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Considering a Maritime Pilot’s defense of Young Bros and the Jones Act

UPDATE: HawaiiShippersCouncil-135 Final Paper

by Michael Hansen, Hawaii Shippers Council, July 2, 2020

The Honolulu Star Advertiser published on June 15, 2020, an op-ed column, “Give Young Brothers a chance to put its proposals to the test,” submitted by Captain Edward (“Ed”) Enos, a Hawaii maritime pilot.

As has been well-publicized locally, Young Brothers LLC (YB) is facing an existential financial crisis that could result in a cessation of its operations and leave the State without a surface common carrier of goods between the islands by year’s end.

The YB financial crisis has created a major Hawaii State public policy issue as to whether or not government should support the company and how that financial support might be arranged.

Enos defends the management of YB, supports a government-bailout of YB, and, among other things, disputes the notion that the Jones Act imposes any particular costs on YB’s operation.

In doing so, he makes a series of statements, which are broadly representative of the State’s domestic maritime industry, and offer the opportunity to consider the germane issues

Background

YB is the sole interisland ocean common carrier of goods operating under the Hawaii Water Carriers Act of 1974 (HWCA) and regulated by the Hawaii State Public Utilities Commission (HPUC), which has issued YB a Certificate of Public Convenience and Necessity (CPCN) allowing it to operate as a “natural monopoly.”

YB operates eight non-self-propelled oceangoing cargo barges towed by five oceangoing tugboats from its hub port of Honolulu Harbor to six Neighbor Island out-ports in a radial route structure.

At issue in the current YB financial crisis are four key points: (i) should the State Legislature provide the short-term emergency funding of $25 million requested by YB to support their operations through the end of year 2020; (ii) should the HPUC approve YB's application for a long-term freight rate increase to generate $27 million in additional revenue per annum over the next several years to ensure YB’s continuing operation; (iii) can the current YB management actually control costs and operate an efficient and effective service without ongoing State financial support; and, (iv) under what conditions might State financial support or subsidy be provided to YB in the short, medium and long terms.

On September 25, 2019, YB filed a rate case with the HPUC requesting an overall freight rate increase of 34% to generate an additional $27 million in annual revenue “to continue statewide service.” The rate case remains under review by the HPUC, a ruling is not expected until near the end of year 2020, and any approved increase would likely become effective in early 2021.

In a May 26, 2020, press release, YB stated, “[our] parent company covered over $21 million in losses from 2018 and 2019,” and additionally “[YB] reported losing nearly $8 million through April [2020] and projects mounting losses totaling approximately $25 million by the end of the year” exacerbated by a “30% drop in cargo volumes due to the COVID-19 pandemic.”

In the same press release, YB clearly states the “company [i.e., YB] will no longer receive cash infusions from its parent company as of June 1, 2020” and ergo YB is independently “seeking $25 million in CARES Act funding from the state legislature to sustain operations through December 2020.” Essentially, YB gave notice to the State that without a bailout it’s cash position would become critical after July 2020 and it could possibly become insolvent before year’s end.

Although two measures were under consideration during June 2020 by the Hawaii State Legislature to address YB’s situation, they have stalled or been deferred with the Regular 2020 Session set to adjourn on July 10. At this point in time, it can clearly be said that the Legislature isn’t moving towards resolution of a short-term emergency funding or a longer-term subsidy mechanism for YB. Perhaps the Legislature will address these issues in special session later this year.

Enos refers, as many do, to YB’s history as “a 100-plus-year-old local company,” which is a reference to its establishment in 1900. That’s somewhat misleading as most people today think of YB is an interisland common carrier, which it didn’t become until nearly half-a-century later.

YB inaugurated common carrier barge service 74-years ago after its acquisition by Oahu Railway and Land Co. Ltd. (ORAL), which later became Dillingham Corporation, displacing Interisland Steam Navigation Co., Ltd. in 1947.

Matson Navigation Company Inc. also operates an interisland cargo barge service based in Honolulu Harbor operating to the four main Neighbor Island out-ports (but not the two small islands of Molokai and Lanai).

