 I'll be back. We're live. I'm Jay Fidel here on TinkTech. And it's Monday morning. And, of course, community matters at 12 noon. So the question before the house is, is the Philly Shipyard announcement likely to become true? And we heard an announcement from the Philly Shipyard recently. And there's more to these announcements than meet the eye. If you want to ask a question or make a comment in the conversation, you can tweet us at TinkTech HDI or call us at 415-871-2474. So our guest for the show is our old friend Mike Hanson of the Hawaii Shippers Council. So on Thursday, I think, the Philly Shipyard announced that it would construct four new container vessels to service the U.S. mainland Hawaii route, which is currently only serviced by Pasha Hawaii and Matson, both based in Honolulu. Mike will discuss what this means, whether it's likely to happen, and how it fits in the Hawaii Marine landscape. Welcome to the show, Mike. Nice to have you here. I'm glad to be here and see you again, Jay. So let's start with the beginning. We can't go all the way back. For now, though, just for the framework of this discussion, there was an announcement on Thursday. What was the announcement and by whom? Yeah, Philly Shipyard, one of the seven major shipbuilding yards in the United States, announced that they would be building, or at least beginning to organize themselves to build four brand-new container ships for the Hawaii trade on speculation. And coming in here, building four ships on spec, coming in here, getting whatever necessary permits there are, and being one of now three carriers in these islands. Philly Shipyards didn't indicate that they would be operating the service. What Philly Shipyards did say is that they were in the process of discussing this with a Jones Act operator who would enter the trade. What is the Jones Act operator? Jones Act operator is one that is 75% citizen-owned, which is a requirement of the Jones Act, and has U.S.-built Jones Act-eligible ships that they operate. And these ships that Philly Shipyard kind of plates would be Jones Act ships? Yeah, Philly Shipyards is located in Philadelphia, in the old Philadelphia naval yard. And they are a domestic shipbuilder, though they are fully, 100% owned, a wholly owned subsidiary of a Norwegian company whose stock is traded on the awful stock exchange. It's very interesting that somehow that qualifies, even though it's owned by Von. It's because it's in the United States. Okay, see how really silly that is, the Jones Act requirement of being in the United States, when in fact it's owned by interest outside of the United States. Well, in addition to that, the design of the ships is being done by a Korean shipyard, Daewoo, and the main engines will be coming from Daewoo in South Korea. And most of the equipment will be coming from specialist manufacturers in Europe. And most of the steel plate will come from China. It'll just be assembled in Philly Shipyard. In fact, the Coast Guard uses the word assembled in their determinations of whether or not a vessel was built in the United States. Well, this sounds pretty silly. So when they say that they're going to use a Jones Act operator, they don't necessarily mean Matson or Pasha. No, they excluded both Matson and someone else. Right. And there's really only four Jones Act operators who operate what's known as a liner service. That's a common carrier ocean shipping service. And there's enormous amounts of software that go into this. I mean, everything for taking the cargo, receiving it, and having the proper containers and documentation services. It's a big setup. It's a big setup. And this is not something that's done by someone who's running a little tug and barge. What kind of permits do you have to get to set up four new ships running the U.S. mainlander Hawaii trade? There's actually no regulatory requirement in terms of getting approval to enter the trade. You would have to file with the surface transportation board your tariffs. And the biggest hurdle they have to overcome, a third new entrant to the ocean container shipping market would be a terminal in Honolulu Harbor, none of which exists at the present time. So it's not just building the ships and bringing them out here for the trade and filing a tariff. I guess it's a tariff approved or just filed. So you just file it for public disclosure of what your charge is going to be. And that's a federal filing. That's with the surface transportation board. That's a federal agency. So it's more than all of that though. You have to actually have a terminal. Why do you have to have a terminal? Because you've got to put the cargo ashore. If you've got all the nice little shiny ships and get the cargo ashore, you haven't accomplished the task. Well, can't you rent a terminal somewhere? We don't have the terminal space. We don't have container terminal space in Honolulu Harbor to accommodate a new entrant carrier. Who's responsible