Proceedings Of The Marine

SUM 2016

Proceedings magazine is a communication tool for the Coast Guard's Marine Safety & Security Council. Each quarterly magazine focuses on a specific theme of interest to the marine industry.

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63 Summer 2016 Proceedings is a far more cost-effective means of providing sealift than building new ships or recapitalizing the ready reserve force fleet, it is not alone sufficient to maintain the U.S.-flagged fleet without priority being given to U.S.-flagged commercial assets over DOD-owned assets to carry military cargoes. 5 A policy that seeks to utilize DOD-owned vessels on a pri- ority basis over U.S.-flagged commercial vessels may save a small amount of money in short-term freight rates, but will ultimately discourage U.S.-flagged carriers from enhancing their fleet or remaining in service. In the long term, com- mercial carriers will be forced to reduce service, while the U.S. government will be forced to spend huge sums activat- ing and chartering ships to cover for the missing commer- cial liner services and be forced to spend billions on future investment in organic assets and intermodal systems. Therefore, the current U.S. policies to support the use of U.S.- flagged carriers wherever practicable should be enforced properly. Ultimately, these policies will ensure the govern- ment enjoys the longer-term cost benefits of leveraging the sealift and intermodal assets of U.S. carriers without sad- dling U.S. taxpayers with the costs of the government build- ing and operating their own fleet of commercial vessels. Current Status The current state of the U.S.-flagged fleet is dire. The number of liner vessels in the international trading, U.S.-flagged fleet has declined from 151 in 1990 to 73 at the end of 2014, and these remaining 73 vessels are facing strong headwinds on preference cargo. The end of major operations in Afghanistan and Iraq are the primary reasons for a major reduction in the amount of DOD cargo moved. The Export-Import Bank of the United States charter expired for a time in June 2015, and food aid is under attack from a variety of fronts. On a more positive note, Maritime Security Program stipends were recently increased to $3.5 million per vessel for 2016 and have been authorized at $5 million per vessel from FY 2017 through FY 2021. 6 In addition, the industry may face yet another round of con- solidations. The U.S.-flagged fleet went through this before in the 1990s when longtime American shipping companies, such as Sea-Land and American President Lines (APL), were bought by foreign companies — Maersk Line of Denmark and Neptune Orient Lines (NOL) of Singapore, respectively. In fact, APL/NOL is now the target of an acquisition by French container operator CMA CGM. Future Issues U.S.-flagged international carriers depend on the Maritime Security Program stipend to help offset the additional costs of flying the American flag. However, the industry is at a point where the current MSP stipend is not sufficient when combined with the drastically declining cargo base. Various studies to examine the operating cost differential between U.S.-flagged vessels participating in the MSP and foreign-flagged vessels determined that when such factors as insurance, vessel maintenance and repair, total crew costs, and ship management are considered, U.S.-flagged vessel operational costs are approximately $5 million to $7 million more than the costs for equivalent foreign-flagged vessels. 7 These factors affect the ability of U.S.-flagged vessel oper- ators to reinvest in new U.S.-flagged ships. One way to counteract this is to extend the age of MSP eligibility out an additional five years. New ships are long-term assets, eligible to participate in the Maritime Security Program for 25 years. Most shipping lines operate vessels in a commer- cial capacity out to 30 years, and U.S. government reserve sealift assets are often operated to age 50 or older. There is little appreciable difference in the condition of an American vessel from 25 to 30 years. Most importantly, this would give the government five more years of MSP vessel usage at no additional cost to the federal budget. A major benefit of extending the vessel's useful age out to 30 years is the delay in replacing MSP tonnage. The sti- pend is meant to help defray the operating cost differential between the U.S. and foreign flags, but it does not cover the multi-million dollar investment costs that American ship- ping companies must make to purchase and bring ships into the U.S. fleet. Adding five years to the expected life of a new vessel acquisition makes the investment calculations more favorable for American shipping lines. The commercial maritime industry, through the Maritime Security Program, is currently providing the DOD with 60 vessels and follow-on intermodal systems and networks at a cost of only $210 million to the taxpayer, or $3.5 million per ship in FY 2016. An increase in appropriations for the Maritime Security Program would provide the DOD this essential sealift capability at a cost of only $300 million, or $5 million per ship — still only a fraction of the estimated $65 billion that it would cost our government to replicate this capability. 8 Cargo preference volumes have declined precipitously in just the past few years. However, reductions in the size of the armed forces and continued closure of overseas bases all play a role in this downturn. The Maritime Administration calculated that government-impelled cargo fell from a high of 5.6 million tons in 1991 to 2.2 million tons in 2014, with the majority of the decline from DOD cargo. Military cargo is estimated to reach a nadir of 1 million tons per year in 2016. 9

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