Comment on the Maritime News

July-September 2002

   THE NEW DESTROYER PRICES ARE SCANDALOUS.  The award of FY02-05 contracts for ten more DDGs to Bath Iron Works (6) and Ingalls Shipbuilding (4) was anticipated and the split in favor of Bath is no surprise, coming after the agreement to move four LPDs from Bath to Ingalls.  Good news for the worthy shipyard workers in Bath and Pascagoula.  What is not good news, however, is the price that we the taxpayers are having to pay for these ships. 

When DDG 102 was transferred from Ingalls to Bath recently, its contract price magically grew from $369.8 million to $464.4 million, an increase of over 25%.  Well, we all know that Bath is not as efficient as Ingalls, even after GD has pumped $400 million into its facilities, but this price was also over 40% more than Bath had agreed to for DDG 101, the preceding ship in this long-running series.  No explanation from either Bath or the Navy, naturally. 

Now we discover that even that is apparently not enough for Bath.  The contract price for Bath's six ships averages $528.5 million, almost 15% more than their price for DDG 102 and 60% more than their price for DDG 101.  How can this be? 

Ingalls appears to have the same disease, although not in quite such a virulent form.  Their contract price for four ships averages $492.4 million, over 45% more than their price for DDG 100.

Now nobody wants Bath and Ingalls to stay busy, make money and keep out of the commercial side of the industry more than me, but, come on, guys, this is ridiculous.  Prices are supposed to go down with quantity, not up.  You were doing quite well earlier in the program (see chart).  What happened? 

The Navy long ago demonstrated that it doesn't give a damn how it spends the taxpayers' money, but someone in the Congress ought to.  Explanations are required.  Tim Colton, September 14, 2002.

   AKER KVAERNER'S HEAVY HAND IN PHILLY.  The firing of Ron McAlear was not a smart move.  Yes, I did say "firing".  Although the press release contained the usual BS about "leaving to pursue other opportunities" and the big shots in Oslo said the usual polite things about what a great job he had done, the fact is that he was heaved out.  Why?  Because Kvaerner Philly isn't meeting its productivity targets.  Well that sounds to me like a situation in which they should have fired the VP Operations, not the CEO.  But hold it a moment, the VP Operations is a Norwegian.  Can't fire him.  Only Norwegians know how to build ships and run shipyards.  OK, so we'll fire the American and promote the Norwegian who was in charge of the poor productivity.  Simple, really.

The organizational structure that they had might not be the best but it was fairly logical.  By all means put Norwegians in the key operating positions if that's what you need to do, but the front man needs to be an American, one who knows the industry forwards and backwards and who is well known and respected in the industry.  They had that in Ron McAlear and now they haven't.  And next time they are looking to hire an American in a senior position, there won't be many applicants.

The prevailing view in Aker Kvaerner also seems to be that marketing, sales, industry relations, community relations, engineering, human resources, estimating, are all redundant and just a waste of money.  In fact, everything's redundant that's not directly related to hanging steel.  Having decided that the yard will only build containerships - I guess tankers are too hard, even for Norwegians - they also seem to have decided that they don't have to sell them.  The customers, apparently, will come to them by default.  The fact that there are only two customers and the 2600-TEU ship that Aker Kvaerner insists on building is not well suited to either of these customers' trades, is, apparently, irrelevant.

 As to external relations, one might think that Aker Kvaerner would be concerned to overcome some of the animosity that they have generated in the industry and in the community.  They should want to become a key player in the U.S. maritime industry, helping to influence maritime policy and working to improve the condition of the industry as a whole, to everyone's benefit.  But no, apparently, they would rather be for ever the outsider.  What a sorry way to run the Pennsylvania taxpayer's shipyard.  Tim Colton, August 27, 2002.

