What does Horizon Line’s demise mean?
by Michael Hansen, President Hawaii Shippers Council
The news today of the sale of Horizon Lines was not unexpected, Horizon has been operating in an insolvent condition and incurring operating losses for the past three years or so. It was really only a matter of time before this kind of action would have to be taken.
Horizon’s primary problem was operating very old containerships in the noncontiguous trades of Alaska, Hawaii and Puerto Rico. With the cost of U.S. newbuildings now five times that of constructing comparable ships in South Korea and Japan, Horizon could not afford to build new Jones Act ships to continue as an operating company. The loss of Horizon will reduce the level of competition in the noncontiguous container trades and clearly demonstrates the disproportionate burden of the domestic build requirement of the Jones Act on the noncontiguous jurisdictions.
Although at first glance the sale of Horizon Lines assets may not seem to be a significant loss of competition, I see the loss of what was once the major player in the noncontiguous container trades -- i.e., Horizon Lines -- causing an erosion of competition at the margins through further industry consolidation and making the trades even less contestable (i.e., subject to competition).
In a civil suit brought in the Puerto Rico trade by a group of major shippers against the domestic common carriers, the plaintiffs refer in their complaint to the "Alaska Model" whereby the goal of the Jones Act container industry was seeking a duopoly in each of the trades. This would give the remaining incumbent carriers the ability to effectively manage the trades to their benefit.
In lieu of the Horizon purchase, Pasha would not have become a major player in the Hawaii container trade with the pending deployment of its new Ro/Con ship the Marjorie C. The new Pasha Ro/Con will have limited container capacity, would have offered fortnightly service, and was projected to use ships gear to discharge and load containers in Hawaii, which would result in expensive cargo handling as compared to shore gantry cranes used by the other carriers. With the acquisition of Horizon's Hawaii trade assets, Pasha will have its own container terminal at Pier 51A Honolulu Harbor which should allow Pasha to integrate the operation of their new Ro/Con with the former Horizon assets making it far more efficient.
Despite the limited capacity of its single Ro/Ro vehicle carrier “Jean Anne”, Pasha’s carriage of motor vehicles over the past five years has brought new competition to the Hawaii trade that affected both Matson Inc. and Horizon Lines.
Although Horizon’s complete withdrawal from the Puerto Rico trade will reduce the number of common carriers from five to four, this too will likely result in significantly less competition in that trade. The pending introduction of expensive new TOTE/Sea Star Line and Crowley Corporation containerships in the Puerto Rico trade over the next three years or so will make it very difficult for the third carrier Trailer Bridge – a barge service -- to compete. The trade to Puerto Rico is just too far from the U.S. mainland for tugs and barges -- that’s why Crowley is switching from barges to ships with its newbuildings. Withdrawal of Trailer Bridge would establish the "Alaska Model" in the Puerto Rico trade too.
The new TOTE and Crowley containerships will be extraordinarily expensive and shippers will have to cover those capital costs. The loss of competition will facilitate the carrier's recovery of those capital costs through higher freight rates on the Puerto Rico trade lane.
Matson got the best route and equipment from Horizon. The Alaska trade ships are Horizon’s newest and are said to be in good condition and the trade lane profitable. Presumably as a result of the announcement, Matson (MATX) is trading up in afterhours trading this Sunday.
I am a little surprised that TOTE didn’t seek to purchase Horizon’s Hawaii trade assets. TOTE has a container terminal on the USWC at Seattle (to serve its Alaska trade), an inter Hawaiian island freight service – Young Bros. Ltd. -- which has been handling Horizon neighbor island relays for many years, and Horizon’s Hawaii trade would have given TOTE a presence in three of the four noncontiguous trades (except Guam).
Pasha is a strong company both financially and operationally especially in respect of their core business of operating Ro/Ro vehicle terminals. In addition, Pasha has experience operating Pure Car and Truck Carriers (PCTC), but not containerships and a full container service. Furthermore, Pasha is having problems with their new Ro/Con ship Marjorie C recently launched by VT Halter Marine Inc. Pascagoula Shipyard but not yet delivered to Pasha presumably due to technical problems which have not been resolved.
It will be interesting to see how Pasha does with Horizon’s Hawaii service?
If Pasha remains in the Hawaii container trade, they will need to replace the four ageing containerships built 1979/1980 Horizon is operating in the Hawaii trade. This will cost a lot of money (total around $800 million), which will ultimately have to come from freight money. Providing all other things go well, with Pasha and Matson operating a duopoly in the Hawaii trade they should be able to manage the trade to pay off capital expenditures for new construction.
Background: Horizon Sells Hawaii Operations to Pasha Lines, Alaska to Matson