TOTE pulls plug on Hawaii service; what will Hawaii DOT, Philly Shipyard, Pasha and Matson do next?

by Michael Hansen, Hawaii Shippers Council, January 31, 2018

After the close of business on Friday, January 26, 2018, Eastern Standard Time (EST), Saltchuk Resources Inc. / TOTE Inc. d.b.a. TOTE Maritime (TOTE) and Philly Shipyard Inc. (PSI) issued complementary press releases (here and here) announcing that TOTE’s Letter of Intent (LOI) with Philly Shipyard, which expired on January 31, 2018, would not be renewed.

The non-binding LOI if implemented would have committed TOTE to purchasing four (4) newbuild containerships, with a nominal capacity of 3,600 TEU (twenty-foot equivalent units) each, to be constructed and delivered by PSI in the 2020 and 2021 timeframe for employment by TOTE in the U.S. West Coast (USWC)-Hawaii trade. This announcement appears to give the two incumbent ocean common carriers in the trade, Matson Navigation Company Inc. (Matson) and Pasha Hawaii Transport Lines LLC (Pasha), a welcome reprieve from potentially devastating competition.

This development, although not completely unexpected, means that the current carriers will in all probability avoid a “pricing war” and possible bankruptcy of one carrier, which Matson’s management opined would result from three major carriers operating in the trade.  However, there are several open questions about what the players may do as a result of the TOTE decision.

Reviewing how matters arrived at this point, it all began with PSI’s press release of June 8, 2017, first announcing their intention to build four containerships for the Hawaii trade. Subsequently, in a pair of contemporaneous releases issued on August 8, 2017, PSI and TOTE identified TOTE as the intended buyer of the four ships and operator of the new entrant service in the domestic Hawaii trade.

Both companies year 2017 press releases stressed their proposed newbuild ship delivery schedule would address the need to replace the several elderly steamships employed in the Hawaii trade that could no longer be operated after new emissions regulations come in to effect in 2020. There were (and still are) twelve (12) steam-powered Jones Act containerships deployed the domestic Hawaii trade; Matson with eight, and Pasha four. The proposed PSI newbuilds would have supplied the necessary capacity to replace all the steamships when combined with Matson’s four newbuilds that were either under construction or on order at the time.

The PSI newbuilds would meet the revised Annex VI, International Convention for the Prevention of Pollution Ships (MARPOL), deadlines. That is compliance with the reduced global sulfur cap of 0.5% effective January 1, 2020, and Tier III NOx (nitrogen oxide) standards in the North American Emissions Control Area (NA ECA) for ships constructed (or reengineered) after January 1, 2016.

The NA ECA extends out 200 nautical miles (nm) from the USWC and the eight main Hawaiian Islands; essentially encompassing the Exclusive Economic Zone (EEZ). This requires ships operating on USWC-Hawaii routings to be NOx compliant for approximately 20% of their passages. These are sometimes referred to as the MARPOL/ECA requirements or compliance.

It was clear from the year 2017 PSI and TOTE press releases that their intention was to displace Pasha targeting their reliance on elderly steam-powered containership fleet and tentative future terminal assignment in Honolulu.

In their press release of August 8th TOTE stated,  “New environmental regulations taking effect in 2020 necessitate replacement of aged ships currently operating in the trade. As planned, the new vessels from Philly Shipyard will enter service in early 2020 and 2021, just in time to meet the deadline and maintain trade capacity.” This was clearly a reference to Pasha’s complete reliance on their fleet of four 38-year-old steam-powered containerships acquired in 2015 with the purchase of Horizon Lines Inc.’s Hawaii service. At the time, Pasha’s ship renewal plans were unclear, while Matson had already committed to four newbuilds.

TOTE stated further on August 8th, “This week began conversations to secure the new deep water Kapalama Container Terminal (KCT) in Honolulu for TOTE, a critical step in making the new service a reality.”  Although Pasha was widely-assumed to be the designated tenant of the State’s long-planned new container terminal in Honolulu Harbor, a $448 million project that broke ground on January 16, 2018, TOTE sought to leapfrog Pasha and secure KCT for themselves. Apparently, at the time, there was not a firm agreement between the State and Pasha regarding KCT, and the TOTE proposal caught both parties off guard.