   A BUILD-UP OF THE INGALLS WORKFORCE WOULD BE A SERIOUS MISTAKE.  It was revealed this week by Senator Lott in the Biloxi Sun-Herald (What, you don't read the Biloxi Sun-Herald?  Well, shame on you, you don't know what you're missing!) that Northrop Grumman (NYSE:NOC) is planning to increase the size of the Ingalls Shipbuilding workforce by 2000 to 3000 over the next 2 to 4 years.  This projection is not what you would call precise, and a couple of days later an NGSS spokesman tried to convey the impression that this build-up will be spread over all three yards, which makes no sense whatever.  It is, however, a clear indication that NOC is planning to move the entire LPD 17 program to Ingalls, i.e., the five remaining Avondale ships as well as the four Bath ships.  Otherwise you can't force the numbers.  It's not the DD(X), or Deepwater, or CG overhauls, or anything else.  The number of jobs to be created by the DD(X) program has been greatly exaggerated, and nothing's going to happen out in the yard in the next four years anyway, the time it takes those guys to engineer things these days.  Nothing's going to get built for the Coast Guard's Deepwater Program any time in the next four years either.  It has to be the LPD 17 program and even this is not new work, given that the cruise ships went away and the LHD program is winding down. 

Our rough estimate of Ingalls' manpower requirements over the next four years is illustrated below.  We have had to make a lot of assumptions in developing this chart, some of which are probably wrong.  And our s-curve is probably not the same shape as Ingalls' s-curve.  But we should be reasonably close and the required build-up is certainly very clear.  In fact, the build-up looks, at first glance, to be more like 4,000 than 2,000 to 3,000, but remember that there are 1,600+ people missing from the front of this chart who had been working on Project America.  If they go back to work first, then the number of new employees required is around 2,500.

Clearly, Ingalls needs to get the LPD program in there ASAP and put their Project America people back to work.  Then they need to hire about another 2,500, right?  Wrong.  Once they get their workforce back to about the 10,000 level they need to start outsourcing any additional work, to the extent necessary to maintain the in-house workforce at that level.  There are three reasons for this strategy:

(1) Experience has shown, time and again, that a significant increase in a shipyard's workforce is followed immediately by a significant and shipyard-wide decline in productivity.  You can hire people but you can't hire experience.  Given the current critical shortage of middle management and production staff, to increase the workforce by 20% would be suicidal.  They need to stick with the present workforce and concentrate on improving its efficiency.  To give Northrop Grumman credit (for once), they have been working hard on improving their efficiency, both Ingalls and Avondale fully embracing (at last) the principles of modern, systematic shipbuilding.  But they have a long way to go.  

(2) Even without the increased costs that would result from declining productivity, recent experience indicates that there are precious few economies of scale in naval shipbuilding.  There should be but apparently there aren't.  You would think that if you were to give the big shipbuilders more work, their fixed costs would then be spread over a larger direct labor base and, as a result, their overhead rates would be reduced.  But no: they just find new ways to spend, spend, spend indirect dollars.  One of the most egregious of the Navy's many failures in recent years has been its inability to get the big shipbuilders to cut their overheads.

(3) As we have pointed out many times over many years now, subcontracting of work by the large shipbuilders to the smaller shipbuilders is a win-win-win strategy.  The big yards' costs go down, because the smaller yards are so much cheaper, so they make more profit; the smaller yards get more work, so they make more money too; and the Navy doesn't pay any more or less for its ships in the short term and in the longer term pays less.

There's a much bigger issue here than simply whether Northrop Grumman knows what it's doing or not.  Let's be absolutely clear.  A healthy shipbuilding industry is not one that consists of two giant companies with 95% of the business and hundreds of little family firms fighting to staying alive on a diet of workboats.  A healthy shipbuilding industry is one with (a) at least three large, diversified, companies (you need at least three for true competition), (b) a second tier of at least three well-capitalized mid-sized shipbuilders that are capable of building deep-draft oceangoing merchant ships and that can also build naval auxiliaries if needed, and (c) a third tier of versatile small yards, such as we have now, that can build the myriad of smaller boats, craft and barges that our economy requires.  It is in everybody's long-term interests that we take steps to move the industry in the direction of this type of structure.  In theory, this is MARAD's job, but in practice it is up to the Navy, because it's the Navy that's got the money and the power to make it happen.  Tim Colton, August 22, 2002, (chart added August 24).

   THE LCS PROGRAM COULD BE A WATERSHED FOR THE NAVY.  Naval Sea Systems Command released an RFP on August 14 for conceptual designs for a "focused-mission high-speed ship", better known as the littoral combatant ship, or LCS.  Up to six contracts will be awarded, each for not more than $500,000.  The value of the contract is not significant: most contractors will willingly spend much more than that.  Why?  Because the Navy thinks that this ship will cost around $200 million (way too much) and the CNO wants 30 to 60 of them.