Matson’s interisland barge service is regulatorily-prohibited from carrying local cargoes (it hasn’t been granted a CPCN by the HPUC under the HWCA). The Matson barge service carries only interstate cargo (from/to its mainline containerships at Honolulu Harbor) on through Bills of Lading (Bs\L) and these movements and rates are regulated by the federal Surface Transportation Board (STB).

YB also carries interstate cargo stemmed by Pasha Hawaii Transport Line LLC and Matson moving under STB regulation and international cargo supplied by the Japanese-owned Ocean Network Express Ltd. (ONE Line) under the U.S. Federal Maritime Commission (FMC) regulation between Honolulu and Neighbor Islands out-ports.

These interstate and international cargoes are transported by YB under contract carriage arrangements with the interstate and international carriers and outside the regulatory purview of the HPUC.

Jones Act

Addressing the Jones Act issue, Enos states, “The wages of longshoremen (anywhere) will never be changed by getting rid of the Jones Act. This is often misunderstood and repeated with any article about Hawaii’s maritime industry.”

Enos is correct (though his “anywhere” reference is overbroad). This is a common misunderstanding in Hawaii and elsewhere in the U.S. The Jones Act does not regulate stevedoring activities also known as longshoring.

Enos further states, “Information provided by YB show operational costs associated with cargo handling are nearly double the voyage costs related to actual tug/barge operation.”

This is a well-known, common-sense principle in ocean shipping: for shortsea liner services such as YB (their longest passage between Honolulu and Hilo is 200 nautical miles), cargo handling costs (i.e., for terminal handling, loading and discharging) are greater than the vessel operating costs (i.e., time on the vessels, bunker fuel, port charges, etc.); while, for deepsea liner shipping, involving long passages of thousands of miles, the vessel operating costs are greater than for cargo handling.

Following from his observation that YB’s shortsea service incurs greater cargo handling than vessel operating costs, Enos rationalizes that given the existence of organized shoreside stevedore labor that isn’t regulated by the Jones Act, there’s nothing that can be done about YB’s cargo handling costs and by extension their overall service costs by reforming or eliminating the Jones Act or even by any other means.

This is simply not true and something of a red herring.

Small Island Service

Enos raises the issue of providing Honolulu-based interisland shipping service to the small islands of Molokai and Lanai, which has long been financially marginal due to low cargo volumes and regulatory insistence on a relatively high level of service frequency.

He notes, “Who would want to provide service to Molokai and Lanai? Cargo throughput is so low and freight rates are kept low (by the current regulatory scheme imposed by the PUC) so as to be reasonably affordable by those island residents. Even if it means YB operating at a loss.”

This concern is particularly important because Matson’s interisland feeder barge service doesn’t call on these two islands, and a cessation of YB service would leave these islands in Maui County without common carrier surface transportation.

Traditionally, the YB service to Molokai and Lanai has been subsidized by income generated serving the four major out-ports on the larger Neighbor Islands where cargo volumes are significantly greater and historically these routes were profitable. This sort of arrangement with a regulated common carrier is known as a “cross subsidy” and part of the carrier’s obligation under a CPCN authorizing it to operate as a monopoly.

Although this is an issue of real concern, the deficits incurred by YB serving Molokai and Lanai are not a major source of their overall losses. Sorting out YB’s other problems would largely resolve this issue and allow the cross-subsidy to continue without being an undue burden on the carrier.

Hawaii Superferry

The now defunct Hawaii Superferry is regularly raised as a lost opportunity for the State to support an alternative to YB, which would also have provided surface common carrier transportation between the islands. Enos is a supporter of fast ferry operations, such as was the Hawaii Superferry, and asserts that its failure was the sole result of legal and regulatory action taken by the State. However, that’s not the whole story.

The Hawaii Superferry vessel experienced operating problems including hull damage attempting to maintain its interisland schedule in heavy weather and the service operated at a financial loss. In other words, a fast ferry operation doesn’t appear to be well-suited to inter-Hawaiian-Island service.

However, Enos is correct that an interisland ferry isn't a solution to the immediate crisis. Developing a new interisland ferry program with a more suitable vessel type would face many obstacles and be highly unlikely to provide a timely solution in the short or medium term to interisland surface transportation in the event YB were to abruptly cease service.

