BY MICHAEL HANSEN – 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.
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 and westbound traffic, with the westbound at approximately 50 percent of the eastbound traffic volume. 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 Guam, and provide highly competitive, low-cost ocean-freight services.
Over the past two decades, the perception that Hawaii and Guam could take advantage of the mainline trans-Pacific carriers has inspired several pieces of legislation introduced in Congress.
In addition, the business community on Guam launched a major effort in the mid-1990s to gain a full exemption from the Jones Act, similar to those enjoyed by the Commonwealth of the Northern Mariana Islands, American Samoa and the U.S. Virgin Islands.
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.
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 Guam, calling at those ports would not be economical for the carriers even if their ships could be accommodated. Additionally, the deviation required to call at Honolulu and Guam would detrimentally lengthen the carrier’s transit times and disrupt their sailing schedules.
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, 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.
These very large containerships, also called mega-ships, make economic sense on this trade lane because the routes are so long 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, which will lead to larger ships on the Asia-Americas Atlantic Coast and Europe-New Zealand/Australia trades.
Two announcements, made during March 2012, characterize what is developing in the trans-Pacific trades. Mediterranean Shipping Company announced it 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.
The foregoing shouldn’t be interpreted to mean that given the necessary Jones Act exemptions, there wouldn’t 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 wouldn’t be possible to induce the mainline trans-Pacific carriers to call at Honolulu and Guam with the large containerships they are operating in the trade.
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 Guam en route to Asian ports and would require a cabotage exemption for both Hawaii and Guam; the other would call just at Guam westbound, as did the recently terminated Horizon service, requiring only a cabotage exemption for Guam.
In either case, the carrier would employ feedermax containerships (2,000 t0 3,000 TEU capacity) and rely on higher freight rates to the islands in order to support the service. 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 that 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 isn’t very useful at this time. It’s 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.
Another alternative scenario would be to contemplate a change in the Jones Act to exempt 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.
Michael Hansen is President of the Hawaii Shippers Council