It is good news that the Navy is willing to award as many as six of these contracts, because it makes it clear that they want to involve more contractors than just the "big two" - General Dynamics (GD) and Northrop Grumman (NOC).  This program represents a major opportunity for the Navy to broaden the naval shipbuilding base.  The LCS may be a highly sophisticated ship but it is not a big one, and the second-tier yards - Atlantic, Bender, Bollinger, Conrad, Halter, Marinette - not only know how to build ships like this, which the big yards do not, but can also build it for a lot less than either GD or NOC.  If the Navy's thinking straight here, and for once I think that it may be, it's thinking of awarding two construction contracts, both of them to second-tier yards.   Then they could have at least one and possibly two new competitors for future surface combatant programs, an outcome that would be very much to the taxpayer's benefit.  Tim Colton, August 20, 2002.

   NCL'S TAKEOVER OF PROJECT AMERICA IS IRONIC.  Northrop Grumman has confirmed the news reported here six weeks ago, that the remnants of its grandiose "Project America" have been sold to Norwegian Cruise Line.  No price was revealed - why would this be a secret? - but it is believed to be embarrassingly low, reportedly only $36mm.  Maybe that's why it wasn't revealed.  So ends yet another chapter in the long history of Ingalls' commercial shipbuilding foul-ups.  It boggles the mind that a shipyard that is so good at building gray ships could be so bad at everything else.

The really interesting feature of this deal, however, is that the buyer is Norwegian Cruise Line, because it was NCL that worked out how to cruise Hawaii without breaching the Passenger Vessel Services Act, and, as a result, was able to provide foreign-flag competition for American Classic Voyages, (AMCV).  NCL's 2-year-old Norwegian Star operates 7-day cruises of the Hawaiian Islands out of Honolulu, but includes nearby Fanning Island, in Kiribati, in its schedule, thus making the trip an international one.   AMCV's 20-year-old Patriot and 50-year-old Independence, with their high US-flag costs, were never going to be able to compete with this and the new ships would not have been much better off.  Adding insult to injury, NCL apparently wants to be able to operate the ex-AMCV ship in the Hawaiian Islands without the annoying side trip to Kiribati, and is working with Senator Inouye (D-HI) to get a waiver of the PVSA to allow this.  Tim Colton, August 20, 2002.

   CONRAD INDUSTRIES TO BUY SWIFTSHIPS.  The agreement is just a Letter of Intent at this point, to buy the assets of Swiftships for about $12.5mm cash.  There appear to be some hoops to be jumped through before it can close, but this looks like a pretty good fit.  Conrad Industries, a publicly traded company, (NASDAQ:CNRD), in business since 1948, operates three shipyards, in Morgan City LA, Amelia LA and Orange TX, building, converting and repairing boats and barges up to about 300 feet in length, and is currently building a new repair yard in Morgan City.  Their Morgan City construction yard is known for building lift-boats and dry-docks and their Orange yard for small tugs and lighters for the U.S. Government, small ferries and similar craft.  Conrad had EBITDA of just over $6mm last year, on gross revenues of just under $47mm.  Swiftships, a privately held group of companies, operates two shipyards, both in Morgan City, building offshore crewboats, patrol craft and luxury yachts.  Swiftships was created in 1969 as the successor company to Sewart Seacraft, the builder of all those hundreds of Swiftboats that performed so well in the Vietnam War.  Swiftships has considerable growth potential but realization of this has been hampered by recurring rumors of financial difficulty (confirmed by the provision in the LOI for Conrad to lend cash to Swiftships between now and closing), and by the company's stealth approach to marketing.  Acquisition by Conrad should solve both those problems.  Tim Colton, August 11, 2002.   It was subsequently reported that this deal is off.

   THE NEW YORK TIMES DISCOVERS THE OFFSHORE INDUSTRY.  The Business section of today's New York Times has a long article about deepwater exploration and production in the U.S. Gulf that is reasonably carefully thought out, well written and balanced.  Whatever next?  Click here to read it.  If the NYT is on board, maybe we can get more popular and congressional support for legislation designed to stimulate increased offshore activity.  Tim Colton, August 11, 2002.

