U.S. domestic ocean shipping has never seen a year like 2011. Two carriers pleaded guilty to price-fixing. One dodged debt default with a stem-to-stern refinancing. Another filed for Chapter 11 bankruptcy protection. The West Coast-Guam trade lane is down to a single container line.
The events are reviving long-standing questions about the future of the Jones Act, the 91-year-old law that requires cargo between U.S. ports to move in U.S.-flag ships built, owned and crewed by American citizens. Built long before globalization changed the nature of trade and competition, the law faces new questions over whether the protected markets can provide enough support for carrier competition and whether the needs of commercial ship operators can be balanced with the needs of shipbuilders.
Ten years after the failure of a high-profile effort to loosen the law’s restrictions, there’s renewed talk of amending the Jones Act to allow domestic carriers to acquire cheaper foreign-built ships, or even outright repeal of the law.
Congress’s Government Accountability Office agreed in September to conduct a detailed study of the Jones Act’s impact on Puerto Rico’s economy. Pedro Pierluisi, the commonwealth’s resident commissioner and nonvoting representative in the U.S. House, requested the study.
Pierluisi hasn’t endorsed repeal but said he asked the GAO “to determine, once and for all, the impact that the Jones Act has on our economy. The GAO has the credibility and expertise to analyze this issue, and to present its conclusions to members of Congress who, in the final analysis, are the only ones who can make a change to the underlying law.”
Roberto Monserrate, deputy executive vice president of the Puerto Rico Manufacturers Association, said the association has been on record since 1978 in favor of relaxing provisions of the Jones Act. He said the GAO study could provide ammunition for reform.
“What’s different from 10 years ago is the recession in Puerto Rico. We are in such a deep recession that we need to look at every possible way to lower costs. If this is part of the solution, we should do it. Manufacturing in Puerto Rico has been shaped by the transportation limitations” imposed by the Jones Act, Monserrate said.
Shippers are concerned about the likelihood of consolidation among the market’s four carriers, he said. Horizon Lines, Crowley Maritime, Sea Star Line and Trailer Bridge have been battling to survive in a depressed market that most agree isn’t big enough to support four competitors.
The battle in Puerto Rico has been spiced by a criminal antitrust investigation that has produced guilty pleas by Horizon, Sea Star and five of their former officials, the indictment last month of Frank Peake, a former Sea Star president, and tens of millions of dollars in litigation costs.
Horizon last week announced it will pay $13.75 million to settle remaining civil antitrust claims by shippers that opted out of a $52.25 million class-action settlement by Horizon, Sea Star and Crowley. Through the third quarter, Horizon had logged $32 million in antitrust litigation costs since 2008.
Trailer Bridge, the market’s smallest operator, was dismissed from the antitrust case but last month filed for Chapter 11 bankruptcy reorganization after failing to refinance $82.5 million in maturing bond debt. Horizon, the largest Jones Act liner carrier, avoided bankruptcy last summer with a $652 million refinancing.
Puerto Rico isn’t the only market where the Jones Act is an issue. Horizon’s November exit from its money-losing trans-Pacific service left Matson Navigation as the sole U.S.-flag liner service to Guam. One forwarder said he can ship a 40-foot freight-all-kinds container from the West Coast to Hong Kong for less than $1,000, but Matson charges nearly $6,000 to move a similar box to Guam.
And in the coastwise trade, American Feeder Lines said it will seek a waiver from U.S.-build requirements until the fledgling carrier can raise financing for U.S. construction of 10 ships it hopes to operate between East Coast ports. At least one union, the American Maritime Officers, opposes the waiver. A waiver for AFL also would boost a business likely to compete with U.S. railroads that operate on the East Coast.
The recent flurry of activity on the Jones Act front follows years of relative quiet. The law was in the news constantly a decade ago, when former Federal Maritime Commission member Rob Quartel led a reform effort that was trampled by a phalanx of Jones Act carriers, seagoing labor, shipyards and allied industries, including inland towing.
That industry armada remains intact, and any renewed effort to amend the Jones Act will face long odds. The law may not suit economic purists, but it serves a legitimate national interest in preserving U.S. jobs and defense capability, said former Maritime Administrator John Graykowski, a Washington-based industry consultant.
“The policy rationale for the Jones Act is still valid,” he said. “Pure economic theory is great, but there are other reasons to do things than pure economic theory and what’s cheaper. I’ve never bought into the argument that repeal of the Jones Act would provide net gains for the country.”
The Jones Act’s cabotage provisions aren’t unique. More than 50 nations reserve their domestic cargo for their own carriers. In many cases, those laws are more restrictive than the Jones Act.
