 per TEU, with dry box prices on the lower side and refrigerated containers priced higher. Average northbound rates are down by about a third from where they were five years ago, with a 20-foot equivalent unit moving for between $500 to $700. Those northbound rates are primarily the cost of drayage, as containers "move basically for free" on the water, the executive said.

The removal of Horizon capacity will allow the remaining players, Crowley Maritime, Sea Star and Trailer Bridge, to gain market share, potentially raise rates, and perhaps even invest more in vessels serving the 1,100-mile trade lane, said Stanley Payne, principal at Summit Strategic Partners and a former senior executive at the Virginia Port Authority and Canaveral Port Authority.

The U.S. mainland-Puerto Rico trade lane “hasn’t been viable for 15 years,” said another longtime executive in the trade who asked to remain anonymous. “It’s a far more crowded market than on the Alaska and Hawaii (trades) where there are only two main operators.”

In addition to announcing it would shut down its Puerto Rico business, Horizon on Tuesday said it would sell its Alaska and Hawaii services to other Jones Act carriers. Matson will buy Horizon’s Alaska service and compete with TOTE. Pasha, the No. 3 carrier in the U.S. mainland-Hawaii trade which operates ro-ro tonnage in that market, will acquire Horizon’s Hawaii operation and go head-to-head with Matson.

Horizon’s announcement ended years of speculation on the company’s future. Over the last several years, the company, facing massive debts, went through two rounds of private equity ownerships, got burned in launching a trans-Pacific service and was ensnared in a U.S. Justice Department antitrust investigation that netted guilty pleas by the company and three of its former executives.

Horizon’s exit from the Puerto Rico market has ignited a new question: Will there be enough container business on the trade lanes in the longer term, particularly if trade volume continues to decline?

“The market is a cruel mistress,” Payne said. “Whether there is enough business (to support the remaining three carries on the lane) remains to be seen.”

There are few signs that the territory will experience the type of economic rebound enjoyed on the mainland. Thousands of Puerto Rico residents — many of them young people — leave the island monthly to find jobs and escape escalating crime. The island’s population shrank by about 200,000 people between 2000 and 2013 to 3.6 million in 2013 and is expected to fall to 3 million by 2040, according to a Pew Research report. Following Moody’s and Standard & Poor’s downgrading of the commonwealth’s public debt to junk status, the government late last month announced a plan to raise its excise tax on oil by 60 percent to reduce its debt burden.

Puerto Rico’s woes are deep and long-standing. The island lost tuna canneries and textile manufacturing in the 1990s, and, more recently, pharmaceutical firms, including Pfizer and Merck, have shifted production to lower-cost sites. Increased taxes on manufacturing, along with the expiration of patents, hastened their exit.

Unsurprisingly, the loss of manufacturing and shrinking population have dramatically pulled down the island’s trade with the mainland U.S. Container volume between 2007 and 2013 fell 12 percent to roughly 562,000 TEUs, according to PIERS, the data division of JOC Group. Encouragingly, U.S. mainland imports have are up in this year through September, by 5.3 percent. But import volume accounts for only one-fifth of total trade volume, and U.S. mainland exports to the island were down 3.8 percent year-over-year in the same period.

Horizon’s departure will shake up the market. The Charlotte-based carrier has the second-largest share of total volume on the lane. In the first nine months of this year, Horizon carried 28.8 percent of the total U.S mainland-Puerto Rico container volume, second only to Crowley’s 34.1 percent. Sea Star Line captured 24.7 percent of the market in the same period, followed by Trailer Bridge, which moved 12.1 percent, according to PIERS.

Crowley declined to speculate on what Horizon’s departure would mean for the market. The company said it was committed to the market and was making necessary investments in its fleet and supporting operations. Sea Star President Tim Nolan said in a statement that the company "continues to explore all options within our control to ensure there is sufficient capacity to meet market demand in 2015." Trailer Bridge and Sea Star didn’t respond to requests for comment.

Horizon’s aging fleet and the difficulty it faced in reinvesting in vessels to meet more stringent federal emission standards by 2020 appear to be key factors in the company’s breakup and exit from the Puerto Rico trade. Horizon’s ships are an average age of 37 years old, making its fleet among the oldest in the world.

Competitors Crowley and Sea Star have done the opposite. Crowley is building two vessels powered by liquefied natural gas that will replace triple-decked towed barges that have served the market since the early 1970s. TOTE, the parent company of Sea Star, has also ordered two LNG-powered vessels to meet stiffer clean-air regulation from the U.S. Environmental Protection Agency.

Horizon’s self-propelled ships provide a Jacksonville-San Juan transit time that’s three days less than the eight-and-a-half-day transit of the towed barges used by Crowley and Trailer Bridge. That’s helped Horizon retain business of transit-time-conscious shippers, such as Wal-Mart, and suggests that Sea Star, which also operates self-propelled ships, will be an immediate beneficiary of Horizon’s exit. On the flip side, Horizon’s steam-powered ships require larger crews and higher operting costs than tug-barge operations.

Horizon also never got on board with using 53-foot containers, which are standard in U.S. over-the-road operations and are used by Crowley and Trailer Bridge and, to a lesser extent, Sea Star. By using 53-foot containers instead of 20-foot and 40-foot containers, shippers can load more cargo into a container and carriers reduce their total container moves by about one-third.

Then there were the troubles beyond operations. Horizon avoided bankruptcy in 2011 through a major restructuring, leaving it with funded debt totaling $522.9 million at a weighted average interest rate of 12.4 percent. The majority of the debt would have matured in 2016. BB&T warned in July that the carrier would have difficulty refinancing the debt over the next two years, as Horizon faced more than $100 million in interest debt obligations due in each of the next two years.

“The company continues to incur debt to help fund operations, and as it struggles to turn a profit, we expect the debt load will rise and with an aging fleet in need of repair and overhaul and significant capex requirements, the ability to successfully turnaround the company is a challenge to say the least,” BB&T said in a research note in July. Horizon did, however, see its net income rise in the third quarter to $9.5 million compared to $1.6 million gain a year earlier.

Contact Mark Szakonyi at mszakonyi@joc.com and follow him on Twitter: @szakonyi_joc.