Freight Rate Increases

This is a major point of contention between YB and the HPUC. Historically, the HPUC has been reluctant to approve general rate increases (GRI)s as proposed by YB in their rate case applications. Typically, the HPUC has either denied a requested increase or approved a significantly smaller increase than requested by YB.

The HPUC perceives the underlying problem as YB management’s inability to control costs and operate an effective service. In contrast, YB contends the factors driving their cost increases are largely beyond their control and include industry-wide collective bargaining agreements, the high cost of operating a business in Hawaii, and the costs to acquire needed new vessels, containers and cargo handling equipment. They remain at loggerheads over these issues.

YB believes a substantial increase of their freight rates is essential to their recovery plan. However, if approved, one of its likely effects would be a further decrease in demand for local carriage.

Less than Container Load (LCL) Cargo

Another issue widely mentioned with regards to the YB policy issue is the carriage of less than container load (LCL) cargo, which is more time consuming and expensive for a carrier to handle than Full Container Load (FCL) cargo.

The YB common carrier operation began in 1946 as a “pallet carrier” service. That is, YB’s original cargo handling mode was to accept cargo secured on a pallet which permitted mechanical handling using forklift trucks (FLT)s. This included using FLTs to load and discharge palletized cargo using ramps between the pier and barge.

For many years, YB operated specialist cargo barges purpose-designed-and-built to carry pallet load cargo, which accommodated the many small shipments from Honolulu wholesalers to the small business on the Neighbor Islands. And, regular shipments of produce from the small farmers on the Neighbor Islands to wholesalers in Honolulu. This cargo handling mode expedited the receipt and delivery of shipments on what is essentially an overnight service to the merchant’s benefit.

Over time, YB became primarily a container cargo operation, largely in response to many Neighbor Island customers increasing business scale requiring larger FCL shipments and to reduce cargo handling costs. This conversion to what is virtually a fully containerized operation required the LCL cargo carried by YB to be containerized.

One of YB management’s restructuring proposals is to no longer accept LCL cargo and only accept FCL cargo to reduce their operating costs. This is particularly problematic for the small islands of Molokai and Lanai where the shipments are still largely pallet load cargo.

This approach would disproportionally disadvantage the State’s small business and farmers and likely further reduce YB’s cargo volume.

YB Management Track Record

Enos states, “Given the time critical nature of their situation, it would be best to let YB President Mr. Jay Ana recommend all that they can do ASAP to lower operating costs, cut losses, and make changes to their overall operation so they can operate as efficiently as is possible. “

However attractive and expedient this approach may seem, it unfortunately ignores the track record of YB’s management over the past three decades.

Saltchuk has owned YB for 21 years having purchased it from Hawaiian Electric Industries Inc. (HEI) in 1999. After owning YB for 13 years, HEI reported a loss of U.S. $2 million on the sale to Saltchuk indicating YB’s profitability was a problem even then.

After sharply declining profits in 2016 and 2017, YB incurred significantly large losses in 2018 and 2019. In order for such large losses to occur so quickly, the underlying problems had to be systemic and developing overtime

It’s not as if Saltchuk is without ocean common carrier experience. Saltchuk operates two deepsea Jones Act liner containership operations under the TOTE brand in the Puerto Rico and Alaska trades. However, deepsea containership experience may not translate well to YB’s shortsea barge service.

Outlook

Enos concludes saying, “I can’t fathom what other company could show up tomorrow, set up a scheduled interisland cargo service, offer lower freight rates, and do as good a job, or better.” That is likely a true statement, especially in the short to medium term.

A possible alternative, as a stopgap measure in the event YB were to shutdown precipitously, would be to ask Matson to use their existing interisland barge service to cover the local cargo requirements.

The outlook for the recovery of the Hawaii State economy from the COVID-19 lockdown and quarantine, in particular for the key tourism sector, is major issue complicating the YB situation as continuing lower cargo volumes especially over the next several years would negatively impact YB’s reorganization strategy.

Collectively these issues do create a public policy conundrum, which doesn’t appear to have a clear and ready solution.