Comment on the Maritime News

April-June 2005

   NOT THE FIRST IN OVER 50 YEARS.  Being an unreconstructed picker of nits, I feel compelled to point out that the new cruise ship "Pride of America" is NOT the first new US-flag cruise ship in over 50 years, as everybody associated with her seems to think.  She is the first new US-flag cruise ship ever.  That's right, there has never been a new US-flag cruise ship before.  (I'm talking deep-draft, oceangoing ships here, not coastal and inland boats like the "Cape May Light".)  "What about "Argentina" and "Brasil"?", do I hear you cry?  Well, "Argentina" and "Brasil", which were built for Moore-McCormack Lines by Ingalls (hull #s 467 and 468) and delivered in 1958, were liners, not cruise ships.  (Cruising as we know it today had not really been invented in 1958: although a few liners occasionally went on cruises, the business didn't really start on a year-round basis until the mid-60s, and it was started, ironically enough, by Norwegian Cruise Line.)  They were designed and built specifically to carry passengers, as fast as possible, on a regularly scheduled service, between the East Coast of the United States and the East Coast of South America.  No piddling about in the islands.  They were converted to cruise ships later, after being put out of business as liners by this wretched thing called an aeroplane.  The same goes for "Santa Rosa" and "Santa Paula", which were built for Grace Lines by Newport News (hull #s 521 and 522) and also delivered in 1958, "Independence" and "Constitution", which were built for American Export Lines by Quincy (hull #s 1618 and 1619) and delivered in 1951 and 1952, and, of course, "United States", which was built for U.S. Lines by Newport News (hull #488) and delivered in 1952.  Tim Colton, June 17, 2005, amended June 24, 2005.

   THE WISDOM OF JOHN YOUNG.  The Assistant Secretary of the Navy for Acquisition, John Young, is quoted in the current edition of the Navy League's monthly magazine, "Sea Power" as calling for "more discipline inside the system, starting with more reasonable and timely requirements." "Someone in the acquisition team has to stand up and say, ‘are we getting the best bang for the buck?'", Young said.  Well, duh.  Or, no shit, John.  So why don't you do something about it?  Naval shipbuilding costs and schedules are now totally out of control, and it happened on your watch, John.  Do something about it, for chrissake, or resign.  Or are you hoping to get one of those medals that Bush gives to people who screw up?  Tim Colton, June 10, 2005.

   NEW LEADERSHIP AT NGSS.  The new President of Northrop Grumman Ship Systems, Phil Teel, is an aeronautical engineer with a distinguished career in the aerospace industry, first at NAVAIR and more recently at Raytheon and Northrop Grumman.  He is not a shipbuilder, but don't let's hold that against him until we see what he does.  I invite employees of NGSS, its customers and its subcontractors to continue to keep me up to date on developments in Pascagoula and I undertake not to dump on this poor guy for at least six months, and not necessarily then.  And here is a link to a compendium of all my comments and position papers concerning Northrop Grumman over the past four years.  Tim Colton, June 3, 2005.

   THE LPD 17 SAGA CONTINUES.  I'm going to be in trouble with the PR folks at Northrop Grumman again, (ooh, scary), but I'll just have to live with that.  I have been told, by numerous different sources, all of them directly involved in the LPD 17 program but maybe not all of them completely impartial, that (a) the Navy issued over 15,000 trial cards as a result of the LPD 17's recent sea trials; (b) these were "the worst sea trials in the Navy's history"; (c) delivery is not now expected until the fall; and, most amazingly, (d) the problems are so bad that the Navy is seriously considering not commissioning the ship at all, but turning it into some kind of training platform.  I invite informed readers to tell me the real story, in confidence, of course.  Tim Colton, June 3, 2005.

I'm told that delivery is now scheduled for mid-September, but that there will then be an extended PDA, during which NGSS will be expected to fix all the discrepancies at its own expense, an effort that is estimated to require about a million man-hours.  June 5, 2005.

   WHAT IS A BELTWAY BANDIT?  Just in case you wondered, check the DoD contract awards for May 31 (click here).  The Navy awarded 503 contracts to support contractors.  That's right, 503 separate contracts, each with a four-year base term.  And the announcement says that these awards are in addition to 150 similar contracts already awarded.  The total value of these 503 contracts is estimated to be equivalent to about $5.3 billion a year, i.e., an average of over $10 million per contractor per year.  Tim Colton, June 3, 2005.