   HESS EXITS TANKER OPERATIONS.  Amerada Hess has agreed to sell its fleet of six ITB product carriers to a new company, United States Shipping LLC, that includes the fleet's current management.  The six 48,000-dwt barges (built in 1982-3-4 by Bethlehem Steel Sparrows Point) and the six tugs (built by Halter Marine) were valued at $290mm, or almost $30mm each.  They are described in the press release and on Sheridan Transportation's web site as having double bottoms, (although the current issue of the ABS Record doesn't say anything about them having double bottoms), in which case their OPA 90 phase-out years are 2012-3-4 and they have an average working life remaining of a little over 10 years.  Tim Colton, August 11, 2002.

   NASSCO AND TOTE CHRISTEN "MIDNIGHT SUN".  The first of TOTE's two new giant "Orca"-class trailerships was christened on Saturday, August 3, 2002.  Good for TOTE for investing in such a technologically advanced ship and good for NASSCO for building it.  The official NASSCO photograph of the celebration is reproduced below: does anyone besides me notice something very odd about this scene?

MV Midnight Sun

OK, time's up.  First, the ship is in the water: a christening is supposed to be held immediately before the ship touches water for the first time.  ("Midnight Sun" was floated out of the building dock over two months ago: that's when she should have been christened.)  Second, they are christening the ship on its stern: that's like baptizing a baby on its backside.  And third, there is no name painted on the hull.  (In fact, the hull appears to be still wearing only its prime coat.)  All very untraditional.  Tsk, tsk.  Tim Colton, August 6 and 11, 2002.

   SHIPBUILDERS TESTIFY TO THE HOUSE ARMED SERVICES COMMITTEE.  The House Armed Services Committee's Special Oversight Panel on the Merchant Marine held a hearing on "commercial shipbuilding in the U.S. and the maritime security program" on Tuesday, July 23.  Testifying were Dick Vortmann of NASSCO, Herschel Vinyard of Atlantic Marine Holdings and Ron McAlear of Kvaerner Philadelphia, all good, sensible people.  You can find their testimony on the HASC web site.  All three made excellent points about the decline in both the US-flag merchant fleet and the merchant shipbuilding industry, and all three proposed new forms of governmental support for the shipbuilding industry, as summarized somewhat ruthlessly below.

Mr. Vortmann's proposal, which is, I believe, the policy of the American Shipbuilding Association, is that the Department of Defense should pay for the design and construction of an unspecified number of new, militarily useful, ships over a multi-year construction period.  Operators would then pay DoD the international bareboat charter rate for a comparable vessel leased for 20 years, the lease payments being used to defray the up-front acquisition costs.  The volume of shipbuilding generated by this program would enable the yards to achieve series production, which, together with the increased production volume, would drive down the unit cost of ships and ship systems, whether naval or commercial.

Mr. Vinyard's proposal, which is, I believe, at least partly the policy of the Shipbuilders Council of America, has five points.  He recommends that (1) all non-emergency maintenance and repair on MSP ships should have to be performed in U.S. yards, with an offsetting increase in the size of the MSP payments, (2) the Title XI program should be funded consistently from year to year and should be administered in the same way as commercial lending programs, (3) vessels built and/or repaired in the U.S. should be given priority status when cargo preference contracts are awarded, (4) the use of Capital Construction Funds (CCFs) should be extended to construction of vessels to be operated in the domestic coastwise trade and also to vessel repairs in U.S. yards, and (6) Military Sealift Command should be required to repair its ships in U.S.  yards and should encourage the construction of ships in U.S. yards by offering more long-term time charters. 

Mr. McAlear's proposal, has two points, one of which is Mr. Vinyard's point about extending the use of CCFs to construction of vessels to be operated in the domestic coastwise trade.  Mr. McAlear's new idea is that MSP operators should be required to seek proposals from U.S. shipbuilders when soliciting prices for new ships from foreign yards, with an offsetting increase in the size of the MSP payment for any operator who then contracts for a US-built ship.

All these suggestions have merit.  Inevitably, the ones that would have the most beneficial impact on our beleaguered industry are also the ones that would cost the most and are the most difficult politically. 

A detailed position paper on this subject will be added to this web site momentarily, as they say in the airline industry.  In a few days' time, anyway, if not sooner.  Well sometime this summer, with luck.  Tim Colton, July 25, 2002.

