Trans-Pacific Carriers are Unlikely to Serve Hawaii and Guam

by Michael N. Hansen, President, Hawaii Shippers Council

The Holy Grail for many cargo interests shipping by ocean in the domestic Hawaii and Guam trades is an unrequited generational quest to find a way to take advantage of the existing mainline Trans-Pacific container carriers passing regularly Westbound by the islands bringing international competition and significantly lower freight rates from the U.S. mainland.

Trans-Pacific Trade

The cargo interests see that the prevailing Trans-Pacific ocean freight rates are generally much lower than comparable rates from the U.S. West Coast to Hawaii and Guam, and they wonder why should the rate to ship a container all the way across the Pacific either Westbound or Eastbound be so much lower than part-way across the ocean to the islands?

They also recognize over time there has been a significant and persistent imbalance in the Trans-Pacific container trade between the Eastbound (Asia to the Americas) and Westbound (the Americas to Asia) traffic with the Westbound at approximately 50% of the Eastbound traffic volume. The dominate Eastbound Trans-Pacific traffic is known in the industry as a “headhaul” as opposed to the Westbound “backhaul.” The greater Eastbound traffic volume attracts higher freight rates that sustain the carriers financially, while Westbound rates are set much lower to draw cargo volume.

The lower prevailing Trans-Pacific freight rates coupled to the persistent trade imbalance have led many to conclude that if not for the Jones Act, it would be possible to induce one or more of the several Foreign-Flag Trans-Pacific containership operators to call Westbound at Honolulu and Hagatna (Guam’s main port) and provide highly competitive low cost ocean freight services. They believe the mainline international Trans-Pacific carriers would be very susceptible to this inducement. For the reason that these carriers would have the opportunity to derive incremental Westbound freight revenue on their half-empty lower-rated backhaul.

Jones Act

The Jones Act prohibits Foreign-Flag ships from carrying cargo between domestic places including Hawaii and Guam. As such, for Hawaii and Guam to take advantage of the traffic on the international trade lanes between the West Coast of North America and East Asia, there would have to be an exemption from the cabotage provisions of the Jones Act permitting Foreign-Flag ships to carry domestic cargo between the U.S. mainland, Hawaii and Guam.

Over the past two decades, this perception that Hawaii and Guam could take advantage of the mainline Trans-Pacific carriers has in large part inspired several pieces of legislation that were introduced into the U.S. Congress. Three bills were introduced in 1996 and 1997 based upon the legislative proposal initiated by Rob Quartel and his Jones Act Reform Coalition (JARC), which would have facilitated Foreign-Flag containership operators to call Westbound on an outwards foreign voyage at Honolulu and Hagatna on a “pass-by” basis. Subsequently, former Representative Ed Case (D-HI) introduced a bill in 2003 that would have exempted the just Hawaiian noncontiguous trade from the Jones Act.

In addition, the business community on Guam launched a major effort in the mid-1990’s to gain a full exemption from the Jones Act similar to those enjoyed by the Commonwealth of the Northern Mariana Islands, the Territory of American Samoa, and the Territory of the U.S. Virgin Islands.

Limitations in the Hawaii and Guam Trades

There are several limitations in the Hawaii and Guam trades that would make it very unlikely for the islands to be able take direct advantage of the existing Foreign-Flag containerships employed in the Trans-Pacific trades. Even if those jurisdictions were to be granted the necessary exemptions from the Jones Act to allow Foreign-Flag containerships to carry their domestic cargo from the U.S. West Coast

The primary reason for this is the very large size of the containerships operating in the Trans-Pacific trade today. Not only is the size of the containerships themselves beyond the physical capacity of the ports of Honolulu and Hagatna, calling at those ports would not be economical for the carriers even if their ships could be accommodated. The daily operating cost of these large containerships over the time required to divert and call in port and the port costs the ships would incur while in port are likely to be greater than the potential revenue that might be generated from cargo transacted at those ports. Additionally, the deviation required to call at Honolulu and Hagatna would detrimentally lengthen the carrier’s transit times and disrupt the integrity of their sailing schedules.

