Comment 2002q1

FRIEDE GOLDMAN HALTER FILES ITS REORGANIZATION PLAN. The reorganization plan was filed with the U.S. Bankruptcy Court on Friday, March 22, 2002.

To read our position paper on this subject, click on: FGH Plan. Tim Colton, March 26, 2002.

NOBLE DRILLING LENDS OCEAN RIG $45 MILLION @ 25% INTEREST. This is an interesting deal. Ocean Rig owns two bare-deck semi-submersible drilling rigs, dubbed Bingo 9000-3 and Bingo 9000-4, that were built by Dalian Shipyard in China and have been laid up there for about three years. ("Bare-deck" is a strange offshore industry euphemism for "bare everything": there isn't a gram of outfit material anywhere on these hulls.) Ocean Rig was planning to do with these hulls what it did with the first two of the same design, that is, bring them back to a U.S. shipyard for completion. Unfortunately, completion of the first two cost about twice what had been anticipated, making them the world's most expensive drilling rigs and effectively putting Friede Goldman International into bankruptcy. Of course, it's hard to imagine how anyone in their right mind could ever have thought that such an approach to building a drilling rig made sense. It's axiomatic that outfitting gets progressively more expensive the later in the process that you do it: what takes one hour when done in the shop takes three when done on the building ways and what takes one hour when done on the building ways takes three when done afloat.

But, now Ocean Rig needs money (again) and along comes Noble Drilling with an offer. Noble will give Ocean Rig $45 million for the two bare hulls, but Ocean Rig can buy them back at any time in the next 12 months for $56 million. Sounds good to me, speaking as one of Noble Drilling's stockholders. If Ocean Rig buys them back a year from now, we made about 25% on our money. If they don't, we've got two bare hulls for a price that's less than half of cost. Of course, we've still got to outfit them, but we should be able to find a competent shipyard, one that understands radical concepts like planning and material control, somewhere. Tim Colton, March 22, 2002.

SEAAMERICA DROPS ITS CRUISE SHIP PROJECT. No surprise, really, that SeaAmerica Cruises has publicly announced that its project is dead: I think that we all knew that. It's a shame, however, because David Turner's idea of two modestly sized ships squarely aimed at an underserved market, the convention business, made a lot of sense, a good deal more sense than American Classic Voyages, which presumed to compete with Carnival and the other biggies. Tim Colton, March 22, 2002.

MORISON'S CLASSIC HISTORY REPUBLISHED. The University of Illinois Press has published a paperback edition of the 15-volume classic "History of United States Naval Operations in World War II", by the great Samuel Eliot Morison, originally published between 1947 and 1962. If you don't already have it, buy it. It's brilliant. Only $24.95 per volume from http://www.press.uillinois.edu/s01/morison.html Tim Colton, March 21, 2002.

ALSTOM'S PROBLEMS DEMONSTRATE WHY SHIPBUILDING IS NOT FOR SHORT-TERMISTS. French industrial giant Alstom, the parent company of Chantiers de l'Atlantique, has announced a plan to restructure its debt, sell assets, cut costs and raise cash. The need for this plan was largely brought about by Atlantique's ill-advised provision of long-term financing for $1.14 billion worth of cruise ships. The details of the plan are complex - you can find them on Alstom's web site, but watch out that you don't violate the ludicrously restrictive legal language that is attached. The point that I want to make here is that Alstom not only hasn't fired anyone at Atlantique, they have set recovery goals for the shipyard that are quite amazingly relaxed. Get this: Atlantique has to achieve a 3% operating margin in 2005 and a whopping 5% in 2006. Based on Alstom's actual results over the past three years, an operating margin of 5% for the company as a whole would result in a net of about 2.5%. Talk about unambitious! Wouldn't it be great to have a parent company like this? What can Alstom's stockholders think? Why would anyone ever buy Alstom's stock? Tim Colton, March 14, 2002.