for making sure that we have enough terminal space to accommodate any ships that come here? The state harbor's division, which is a division of the State Department of Transportation. Is it implied in this that perhaps they should be building more terminals? They are building a new terminal at Kapalama Basin called the Kapalama Container Terminal. That's not done yet. They just started work and that will not be completed for approximately five years. Five years to build a terminal? Wow, that seems very slow. It's a lot of work. So was there a time factor in the announcement made by Philly Shipyard? They say they're going to do this now or later? Yes, they're going to be able to deliver these four new ships all prior to 2011. I mean, 2021. Well, that's five years from now or almost five years. So presumably, I suppose, the terminal that they're building at Kapalama would be ready by then. Well, the terminal at Kapalama has been fairly well designated for Pasha. And Pasha as the successor company to Horizon Lines, as the successor company to CSX Lines, as the successor company to C-Land. That's how long that terminal has been in planning process. Oh, my God. So, you know, what strikes me, and I was going to mention this to you, Department of Transportation and Harbor Division is one of the most powerful agencies in the state. It's long been the case. Because we're a water-bound state, we rely on this and power comes from having an exclusive position. Yeah, but the Department of Transportation also has the airports. And it has the highways. So, yes, it's enormously powerful. And you can see the problems that the airlines are having at the airport with the recent proposal to create a port commission for just the Hawaii state airports. Yeah, that's another show or show. I mean, I would like to talk about that. It's a huge mess. So, what I'm getting at, though, is that if the Department of Transportation, which is ultimately a political animal, didn't want Philly shipyards or its operator to come here, they could stop them, couldn't they? Yes, and really, there's... Once the Kapalama container terminal is completed, then Pasha has to install the container cranes and the other equipment to operate the terminal. Yeah. And then shift their operations there. Basically, from Pier 51 Alpha, which is over on Sand Island, that space is going to go to Madsen, according to the Harbor Plan, which would leave Pier 1 open for a new entrance carrier. For the Philly ships? Yes. Is that big enough? Absolutely big enough. It's marginal, but it would probably be big enough for their operation as it's being contemplated. The problem there is that the container cranes, there's none there. They have to be installed. That's a big job. Yeah. Then the gantry tracks are no longer suitable for container cranes. So, all that has to be rebuilt. That is a significant expense. Sure. Many millions are expense. Yes. And so, you know, we're talking, this is something that's quite far off in the future if it will ever be done. Well, as the Department of Transportation said anything, you know, welcome Philly. We're looking forward. We're going to make room for you. From the media people that I've spoken to who have spoken to Harbor's Division, Harbor's Division said that there is no agreement in place for the Philly shipyard to build a proposed operation. That sounds pretty unrealistic to build four ships on spec. That's hundreds of millions anyway. Yeah, we're talking somewhere a little north of $200 million a piece. And those would be American hulls would be more expensive than ships built outside of the United States. Right. You could build the same ship in South Korea, for example, for $50 million. The reason that we're facing this situation is that Pasha is having from what I understand, from what I've heard from various parties is having a difficult time arranging the financing to build the four ships that they want in the Texas yard of Keppel. I see. So they got another issue out there with the competitive Philly shipyard. And what the Philly shipyard is doing is they're trying to get the jump on that knowing that Pasha can't complete the deal. And then Philly shipyard is offering to build these four ships threatening to come into the trade. But at the same token, Philly shipyard is also saying that we will arrange financing through what's known as a bare boat company. You know, it's a financial arrangement where the owners of the ship will pay for it and then lease it to Pasha. As a bare boat charter. As a bare boat charter. Yeah. Or a demise charter. So it's less for lawyers like Pasha. It all sounds pretty specky, though. Frequently, I think the newspapers that take press releases, this was in Star Advertiser and it was in PBN, I thought. It was on the press releases and you really wonder if there's any real action going on. In both the How to Loose Star Advertiser article, they spent, oh, maybe a third of the