TOTE sought to achieve several ends by securing KCT for themselves to: (1) operate their proposed new entrant service in a brand new, modern container terminal facilitating efficient cargo handling; (2) bottle-up Pasha by forcing them to continue less efficient operations at two separate and aging terminals at Pier 51A Sand Island and at Piers 1 & 2 (also known as Diamond Head Terminal) in Honolulu Harbor; (3) stymie Matson’s plans to expand and modernize their Honolulu Terminal on Sand Island to include the adjacent Pier 51A area that was to be vacated by Pasha; and, (4) gain the synergy of being located adjacent to Piers 39/40 where their sister-company Young Brothers Limited (YB), the sole interisland common carrier by water, operates their hub terminal and would provide for the convenient and economical transshipment of TOTE’s mainland container cargo bound for the Neighbor Islands (NI).

It can be assumed that Matson marshaled their considerable influence in Hawaii to oppose TOTE’s proposal both in terms of avoiding limits to their Honolulu Terminal expansion on Sand Island and entry of a stronger competitor in their home Hawaii trade, in which they carry an overwhelming 70 to 80% of the cargo volume.

Matson’s efforts to avoid a strong competitor was evident when continuing losses forced Horizon Lines to windup as an operating company and sell their assets and operations. Matson purchased the whole company on May 31, 2015, primarily to acquire Horizon’s Alaska service. For anti-trust reasons, Matson needed to off-load Horizon’s Hawaii service to another Jones Act operator. Matson selected Pasha rather than the other two much stronger and experienced Jones Act common carrier containership operators, TOTE and Crowley Maritime Corporation.

TOTE’s proposal also ran afoul of the Matson-dominated Hawaii Harbor Users Group (H-HUG), which was the driving force behind creation of the Harbors Modernization Plan (HMP) first authorized by the Hawaii State Legislature in 2008 and included KCT as its keystone project.  The HMP assumed that Horizon and its predecessor and successor companies would relocate to KCT placing them adjacent to YB for relay of their NI container cargo without the over the road trucking currently required from their Pier 51A location.

The stalemate over assignment of KCT was resolved on September 21, 2017, when Hawaii Governor David Y Ige (D) announced the Hawaii State Department of Transportation (HDOT) had formally awarded tenancy of KCT to Pasha and allocated the Diamond Head Terminal at Piers 1 & 2 in Honolulu Harbor to TOTE.

This Hawaii State decision meant that TOTE would not have access to a deep water container terminal in Honolulu Harbor for several years, well after the planned delivery of the PSI-built ships. TOTE would have had to await the completion of KCT (now forecasted for some time in 2022), Pasha outfitting KCT and relocating from their current operating locations at Pier 51A on Sand Island and Piers 1 & 2, and  State improvements to Piers 1 & 2 container terminal.

TOTE’s announcement of January 26th stating their “plans to enter the Hawaii to mainland service are on hold” and “not renew the letter of intent (LOI) with Philly Shipyard” were based upon a “technical review of Piers 1 and 2 in Honolulu Harbor . . . . . which indicated that upgrades and improvements will be required to accommodate the new operations” and concludes the decision is “due to the scope and timing of the upgrades and improvements.” 

Certainly, substantial improvements would be required for TOTE to efficiently use the Diamond Head Terminal at Pier 1 and 2. These improvements would have to be funded by both the State and TOTE and include reconstruction of the pier fronts and aprons to accommodate the instillation of new container gantry cranes (a specialized shore crane for loading and discharging containers), possibly some dredging, and full reconditioning of the container yard surface. It’s not clear just how the costs of these improvements to the facility might have been shared between the State and TOTE. In addition, TOTE would have to acquire and install at least two new gantry container cranes and other operating equipment.

However, the cost of upgrading Diamond Head Terminal was not the whole story behind TOTE’s decision. At the time, I wrote about the State’s decision, “This may mean the Pier 1 & 2 terminal won’t be available to TOTE until the 2024 / 2025 time frame – possibly eight years from the present. Presumably, this will give TOTE ample time to consider their next step in regards to launching a new entrant service between the U.S. West Coast (USWC) and Hawaii.”

It was clear after Governor Ige’s announcement of September 21, 2017, that PSI and TOTE’s aggressive attempt to leapfrog Pasha didn’t work and the option of Piers 1 & 2 wasn’t compatible with PSI’s proposed delivery schedule for four newbuild containerships. Paying to lay-up four extraordinarily expensive newbuild Jones Act containerships for up to five years each (providing the State’s time table holds) would have been a very costly undertaking. And, presumably, if the State facility projects fall behind schedule, the time frames for service inauguration could become extended.

The TOTE decision leaves several unanswered questions amongst the various players.