GENERAL DYNAMICS CONSISTENTLY OUTPERFORMS LARGER COMPETITORS. There is an excellent article in the Wall Street Journal today (March 13, 2002) about General Dynamics. You should be able to find it with this link: http://online.wsj.com/article/0,4286,SB1015972986864104200,00.html?mod=COMPANY It's so good that it requires no further comment from me (for once). Tim Colton, March 13, 2002.

U.S. MARINE REPAIR PLANNING A $160 MILLION IPO. U.S. Marine Repair (USMR) is currently owned by the Carlyle Group. It was created by Carlyle's acquisition of Southwest Marine in October 1997 and Norshipco in July 1998, with the subsequent addition of Pacific Ship Repair (San Diego CA) in December 1998 and Marisco (Honolulu HI) in June 2001. No details of the terms of any of these acquisitions have ever been revealed publicly: if anyone can tell me any of the details, please do so. This gives USMR the following six operations:

CSX CORP TO SELL ITS JONES ACT LINER COMPANY, CSX LINES LLC. Integrated intermodal transportation apparently no longer includes shipping. Will CSX Lines be split up? Who would buy it, or pieces of it? Who would want to be a Jones Act operator?

To put this opportunity in perspective, the CSX Lines fleet is shown below. A total of 16 ships, with an average age of 25 years. And 13 of the 16 have steam-turbine propulsion plants: it's getting harder every year to find experienced marine engineers licensed for steam. The 13 steam-powered ships have an average age of 28 years: they should all be razor-blades.

So here's an opportunity for someone with access to all those CCF funds that are just sitting there earning a miserably low level of interest. Buy CSX Lines and start building a series of fast, modern, efficient containerships for the Puerto Rico and Hawaii trades. Captain Schubert wants to revitalize the US-flag fleet: let's start here. Tim Colton, March 12, 2002.

*Vessel Name*	*Year Built*	*Built By*	*Built As*	L	B	D	*Prop'n.*	HP	GT	*DWT*	*TEU*	*Service*
CSX Challenger	1968	Sun	American Legion	701	90	32	Steam	20,100	19,200	22,500	1314	USGC-Puerto Rico
CSX Discovery	1968	Sun	American Liberty	701	90	32	Steam	20,100	19,200	22,500	1314	Laid Up
CSX Crusader	1969	Sun	American Lark	701	90	32	Steam	20,100	19,200	22,500	1314	USEC-Puerto Rico
CSX Navigator	1972	Ingalls	Austral Envoy	813	90	36	Steam	21,000	21,700	30,900	2282	USWC-Hawaii
CSX Trader	1973	Ingalls	Austral Entente	813	90	36	Steam	21,000	21,700	30,900	2282	USWC-Hawaii
CSX Expedition	1973	Ingalls	Austral Ensign	813	90	36	Steam	21,000	21,700	30,900	2282	USEC-Puerto Rico
CSX Hawaii	1973	Ingalls	Austral Endurance	813	90	36	Steam	21,000	21,700	30,900	2282	USEC-Puerto Rico
CSX Consumer	1974	Bethlehem	Australia Bear	721	95	34	Steam	23,500	23,800	25,700	1488	USWC-Hawaii
CSX Producer	1974	Bethlehem	New Zealand Bear	721	95	34	Steam	23,500	23,800	25,700	1488	Laid Up
CSX Pacific	1979	Bethlehem	Austral Pioneer	813	90	36	Steam	21,000	21,700	30,900	2302	USWC-Hawaii
CSX Enterprise	1980	Bethlehem	Austral Puritan	813	90	36	Steam	21,000	21,700	30,900	2302	USWC-Hawaii
CSX Reliance	1980	Avondale	Edward Rutledge	893	100	41	Steam	23,500	34,100	46,000	2438	USWC-Hawaii
CSX Spirit	1980	Avondale	Benjamin Harrison	893	100	41	Steam	23,500	34,100	46,000	2438	USWC-Hawaii
CSX Anchorage	1987	Bay	Sea-Land Anchorage	710	78	33	Diesel	14,900	20,100	20,700	1668	USWC-Alaska
CSX Kodiak	1987	Bay	Sea-Land Kodiak	710	78	33	Diesel	14,900	20,100	20,700	1668	USWC-Alaska
CSX Tacoma	1987	Bay	Sea-Land Tacoma	710	78	33	Diesel	14,900	20,100	20,700	1668	USWC-Alaska