   BANKRUPTCY COURT APPROVES VTK'S ACQUISITION OF HALTER.  The U.S. Bankruptcy Court in the Southern District of Mississippi, sitting in Biloxi, has approved the proposed sale of the assets of Halter Marine, Inc., to Vision Technology Kinetics, Inc., (VTK) for $67 million.  The price to be paid is $19 million more than the previously announced deal with Bollinger at $48 million, but lest anyone think that VTK was overgenerous, you should know that Bollinger's final offer in the auction process was $66.75 million.  Note also that VTK has 90 days to confirm Halter's $400 million contract to build four fast patrol craft for the Egyptian Navy and, if they do so, they will pay an additional $5 million.  Note also that VTK also has 90 days to finalize an agreement with Pasha Hawaiian Transport Lines on the completion of their car carriers, a process which should not take more than two weeks.  Asked by Judge Gaines if VTK was paying a fair price, General Coburn, VTK's Chairman, said "We're paying a high price: time will tell if it's a fair price." 

The approval hearing lasted two days, although it contained only enough substance for about 30 minutes of intelligent discussion: that might possibly have had something to do with the participation of at least 60 lawyers.  Let's see, two days plus travel time times 60 lawyers times $450 an hour plus expenses plus 15% comes to .........  And they wonder why they are held in such low regard.

Who is VTK?  VTK is one of four divisions of VT Systems, Inc., a U.S. company headquartered in Alexandria VA.  VT Systems is a defense contractor and its Chairman and C.E.O. is John G. Coburn, a recently retired four-star general, whose last job in the U.S. Army was as Commander of Army Materiel Command, the agency that is responsible for all the Army's procurement, a $19-billion business.  Being owned by VT Systems will not, therefore, have any impact on Halter's ability to continue to do business with the Defense Department.  VT Systems' four divisions are Aerospace, Electronics, Kinetics (formerly known as Land Systems) and Marine.  Although Halter was bought by VT Kinetics, organizationally it will be part of VT Marine, which currently has no active operations.

VT Systems is a wholly owned subsidiary of ST Engineering Ltd., a Singaporean company that is traded on the Singapore stock exchange.  ST Engineering has over 10,000 employees and had sales last year of S$2.47 billion (US$1.42 billion at the current exchange rate), with after-tax profits of S$350 million (US$200mm).  It is primarily a defense contractor and is organized in the same four divisions as VT Systems -  Aerospace, Electronics, Kinetics and Marine - and Halter will obviously be closely associated with ST Marine.  Although ST Engineering is publicly traded, its stock is controlled by Singapore Technologies Pte. Ltd., a publicly-traded conglomerate, the other major components of which are ST Technology, ST Infrastructure & Logistics, ST Property and ST Financial Services.  ST had total sales last year of over S$9 billion (over US$5 billion).  Although publicly traded, more than half the stock is owned by the Government of Singapore.

ST Marine was founded in 1968 as Singapore Shipbuilding and Engineering.  It designs, builds, converts and repairs small and medium-sized ships, including many of the same types and sizes of ship as does Halter.  It recently delivered four LSTs to the Singaporean Navy and its current workload includes three platform supply vessels for Tidewater Marine.  ST Marine has about 1,000 employees and had total revenues last year of S$335mm (US$192mm), with after-tax profit of S$46mm (US$26mm).

So now we know who bought Halter.  What do we think about it?  We think it's great.  With every year that passes, we see the U.S. shipbuilding industry continue to decline, getting progressively less efficient and making a fool of itself with gross stupidities like the Double Eagle tankers, Ocean Rig, Petrodrill, Project America and FastShip.  And now here comes a large, successful, well-managed, international defense contractor (vastly better managed, by the way, than Kvaerner was, at least before Mr. Roekke showed up) that actually wants to invest in the U.S. shipbuilding industry.  Will wonders never cease? 

I've already heard some xenophobic comments on this deal, but that's really stupid, as well as repugnant.  Singapore is a major maritime power.  It has the world's largest port, is the world leader in both the ship repair industry and the offshore drilling rig industry, and is a world leader in the shipping industry.  As far as I'm concerned, ST is very welcome in the U.S. shipbuilding industry and this acquisition can be nothing but good news for Halter's long-suffering employees and the economy of Mississippi.  Tim Colton, July 25, 2002.

PS: I understand that the new company will be called VT Halter Marine, Inc.