HDOT HARBORS DIVISION

What HDOT will do with Piers 1 and 2 Honolulu Harbor in the wake of the TOTE announcement? That question will not become ripe for approximately the next approximately five years as the current Pasha operations will continue there until they can be relocated to KCT. These Pasha terminal operations at Piers 1 & 2 include Pasha’s California/Hawaii Roll-on/Roll-off (Ro/Ro) auto services, Nippon Yusen Kabushiki Kaisha / NYK Line Asia/Hawaii container service and Hapag Lloyd consortium Australia-New Zealand/Hawaii container service.  Hawaii News Now reported on the KGMB TV evening news, January 29, 2018, that HDOT stated the Harbors Division would focus on the KCT project and had no alternative future plans for Piers 1 & 2. 

Longer term, there is the possibility that TOTE may revive their interest in a Jones Act mainland-Hawaii service, or some other carrier, either domestic or foreign (i.e., non-Jones Act), might propose to operate a service using Diamond Head Terminal as their Hawaii base. The main impediment to recruiting a tenant for Diamond Head Terminal will be the facility improvements, installation of container gantry cranes and the costs of operating a standalone terminal.  It’s also unknown what will be HDOT’s propensity to effect upgrades in the absence of a firm tenant, possibly further delaying the active use of the facility after Pasha relocates to KCT.

PHILLY SHIPYARD

A key player in all of this is PSI.  It is necessary to parse their press release of January 26th to gain an appreciation of their plans going forward.

PSI wrote, “The LOI . . . . .  contemplates the construction and sale of up to four . . . . . vessels, with planned deliveries for the first pair (Hulls 031-032) in 2020 and the second pair (Hulls 033-034) in 2021.” With respect to the second two containerships, PSI stated, “. . . . the project to build Hulls 031-034 as containerships is being put on hold.  PSI is suspending substantially all construction-related activities on these vessels, including design, planning and procurement work.” Continuing, PSI said, “. . . . .  PSI has placed orders for all major long-lead items for the first pair.  If these orders were to be cancelled, then the cancellation costs would be substantially lower than the value of the orders placed.” Concluding, “PSI is exploring alternatives in order to secure contracts and financing for these vessels.” 

Collectively these rather indirect statements would appear to mean that PSI will continue with construction of the first two containerships on speculation, and stop all work on the second pair. This is not the first time PSI would have built two containerships for the Hawaii trade on speculation.

In 2005, PSI, then known as Kvaerner Philadelphia Shipyard Inc. (KPSI), created OceanBlue Express Inc. ostensibly to operate two containerships, which were under construction at the shipyard, in the Hawaii trade. Ultimately, Matson did enter into an agreements with yard on February 14 and 18, 2005, respectively for the two containerships, which became the MANULANI (built 2005) and MAUNALEI (built 2006).

Uniquely, PSI could finance the two containerships through their sister company American Shipping Company (ASC) as the original owner and bareboat them to an operator such as Matson or Pasha.  PSI has done this with 10 medium range 46,000 MT deadweight Jones Act Veteran Class product tankers they built at their Philadelphia yard between 2005 and 2011 and placed them under long term bareboat charter to Overseas Shipholding Group Inc. (OSG). PSI has suggested their proposed containerships for the Hawaii market could be handled through ASC.

At the present time, PSI’s Jones Act order book is getting very thin and they seriously need new orders, a situation which could lead them to build on speculation. They delivered the last of a series of eight 50,000 metric tonne (MT) product tankers (hulls 021-028) on November 20, 2017, leaving only two 3,600 TEU Aloha Class containerships for Matson under construction in the yard with delivery in fourth quarters of 2018 and 2019 respectively.  Both Jones Act markets for product tankers and containerships are now fairly well built-out after a decade long building spree leaving few new orders for Jones Act ships.

PASHA HAWAII

Pasha issued on August 23, 2017, a press release announcing they signed contracts with Keppel AmFELS, LLC for the construction of two 2,525 TEU Jones Act containerships at their Brownville, Texas, shipbuilding yard.  At the time, this order was seen as necessary first step for Pasha to remain a player in the domestic Hawaii trade and direct response to TOTE’s announcement a week earlier.

However, there have been several reports since that Pasha has not been able to secure financing for the two containerships from Keppel, leading some to suspect the order Pasha announced in August 2017 may have been subject to financing.

An alternative for Pasha would be to accept two containerships from PSI on long term bareboat charter (lease) from their sister company, American Shipping Company (ASC).

Although, ideally Pasha would need four newbuild containerships to maintain their current schedule, it appears they have an alternative for the third and fourth vessels. Pasha has taken measures to refit two of their existing steam-powered C8 class 2,300 TEU containerships – the HORIZON PACIFIC (built 1979) and HORIZON ENTERPRISE (built 1980) -- in China.