TITLE XI: LET'S APPROVE THE LOW-RISK, NOT THE HIGH-RISK PROJECTS. Is that a radical suggestion, or what? You might think that MARAD, after demonstrating with the AMCV, SeaRex and Ham Marine projects that it has learned nothing about risk assessment over the years, would now be focusing exclusively on the low-risk projects on its application list. After all, if they get themselves into another disaster like AMCV, the Administration is going to pull the plug not only on the whole Title XI program but probably also on MARAD itself. And the shipbuilding industry's friends on Capitol Hill, already seriously embarrassed, will not be able to rescue them.

To read our position paper on this subject, click on: Title XI Again. Tim Colton, March 7, 2002.

THE ASA IS RIGHT ABOUT NAVAL SHIPBUILDING. The attack by Cindy Brown, President of the American Shipbuilding Association, on the Bush budget for naval shipbuilding is right on target, if a little intemperate in tone. What is the matter with you guys in the Navy? Can't you count? If you don't stand up and insist on more ships, nobody's going to make you a gift of them. Or are you expecting Senator Lott to do your work for you?

To read our position paper on this subject, click on: Naval Shipbuilding. Tim Colton, March 3, 2002.

HITACHI ZOSEN TO EXIT SHIPBUILDING. Hitachi Zosen, one of Japan's "Big Seven", will spin off its shipbuilding division in October and will sell its 28% stake in Singapore's Keppel Hitachi Zosen to Keppel this March. Hitachi's Ariake, Maizuru and Kanagawa shipyards will be merged with NKK's Tsu and Tsurumi shipyards in a new stand-alone public company. The move continues a trend. Sumitomo Heavy Industries announced in December that it would spin off its merchant shipbuilding yard at Yokosuka as a stand-alone company and would merge its naval shipbuilding yard at Uraga into a joint venture with IHI, to which IHI would contribute its Kure and Yokohama shipyards. Kawasaki Heavy Industries has also said that it wants to spin off its Kobe and Sakaide shipyards, given a suitable partner, but talks with IHI broke down in November. Only Mitsubishi Heavy Industries and Mitsui Shipbuilding & Engineering (which was itself spun off from the Mitsui Group decades ago) are apparently happy to stay in the shipbuilding business. Tim Colton, February 6, 2002.

AKER AND KVAERNER WILL COMBINE THEIR SHIPYARDS. Effective February 15, 2002, Aker's and Kvaerner's shipyards will come under common management, Aker Kvaerner Yards AS, which will be owned 50/50 by Aker RGI Holding ASA and Kvaerner ASA. The yards involved are:

The Aker/Kvaerner press release says that they have a combined backlog of 80 vessels and I can only count 71, but details, details, it's still a lot of business.

The plan is to allow the individual shipyards a good deal of autonomy, with a lean-and-mean corporate staff to coordinate and provide direction. A good move. Tim Colton, February 4, 2002.

PRESIDENT'S BUDGET SUBMISSION SINGLES OUT LPD 17 AND TITLE XI PROGRAMS FOR CRITICISM. The 13-page summary of the President's proposed FY03 budget for DoD highlights only two problem programs and one of them is the LPD 17 program. This is what it says:

The 12-page summary of the President's proposed FY03 budget for DoT also highlights only two problem programs and one of them is the Title XI program. This is what it says:

NORTHROP GRUMMAN SHIP SYSTEMS REPORTS AN OPERATING PROFIT OF ONLY 1% IN 2001. Northrop Grumman Corporation (NYSE:NOC) made a net profit of $427 million on total sales of $13.6 billion in 2001 (3.1%). Operating profit was $1,006 million (7.4%). NOC's Ship Systems Division, which is made up of Newport News, Ingalls and Avondale, achieved an operating profit of only $19 million on total sales of $1.9 billion (just 1.0%). Pretty uninspiring. More analysis here in March, after we see the full 10-K. Tim Colton, January 30, 2002.

