Comment on the Maritime News

January-March 2005

   IS JJMA'S SALE TO ALION A GOOD MOVE?  I assume that JJMA's owner-managers are going to get rich on this deal because it's hard to see why else they would sell out.  JJMA is very good at what it does and is clearly at the top of the naval architectural heap.  How is being owned by Alion going to help?  If JJMA were #3 or #4 in the business, say, and wanted to increase market share, maybe being part of a bigger company would help.  But it isn't, so it won't.  And JJMA has been down this track before, so they should know: John McMullen originally sold JJMA to Talley Industries, back in the early 90s (earlier?).  That was not a happy relationship, so JJMA's management organized a buyout, a good move.  This new sale seems like a regressive one to me, but I admit to not knowing all the details.  Anyway, good luck to them: JJMA was the company that brought me to the U.S., so they do make smart decisions occasionally.  Tim Colton, March 26, 2005.

   CONRAD'S DE-LISTING A SMART MOVE Goodness, a rational business decision from Conrad.  This company was always too small to be publicly traded and never had a ghost of a chance of growing to a size at which it might make sense.  (Who were the nitwits that sold the Conrad family on going public in the first place?  Run them out of town.)  There is a significant cost associated with being a publicly traded company, not to mention a whole pile of legal ramifications, and a company needs to have a certain critical mass before it takes this step.  Conrad never had that critical mass and all credit to it now for recognizing that.  So who among the publicly traded minnows will follow?  Tim Colton, March 23, 2005.

   WHY INVEST IN HORIZON LINES?   Having paid way too much for Horizon Lines, Castle Harlan is now trying to recover its investment by taking it public.  The draft IPO issued this week offers common stock to the value of about $287mm, with most of the proceeds going to the existing stockholders rather than to anything useful like building new ships.  It is not clear to me why anyone would want to buy this stock, but maybe I'm not as smart as all those Wall Street wizards who know so much about the maritime industry.  You can find the draft S-1 here.

I find it interesting that the prospectus does not provide any projections of future earnings.  It doesn't even include a projection for the current year.  Apparently potential investors are expected to know enough to work these things out for themselves.  Certainly, the company's recent results do not indicate any glowing future, regardless of all the puff in the accompanying language.  the table below provides the key figures, in millions of dollars.  The EBITDA looks good but just look at all that debt.

Item 2002 2003 2004
Operating Revenue 804 886 980
Operating Expenses 767 848 929
Operating Income 37 38 52
Net Income 22 15 14
Total Assets 321 493 1020
Long-Term Debt 0 165 610
Stockholders Equity 114 97 26
EBITDA 70 84 113

The prospectus, in the manner of these things, lists no fewer than 28 risk factors, including such highly improbable events as the repeal of the Jones Act.  Only one of these risk factors mentions the age of the fleet and that only in passing:

We may face significant costs as our vessels age.  We believe that our vessels each have (sic) an estimated useful life of 45 years from the year it was built (sic again).  The average age of our vessels is approximately 28 years.  We expect to expend increasing expenses (sic yet again) to operate and maintain our vessels in good condition as they age.  Eventually, these vessels will need to be replaced.  We may not be able to replace these vessels with new vessels based on uncertainties related to financing, timing and shipyard availability.

Leaving aside the bad English, this is grossly misleading: SEC please note.  First, the last Horizon prospectus said that their ships had an estimated useful life of 40 years: how can it now be 45 years?  Second, the statement that the average age is 28, coming immediately after the statement that the useful life is 45 years, although not inaccurate, clearly suggests that there is no need to worry about replacement, at least just yet.  This suggestion is reinforced by the use of the word "eventually" in the next sentence: everybody knows that "eventually" is a long way off, certainly not until after Castle Harlan has extricated itself from this turkey.  What was it Keynes said?  "Eventually, we are all dead", or something like that.  And third, the risks identified don't sound like risks to me and certainly wouldn't to an uninformed reader.  The real risks are not mentioned: (a) the estimate of 45 years is not supported by any expert that I know and may be over-optimistic and (b) the best part of $2 billion will be needed to renew the Horizon fleet, an amount that could kill an already debt-heavy company.