   COAST GUARD TO BUY 180 RESPONSE BOATS.  The U.S. Coast Guard is planning to acquire about 180 boats, designated "Response Boat - Medium", or RB-Ms, that will meet current and projected multi-mission demands in coastal waters and replace 172 existing 41-foot utility boats (UTBs).  Three Phase I contracts will be awarded for test boats, to be delivered within six months.  One Phase I contractor will get a Phase II production contract for all 180 boats, to be delivered over a period of five to ten years.  The draft RFP is supposed to be out already but at the time of writing has not been seen: when it appears, we will review it here.

Interestingly, the Coast Guard wants the technical data rights to the successful design, so that it can build the same type of boat at "a USCG facility", i.e., the hopelessly inefficient Coast Guard Yard in Baltimore.  When will they ever learn?  Tim Colton, July 13, 2002.

   AVONDALE TO SUB OUT HULL BLOCKS.  Second-tier shipbuilders have been asked by Northrop Grumman Ship Systems Avondale Operations to bid for the supply of pre-outfitted hull blocks both for the Navy's LPD 17 program and for the Polar Tankers crude carriers.  Apparently both programs are falling further behind schedule.

Let's examine this.  First, the table below tells the LPD story.  The first of the three ships under contract at Avondale (and let's not complicate this exercise by introducing the ship subcontracted to Bath Iron Works and now scheduled to be built by Ingalls), is now expected to be delivered more than 28 months late, requiring about 43% more time than had been planned.  To be fair to Avondale, there are many reasons for this extraordinary delay and not all of them can be blamed on the shipyard.  This is reflected, in fact, in the revised schedule for the second and third ships, which are now expected to be delivered at two 8-month intervals instead of the original 20 months and 10 months: apparently, Avondale thinks that all those up-front problems have been fixed.  This acceleration, may, however, prove to be a mistake.

Ship LPD 17 LPD 18 LPD 20
Original Contract Schedule
Contract Award Date Dec 17, 1996 Dec 18, 2000 May 30, 2000
Delivery Date July 17, 2002 Feb 18, 2004 Dec 30, 2004
Construction Period (months) 67 38 55
Interval Between Ships (months)   20 10
Currently Projected Schedule (according to both NAVSEA and Avondale)
Delivery Date Nov 30, 2004 Jul 29, 2005 Mar 31, 2006
Construction Period (months) 95.5 55.5 70
Interval Between Deliveries (months)   8 8
Delay (months) 28.5 17.5 15

The table below tells the Polar Tankers story.  The first of the five ships under contract at Avondale was delivered 15 months late, requiring about 50% more time than had been planned.  In this case, the responsibility for the delay is probably largely the shipyard's.  The revised schedule according to Avondale shows them catching up to the original schedule.  The revised schedule according to Polar Tankers shows them not catching up to the original schedule.  Which is right?  Having delivered two ships already, the up-front problems on this program must have been fixed.

Ship Endeavour Resolution Discovery Adventure Enterprise
Original Contract Schedule
Contract Award Date Jun 30, 1997 Jun 30, 1997 Sep 28, 1998 Oct 13, 2000 Feb 27, 2001
Delivery Date Feb 1, 2000 Sep 1, 2000 Aug 1, 2002 Sep 1, 2003 Aug 1, 2004
Construction Period (months) 31 38 46 34 41
Interval Between Ships (months) 7 11 13 11
Currently Projected Schedule (according to Avondale)
Delivery Date Apr 30, 2001 May 30, 2002 Dec 20, 2002 Sep 30, 2003 May 31, 2004
Construction Period (months) 46 59 51 35 39
Interval Between Ships (months) 13 7 9 8
Delay (months) 15 19 5 1 -2
Currently Projected Schedule (according to Polar Tankers)
Delivery Date Apr 30, 2001 May 30, 2002 Jun 30, 2003 Jun 30, 2004 Jun 30, 2005
Construction Period (months) 46 59 57 44 52
Interval Between Ships (months) 13 13 12 12
Delay (months) 15 19 11 10 11

In a steady-state operation, building repeat LPDs at 8-month intervals is equivalent to building 1.5 complete LPDs a year.  Similarly, building Polar tankers at 8-month intervals is equivalent to building 1.5 complete Polar tankers a year.  The question is, how many people does this workload require?