article discussing what I had to say in quoting me. So they did state the other side of the coin. Good. And the Pacific Business News ran their first article based just what was in the press release and sounded like we were going to have a new shipping line immediately. And the second, next day, Friday, I think it was Friday, they ran my side of the story. So that side did get out. From what I understand, Philly Shipyard is planning to come to Hawaii and hold some kind of a press event. Wow, so they are going to follow through at least on the media. That's what they said. They've hired a local PR representative, Shane Peters, who is of the Peters family, Holy Code Drake and Henry Peters. And he was the communications director for Neil Abercrombie in his 2014 race for re-elections. So there'll be more on that. But what we haven't really discussed is your response. And I think we need to do that. But we take a break first. We come back, Mike. We're going to take a break. Mike Hanson, the Hawaii Shippers Council. And we're talking about this announcement by Philly Shipyard that we're going to bring four new ships out here from the mainland. We'll be right back. We all play a role in keeping our community safe. Every day, we move in and out of each other's busy lives. It's easy to take for granted all the little moments that make up our every day. Some are good, others not so much. But that's life. It's when something doesn't seem quite right that it's time to pay attention. Because only you know what's not supposed to be in your every day. So protect your every day. If you see something suspicious, say something to local authorities. So Mike, you're really an expert in this kind of thing about shipping between here and the mainland and the whole arrangement with Matson and Pasha and all that. And I wonder if you could tell us what your response was, the response you made when the newspaper called you about this announcement by Philly Shipyard. Yes. Basically, it was an interesting development, but not unprecedented. The previous owners of Philly Shipyard, a company called Kevin Covernor, also Norwegian, back in 2004, in 2005, had built a series of ships for Matson. And they were having some difficulty with Matson accepting the last two ships in the series. And as a result of this breakdown and their negotiations with Matson, the then owners of Philly Shipyard formed a company called Ocean Blue Express. And they hired, they recently retired then, president of Matson, C. Bradley Mulholland, who many people here will still remember, to be the head of that company, based in San Rafael, California. And they threatened— They were originally here, but they moved to San Rafael, right? Who's they? Matson. Oh, no, Matson did go to San— they were in Oakland for a long time. They moved to San Francisco, actually, and then Oakland and San Rafael. Okay. A lot of the shipping businesses moved to San Rafael, just because it's a cheaper place to operate and it's easier to get around. But Ocean Blue Express then threatened to come in and operate in competition with Matson. And at the time, Pier 1 was open. So that's where they were proposing to operate. Where's Pier 1 now? Pier 1 is near the entrance to Honolulu Harbor. Do you know where the foreign trade zone is located? Okay, foreign trade zone is at Pier 2. That's a great location, isn't it? It's a big—that was a Matson's— during the 50s and 60s and into the 70s, that was the Matson terminal. Yeah. So that whole area was developed for Matson's— Before they moved to Sand Island. Exactly. Yeah. And so that's—it's a good terminal. But there's no container cranes there any longer. And the tracks for the container cranes are no longer workable. So that, on the apron, would all have to be rebuilt. This is the one you were talking about before. That's a big expense. Yeah. Anyway, so Ocean Blue Express threatened in late 2004 come into competition with Matson. And by the end of February 2005, Matson had signed contracts with then operators of Philly Shipyard to purchase the two ships. And those two ships are now operating in Matson's fleet. And this is very reminiscent of that power move on the part of Philly Shipyard. If I can get this straight. So Shipyard comes in and says, we want to sell you some ships. And we're just going to build them on spec. We're going to deliver them out today. Maybe one of your competitors. And then, you know, if you want to buy them, you can buy them. And then you wind up buying them because you don't want your competitor to come in and use the very same ships. And this happened in 2005 with Ocean Blue Express. And it looks like—at least to you, it looks like it's happening again now, in this Philly Shipyard announcement. Yeah, there isn't the terminal space in Honolulu Harbor. And you're looking at unlimited market. I mean, Matson said to have maybe 70% of the container market and Pasha maybe 30%, something along those lines. So what