Look at this table of the Horizon fleet.  If the ships have an economic life of 40 years, which is supportable, Horizon needs to be building ships now, not shrugging off the need.  If the ships indeed have an economic life of 45 years, unsupportable though that is, Horizon at least needs to be planning a replacement program now and that should be spelt out in their prospectus.  But nowhere in this fascinating 180-page document is there any mention of any possible need to build new ships.

Vessel Name Year Built Replace at 40 Possible Delivery Schedule Replace at 45 Possible Delivery Schedule
Horizon Challenger 1968 2008 2007 2013 2012
Horizon Discovery 1968 2008 2008 2013 2013
Horizon Crusader 1969 2009 2009 2014 2014
Horizon Navigator 1972 2012 2010 2017 2015
Horizon Trader 1973 2013 2011 2018 2016
Horizon Expedition 1973 2013 2012 2018 2017
Horizon Hawaii 1973 2013 2013 2018 2018
Horizon Consumer 1974 2014 2014 2019 2019
Horizon Producer 1974 2014 2015 2019 2020
Horizon Pacific 1979 2019 2016 2024 2021
Horizon Enterprise 1980 2020 2017 2025 2022
Horizon Reliance 1980 2020 2018 2025 2023
Horizon Spirit 1980 2020 2019 2025 2024
Horizon Anchorage 1987 2027 2025 2032 2030
Horizon Kodiak 1987 2027 2026 2032 2031
Horizon Tacoma 1987 2027 2027 2032 2032

What's also stunning is that nothing about this IPO does anything for the company's operations.  A substantial portion of the proceeds of this IPO - about $228mm - will be used for financial purposes, as follows:

(i) $39mm to redeem about 25% of the company's 11% senior discount notes;

(ii) $57mm to redeem about 22% of the company's 9% senior notes;

(iii) $61mm to redeem 100% of the company's Series A preferred stock;

(iv) $71mm to pay a dividend to holders of the company's Class B common stock.

This leaves about $59mm for other purposes, but $19mm is already earmarked for "costs we will incur related to the consummation of this offering".  Not a bad fee.  We should all be lucky enough to be investment bankers. 

Wouldn't it have been nice if Horizon had come to the market with a plan to modernize its operations?  In the world fleet, containerships go to the scrap yard at age 28, on average: Horizon boasts that it's going to keep its fleet running to age 45, as if that were something to be proud of rather than to be embarrassed about.  There isn't a single steam-powered ship in the world containership fleet: Horizon happily preserves a fleet with 13 of these expensive monsters.  Horizon's competitors, Matson and TOTE, have both invested in modern tonnage: Horizon strives to keep its inefficient, obsolete fleet of dinosaurs going indefinitely.  The next time they come to the market they will probably have discovered that their ships have an economic life of 50 years.

And by the way, Horizon's CEO was paid $1,173,000 last year: that was almost 10% of the company's net income.  Tim Colton, March 5, 2005.

   SUN SHIP'S DRY-DOCK #4 RETURNS TO SERVICE It has been reported that Port Arthur topside ship repairer Gulf Copper has bought the old Sun Ship Dry Dock #4 and will relocate it to Galveston for use in the rig repair business. 

This dock was designed and built by Sun Ship in 1974, for use in its Chester shipyard.  It is 700 feet long by 198 feet clear breadth, and is in two 350-foot sections that can be either used separately or linked together.  It is designed to lift 70,000 tons but was never officially rated at more than half that.  The original idea was that it would be used for the launch-transfer of large tankers built on the land-level facility in Sun Ship's North Yard (now the highly successful Penn Terminals).   It was used for this purpose several times (Hyundai Heavy Industries please note).  Sun Ship's successor, Penn Ship, also used it for this purpose and, notably, used it to transfer the large ro-ro "Sea-Land McLean" from the Delaware River to dry land, where it was converted to the fast sealift ship "Capella" (T-AKR 293).  This 27,000-ton transfer constituted the single largest floating structure ever to be brought back on to dry land, not a particularly awesome achievement in itself but an interesting Guinness-type statistic.  When Penn Ship ceased operations in 1990, the dock was sold to the Navy, which designated it AFDB 9 and leased it to Metro Machine of Pennsylvania, for continued use at the Chester shipyard.  Metro never used it much and, when the lease expired recently, the Navy sold it to CalDive, which immediately discovered that it didn't want it after all.

