 Think Tech Hawaii. Civil engagement lives here. Welcome to Making Leadership Work. I'm Tim Appachella filling in for Jay Fidel. Today's episode is titled See Changes at Matson. Matson is the major cargo shipping company here in Hawaii and also provides numerous other ocean services of which we're going to talk about in today's show. You know, Matson is such a big part of Hawaii's history and it's really what keeps the state thriving. But we don't always hear about the new changes that's taking place with Matson. So with us today is Michael Hansen, president of Pacific Maritime Transportation Corporation and Hawaii's Shippers Council to let us know exactly what Matson's up to and what kind of changes are going on. Michael, thank you so much for joining us and I really appreciate it. Thank you for having me, Tim. I'm looking forward to our discussion. Yeah, me too. Say, you were born and raised here in Hawaii. That's correct. So tell me a little bit about your background and a little bit about the basically the cargo shipping business here in Hawaii. Yeah, I was born, like I said, born and raised here in Hawaii and went to work at young brothers in the early 70s and have been involved one way or another in the maritime business ever since. So I do have some history there. Today's topic is like we discussed, like you introduced, was it's going to be about Matson. Matson is Hawaii's major shipping company, ocean shipping company. It provides it carries somewhere between 70 and 80% of the container cargo that arrives here in Hawaii, which is a very significant amount. Their major competitor is Pasha Hawaii Transport Line, which was formerly Horizon Lines. That change took place in 2015. Matson operates a number of several services off the West Coast to Hawaii. They're currently deploying 10 container ships in that service, and they're providing three and a half calls per week at Honolulu Harbor, which is a very high frequency. In addition to that, Matson operates an inter-island service with container barges and one row, row barge, where they take the cargo off of the mainline ships arriving from the mainland and then tranship or relay that cargo to neighbor island ports. And their barges call it. They don't do this at a harbor. They do this in mid ocean. Negative. The mainline ships come to Honolulu Harbor. Matson has a major terminal on Sand Island. They call it their Honolulu container terminal. The mainline ships discharge all of their cargo or all their cargo bound for Hawaii. And then whatever is supposed to go to the neighbor islands then is reloaded onto their three inter-island barges. And those barges operate to Nauwiliwili on Kauai, Kahalui on Maui, Kauai High, and Hilo on the Big Island. And that's how they distribute the cargo here in Hawaii. What's the frequency of these inter-island? Oh, it's a relatively high frequency. They're probably making something on the order of four trips a week. Oh, okay. Between three. They didn't realize it was that many. Yeah, because as soon as the ships arrive, the mainline ships arrive here, they've got to get the cargo out to the neighbor islands. And so if they have 10, what's the frequency that's coming from the mainland to Oahu? Three and a half calls per week. Oh, okay. Yeah. And then in addition to that, Matson operates what's known as their Trans-Pacific Service. Part of that Trans-Pacific Service serves Hawaii. The ships go on to Guam and then to Okinawa and then to two ports in China and then directly back to Los Angeles. That service is operated with five container ships. And it's part of those 10 ships that make that three and a half calls per week at Hawaii. Interesting. And that is, they operate basically Jones Act to Hawaii and to Guam. And then to Okinawa, they're operating in what's known as a preference cargo trade. They're carrying U.S. military cargo. I see. Which has a preference for U.S. flag ship. Do they also fall under the Jones Act when it comes to American Samoa? American Samoa is exempt from the Jones Act. Okay. American Samoa was made exempt from what's known as maritime sabotage by the tripart agreement of 1899, which was between the U.S. The U.S., Germany, who split the Samoan Islands. Germany took the western two islands, which became eventually western Samoa. America took the eastern islands, which became American Samoa. And the third party to that convention was the United Kingdom. And they got a protectorship over Tonga. I see. Okay. That agreement. The old colonia split and divide and conquer. Actually, it still serves its function today in today's shipments. And as a result of this agreement, they all agreed that they wouldn't impose sabotage on their areas. I'm sorry. What's sabotage mean? The Jones Act is a sabotage law. Okay. Cabotage restricts the transportation within your own domestic sphere. And it goes to different degrees. You can have flag sabotage where you have to have your own flag. In the case of the Jones Act, not only does it require a flag, but it requires that the vessel be built in the United States. Right. And there's four provisions of the Jones Act. And you just listed two of them. Right. The basic provisions of the Jones Act are the vessel has to be built in the United States, a registered vessel of the United States, a US flag, crewed with U.S. citizens and some green card holders. And it has to be substantially U.S. owned, 75%. Right. Those are the basic requirements of the Jones Act. So the service from the West Coast that Batson operates with the five container ships to Hawaii and Guam is Jones Act. Going to Okinawa is reference cargo, meaning that the military cargo they're carrying to the bases in Okinawa are required to be carried by a U.S. flag carrier. Then they end up in China. And then from China, the ships make a weekly service directly to Los Angeles using great servo routing. And in that, they're competing with all the large international trans-specific carriers. But Batson, because they have small ships, they operate them at a higher speed than the big ships go. And they also are able to deliver the cargo on the other end more quickly. So it's called an expedited service. They charge a higher freight rate for this. Well, I mean, if they're getting 80% of the business to Hawaii, right, they're not getting 80% of the trans-specific business. Okay, got it. They're getting maybe one