Pasha received a foreign rebuild determination letter from the U.S. Coast Guard (USCG) dated May 25, 2017, stating the proposed hull and superstructure work would be within allowed parameters. In addition, it’s expected that Pasha would re-engine those ships with diesels, as Horizon Lines Inc. once proposed, allowing the ships to meet the requirements of the MARPOL emissions regulations coming into effect on January 1, 2020.

MATSON NAVIGATION

Matson has already benefited with the substantial rise in their common stock (NYSE: MATX) price on Monday, January 29th, the first full day of trading following the TOTE announcement, from an opening at $34.14 trading to a high of $40.32 and closing at $37.68 up $6.47 per share or an increase of 20.81% on the day.

An open question is whether or not Matson might eventually accept the two PSI containerships being built on speculation as they did in 2005? The new and lager containerships could replace two of the older ships Matson currently operates.

Matson will be reporting quarterly results towards the latter part of February 2018 and their earnings call will follow shortly thereafter. It will be interesting to learn Matson’s observations on the TOTE / PSI announcement and the other outstanding issues as presumably they will perceive the need to address them and the financial analysts on the call are likely to ask about it.

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Links:

• Press Release, TOTE Update on Hawai’i Plans, Saltchuk Resources Inc., January 26, 2018
• Press release, Philly Shipyard places TOTE containership project on hold and considers alternative projects, Philly Shipyard ASA, January 26, 2018 17:56 ET 
• Press Release, State breaks ground for new Kapalama Container Terminal, Hawaii State Department of Transportation, January 17, 2018
• Press Release, Governor Ige announces milestone in harbor modernization (HDOT makes new terminal allocations, selects contractor for Kapalama Container Terminal Project), Office of the Governor, September 21, 2017
• Press release, TOTE Announces Plans to Establish New U.S. Mainland to Hawai’i Shipping Service, Saltchuk Resources Inc., August 17, 2017
• Press Release, Philly Shipyard announces TOTE Maritime as its partner under the previously disclosed Letter of Intent to build up to four new containerships, Philly Shipyard Inc., August 17, 2017
• Press Release, Philly Shipyard Signs Letter of Intent with a Leading Jones Act Operator to Build Up to Four New Containerships for the Hawaii Trade, Philly Shipyard Inc., July 21, 2017
• TOTE’s Plan for New Hawaii Shipping Service Put on Indefinite Hold; Construction Suspended on Four Newbuilds at Philly Shipyard, Mike Schuler, GCaptain, January 26, 2018
• TOTE halts plans for Hawaii expansion, new ships, Joseph Bonney, Senior Editor, Journal of Commerce, January 26, 2018 7:01 EST
• New Hawaii shipping service is a no-go, Andrew Gomes, Honolulu Star Advertiser, January 27, 2018 12:24 a.m. HST
• TOTE cancels plan to launch U.S. mainland-Hawaii service, Mark Edward Nero, American Shipper Magazine, Monday, January 29, 2018
• Matson: This Company Is Poised To Shoot Higher, James Sands, Seeking Alpha, Jan. 29, 2018 4:49 AM ET
• Matson, Pasha avoid ‘pricing war’ after TOTE halts plans for Hawaii-Mainland route, Anna Hrushka, Pacific Business News, Jan 29, 2018, 2:19pm HST
• HSC-940: Estimated sequence of events; Reshuffling of container terminal assignments among ocean carriers at Honolulu Harbor, Michael Hansen, Hawaii Shippers’ Council, September 25, 2017
• HSC-939: Current operations in Honolulu Harbor projected to be relocated to Kapalama Container Terminal (KCT) in 2022, Michael Hansen, Hawaii Shippers’ Council, September 25, 2017

Related:

• TOTE to challenge Pasha for Hawaii Trade? By Michael Hansen Hawai’i Free Press September 27, 2017
• Problems ahead for Pasha Hawaii and TOTE despite Gov Ige’s terminal announcement By Michael Hansen Hawai’i Free Press September 26, 2017
• Ige assigns dock space to Pasha, TOTE By Michael Hansen Hawai’i Free Press September 22, 2017
• Saltchuk puts Matson’s terminal expansion at risk? By Michael Hansen Hawai’i Free Press August 26, 2017
• Pasha signs contract to build two containerships; what now? By Michael Hansen Hawai’i Free Press August 25, 2017
• Mystery ship operator identified for Philly Shipyard’s newbuild containerships By Michael Hansen Hawai’i Free Press August 17, 2017
• Pasha to buy four mystery ships? By Michael Hansen Hawai’i Free Press June 21, 2017
• A third marine carrier in Hawaii  ThinkTech Hawaii video interview of Michael Hansen June 13, 2017
• Ships under construction for new cargo liner service for the Hawaii trade? Hawai’i Free Press June 9, 2017