   YOUR TAX DOLLARS AT WORK, PART 3.  The award of a $3-billion contract to Raytheon for design of the DD(X) raises the question of what happened to the $3-billion contract awarded to Northrop Grumman Ship Systems on April 29, 2002, for design of the DD(X).

Ingalls Shipbuilding Inc., Northrop Grumman Ship Systems (NGSS), Pascagoula, Miss., is being awarded a $2,879,347,000 cost-plus-award-fee contract for DD(X) Design Agent activities, including the design, build and test of engineering development models (EDMs) for major subsystems and components for the DD(X) destroyer. DD(X), a multi-mission surface combatant tailored for maritime dominance, will provide independent forward presence and deterrence, and operate as an integral part of joint and combined expeditionary forces. Work will be performed in Pascagoula, Miss. and Bath, Maine (38 percent); Portsmouth, R.I. (16 percent); Minneapolis, (13 percent); Tewksbury, Mass. (nine percent); Reading, Mass. (four percent); Andover, Mass. (four percent); Newport News, Va. (three percent); Fullerton, Calif. (two percent); Fort Wayne, Ind. (two percent); Bethesda, Md. (two percent); Anaheim, Calif. (two percent); Cincinnati, Ohio (two percent); Hudson, Mass. (two percent); and Philadelphia, (one percent) and is to be completed by September 2005. Contract funds will not expire by the end of the current fiscal year. This contract was competitively procured via publication in the Commerce Business Daily and the solicitation was posted to the Navy Electronic Commerce Online (NECO) Internet web page, with two offers received. This contract is incrementally funded; funding in the amount of $273,167,189 has been obligated to the contract. The Naval Sea Systems Command, Washington, D.C. is the contracting activity (N00024-02-C-2302).

How much does it cost to design a destroyer?  Tim Colton, June 3, 2005.

   YOUR TAX DOLLARS AT WORK, PART 2.  The award of a $3-billion contract to Raytheon for design of the DD(X) apparently isn't sufficient: this week the Navy awarded a $376-million DD(X) contract to United Defense.

United Defense L.P., Armament Systems Division, Minneapolis, Minn., is being awarded a not to exceed ceiling $376,000,000 cost-plus-award-fee contract for continuation of design, development and test of the Advanced Gun System (AGS), including the fully automated gun, magazine and the Long Range Land Attack Projectile (LRLAP), in support of the DD(X) Program.  The AGS is a fully automated, single barrel, 155-mm, vertically loaded, stabilized gun mount that is capable of storing, programming, loading, and firing LRLAP.  Its primary mission is Land Attack Warfare in support of ground and expeditionary forces beyond the line-of-sight in the DD(X) System's littoral engagement area where precise, rapid-response, high-volume, long-range fire support are required.  Work will be performed in Minneapolis, Minn. (55 percent) and Orlando, Fla. (45 percent), and is expected to be completed by September 2010.  The contract was not competitively procured.  Contract funds will not expire at the end of the current fiscal year.  The Naval Sea Systems Command, Washington, D.C., is the contracting activity (N00024-05-C-5117).

What next?  Tim Colton, June 3, 2005.

   HOLD DOWN THOSE DDG CONTRACT PRICES.  By now I guess that we all agree that the DD(X) program is going to go the way of the DD-21 program and the Navy will have to order a bunch more DDG 51s while it figures out how to design an affordable ship.  (Don't hold your breath.)  Before it does, however, maybe it should take a look at this chart.  Let's see, inflation has been about 2%, right?  Only in the Alice-in-Wonderland world of naval shipbuilding does the price per ship go up if you order more.  Tim Colton, May 29, 2005.

   THE OLD WAYS STILL WORK.  When NASSCO launched the future USNS LEWIS AND CLARK (T-AKE 1) last Saturday, this very good-looking ship slid down an inclined building berth into the waters of San Diego harbor.  Excellent!  At least someone in this industry still remembers how to build ships on a slope.  Sure, it's not as efficient as building them on the horizontal plane, but, what the hell, this is how it was done everywhere until the coming of big graving docks in the 1960s.  Is NASSCO the last of the world's big-ship shipbuilders that still uses inclined building berths?  Tim Colton, May 27, 2005.

   YOUR TAX DOLLARS AT WORK.  Any comment on this announcement would be superfluous.

