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Shake-up In Shipping

With Navieras out of the picture, how will Puerto Rico's four remaining local ocean carriers divvy up the market … and will they finally turn a profit?


July 18, 2002
Copyright © 2002 CARIBBEAN BUSINESS. All Rights Reserved.

Sailing out of the red: Local ocean-shipping lines hope a streamlined trade with less competition will help them return to profitability after years of multimillion-dollar losses

The long-expected shake-up of Puerto Rico’s shipping industry finally took place in April, when Sea Star Lines announced it would buy the assets of the Holt Group’s ocean carrier, Navieras, for an estimated $32 million. It hopes to divide Navieras’ 22% to 24% local market share with three other local carriers.

Puerto Rico’s shipping industry has long been recognized as one of the most overtonnaged, meaning it is substantially over capacity both northbound and southbound. Competition among carriers, who have enjoyed antitrust exemption since the Shipping Act of 1916, has forced ocean carriers’ rates down 4% to 5% annually since 1990.

Industry experts estimate that annual losses for Puerto Rico carriers ascend to $100 million because of what is considered a client-driven market. According to one industry source, the five local carriers may have made more than $700 million in gross revenue last year, but their expenses were $800 million.

Given that environment, it was only a matter of time before one or two maritime cargo companies were forced out of the market, an answer to the other carriers’ prayers.

This action may be a landmark event in Puerto Rico’s shipping industry–perhaps even topping 1995’s bargain sale of then government-owned Navieras to a group of investors headed by Ronald Katim, a former member of the company’s operating arm. After the government accumulated a 20-year loss of $350 million, the sale proceeded for $44 million cash and $25 million in notes.

In 1997 a Philadelphia-based private holding company called the Holt Group sailed into the picture. Holt Group was looking for an ocean carrier that would complement its stevedoring, marine terminal, trucking, and shipping-warehousing company holdings. With Navieras still a losing venture, the Holt Group bought the carrier in 1997 for $69 million in outstanding common stock, plus the repayment of $40 million of Navieras’ outstanding debts and $750,000 in redeemed preferred stock.

At the time, the Holt Group must have thought that the carrier’s then strong market share would help it withstand the company’s total debt, which grew from $97 million in 1997 to $318 million at the end of 1999.

Between 1952 and 1997, 19 maritime cargo companies entered the local market, but only four managed to survive–Sea Barge, CSX Lines, Trailer Bridge, and Crowley. By 2001, Sea Star had acquired Sea Barge and Navieras had reentered the market under the Holt Group to join Crowley, CSX Lines and Trailer Bridge. The carriers reportedly handled 9.6 million short tons (one short ton equals 2,000 pounds) of cargo during 2001, a 3% decrease compared with 9.9 million short tons of cargo transported a year earlier.

How will Navieras’ piece of the pie be distributed now?

A rookie comes from behind to win the race

In 1998 Hawaii’s Matson Navigation Co. and Alaska’s Totem Ocean Trailer Express joined a group of local investors to buy local carrier Sea-Barge, renaming it Sea Star Lines. By 2000, the company’s two self-propelled vessels with combined roll on-roll off, load on-load off, and containerized cargo services had captured 11% of the island’s market share.

On April 2 of this year, Sea Star President Mike Shea announced the company would make a bid to buy Navieras’ assets. The Holt Group was in a position of fiscal weakness at the time, having endured a hostile shareholder dispute over the company’s management since March 2001 as it filed for Chapter 11 bankruptcy protection.

Holt’s most marketable asset was Navieras, but it took a year for the company to agree to sell. Industry sources claim that despite the company’s problems, Navieras’ market share fell only one point year-to-year to 26% in 2001. Navieras’ sale concluded on April 26, 2002 with an uncontested bid by Sea Star in the Delaware courtroom where the bankruptcy case had been filed.

While the terms of the sale are not public, Sea Star now owns Navieras’ four vessels (the Humacao, Mayaguez, Guayama, and Simon J.) and all its containers, chassis, and equipment, including four gantry cranes. The sale also includes the company’s trade names, the transfer of part of Navieras’ terminal and its lease with the Ports Authority, and the assets of Holt Group subsidiary San Juan International Terminal Inc.

Sea Star President Mike Shea initially said the company would continue operating Navieras’ sea routes under the Sea Star/Navieras name. But in May the company retired three of Navieras’ four vessels from operation and entered into an agreement with CSX Lines, the domestic shipping arm of North Carolina-based CSX Corp., to charter space and co-share the use of the remaining ship.

"A ship will always be available for use by either Sea Star or CSX Lines; the intention is that during any dry-dock period, or during any period of time when additional capacity is required, that this spare ship could be deployed with a maximum of seven days’ notice," stated Shea in a recent letter to its customers. "This enhancement to our service reliability is one of the positive results of our purchase of the assets of Navieras."

In February of this year, Sea Star announced it had completed the purchase of two vessels from Matson and was considering leasing or purchasing two additional vessels from Totem, one by the end of 2002 and the other in 2003. With new Vice President and General Manager John Emery on board, the news fits in with plans to expand its services between Puerto Rico and the U.S. mainland by next year.

How do the carriers divvy up Navieras’ market share?

So the deal is good and done. But what about market share?

According to industry sources, Sea Star’s share of Navieras’ market will be about 5%.

