Percy Pyne IV is a New York real estate magnate accustomed to thinking big. In the 1990s, he began noodling on an idea for a domestic transportation service using U.S.-flag container ships along the East and Gulf coasts.
More than 10 years and $10 million later, Pyne and his partners at American Feeder Lines are seeking private equity and bank financing for what would be the biggest bet on U.S. coastal shipping since containerization pioneer Malcom McLean launched Sea-Land Service more than a half century ago.
AFL proposes to operate 10 ships with nominal capacities of 1,300 20-foot equivalent containers on weekly schedules linking up to 18 ports. The vessels would be crewed by U.S. seafarers, as required by the Jones Act, and built in U.S. shipyards at an estimated cost of $70 million each — nearly three times the cost of a similar Korean-built ship.
Skeptics question the project. Many predict the expensive ships and operating costs, including International Longshoremen’s Association labor in ports, will make it impossible for AFL to compete with the cost, speed and flexibility of long-distance trucking.
Pyne, a veteran of real estate megadeals in Manhattan, insists AFL can succeed. “This can be done, and it’s essential and inevitable for the United States economy that it is done,” he said.
Fuel costs, road congestion, environmental concerns, chassis issues and potential driver shortages will push U.S. shippers toward the kind of waterborne container transportation that flourishes in Europe, Pyne said. “In 1956, almost 50 percent of all interstate cargoes were carried by water,” he said. “This is a natural resource we can take advantage of.”
Over the years, many potential operators have made similar pitches to revive coastal “marine highway” services, which were eclipsed decades ago by cheaper, faster motor carriers. But most were small-bore ventures, thinly financed and hinged on the prospect of government subsidies.
Pyne says AFL will be privately funded, starting with $10 million he said the group already has spent designing ships and planning the service. He said AFL won’t ask the Maritime Administration for Title XI loan guarantees. “The field is littered with people that waited for the government to give them money and ended up doing nothing with it,” he said. “Instead of going to the government asking for money to design ships and hire personnel, we did it ourselves.”
AFL partners include Tobias König, founder of König & Cie., a firm that has dozens of ship finance deals, and Johannes Bitter-Suerman, former senior vice president at Germany’s HSH Nordbank. Rudy Mack, former president of Hapag-Lloyd’s Americas operations, has signed on as chief operating officer.
Mack estimates AFL’s potential market at 100 million TEUs a year. That includes 72.3 million TEUs of port-to-port movements, 20.2 million TEUs of international transshipments, 2 million to 5 million TEUs of repositioned empty boxes, 1.65 million TEUs of military cargo, and an unpredictable volume of U.S. aid and specialized cargoes.
AFL needs only a tiny slice of that market to thrive, Mack said. With annual total capacity of 1.2 million TEUs, he said, the carrier can target higher-paying freight such as heavy containers, hazardous materials and refrigerated boxes.
But first AFL must line up financing. König has met with banks and private equity funds in an effort to raise about $750 million. The company aims for a roughly 2-to-1 ratio between debt and equity.
It hasn’t been easy. “First of all, 90 percent of the people say it’s not possible,” König said. Then there’s the dismal record of failures in Jones Act coastal trade. Finally, he said, U.S. banks and equity funds seem more comfortable lending for acquisitions, even poor ones, than for start-ups.
If AFL can raise financing, it can start construction by mid-year and put the first ship in operation by 2013, Pyne said. He said he expects the company to be profitable as soon as all 10 vessels are operating.
AFL is under pressure to start building ships quickly. The company signed letters of intent with Bay Shipbuilding in Sturgeon, Wis., and Aker Philadelphia Shipyard in Pennsylvania to build five ships each, but Aker is struggling to stay afloat.
After Aker finishes work this spring on the last in a series of bulk carriers, the Philadelphia shipyard’s orderbook will be blank. Former Pennsylvania Gov. Ed Rendell tried to steer $42 million to Aker to allow the yard to start work on two 46,000-deadweight-ton product tankers that have no buyers.
The tanker deal was up in the air when Rendell left office Jan. 18. If Aker doesn’t land new contracts, the yard could close by June. That would make it difficult for AFL to get off the ground.
Aker’s closing would leave Bay as the only U.S. shipbuilder that could supply AFL’s ships. Pyne said a bid from National Steel & Shipbuilding in San Diego was too high. Other large U.S. shipyards focus on Navy construction and have little interest in — or ability to compete for — commercial work.
AFL’s design calls for lift-on, lift-off ships. A 2006 study for the Transportation Department by IHS Global Insight and Reeve & Associates suggested the coastal services would work best with roll-on, roll-off vessels that allowed quick loading and discharge without the costs and congestion of large marine terminals.
AFL officials said they rejected roll-on, roll-off vessels because they used ship space less efficiently and required intermodal chassis to be carried on the ship instead of staying on the road, where many motor carriers now pay a daily rental for chassis that ocean carriers once provided free.
The 2006 DOT study said coastal services could be commercially viable in certain port pairs on high-density routes longer than 500 miles if costs, transit time and frequency were competitive with trucking. Mack said AFL would work with truckers for long-haul intermodal shipments.
“Once you jump the first fence, it’s easier to jump the second and the third,” he said, “and I think we’re getting close.”
Contact Joseph Bonney at email@example.com.