No doubt Gulf Copper knows what it has acquired but (a) I'm told that the dock is in very poor shape and needs a lot of work, and I mean a lot; (b) at least one of its four wing-wall cranes has been destroyed; (c) it's a fresh-water dock and will require a lot of coating work to make it suitable for salt-water service; (d) although huge, it's not wide enough to lift a semi-submersible, which limits its value in the rig repair business; and (e) although designed for ships, it's much too big for any ship that calls at Gulf Coast ports, which limits its value in the ship repair business.  Of course it was cheap: that might count for something.  Tim Colton, March 4, 2005.

   IT TAKES AT LEAST TWO TO TANGO It appears that the Navy is planning to cut the number of gray shipbuilders from six to three.  It will do this (a) by making Bath and Ingalls compete for the DD(X) construction contract on a winner-takes-all basis, a competition that Ingalls will win; (b) by making Electric Boat and Newport News do likewise for future SSNs, a competition that Newport News will win; and (c) by going along with Northrop Grumman's phasing out of Avondale as a shipbuilder.  It is, of course, purely coincidental that Maine, Connecticut and Louisiana are states whose congressional delegations can safely be ignored, however loudly they might scream.

Is this a good idea?  Hell no, but first let me explain why Ingalls and Newport News will win the winner-takes-all competitions. 

First, Ingalls has lower labor costs than Bath, not so much because it pays less but because its productivity is much better: this is partly because it has a much more efficient facility, even though General Dynamics has spent over $300mm on Bath's facility, and partly because it doesn't snow in Pascagoula.  In addition, Ingalls has lower overhead costs than Bath, primarily because it can spread its fixed overhead over a direct labor base that is about twice the size of Bath's.  As a result, the total cost of a destroyer built by Ingalls is quite a few percentage points lower than that of one built by Bath: unless GD decides to take a dive, therefore, and the probability of that is negligible, Ingalls will win a winner-takes-all competition.

Some of this logic applies to a Newport News-Electric Boat face-off.  EB is probably more efficient than Newport News but Newport News has much lower overhead costs.  In addition, Newport News makes such enormous amounts of money on its other programs that it can well afford to take at least a small dive.

This consolidation of the industry is not a good thing, for at least two reasons.

(1) Although building all the ships of a program in a single shipyard should result in lower unit costs than dividing it between two shipyards, it won't, because, after the initial competition, there will be no controls over future costs.  The winning shipbuilder will have the Navy over the proverbial barrel and the Navy will be unable to hold costs down.  We have seen this phenomenon over and over again but the Navy has apparently never understood it.

(2) Neither Bath nor EB has any other business opportunities that it can pursue.  Not even a sniff of an opportunity.  This means that both will go out of business and, as we know well from history, a dead shipyard cannot be resurrected.  In addition, as each shipyard works off its orderbook and lays off its workforce, it will incur progressively higher costs and delays on its remaining work, and the Navy will have to pay for this.

What should the Navy do?  Well, it's too late, unfortunately, to go back to real competition, which we haven't had since John Lehman was Secretary, because real competition requires not only two contractors but also at least three competitors for those two contracts.  In the absence of true competition, we must stay with the limited form of competition that we have had for the past 20 years but make it more effective.  This can be done in at least three ways:

(1) Rebuild the number of ships in the fleet by specifying ships that are intrinsically less expensive than the ludicrously gold-plated monsters that the Navy is specifying now.

(2) Restructure the standard shipbuilding contract to provide incentives to the contractor to cut costs and to reduce construction times, and incentives to the program manager to refrain from making design changes.  The Navy leadership goes on and on about the need for lower costs and shorter construction times but it's not going to happen as long as the contract encourages both the program managers and the shipbuilders to spend money rather than to save it.

(3) Continue and expand the process, started by the LCS and other programs, of increasing the amount of ship construction funding that flows to second-tier shipbuilders, such as Alabama, Austal, Bender, Bollinger, Halter, Signal and Marinette, whether directly or indirectly.  This will not only reduce total costs now but it will also stimulate the development of a new defense industrial base, capable of providing true competition for major procurements at some future time.