If the act has an Achilles’ heel, it’s the difficulty carriers such as Horizon and Sea Star — and newcomer AFL — face in replacing aging fleets or building new ones. The ships in Horizon’s Jones Act fleet average 34 years in age. The company says its ships have a useful life of 45 years, about twice what international carriers generally consider the upper limit for their vessels. Sea Star’s three trailer ships were built in the mid-1970s and updated in the mid-1990s.
U.S. shipyards have been criticized for their inability to match foreign yards’ costs to build commercial vessels. Totem Ocean Express, which operates between the Pacific Northwest and Alaska, paid a reported $160 million each in 2003 for a pair of Jones Act ships with capacities of 1,200 20-foot-equivalent units of containers and 250 vehicles. Matson paid $110 million apiece for two 2,890-TEU ships of similar vintage. That kind of money would buy a 10,000-TEU container ship in South Korea.
Shipbuilders blame the higher costs on lack of multiship orders that permit long production runs. Many smaller U.S. shipyards churn out smaller vessels at competitive costs and delivery schedules. But the largest U.S. shipbuilders, lacking commercial orders for international vessels, depend on Navy contracts.
Allowing Jones Act carriers to buy foreign-built ships is an attractive argument on the surface but doesn’t hold up to scrutiny, Graykowski said. A recent Maritime Administration report quoted carriers as saying vessel construction costs represent only 16 percent of total operating expenses, he noted.
Some of the stoutest opposition to foreign construction has come from the inland towing industry, including the American Waterways Operators. Inland operators and shipbuilders fear that if waivers are granted for seagoing vessels, similar requests will be sought for inland towing.
This nose-under-the-tent argument is valid, Graykowski said. “If someone in Puerto Rico makes the argument that they can ship cheaper with a Jones Act exemption, what’s to stop a guy in Peoria from saying the same thing? Where will it stop? Will we have a Rhine barge operator coming over here to run a service on the Mississippi, when our operators can’t do the same over there?”
Even waivers limited to ocean trades are a crack in the Jones Act that would likely widen, he said. “If you grant an exemption to Puerto Rico for any reason, how would you say no to Hawaii, Alaska and the rest of the country? And what do you say to Matson, or Saltchuk (owner of Sea Star and TOTE) or Crowley, which have invested hundreds of millions of dollars in their services over the last 10 years?”
The need to replace older Jones Act ships has sparked proposals to allow carriers to bring in a foreign-built ship for each U.S.-built ship they commit to build. “I would want to proceed very cautiously,” Graykowski said. He said policymakers should ask where such requests would stop, how U.S.-build commitments would be enforced and whether the imported ships would be here forever.
Changes to the Jones Act would not be reversed easily, Graykowski said. “What if we change the law and it doesn’t work out and they lose their existing services? You won’t be able to get the proverbial toothpaste back in the tube. Then what will Puerto Rico say?”
Graykowski questioned whether amending the Jones Act to allow noncontiguous states and territories to be served by international vessels would benefit shippers in the long run. He said non-U.S. carriers would probably serve these points on “a fly-by basis” instead of with frequent, dedicated services that U.S.-flag carriers provide.
In Guam, where vessels operating to and from other ports must be U.S.-flag and predominantly U.S.-crewed but not U.S.-built, some shippers have groused about lack of competition since Horizon ended its trans-Pacific service. Matson CEO Matthew Cox said recently he expects new U.S.-flag competition to emerge, but forwarders say it’s likely to be with feeder services via Asian ports instead of directly from the United States.
Anthony Chiarello, CEO at American Shipping Group, managing partner for Sea Star, said he thinks the GAO’s Puerto Rico study will find the cost of providing Jones Act service “is very close to that of non-Jones Act competing services” such as those between the U.S. and the Dominican Republic.
Carriers operating in the U.S. mainland-Puerto Rico trade struggle with a 3-to-1 imbalance between the dominant southbound route carrying consumer goods from the U.S. mainland and northbound shipments of manufactured goods and materials. A different registry for the ships wouldn’t solve that problem.
Puerto Rico would be a difficult trade for carriers, with or without the Jones Act. The commonwealth’s population shrank 2.2 percent to 3.8 million from 2000 to 2010, its unemployment rate hovers around 16 percent and has been in the double-digits every month but one since 2006, and 36 percent of the island’s households received food stamps last year, more than double the rate of any U.S. state.
“If you were to look at the Puerto Rico trade from afar and ask how many carriers you really need to support that market, most people would not say four,” Chiarello said. “It’s a struggling economy, but we believe it’s still a viable trade that we’re willing to support and invest in, but right now it’s a challenge to make the returns that are necessary for a huge capital investment like putting new ships in.”