have we got here? What is the landscape? I mean, are they in high competition, Matson and Pasha? Pasha's big problem is that they've got— well, they've got six ships, two ships that are of recent build that they built themselves. One is a pure car carrier, meaning it just takes automobiles and small trucks. We have that much automobile and small truck traffic that's several ships involved. Yes. Because it's interesting. And it's one way. No, no, it's two ways. Oh, we take them off the island also? This is the way that the rental car agencies work. Ah, they bring them in and take them back. They move the cars around depending upon market conditions. Ah, okay. So there's a two-way traffic. Interesting about how important cars are to Hawaii, both in the ordinary consumer driving and also in tourism business. But anyway, okay, so— So Pasha's got a pure car carrier. They also have one what's known as a Conroe. The lower part of the ship is a garage. They call it a garage ship, some people. And the weather deck and above is for containers. So container and row, row. Conroe. Conroe is two years old. The pure car and truck carriers built in 2005, I think it is. So she's about 12 years old now. So Conroe is the more advanced technology for shipping? Yeah, it fits in certain circumstances. For example, Matt's building has placed an order for two Conros with the General Dynamics Nazco shipyard in San Diego for their California-Hawaii trade, because they are carrying many vehicles as well. So, you know, the old saw is that we pay an enormous amount of money. We pay more for consumer goods here than are shipped in, than anywhere in the mainland really, because we have to bear the cost of all the shipment. Is it as efficient as it should be between Matt's and Pasha to give us decent prices? Or is this a kind of held hostage arrangement where those two carriers are just raising the prices on us and making every last quart of milk more expensive? Yeah, the Jones Act and the requirement to use U.S.-built ships or U.S.-built vessels does add significantly to the cost. If you look at the federal statistics, Hawaii's somewhere around 7.5%, 17.5% higher cost than the mainland. You mean for shipping? No, for goods. Okay, across everything that comes in. And if we look at that, you know, perhaps 2%, 3% of that is attributable to the Jones Act. Okay. And there's different parts to the Jones Act. You know, you've got the requirement for a vessel to be built in the United States to carry cargo between two domestic points. The ship has to be registered to the United States, meaning U.S. flag. You have to have a U.S. crew and U.S. ownership. The most expensive part of the requirements is the bill requirements. Typically now it's costing to build a self-propelled seagoing ship in the United States is costing five times what it costs in South Korea, for example. And this is why there is such—this is why Pasha, for example, is having such a difficult time renewing the four old container ships that they acquired in the purchase of Horizon Lines Hawaii service. Those ships are approaching 40 years of age. That's old. Very old. Should be retired by then? Scrapped, yes. The average age of a container ship in international trade is 12 years. And there's been recent reports of container ships being scrapped at seven and eight years of age. So this is way beyond what anyone else in the world is ever dreaming of. And there aren't that many ships manufactured in the United States, are there? I mean, we are not—it's not really a good market, I guess, for American ships. We built about two and a half self-propelled seagoing ships per year. In the country. Merchantships, yeah. That's peanuts. Of course. The oceans are filled with ships that are built somewhere else. Yeah, there's approximately 40—these are ships over 1,000 gross tons. Yeah. Worldwide, there's something on the order of 40,000 such ships. And between the Japan, South Korea and China, which build 95% of these kinds of ships in the world, they produce almost very close to 1,000 ships a year. Why is it so expensive to build a ship in the United States? Because we are so inefficient. We don't have the volume to bring the cost down. We've essentially lost the market. We've let it go. The market is somewhere else. Foreign countries, foreign businesses that don't have to comport with the Jones Act would never buy an American ship, am I right? Yes, we're not competitive. Yeah. The U.S. has not been competitive in shipbuilding since the Civil War. That's really true. Prior to the Civil War, when ships were wood and propulsion was by sail, the United States, beginning in colonial times, was the most efficient, low-cost builder of ocean-going ships. And this is what led to the dominance of the clipper ships. So what does it mean efficient? Is it design? Is it engineering? Is it labor? What is it? Yard organization. All the merchant ships that are being built in the United States