Does anyone think that any of this might happen?  No?  Nor do I.  Tim Colton, February 26, 2005.

   KVAERNER PHILADELPHIA SELLS CONTAINERSHIPS TO MATSON This no real surprise.  It always seemed more likely that Ocean Blue Express was a stick with which to beat Matson than a serious business proposition.  The fact that Matson has first right of refusal on four more ships, to be delivered by June 2010 is more interesting, suggesting, as it does, that Kvaerner is not confident of its future as a tanker builder.  Or maybe they've come round to agree with me, that they should stick to containerships and leave the tankers to lower-cost shipbuilders such as Halter and Alabama.  Note the delightful claim from the shipyard's President in Kvaerner's press release that "The contract with Matson confirms that Kvaerner Philadelphia has made a successful transition to become a highly efficient Jones Act shipbuilder".  Yeah, right.  Building ships at more than three times the world market price at a rate of one every 11 months can not be described as highly efficient, even by Jones Act standards.  In addition, these costs and construction times are still way short of what Kvaerner said it was going to do back when it took all those hundreds of millions of taxpayers' money.  Tim Colton, February 25, 2005.

   ADMINISTRATION REQUESTS $11.5 BILLION IN FY-06 FOR ONLY 4 SHIPS.  Good grief, what are we doing here?  $11.5 billion buys only four new ships?  Someone please tell me that these figures are not correct.  Am I the only person in America who thinks that somebody in the Navy needs to be fired?  Possibly the Assistant Secretary for Acquisition.  Oh, no, we can't fire him, he's going to be promoted to Under Secretary.  He's screwed up so badly, they will probably give him a Presidential Medal of Freedom as well.  Tim Colton, February 12, 2005.

Program

# of New Ships

SC,N

# of New Ships

RDT&E

# of New Ships

Sealift Fund

# of New Ships

Totals

Prior-Year Costs

CVN 77

564.9

308.0

872.9

 

CVN refuelings

1,513.6

   

1,513.6

 

SSGN conversions

286.5

24.0

310.5

 

NSSN

1

2,401.5

155.8

1

2,557.3

182.7

SSN/SSBN refuelings

332.0

332.0

 

DD(X)

716.0

1,084.7

1,800.7

 

DDG 51

225.4

225.4

 

LHD 8

a

197.8

a

197.8

 

LPD 17

1

1,344.7

11.4

1

1,356.1

66.8

LHA replacement

150.4

150.4

 

T-AKE 1

   

   

1

380.1

1

380.1

 

Littoral Combat Ship

36.8 

1

576.4

1

613.2

 

LCAC upgrades

110.6

110.6

 

Weapons systems

394.5

Service craft

56.2

56.2

 

Outfitting

427.0

427.0

 

Prior-year costs

 

644.0

         

644.0

 

In all

2

$9,007.4

1

$2,160.3

1

$380.1

4

$11,547.8

$644.0

 

   HERE COMES CHINAThe news that China's Hudong-Zhonghua Shipyard is going to develop a shipyard in Europe is a fair scunner.  OK, so China's shipbuilding industry gets bigger and better every year, and is scaring the pants off the Koreans, but building a new shipyard in Europe?  Traditional European shipbuilders may now all go out behind their local subsidy administrator's office and shoot themselves.  The deal is that Hudong, which is one of the best and most advanced Chinese yards, will invest the equivalent of $50 million in the CeskoSlovenska Plavba Labska (CSPL) shipyard in Decin, in the Czech Republic, which builds river traders at the rate of four or five a year.  (Brush up your Czech and visit www.cspl.cz and then visit www.hz-shipgroup.com, where English is OK).  What next?  Can we expect Dalian New Shipyard to offer to buy Kvaerner out of the Philadelphia Shipyard?  Tim Colton, January 22, 2005.

 

   NEW SHAPE TO THE MSP FLEET.  The new line-up includes 39 containerships (compared to 38 before), 14 car carriers (8), 1 barge carrier (1), 2 heavy-lift ships (0), and 4 product carriers (0), for a total of 60 ships (47).  See the breakdown below.  The new line-up reflects the increasing importance of ro-ro capability.  In addition, the inclusion of four foreign-trading product carriers essentially eliminates any need for US-built tankers.  Place-holders for new-construction ships?  I don't think so.  Tim Colton, January 22, 2005.