Avondale's productivity appears to be deteriorating.  Its take-over, first by Litton Industries and then by Northrop Grumman, resulted in the early retirement (or departure for other reasons) of many of its most experienced personnel.  In addition, there is a general shortage of mid-level talent being experienced by all U.S. shipyards, as a result of the cataclysmic downturn in the industry in the 1980s, when we essentially lost a generation of shipbuilders.  And Avondale's long-running labor disputes may be over but it still doesn't have the happiest workforce in the business.  By my estimate, and being fairly generous as to Avondale's current productivity, the combined work content of the two programs requires a production workforce of over 7,000, substantially more than Avondale currently employs.  Result, the need for extensive subcontracting.  If they hadn't accelerated the follow ships of the LPD program, they might have been able to handle it.

It is now widely rumored in the industry that Northrop Grumman Ship Systems will shift the entire 12-ship LPD program, including both Avondale's 3 ships + 5 options and Bath's 1 ship + 3 options, to Ingalls.  This is an excellent idea.  In fact, it's such a good idea that you will not be surprised to hear that I suggested it back in September, in a position paper that can still be found on this web site: click here to read it.  In return, Avondale will get to build any large Coast Guard cutters required by the Deep Water Program, which I didn't suggest - I suggested that they should subcontract all the Deep Water cutters to Bollinger and Halter - but which is nevertheless not inconsistent with my suggestion.

Curiously enough, when the recently retired VADM Nanos challenged the industry last year to propose ways of cutting costs, one of my suggestions, which got shouted down by the so-called "Big Six", was just this.  If the big yards were to subcontract work to the second-tier yards, it would be a win-win-win situation.  The big yards' costs would go down, because the second-tier yards can produce pre-outfitted steel for at least 25% less, so they would make more profit.  The second-tier yards would get more work, so they would make more money too.  The Navy wouldn't pay any more or less for its ships in the short term but it would get the second-tier yards involved in the big yards' programs, which, in the longer term, should make the industry stronger, more competitive and less divided.  Of course, I'm the eternal optimist.   Tim Colton, July 8, 2002, modified July 18, 2002.

   WATCH OUT, GUYS, SECTION 37 OF THE SHIPPING ACT OF 1916 APPEARS TO BE IN EFFECT.  The what?  Section 37 of the Shipping Act of 1916, is reproduced in full below.

When the United States is at war or during any national emergency, the existence of which is declared by proclamation of the President, it shall be unlawful, without first obtaining the approval of the Secretary of Transportation:

(a) To transfer to or place under any foreign registry or flag any vessel owned in whole or in part by any person a citizen of the United States or by a corporation organized under the laws of the United States, or of any State, Territory, District, or possession thereof, or

(b) To sell, mortgage, lease, charter, deliver, or in any manner transfer, or agree to sell, mortgage, lease, charter, deliver, or in any manner transfer, to any person not a citizen of the United States, (1) any such vessel or any interest therein, or (2) any vessel documented under the laws of the United States, or any interest therein, or (3) any shipyard, dry dock, ship-building or ship-repairing plant or facilities, or any interest therein; or

(c) To issue, transfer, or assign a bond, note, or other evidence of indebtedness which is secured by a mortgage of a vessel to a trustee or by an assignment to a trustee of the owner's right, title, or interest in a vessel under construction, or by a mortgage to a trustee on a shipyard, dry dock, or ship-building or ship-repairing plant or facilities, to a person not a citizen of the United States, unless the trustee or a substitute trustee of such mortgage or assignment is approved by the Secretary of Transportation; Provided, however, That the Secretary of Transportation shall grant his approval if such trustee or substitute trustee is a bank or trust company which (1) is organized as a corporation, and is doing business, under the laws of the United States or any State thereof, (2) is authorized under such laws to exercise corporate trust powers, (3) is a citizen of the United States, (4) is subject to supervision or examination by Federal or State authority, and (5) has a combined capital and surplus (as set forth in its most recent published report of condition) of at least $3,000,000; or for the trustee or substitute trustee approved by the Secretary of Transportation to operate said vessel under the mortgage or assignment; Provided further, that if such trustee or substitute trustee at any time ceases to meet the foregoing qualifications, the Secretary of Transportation shall disapprove such trustee or substitute trustee, and after such disapproval the transfer or assignment of such bond, note, or other evidence of indebtedness to a person not a citizen of the United States, without the approval of the Secretary of Transportation, shall be unlawful; or