DAEWOO REPORTS A 5% NET PROFIT FOR 2001. Daewoo Shipbuilding & Marine Engineering, which was spun off from Daewoo Heavy Industries at the end of 2000, made a net profit of KRW 158 billion (about USD 118 million) on total sales of KRW 3.156 trillion (about USD 2.367 billion) in 2001. Only just over 5%, but pretty good for a company that was allegedly only winning contracts with the aid of enormous subsidies. In addition, DSME has halved its debt, from the truly amazing level of KRW 1.19 trillion (about USD 892 million) to the still daunting level of KRW 623 billion (about USD 467 million). Pretty impressive. Tim Colton, January 28, 2002.

GENERAL DYNAMICS REPORTS AN 8% NET PROFIT FOR 2001. General Dynamics Corporation (NYSE:GD) made a net profit of $943 million on total sales of $12.2 billion in 2001 (7.7%). Operating profit was $1,485 million (12.2%). GD's Marine Systems Division, which is made up of Electric Boat, Bath Iron Works, NASSCO and AMSEA, achieved an operating profit of $310 million on total sales of $3.6 billion (8.5%). More analysis here in March, after we see the full 10-K. Tim Colton, January 28, 2002.

THE END OF THE U.S. LINER SHIPPING INDUSTRY. International Shipholding Corporation, of New Orleans, announcing a loss of $64 million in 2001, has confirmed what it had previously indicated, that it has reclassified its three US-flag LASH ships as "assets held for disposal" and written down their values accordingly. The ships involved are operated by Waterman Lines and are the only remaining US-flag ships in liner service, the ownership of which is genuinely American. In case you hadn't noticed, the others aren't:

Another watershed point in the decline of the U.S. maritime industry. Tim Colton, January 18, 2002.

INGALLS AND AVONDALE TO MERGE. Northrop Grumman has announced that it is going to "align" its shipbuilding operations at Ingalls and Avondale. This novel use of the verb appears to be a euphemism for "merge" or "consolidate". Under this so-called "alignment", all bidding, contracting, program management, engineering, procurement and operations management will be centrally managed by Northrop Grumman Ship Systems. If this isn't a merger, what is? There is logic to this decision, but only if Northrop Grumman has decided to abandon all pretense of being a commercial shipbuilder, because this move absolutely guarantees that Avondale will never again be able to bid competitively for a commercial contract. (Of course, we know that Ingalls achieved that dubious distinction many years ago.) This is great news for the competition, especially with all the Jones Act shipbuilding opportunities coming down the track.

The Northrop Grumman press release is just packed with muddled thinking. It describes the two shipyards as "complimentary": even if it means "complementary", they aren't going to be complementary any more. They might have been complementary, if Northrop Grumman had followed a strategy of making Ingalls the premier naval shipbuilder, which it could be, and Avondale the premier commercial shipbuilder, which it might once have been. The press release also describes the company's immediate imperatives as being to "outperform customer expectations on the LPD 17 amphibious assault ship, in terms of cost, schedule and quality" and to "win a leading role in the development of the Navy's future generations of surface combatants ....". Ambitious goals, I don't think. Considering that the LPD 17 program is at least 30% over budget and more than two years behind schedule - the Congress has had to appropriate over $4 billion (so far) for only four ships - the customer might be forgiven for having abandoned its original expectations and being more interested now in just getting some ships built. And they already have a leading role in the development of the Navy's surface combatants - they have had for decades.

Isn't it depressing to watch the continued destruction of the U.S. shipbuilding industry? Tim Colton, January 15, 2002.

MINERALS MANAGEMENT SERVICE OKS FPSOS IN THE GULF. The Minerals Management Service (MMS) finally announced its long-anticipated decision on December 31. Floating Production Storage and Offloading systems (FPSOs) are now allowed in the Gulf of Mexico, at least outside the Coast Guard's Lightering Prohibited Areas. Who will announce the first project? How big? Where will the FPSO be built and/or converted? Remember that the Coast Guard has already ruled that FPSOs are NOT Jones Act vessels, although the shuttle tankers that will bring the oil ashore from the FPSOs are. You could read the MMS decision on the MMS website, if it wasn't for the fact that the entire Department of the Interior has been cut off from the Internet as a result of a District Court order relating to Indian Trusts. Tim Colton, January 3, 2002.