Raytheon Co., Integrated Defense Systems (IDS), Tewksbury, Mass., is being awarded a cost plus award fee letter contract with a not to exceed ceiling of $3,000,000,000 for DD(X) Ship System Integration and Detail Design associated with specific DD(X) Ship Systems.  Work will be performed by Raytheon IDS in Tewksbury, Mass.; Lockheed Martin Maritime Systems and Sensors, Moorestown, N.J.; United Defense LP, Minneapolis, Minn.; Northrop Grumman Mission Systems, King George, Va.; and Ball Aerospace & Technology Corp., Westminster, Colo., and is expected to be completed by December 2009.  Contract funds will not expire at the end of the current fiscal year.  This contract was not competitively procured.  The Naval Sea Systems Command, Washington, D.C., is the contracting activity (N00024-05-C-5346).

Let's hope that, even though the Navy couldn't manage to hold a competitive procurement, they remembered to include a cancellation clause.  Tim Colton, May 23, 2005.

   LPD 17 ON SEA TRIALS AT LAST.  The future USS San Antonio, the first of the Navy's new class of assault ships, left Ingalls' shipyard for its sea trials today, although sources say that a naval ship has rarely been so unready.  All being well, it will now be delivered on May 13, regardless of how long the deficiency list might be, and commissioned in Ingleside TX in June.  The contract for this ship was signed on December 17, 1996 and its original contract delivery date was July 17, 2002, allowing 67 months for detail design and construction.  Actual time required: 101 months, 50% more than planned.  Ah, well, better late than never.

The following photograph was released by Northrop Grumman, for once, thankfully, without a self-congratulatory press release.  But it looks to me like a fake: not only is there no sign of life on this ship, but where are all the porta-potties they loaded on board before sailing?  Tim Colton, April 29, 2005.  I am assured by people who went on the trials that the picture is not a fake: I stand corrected (May 13, 2005).

   WHAT SHOULD NORTHROP GRUMMAN DO?  It has been said that I am hard on Northrop Grumman Ship Systems (NGSS).  This may be so, but I doubt that it’s unjustified.  In addition, the number of critical e-mails that I receive is tiny compared to the number of supportive ones, most of which come from NGSS employees.  And I just went back and reviewed all my comments on NGSS since I started this column four years ago and can’t see any reason to modify any of them.  Sure, there are a few snide remarks here and there but they are intended more as attention-getters (Did you see what Colton wrote on his web site?) than anything else.  Nobody should ever take it personally.  If you can’t take the heat, get out of the shipyard.

So what would I do if I were in charge at NGSS (though heaven protect us all from such a dire situation)?  Read on.

If Northrop Grumman is a professionally managed company, it has a strategic plan, and each of its business units, including NGSS, also has a strategic plan.  Strategic plans usually (not necessarily but usually) look five years ahead and are updated annually, according to defined procedures.  I have not seen NGSS’ strategic plan, but here are some thoughts about what it might include.

The key question is, what business is NGSS in?  If all they want to do is build new ships for the U.S. Navy and the U.S. Coast Guard, they had better start downsizing today.  If, on the other hand, they are going to be bold, and not limit themselves to two customers, they had better have a plan not only for penetrating but also for making money in other markets.  Here’s how to do both of these.

First, some ideas for a downsizing strategy:

(1)   Move all the LPD work being done at Avondale to Ingalls.  All of it.  Transfer partial hulls and hull blocks onto barges and tow them out.

(2)   Put the last Polar Tanker in the water as soon as possible and either move it to Ingalls or subcontract its completion.

(3)   Then close Avondale.  Sell the off-site facilities/operations.  Don’t try to sell the main yard: nobody wants it.  Transfer it to the State of Louisiana, in return for the debt, and let the State split it up and lease it out.

(4)   Consolidation of the LPD program should improve facility utilization at Ingalls.  Restructure the yard’s construction schedule by product line to optimize resource utilization and productivity.  Get tough with the Navy on this and on changes.  No more changes. 

(5)   Don’t oppose sole-sourcing the DD(X): NGSS doesn’t owe the folks in Maine anything.  Propose a multi-year sole-source funding of DD(X).  At a minimum, this should be similar to that for the SSN 774 program, but something like the 30-ship DD 963 contract would be better. 

(6)   Get rid of all the non-shipbuilders in Production and hire some professionals.  Steal them from BIW if necessary.