A rough guide to the size of containerships currently operating in the international trades is as follows:

Containership Class	Container Capacity (TEU)	Maximum Draft (ft)	Number of Rows
Small Feeder	Up to 1,000
Handy-Size / Feeder	1,000 – 2,000
Sub-Panamax / Feedermax	2,000 – 3,000
Panamax (until 2015)	3,000 – 5,000	43’	12 -13
Post Panamax / New Panamax (after 2015)	5,000 – 10,000		18
Super Post Panamax / New Post Panamax	12,000 – 13,000		22
Ultra Large Container Vessel (ULCV)	Greater than 14,000	50’	22 – 23
Maersk Line Triple E Containership	18,000		23

The container capacity refers to the total number of Twenty-foot Equivalent Units (TEU)’s that a containership can carry. Though, by far, the most prevalent container size carried today is the forty foot unit (referred to as an FEU). The number of rows refers to the number of containers that can be stowed longitudinally across the breadth of the containership. The number of container rows determines the size of the port container cranes required to work the ship.

The foregoing chart refers to the Panama Canal Expansion Project which is scheduled for completion in 2015. When the Project is completed the largest size of containership that can pass through the canal will increase from the current “Panamax” class up to 5,000 TEU to “Post Panamax” class up to 10,000 TEU.

The controlling draft in Hagatna Harbor is 36 feet and the container cranes have a maximum reach of 13 container rows limiting Guam’s ability to handle only containerships up to approximately 3,500 TEU. The controlling draft in Honolulu Harbor is 40 feet and the maximum draft alongside the container terminals at Piers 1 and 51 is 39 feet and at Piers 52 and 53 is 40 feet effectively limiting containerships to less than 4,000 TEU.

Matson Navigation Company & Horizon Lines

In 2006, Matson inaugurated a Trans-Pacific service with a string of five U.S.-Built U.S.-Flag feedermax containerships that relies on protected Jones Act and military preference cargo freight rates Westbound to Hawaii and Guam and the prevailing international freight rates Eastbound. Matson refers to this situation as a “double headhaul” and has labeled the service China Long Beach Express Service No.1 (CLX1). The port rotation on this loop is: Los Angeles, Honolulu, Hagatna (Guam), Xiamen (China), Ningbo (China), Shanghai (China), Los Angeles.

The five feedermax containerships Matson employs in their Transpacific service are as follows:

Matson Navigation Company Inc. Trans-Pacific Service Five Feedermax Containership String
Vessel Name	Year Built	TEU Capacity
R J PFEIFFER	1992	1970
MANULANI	2003	2600
MAUNAWILI	2004	2600
MANULANI	2005	2600
MAUNALEI	2006	2500

In contrast to Matson’s roughly 2500 TEU per ship Trans-Pacific service string, the international Trans-Pacific operators are currently operating Panamax (up to 5,000 TEU) while transitioning to Post Panamax (10,000 TEU) and Super Post Panamax (13,000 TEU) containerships.

In the past decade, both Matson and Horizon attempted to operate in the Transpacific with Foreign-Built feedermax containerships of between 2,500 nd 3,000 TEU, and were both forced to withdraw their respective services after incurring significant losses because they couldn’t compete with the larger ships in the trade.

In 2010 Matson inaugurated a true Trans-Pacific service known as China—Long Beach Express Service No. 2 (CLX2) employing a string of five feedermax Foreign-Flag containerships on time charter. This was an attempt to leverage off their existing CLX1Trans-Pacific service and seek synergy by integrating the two services. Matson terminated CLX2 with the arrival of the KAILUA at Shanghai during September 2011. For CLX2, Matson reported startup losses of $19.3 million in 2010, but included operating and shutdown losses in results for continuing operations in 2011. In 2011, Matson returned an operating profit $14.8 million less than 2010 suggesting overall losses attributable to CLX might be on the order of $34 million.

After withdrawing aging U.S.-Built U.S.-Flag containerships from their Trans-Pacific Service, in early 2007 Horizon inaugurated a Trans-Pacific service calling Westbound at Guam and then to China with five U.S.-Flag Foreign-Built 2824 TEU feedermax containerships code-named the Five Star Express (FSX). However, the service didn’t work and it was terminated in November 2011 incurring a restructuring charge of $110 million in the fourth quarter of 2011. The failure of the service was largely because the reorganized service was prevented from carrying domestic cargo to Hawaii because it employed Foreign-Built containerships.