 

Old Line-Up New Line-Up
Ship Name Ship Type Company Name Ship Name Ship Type Company Name
APL Korea Containership American Ship Management APL Korea Containership APL Marine Services, Ltd.
APL Philippines Containership American Ship Management APL Philippines Containership APL Marine Services, Ltd.
APL Singapore Containership American Ship Management APL Singapore Containership APL Marine Services, Ltd.
APL Thailand Containership American Ship Management APL Thailand Containership APL Marine Services, Ltd.
President Adams Containership American Ship Management President Adams Containership APL Marine Services, Ltd.
President Jackson Containership American Ship Management President Jackson Containership APL Marine Services, Ltd.
APL China Containership American Ship Management APL China Containership APL Marine Services, Ltd.
President Polk Containership American Ship Management President Polk Containership APL Marine Services, Ltd.
President Truman Containership American Ship Management President Truman Containership APL Marine Services, Ltd.
Green Cove Car Carrier Central Gulf Lines, Inc.        Green Cove Car Carrier Central Gulf Lines, Inc.
Green Point Car Carrier Central Gulf Lines, Inc.        Green Point Car Carrier Central Gulf Lines, Inc.
Green Lake Car Carrier Central Gulf Lines, Inc.        Green Lake Car Carrier Central Gulf Lines, Inc.
      Hercules Leader Car Carrier Central Gulf Lines, Inc.
Liberty Car Carrier American International Car Carrier, Inc.  Liberty Car Carrier American Auto Carriers, Inc.
Patriot Car Carrier American International Car Carrier, Inc.  Patriot Car Carrier Fidelio Limited Partnership
Freedom Car Carrier American International Car Carrier, Inc.  Freedom Car Carrier Fidelio Limited Partnership
      Takasago Car Carrier Fidelio Limited Partnership
      Resolve Car Carrier Fidelio Limited Partnership
      Otello Car Carrier Fidelio Limited Partnership
      Aida Car Carrier Fidelio Limited Partnership
Chesapeake Bay Containership First American Bulk Carrier Corp.   Chesapeake Bay Containership Farrell Lines Inc. 
Delaware Bay Containership First American Bulk Carrier Corp.   Delaware Bay Containership Farrell Lines Inc. 
Endeavor Containership E-Ships, Inc.        Endeavor Containership Farrell Lines Inc. 
Endurance Containership E-Ships, Inc.        Endurance Containership Farrell Lines Inc. 
Enterprise Containership E-Ships, Inc.        Enterprise Containership Farrell Lines Inc. 
      Splendid Ace Car Carrier Liberty Global Logistics, LLC
Lykes Navigator Containership First Ocean Bulk Carriers I Lykes Navigator Containership Lykes Lines Limited, LLC
Lykes Discoverer Containership First Ocean Bulk Carriers II Lykes Discoverer Containership Lykes Lines Limited, LLC
Lykes Liberator Containership First Ocean Bulk Carriers III Lykes Liberator Containership Lykes Lines Limited, LLC
      Lykes Motivator Containership Lykes Lines Limited, LLC
      TMM Yucatan Containership Lykes Lines Limited, LLC
Maersk Missouri Containership Maersk Line, Ltd Maersk Missouri Containership Maersk Line, Limited
Maersk Virginia Containership Maersk Line, Ltd Maersk Virginia Containership Maersk Line, Limited
Maersk Georgia Containership Maersk Line, Ltd Maersk Georgia Containership Maersk Line, Limited
Maersk Carolina Containership Maersk Line, Ltd Maersk Carolina Containership Maersk Line, Limited
Overseas Joyce Car Carrier OSG Car Carriers, Inc. Overseas Joyce Car Carrier OSG Shipholding Group, Inc. 
      Maersk Rapier Product Carrier OSG Shipholding Group, Inc. 
      Maersk Regent Product Carrier OSG Shipholding Group, Inc. 
      Maersk Richmond Product Carrier OSG Shipholding Group, Inc. 
Sealand Achiever Containership U.S. Ship Management, Inc.   Sealand Achiever Containership Maersk Line, Limited
Sealand Florida Containership U.S. Ship Management, Inc.   Sealand Florida Containership Maersk Line, Limited
Sealand Pride Containership U.S. Ship Management, Inc.   Sealand Pride Containership Maersk Line, Limited
Sealand Motivator Containership U.S. Ship Management, Inc.   Sealand Motivator Containership Maersk Line, Limited
Sealand Commitment Containership U.S. Ship Management, Inc.   Sealand Commitment Containership Maersk Line, Limited
Sealand Atlantic Containership U.S. Ship Management, Inc.   Sealand Atlantic Containership Maersk Line, Limited
Sealand Defender Containership U.S. Ship Management, Inc.   Sealand Charger Containership Maersk Line, Limited
Sealand Endurance Containership U.S. Ship Management, Inc.   Maersk Alabama Containership Maersk Line, Limited
Sealand Explorer Containership U.S. Ship Management, Inc.   Sealand Lightning Containership Maersk Line, Limited
Sealand Innovator Containership U.S. Ship Management, Inc.   Sealand Meteor Containership Maersk Line, Limited
Sealand Integrity Containership U.S. Ship Management, Inc.   Maersk Arkansas Containership Maersk Line, Limited
Sealand Liberator Containership U.S. Ship Management, Inc.   Sealand Intrepid Containership Maersk Line, Limited
Sealand Patriot Containership U.S. Ship Management, Inc.   Sealand Comet Containership Maersk Line, Limited
Sealand Performance Containership U.S. Ship Management, Inc.   Sealand Performance Containership Maersk Line, Limited
Sealand Quality Containership U.S. Ship Management, Inc.   Sealand Quality Containership Maersk Line, Limited
      Industrial Challenger Heavy-Lift Ship Patriot Shipping, LLC
      Industrial Chief Heavy-Lift Ship Patriot Shipping, LLC
Lykes Motivator Containership Waterman Steamship Corporation P&O Nedlloyd Vera Cruz Containership Waterman Steamship Corporation
Atlantic Forest Barge Carrier Waterman Steamship Corporation Atlantic Forest Barge Carrier Waterman Steamship Corporation
Green Dale Car Carrier Waterman Steamship Corporation Green Dale Car Carrier Waterman Steamship Corporation
Lykes Explorer Containership Waterman Steamship Corporation P&O Nedlloyd Buenos Aires Containership Waterman Steamship Corporation