(7)   Stop pursuing other markets and concentrate on the ones that are already locked up: if NGSS is going to be the sole source for both amphibs and surface combatants, there is no excuse for not being damn good at it. 

(8)   Attack the overhead: cut everything that’s not the minimum required.  Act like it’s your own money that’s being spent and cut back ferociously.  The yard’s too big: consolidate operations and mothball the parts that aren’t really needed.

(9)   Do more make-buy analyses and don’t hesitate to sub-contract anything that others can do for less.  There’s nothing wrong with subcontracting if it saves money, even though the unions don’t like it.

Second, some ideas for a growth strategy:

(1)   Move the LPD program to Ingalls, as in the downsizing strategy.

(2)   Reverse the Ingalls-Avondale integration and spin Avondale off into a separate company, with its own cost structure and with outside investors.  Turn it into a low-budget commercial ship factory, run by commercial shipbuilders. 

(3)   Step into the containership void left by Kvaerner Philadelphia switching to product carriers.  Buy a design and set up an assembly-line operation – one ship a year for Matson and one a year for Horizon.  Get Daewoo or somebody like that to help.  At the same time, step into the short-sea shipping void and propose a series of low-cost coastal trailerships.

(4)   NGSS expanded the Ingalls waterfront and lengthened the dry-dock to get into the offshore business.  Now carve out a chunk of the waterfront, including the dry-dock and possibly the East Bank yard too, and create a repair/conversion operation, also, like Avondale, as a separate company, with its own cost structure and with outside investors and professional managers.  There’s a lot of repair and conversion work out there.

(5)   The overhead still needs to be cut and the yard’s still too big: lease parts of it out.

(6)   Subcontracting is difficult if you’re downsizing but easy if you’re growing.  Do more of it: it’ll save millions.

(7)   Buy Halter from the Singaporeans: it has tremendous potential, which the Singaporeans are failing to take advantage of.  Again, structure it as a separate company, with outside investors and professional managers.  (No admirals!)  Shift the Deepwater Program to Halter: it’ll save more millions, many of them.

(8)   Go after the foreign military sales business vigorously, with simple, affordable designs, jointly marketing Ingalls’ frigates and Halter’s patrol vessels, and offering financing.  Finance the learning curve, if necessary and to the extent practical.  Use political muscle to get the Navy and the State Department to do what they are supposed to do but don’t do, i.e., help.

Downsizing would be painful, but it’s less risky than growth.  Personally, I think NGSS should go for the growth strategy, but I’m an optimist by nature and it’s not my money.  Of course, GD Marine Systems should probably go for a growth strategy too, especially as they could be downsized right out of business.  But NGSS has a whole bunch of advantages over GDMS: better facilities, better productivity, lower wages, bigger labor pools, more business-friendly locations, more political clout, and so on.

I could go on like this almost indefinitely but this is probably more than enough for the time being.  Tim Colton, April 22, 2005.

   HOW MUCH WORSE CAN IT GET?  The Government Accountability Office (GAO) recently published a report entitled "Improved Management Practices Could Help Minimize Cost Growth in Navy Shipbuilding Programs".  If you haven't read it, you can find it here.  I was going to comment on it but there's so much to comment on that it would take a week.  Read it for yourselves and weep, or, better, yell at your senators and representatives.  What the GAO euphemistically refers to as "improved management practices" might help, but I think shooting an admiral would be more effective.  You know, as Voltaire said of the execution of Admiral Byng, "pour encourager les autres".

Now if that's insufficiently discouraging, read last week's testimony on Navy shipbuilding and industrial base status to the Senate Armed Services Committee's Sea Power Subcommittee.  You can find it here.   Lawdy, lawdy.  The CNO doesn't say much.  Mike Toner reveals that he understands shipbuilding, which we knew.  Phil Dur reveals that he doesn't, which we also knew: his testimony is all misleading boasts, clichés and incomplete sentences.  And Ron O'Rourke has it right, as usual, and tackles head-on all the painful questions that the others either ignored or glossed over, such as the inevitability of BIW closing if the DD(X) program is single-sourced.  Tim Colton, April 16, 2005.

   THE KVAERNER DEAL.  (Comment amended and expanded, May 13, 2005.)  Where to start?  Well, let's start by saying that this is terrific news, there's nothing in this deal that's not achievable, and let's hope that everything goes well, Kvaerner makes a little money, OSG makes a lot of money and all the politicians get re-elected.  There are, however, a couple or three hurdles to be cleared.