Cascade Effect

There is said to be a “cascade effect” as very large containerships enter the world’s major trade lanes. The older and smaller containerships previously employed on those major lanes are displaced and deployed in other trades with less cargo volume; in turn the ships previously employed on the smaller trades displace even smaller ships in the minor trades.

The cascade effect begins with the largest container trade in the world which is the Asia-Europe trade lane via the Suez Canal. Over the past couple of years, the major operators on the Asia-Europe trade lane have been ordering very large capacity containerships – the most prominent of which is Maersk Lines currently building ten 18,000 TEU containerships.

These very large containerships – also called mega-ships – make economic sense on this trade lane because the routes are so long as compared to others around the world and the cargo volumes are so enormous. They are the most efficient way to service the Asia-Europe trade lane especially in respect of fuel consumption. There are extensive feeder service networks on both ends in Europe and Asia that provide the big ships with cargo and support the system.

As the mega ships are deployed in the Asia-Europe trade, the ships currently employed there are largely being deployed to the Trans-Pacific. Also adding to the increasing size of containerships in the Trans-Pacific is the Panama Canal Expansion Project. When Project is completed in 2015, it will lead to larger ships on the Asia-Americas Atlantic Coast and Europe-New Zealand / Australia trades, which are served through the Panama Canal. It is widely believed the Expansion Project is already adding impetus to the trend for larger ships operating in the Pacific and once completed will further reinforce that.

Two announcements, made during March 2012, characterize what is developing in the Trans-Pacific trades. Mediterranean Shipping Company (MSC) announced that they will soon be operating three Post Panamax containerships averaging 12,000 TEU in the Trans-Pacific. At the Trans-Pacific Maritime Conference held in Long Beach in early March, experts predicted the economies of scale will lead to many more “mega-ships” in Asia-Europe and Trans-Pacific trades. This will result in a consolidation in the industry significantly reducing the number of container carriers operating in world trades.

Operating Scenarios

The foregoing should not be interpreted to mean that given the necessary Jones Act exemptions there would not be the opportunity for Foreign Flag containerships to operate reliable and competitive services from the U.S. West Coast to Hawaii and Guam, but the analysis does indicate that it would not be possible to induce the mainline Transpacific carriers to call at Honolulu and Hagatna with the large containerships they are operating in the trade.

By the way of alternatives, it’s possible to contemplate two routes that Foreign-Flag containerships might use Westbound through the islands: one would follow the existing Matson outbound service from the U.S. West Coast and call at Honolulu and Hagatna en route to Asian ports and would require a cabotage exemption for both Hawaii and Guam; and, the other would call just at Hagatna Westbound as did the recently terminated Horizon service and requiring only a cabotage exemption for Guam.

In either case the carrier would employ feedermax containerships and rely on higher freight rates to the islands in order to support the service even though operating Foreign-Flag. The container service operators best positioned to operate these services would be those who already operate a mainline Trans-Pacific service and could integrate the Westbound island hopping service into their overall service. It is reasonable to imagine several existing mainline Trans-Pacific operators who would seriously consider entering this service.

The likelihood of Hawaii receiving a Jones Act exemption to allow Foreign-Flag containerships to carry domestic cargo from the U.S. West Coast is not great and contemplating scenarios based upon that assumption are not very useful at this time. It is more probable that Guam could receive the necessary Jones Act exemptions especially through their ongoing political status negotiations with the federal government or even by means of joining with Puerto Rico to achieve an exemption based upon their status as unincorporated territories of the United States.

Another alternative scenario would be to contemplate a change in the Jones Act to exempt the all noncontiguous domestic trades from the U.S.-Build requirement for self-propelled oceangoing ships. This would dramatically reduce the barriers to entry and produce more competition and lower freight rates in the Hawaii and Guam trades, and the legislative goal is not nearly as high as for a full exemption from the flag-cabotage restrictions of the Jones Act.