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Journal of Commerce
After The Storm
BY PETER T. LEACH
31 January 2005
After years of rate-cutting that produced combined losses of as much as $100 million a year, carriers operating between the U.S. mainland and Puerto Rico are basking in the light at the end of the long tunnel. Though cargo volume remains flat, capacity has tightened and rates are rising.
All four carriers in the trade still appear to have excess capacity when averaged over the full year. But southbound utilization rates topped 80 percent during the peak spring and fall months. Southbound capacity tightened last fall after four hurricanes curtailed shipping between Florida and Puerto Rico and disrupted trucking on the U.S. end of the service. Even during the traditionally slack winter months, capacity remains tight because at least two container ships are in dry dock.
The four lines on the mainland-Puerto Rican trades are Horizon Lines and Sea Star Line, which operate self-propelled container ships, and tug-and-barge operators Crowley Liner Services and Trailer Bridge. They are the survivors of overcapacity and rate wars that existed for years before the bankruptcy liquidation of Navieras-NPR in 2002.
When Navieras went under, capacity in the trade was cut by 25 percent, but rates stayed depressed because shippers enjoyed low rates under existing Navieras contracts that were picked up by Sea Star. Once the contracts ran out, Sea Star and the other three lines were able to renew them at higher rates, which all the lines are now enjoying.
All four carriers appear to be profitable now, although rising costs of fuel and intermodal transport have eaten up some of the increases in freight rates. But the returns are positive enough that Sea Star and Horizon are contemplating the possibility of building new vessels, which average 30 years old and are nearing the end of their use-ful lives.
"The rates are still not back to the point where the trade can justify reinvestment, but we're involved in a long-term planning exercise, and we're looking at building two or three new vessels by 2010, and they take a long time to build," said Frank Peake, who was promoted to president of Sea Star last November. Under the Jones Act, which restricts domestic services from non-U.S. competition, the new vessels would have to be built in U.S. shipyards, whose costs are well above world levels.
Peake estimated that freight rates rose by about 10 percent in 2004, enabling Sea Star to generate a return of 9 to 10 percent on invested capital after tax.
Sea Star invested $20 million in its ships and terminal in Puerto Rico in 2004 and plans to spend another $20 million this year. The spending includes $12 million to $13 million on "life extension" for the two ships it operates in the trade, Peake said. Sea Star operates four roll-on, roll-off container ships, but two of these are under charter to the Defense Department for operations in Iraq. Peake said one of them may be returned by the end of the year.
Partly because of the military charters, Sea Star's capacity is so tight on routes from Jacksonville, Fla., to San Juan that it is buying space from Horizon to handle its cargo overflow. "We buy up to 400 FEUs per week from Horizon, and we split the rest of our needs with Trailer Bridge and Crowley," Peake said.
Sea Star also is upgrading its 40-year-old San Juan terminal with new paving, new security fences and new staging areas. It's spending $6 million on technology upgrades and more than $15 million on containers and trailers, including 100 new 45-foot reefers and 100 new 53-foot trailers and chassis.
Horizon's rates are up an average of 5 to 6 percent, said Gabriel Serra, vice president and general manager of the line's Puerto Rico division. Hori-zon has not pushed rate increases as aggressively as some competitors, and has increased its southbound market share to 30 percent from 28 percent in 2003. Southbound volume to Puerto Rico exceeds northbound cargo by a 4-to-1 margin. "The rate recovery has continued, and we feel more comfortable with the net port-to-port rate," Serra said.
Horizon's results have been hurt by rising inland-transportation costs, he said. "The increase in inland costs hit us pretty hard last year, especially because of port- and truck-capacity issues," he said. "Our inland costs have gone up disproportionately." Serra said more than half of the contracts for Horizon's Puerto Rican service include inland pickup or delivery. "We're trying to make sure we recover those costs, and that's part of the rate increases we're getting," he said. He called it "a tough year" because the four hurricanes disrupted the inland leg. "We did OK on the service end, but we had to spend a lot of money."
Like Sea Star, Horizon would like to build new vessels for the trade. "We're still going through a plan that makes financial sense, but the problem is that the cost and availability of ships right now is a stretch for the returns you can get," Serra said. "It's still in the plan to find a financial model that makes sense, but we have not found it, so there are no ships on order." The line is making other investments in the trade. It has taken over 74 acres of terminal space that was once used by Navieras and is investing more than $5 million to refurbish it. It is also investing $2 million to refurbish the Hawaii, a 26-year-old ship now in dry dock.
Crowley, the highest-volume carrier in the trade, has chartered a lift-on, lift-off barge from Trailer Bridge to test its ability to use that method of transporting automobiles from Jacksonville. If the test works, Crowley plans to operate the barge from its Pennsauken, N.J., terminal, across the Delaware River from Philadelphia, where capacity is tight.
John Douglass, Crowley's senior vice president for Puerto Rico and Caribbean services, said that although capacity from Crowley's services from Florida ports is still tight during the peak season, overall there is excess capacity throughout the year.
Crowley's rates, including inland transport and fuel surcharges, increased 7.6 percent overall last year and 8.8 percent from the North Atlantic. Crowley's volume was flat in both directions through October of last year. Douglass said he thinks rates will continue to increase in 2005, though not at the pace of the last two years. What will force rate increases are the increases in inland trucking costs. "It's difficult for the carriers to control that expense," Douglass said. "It's important for the carriers to pass that on to shippers."
Crowley has no immediate plans to add capacity, except for the barge it will charter from Trailer Bridge. Crowley is planning its next generation of barges to replace its 10 triple-deck ro-ro barges. The oldest two barges are coming up on their 40-year projected life cycle by 2010. "We're talking to shipyards about the cost of construction," Douglass said.
The new barges will be faster and able to handle more automobiles, a market where Crowley sees the biggest demand. The carrier's car shipments were up 7 percent in 2004, with some of the biggest increases coming from Japanese cars produced in the U.S. and shipped to Puerto Rico rather than being shipped directly from Japan.
Trailer Bridge, which returned to profitability last year, is bullish on the long-term growth of the trade as rates improve. "We're seeing meaningful increases," said John McCown, the company's chairman and chief executive. But its rates are still 25 percent below levels of 10 years ago. McCown said Trailer Bridge's volume is rising almost 2 percent a year.
Trailer Bridge, which operates four tug-and-barge sailings a week out of Jacksonville, is benefiting from two trends, McCown said. First, more cargo is moving to Puerto Rico in 53-foot trailers, which Trailer Bridge pioneered in the trade. And second, tug-and-barge services are handling a larger share of cargo. "Ten years ago, only 30 percent of the cargo moved on tug-barge, while 53 to 54 percent moves that way today." McCown said Trailer Bridge is not planning any new vessels. Its seven ro-ro barges average only 8 years old and should last another 20 to 30 years.