 

 

   WHY INVEST IN KVAERNER PHILADELPHIAToday's report in Tradewinds that Aker Yards is planning to go to the Norwegian market for at least $50 million and possibly as much as $100 million for further improvements to its Philadelphia shipyard and for seed money for a series of US-flag product carriers, raises several questions. 

 

First, why more improvements to the facility?  Is the problem in the Philadelphia shipyard one of insufficient capital investment or one of productivity?  I think it's the latter, which requires better management rather than capital investment.  Throwing money at the facility is the Northrop Grumman approach and look where it's got them.

 

Second, why the Norwegian market and not the U.S. market?  Is it because Norwegians don't understand the U.S. market and can be more easily gulled?  As the Greeks say, "Thank goodness for the Norwegians!"

 

And third, why product carriers?  Isn't it clear yet that the Jones Act market for self-propelled tankers is dead and gone?   Meanwhile, we desperately need a modern Jones Act containership fleet, containerships cannot be replaced by ATBs and containerships are what the Philadelphia shipyard was designed to build.

 

As you have often heard me observe, the U.S. maritime industry is marvelous: every time you turn around you find someone else doing something stupid.  Tim Colton, January 7, 2005.

For comment on maritime news reported in earlier quarters, click on one of the following links:

Fourth Quarter of 2004

Third Quarter of 2004

Second Quarter of 2004

First Quarter of 2004

Fourth Quarter of 2003

Third Quarter of 2003

Second Quarter of 2003

First Quarter of 2003

Fourth Quarter of 2002

Third Quarter of 2002

Second Quarter of 2002

First Quarter of 2002

Fourth Quarter of  2001

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