"Sea Star claimed they would be able to transition most of Navieras’ market to their company, but I don’t think that will be possible," an industry source told CARIBBEAN BUSINESS. "It is very difficult for a company that size to suddenly absorb so much in so short a time. Now they have labor problems; its operation systems are not in place; and even the company’s staff may not be prepared to handle this."

A look from San Juan’s Kennedy Avenue at Sea Star’s new terminal, which encompasses Navieras’ former 118 acres, gives you a full view of containers stacked five deep and chassis rolled atop each other. Customers were finding it difficult to claim their containers at the terminal, prompting the letter from the company.

"At the beginning, they honestly thought they could deal with all five vessels [two of their own and the three belonging to Navieras]. But after three or four weeks they must have realized they just were not equipped to deal with such a rapid expansion. This may have caused them to lose potential Navieras clients and perhaps some of their own until they get their business together," said the industry source.

So who gets the big piece of the pie?

CSX Lines President Chuck Raymond stated in April that the company was considering bidding for Navieras, but the company later decided against it. Surprisingly, it is CSX Lines that may end up with the largest share of Navieras’ market–substantially more than 10%, according to Gabriel Serra, CSX Lines division vice president and general manager.

"Navieras’ former clients have favored us a lot, probably because our companies’ operational schemes and itineraries were similar," said Serra. "Over the past year, our services have also improved, particularly in the Internet tools that are now available to our clients and in the terminal’s automation."

CSX Lines has gone through its share of problems. After the sale of the company’s international liner business to A.P. Moller-Maersk Line in 1999, industry analysts repeatedly suggested that its domestic liner business would be next. In 2000, the company had operating losses of $41 million, but by changing deployments, thereby cutting operational costs, that figure was reduced to $27 million last year.

The carrier must be feeling pretty confident these days. Right after the sale of Navieras to Sea Star was approved, CSX Lines announced it would increase overall rates by 10%.

"The company has invested more than $1 million in the automation of all CSX Lines’ terminals, with an additional $1.5 million in chassis and equipment," said Serra. "In April, we also leased 200 more reefer [refrigerated] containers. With our five vessels, we expect a substantial increase compared with last year’s market share."

Is Crowley still king?

The Journal of Commerce’s April 8 edition states that if roll on-roll off and oversized cargo were included, Crowley would be the dominant carrier in Puerto Rico, with about a third of the market. While the industry estimates the company’s market share at 28%, the figure is probably closer to 30%.

"We expect an immediate 5% market-share gain as a result of Navieras’ acquisition, particularly from clients in the U.S. northeast market that were previously served by Navieras and Trailer Bridge [Trailer Bridge suspended its northeast service in January]. By the end of the second quarter this year, Crowley’s market share should be 35% or 36%," said Roberto Lugo, Crowley Lines Service’s Puerto Rico vice president and general manager.

Since 2000 Crowley has been preparing to survive the competition by creating a leaner, more effective operation that would have fewer operational costs. Proof of this strategy is seen in the company’s move of its administrative and marketing divisions to the Isla Grande terminal.

"Our efforts are geared to satisfying our customers’ needs. We have the largest and most varied equipment base in Puerto Rico, with more than 4,000 different kinds of containers and trailers in inventory. And Crowley employees know that the success of our operation is unloading a container to achieve a quick turnaround time back to the U.S. mainland," said Lugo.

Crowley is the oldest carrier in Puerto Rico, with continuous operations since 1974. The company operates from an 85-acre terminal at Isla Grande airport, where it stores its different-size containers and other types of equipment in military-style lines. The company’s entirely ro-ro operation makes it an efficient container-movement operation for its nine barges and tugboats, reaching 175 moves per hour during peak times.

Trailer Bridge’s market gain gives the company a much-needed boost

Because it is a publicly held company, Trailer Bridge’s operational woes have been trumpeted for the past two years as each of its quarterly financial reports showed increasing losses. Shipping industry members say that of all the carriers, perhaps Crowley made a slight profit last year. The rest of carriers, however, are probably navigating in some red waters.

Trailer Bridge probably has some of the most unique and state-of-the art operations, due to the genius of founder Malcom McLean, who passed away last year. Operating revenue decreased 15% in the first quarter (1Q) 2002, from $20.6 million in 1Q 2001 to $17.5 million. And the company continues to incur losses, though it has narrowed the gap considerably from $4.5 million in 1Q 2001 to $519,025 this quarter.

"With the physical removal six weeks ago of a large portion of the excess capacity in the Puerto Rico lane, more sustainable conditions are returning, and will continue to return, to the sector," said John McCown, Trailer Bridge chairman & CEO. "The effect of the hyper competitive, nonsustainable conditions these past couple of years have been extraordinarily adverse to all of the carriers."

As part of its efforts to improve operational results, the company discontinued its U.S. northeast service in January, decreasing in turn its total volume of freight to and from Puerto Rico by 17.6% compared with the previous year. Trailer Bridge is now concentrating its marketing efforts on its Jacksonville, Fla., terminal.

"[The discontinuance of direct northeast service at the end of last year] was the primary driver of the significant improvement in our actual first-quarter results," said McCown. "We are seeing continuing benefits from that and from other actions. In addition, we are starting to benefit from greater asset utilization from the recent capacity rationalization, and we expect that trend will continue for both the other carriers and us."

McCown did not venture to guess what share of Navieras’ market the company might absorb, but industry sources estimate the figure at 4%. Given Trailer Bridge’s efforts to revitalize its bottom line, Navieras’ disappearance just may be what gives it a second wind.

This Caribbean Business article appears courtesy of Casiano Communications.
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