today are being built under license to foreign shipyards. So we're importing the design. We import the design, most of the steel. We import the main engines and most of the equipment. But it's really a way to get around the Jones Act. So try to modify the effect of the Jones Act. But all that considered, you know, when we sort of take everything you and I have been talking about, how does this move, whether Philly Shipyard either comes here as it has announced, which seems doubtful, or sell ships to someone else, a bare boat charter? I'm fairly certain that Philly Shipyard's target is Pasha. Yeah. I mean, there's no doubt. If you read their press release, the Philly Shipyard press release, it's all about Pasha. They want to sell ships to Pasha. Pasha's got a gun at their head. The four old container ships they acquired from Horizon Lines will be regulated out of service on January 1st, 2020. They're steam ships, and they no longer meet the emissions requirements. Ah. And it appears that Pasha has not been able to finalize the shipbuilding deal with Keppo in Texas. Okay. So this is a way to force Pasha to buy the Philly ships that are back, quote, on spec. Now, you know, there's various possibilities that could unfold over the next few years about this, but it sounds like there will be a change, that the economics of the situation require a change from Pasha's point of view, I guess. And the question I put to you, Mike, is, how is this going to affect us? What are the differential effects we might suffer? Are we going to be paying more to ship goods in? Are we going to have fewer carriers, more carriers? Is it good to have fewer or more? In my opinion, you'll have the same carriers. Not going to change. Right. This is just a Fandango that's happening now. It's a ploy. A ploy. A red herring. A red herring. Okay. So the question is, is this red herring going to raise that 17%? Is this red herring going to cost us more as consumers? Well, Pasha, these new ships will be far more efficient than the old ships that are operating today. But the capital cost of these ships is going to be much greater. So they'll have to be much larger contribution? Sure. They've got to return income, get a return on their investment. They have to repay, through a bareboat charter payment, you know, the cost of the construction of the ships. Yeah. So Philly Shipyard makes out in any event. Well, Philly Shipyard sells it to a third company who in turn finances the business. It's a finance thing. Of course. And they in turn bareboat it to Pasha. Now Pasha is going to end up paying probably a lot more for these Philly ships than they would have paid for the capital ships had they been able to finance the capital ships. But they're intimidated by this move, so they'll probably go along and buy the ships. From the scuttle butt that I hear, Pasha couldn't close the deal with Keppel. Hasn't been able to at this point. At least not yet, anyway. So it's really not clear what's going to happen. But I wonder, you know— This will probably—I would imagine this will probably kill the Keppel deal. And so Pasha is going to be looking at— Because of the pressure from Philly Shipyards. Sure. And they've got a deadline to meet? Yeah. Or— Because of the environmental deadline. Yeah. So the question, you know, is—I think one thing that strikes me—and let's close on this—is that none of this is subject to the regulation of the Public Utilities Commission. They may regulate inter-island trade, but not trade between here and the mainland. Not to trade these ships around there. This is interstate trade. Yeah. And so they don't have any jurisdiction on that. That's correct. So there's nothing— The U.S. Constitution, which you well aware of, has an interstate commerce clause. Right. And so there you have it. Absolutely. And so there's really nothing we can do. Am I right? To regulate what's happening, to participate in this decision process. No. This is all between these big carriers and shipbuilders. And until 1995, the Public Utilities Commission—I shouldn't say that—the public advocate—consumer advocate—had intervened in the rape cases in the federal system. With the Federal Maritime Commission. But then they stopped. Yes. And so there was a change in the regulatory venue. There was the 1995 Interstate Commerce Commission Termination Act. And that shifted the regulation of what was known as the non-contiguous traits. So a different venue, and thus it made it more difficult for the consumer advocate and state agencies— The consumer advocate basically said, for what I understand, too much work. Well, yeah, we're not going to— So it happens the way it happens, Mike. And maybe we should check back with you and see the way it goes over the next few months and years. Sure. Thank you very much for coming down. I really appreciate it. And Mike Hansen, the Hawaii Shippers Council, keeping us current on things on the waterfront. Thank you, Mike.