(d) To enter into any contract, agreement or understanding to construct a vessel within the United States for or to be delivered to any person not a citizen of the United States, without expressly stipulating that such construction shall not begin until after the war or emergency proclaimed by the President has ended; or

(e) To make any agreement or effect any understanding whereby there is vested in or for the benefit of any person not a citizen of the United States, the controlling interest or a majority of the voting power in a corporation which is organized under the laws of the United States, or of any state, Territory, District, or possession thereof, and which owns any vessel, shipyard, dry dock, or ship-building or ship-repairing plant or facilities; or

(f) To cause or procure any vessel constructed in whole or in part within the United States, which has never cleared for any foreign port, to depart from a port of the United States before it has been documented under the laws of the United States.

Whoever violates, or attempts or conspires to violate, any of the provisions of this section shall be guilty of a misdemeanor, punishable by a fine of not more than $5,000 or by imprisonment for not more than five years, or both.

If a bond, note, or other evidence of indebtedness which is secured by a mortgage of a vessel to a trustee or by an assignment to a trustee of the owner's right, title, or interest in a vessel under construction, or by a mortgage to a trustee on a shipyard, dry dock, or ship-building or ship-repairing plant or facilities, is issued, transferred, or assigned to a person not a citizen of the United States in violation of subsection (c) above, the issuance, transfer or assignment shall be void.

Any vessel, shipyard, dry dock, ship-building or ship-repairing plant or facilities, or interest therein, sold, mortgaged, leased, chartered, delivered, transferred, or documented, or agreed to be sold, mortgaged, leased, chartered, delivered, transferred, or documented, in violation of any of the provisions of this section, and any stocks, bonds, or other securities sold or transferred, or agreed to be sold or transferred, in violation of any such provisions, or any vessel departing in violation of the provisions of subsection (f) above, shall be forfeited to the United States.

Any such sale, mortgage, lease, charter, delivery, transfer, documentation, or agreement therefor shall be void, whether made within or without the United States, and consideration paid therefor or deposited in connection therewith shall be recoverable at the suit of the person who has paid or deposited the same, or of his successors or assigns, after the tender of such vessel, shipyard, dry dock, ship-building or ship-repairing plant or facilities, or interest therein, or of such stocks, bonds, or other securities, to the person entitled thereto, or after forfeiture thereof to the United States, unless the person to whom the consideration was paid, or in whose interest it was deposited, entered into the transaction in the honest belief that the person who paid or deposited such consideration was a citizen of the United States.

This seems to create problems for a whole lot of people, doesn't it?  The questions are, is it in fact in effect? to whom does it apply, if anybody? can it be enforced?  Apparently not.  Section 1631 of the National Emergencies Act of 1976 says that Section 37 and other clauses like it must be specifically invoked by the President in his proclamation before they come into effect, and it wasn't.  Tim Colton, July 17, 2002.

   A NEW SHIPYARD IN VENEZUELA?  Fairplay reported this week that a consortium of Venezuelan maritime companies is planning to develop a new shipyard in Venezuela, with the capability of both building and repairing ships up to 100,000 deadweight tons and aluminum vessels up to 5,000 tons.  News items like this would normally deserve only a "Yeah, sure" response.  Don't they know that there is a serious excess of shipbuilding capacity in the world?  Don't they know that it's not a good idea to attempt both ship construction and ship repair in the same facility?  What has suddenly made Venezuela a good place to build ships?  It'll never happen.

The twist that makes this report intriguing is that these guys say that they have the "technical support of a group of US shipbuilders with proven experience in building and repairing ships of all types up to 200,000 DWT."  Wow!  That makes all the difference.  Let's see, who meets that description?  Four shipyards: Newport News, Avondale, NASSCO and Baltimore Marine Industries, although including the last is a bit of a stretch and BMI can't really be called a group.  What's the betting it's Northrop Grumman?  GD has too much sense for a project like this.

More news here as soon as we hear it.  Tim Colton, July 5, 2002.

For comment on maritime news reported in the second quarter of 2002, click here.

For comment on maritime news reported in the first quarter of 2002, click here.

For comment on maritime news reported in 2001, click here.

If you have comments or questions, suggestions or complaints, please e-mail me.