First, American Shipping, Inc., (ASI), needs to be a bona fide U.S.-citizen company: I assume that Mr. Graykowski can see to this. 

Second, this deal is apparently going to be financed by ASI, which will be owned by a bunch of Norwegian investors.  How will Kvaerner sell the deal to the investors, when it will require a massive negative cash flow for at least seven years and probably longer.  Let's say, for the purposes of discussion, that ship 1 will cost $100mm, ship 2 $90mm and ships 3 onward $75mm: that's an average cost of about $78.3mm, giving ASI a profit of about 7%.  Let's also say that each ship's costs are evenly spread over two years, with a pitch between ships of six months: that means that the cash outlays will be roughly as shown below:

We don't know what OSG's charter rate is, but we can guess.  If it's based on 6% for 25 years, for example, it should be about $7mm/ship/year, or $84mm/year for all 12 ships.  It looks like ASI's going to be more of a banker than a shipbuilder.

Third, can Kvaerner Philadelphia actually perform on this contract?  It ought to be possible: two ships a year is a good deal less than the designed capacity of the yard and $83mm per ship is almost three times what you would pay today for a ship like this in the Far East - $27mm in China, although maybe $33mm in Korea.  (By the way, is this $83mm figure in today's dollars or is it escalated?  It makes a difference.)  A 46,000-dwt product carrier is almost exactly comparable in complexity to the 30,000-dwt containerships that the yard is building now - both are about 24,000 CGT - so the price should be achievable, assuming that they can keep up their productivity improvements and buy material overseas without falling foul of the U.S. Coast Guard.

Fourth, who's providing the construction financing?  Is Kvaerner going to put up a performance bond?  All those wise Norwegians who are going to invest in ASI are going to trust the yard to perform?

And fifth, has OSG lost its mind?  OK, their deal with American Shipping is great: they will pay a charter rate based on a per-ship price of only $83mm and are on the hook for only five years.  These ships should be in the market before any other new builds, which will give OSG a valuable advantage over its competitors.  But where do they get the idea that the Jones Act product distribution trades can support 12 new product carriers, let alone the 30+ ships being planned by Seacor, Chevron, American Heavy Lift, Keystone, Maritrans and others?  Suddenly it's raining product carriers: have none of these people ever heard of ATBs? 

OSG says that I haven't done my homework as well as they have and that (a) there are 37 ships that need to be replaced as a result of OPA 90 and (b) ships beat out ATBs in the longer-haul trades.  I maintain that (a) there are only about 20 that need to be replaced, they don't have to be replaced one for one and they don't have to be replaced by ships, and (b) that modern ATBs beat ships on every trade route except that between the US Gulf and the US West Coast.  Readers' comments?

And by the way, what was Clinton doing at the ceremony in Philadelphia?  He seemed to be claiming some kind of credit for Kvaerner's success, such as it is, but the federal government had no role at all in the creation of this shipyard.  It was the City's deal all along, with belated help from the State: the City gets all the credit, or the blame, depending on your point of view.

I hate to sound cynical and negative (not really).  It would truly be terrific if this program were to be a roaring success  Tim Colton, April 16, 2005, amended and expanded May 13, 2005.

   GD NO LONGER OUTPERFORMING NOC.  The "big two" both published their results for 2004 recently.  The figures for their shipbuilding operations for the past four years are summarized below.  Not much comment is needed.  General Dynamics (NYSE:GD) is no longer doing better than Northrop Grumman (NYSE:NOC) - they both had the same operating profit margin, although GD has higher revenue per employee, lower assets per employee and higher asset turnover, indicating that NOC's shipyards are under-utilized compared to GD's.  Tim Colton, April 16, 2005.

   WHY CAN'T WE SELL FRIGATES TO PAKISTAN?  Only a week after it was announced that the Pakistani Air Force is to buy a coupla dozen F-16s from Lockheed Martin, we learn that the Pakistani Navy is to buy four frigates from China.  Am I missing something here?  If they can afford to buy Lockheed Martin's phenomenally expensive fighters, why can't they afford to buy Northrop Grumman's or General Dynamics' phenomenally expensive frigates?  After all, it's the U.S. taxpayers' money, isn't it?  And we are looking for a way to keep both Bath and Ingalls in business, aren't we?  Or aren't we?  Tim Colton, April 8, 2005.

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

First Quarter of 2005

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.