$9.5 BILLION FOR NAVAL SHIPBUILDING IN FY-02. The final version of this year's Defense Appropriations bill contains funds for naval shipbuilding programs as shown below:

Program	*# of New Ships*	Amount	*Prior-Year Costs*	Principal Beneficiaries
CVN(X)		$138,890,000	$169,364,000	Newport News
CVN refuelings		$1,221,831,000		Newport News
SSGN		$365,440,000		Electric Boat
NSSN	1	$2,263,202,000	$226,990,000	Electric Boat and Newport News
Submarine refuelings		$460,015,000	$16,248,000	EB, NN, PNSY, PSNSY
CG conversions (AP)		$75,000,000		Bath and Ingalls
DDG 51	3	$3,091,036,000	$143,657,000	Bath and Ingalls
LHD 8	1	$267,238,000		Ingalls
LPD 17		$155,000,000	$172,989,000	Avondale and Bath
LCAC upgrades		$46,091,000		Textron
T-AKE	1	$370,818,000		NASSCO and Bath
Minehunter SWATH		$1,000,000
Yard oilers		$3,000,000
Other		$302,230,000
Prior-year costs		$729,248,000
In all	6	$9,490,039,000	$729,248,000

The prior-year costs are pretty startling: it seems that both the Navy and the big two continue to have difficulty managing costs. Tim Colton, January 3, 2002.

Shipyard Name	Location	Area (acres)	Dry-Dock	Type	Clear Width	Lift Capacity
SWM San Diego	San Diego CA	34	#1	Floating	106'	22,300
SWM San Diego	San Diego CA	34	#2	Floating	66'	4,000
SWM San Pedro	San Pedro CA	31	#1	Floating	100'	6,000
San Francisco Dry-Dock	San Francisco CA	56	#1	Floating	98'	21,000
San Francisco Dry-Dock	San Francisco CA	56	#2	Floating	148'	65,000
SWM Ingleside	Ingleside TX	29
SWM Pearl Harbor	Honolulu HI		#4	Graving	139'	n/a
Norshipco	Norfolk VA	110	Titan	Floating	160'	52,500
Norshipco	Norfolk VA	110	Virginian	Floating	99'	11,000

Shipyard	Location	Employees	Current Orderbook
Aker Brattvaag AS	Norway	450	9 OSVs
Soviknes Verft AS	Norway	450	8 OSVs
Brevik Construction AS	Norway	600	8 OSVs
Aukra Industrier AS	Norway	200	1 chemical tanker, 3 OSVs
Langsten Verft	Norway	400	1 fishing vessel, 2 OSVs, 1 patrol boat
Aker Finnyards	Finland	1,000	4 deep-sea ferries
Aker MTW Werft	Germany	1,400	2 cruise ships, 8 containerships
Aker Tulcea	Romania	2,250	2 general cargo ships and a lot of bare hulls for the Norwegian shipyards
Estaleiro Promar	Brazil	250	5 OSVs
Subtotal, Aker		7,000	56 vessels
Kvaerner Masa Yards Helsinki	Finland	2,000	4 cruise ships
Kvaerner Masa Yards Turku	Finland	2,200	4 cruise ships
Pikkio Works Oy	Finland	300	accommodation modules
Kvaerner Warnow Werft	Germany	1,200	5 containerships
Kvaerner Philadelphia Shipyards	USA	800	2 containerships
Sub-Total, Kvaerner		6,500	15 vessels
Total, Aker + Kvaerner		13,500	71 vessels

U.S.-Flag Operator	Parent Company	Nationality
Sea-Land Service	Maersk	Denmark
American President Lines	Neptune Orient Lines	Singapore
Farrell Lines	P. & O. NedLloyd	U.K./Netherlands
Lykes Lines	Canadian Pacific	Canada