percent. Okay, one percent. So from mainland to this, our state, they're getting 80% of the business. Who's filling in the 20%? Most of it's carried by Pasha. It is Pasha. Okay. And it's somewhere between 70 and 80%. When Pasha first, when Horizon lines was operating, and they were in the neighborhood of around 70, Batson was in the neighborhood of about 70% of the cargo, Horizon lines was about 30% of the cargo. But as the Horizon lines service deteriorated towards the time that they were forced to sell. And as Pasha picked up after Horizon lines, there was a deterioration of some of the services. And actually Pasha, when they took over, they abandoned one of the services that Horizon had previously operated. I'm going to take a slight left turn here on this discussion, because as a consumer, and we all got here somehow, and we all had to have our things shipped here somehow, sure. We weren't born and raised here for generations. You know, the cost of shipping your car, the cost of putting your contents in a container, how are those rates established? Because if Horizon has 80% of the cargo business, is there a formal pricing structure that's regulated, or is it just limited competition on establishing the rates of shipping your goods? Well, first of all, it has to be based upon cost of service. I mean, they have to make enough money to cover their cost. And the Jones Act contributes a tremendous amount to their cost of service. Okay, so that's incorporated, and that's why we pay? Of course, yeah. Because I mean, to build a ship, a large ship in the United States today, will cost you five times what a comparable ship would in South Korea or Japan. Why? Is it because we're using our labor rates? Labor rates in Japan are actually higher. Why is it five times more? Because we're inefficient, and we construct so few large ships that we don't have any economy of scale. Because our maritime shipping industry is almost? Yeah, the U.S. shipbuilding industry has not been competitive with the rest of the world since the end of the American Civil War. I thought you were going to say World War II, but that didn't come out. No. Okay, the Civil War. And there's, after the Civil War, there was a movement in the United States to eliminate the build requirement. And that finally fizzled out, but that's still an issue today. And it's even more, the costs are even more exaggerated. So who's building all the ships in the world today? Close to 95% of the large ocean-going ships in the world today are constructed in three Asian countries. South Korea's number one, China's number two, and Japan's number three. Is that right? What about oil tankers? Oh, sure. We're talking container ships, oil tankers, bulk carriers, any kind of a ship. I didn't know that. Yeah. And I bet a lot of our viewers aren't aware of that. What they've, over time, they've been able to create in Northeast Asia, because most of the Chinese shipbuilding is in the northeastern part of the country. They've got economies of scale working there for steel manufacturing, engine manufacturing, and all of the pieces and bits and pieces you need to put together to make a ship. So you've got a concentration in this area of the world with all of these, with all this expertise and all this capacity. And so it becomes very difficult for anywhere else in the world to begin competing with us. Well, all my synapses are kind of working over time right now, because I'm thinking, you know, there's so many complaints about the high cost of living here in Hawaii. And that's directly, some of that's in part to the cost to ship goods and foods and all the equipment and products that we have. According to the federal government, the cost of living in Hawaii is about 18 percent higher than it is on the U.S. average. What percentage of that 18 percent could be attributed to the Jones Act and the cost of embedding the Jones Act into, you know, the manufacturing of ships by a U.S. company? Yeah, we're estimating somewhere around two to three percent. Is that right? I mean, the Jones Act is certainly not the cause of all of this, but it's a contributor. When you talk to people, they complain about, you know, shipping a car from Los Angeles or Seattle or somewhere around the, you know, on the Pacific Coast. Right, but the cost of all of the goods that we purchase here, including materials for construction, building houses, you know, for food and clothing and all that. I didn't realize it costs five times more to build. A large, ocean-going ship in the United States than in, for a comparable ship now, we're not, you know. So, for example, Matson is spending $255 million to build one ship in San Diego, for example. And that ship might cost, in South Korea, maybe $50 to $60 million. What do you think it would cost in Japan? Because, like you said, a labor cost in Japan is probably comparable to the United States. So, what do you think that same ship would cost in Japan, do you think? Probably not too much more. Yeah, interesting. And actually, the labor in South Korea is not cheap today. Right. I mean, that's a fairly high-tech economy. So, what's Matson up to right now? I mean, they're expanding their routes. Are they not? I think you mentioned recently that they're going to expand out to... One of the big things that they've done recently, of course, is something you touched upon is the horizon acquisition. Matson acquired the ailing horizon lines. Horizon lines basically failed because they had a fleet of very old ships that they could not afford to replace in the United States, and they were operating all Jones Act trades. Horizon lines had a service to Hawaii, to Alaska, and to Puerto Rico. The Puerto Rico service essentially collapsed. And when Matson purchased them in mid-2015, Matson retained Horizon's Alaska service with their three newest vessels, which was a good buy. And they sold to Pasha, the Hawaii service, with its old vessels. And so Pasha is now stuck with four very old container ships that need to be replaced as soon as possible, but they're facing the very high cost of construction in the United States. Correct. They have announced last year that they were going to build two new ships at a shipyard in Texas, but there's been none of the usual kinds of announcements from the shipyard or from the shipping company that construction has started. Interesting. So we don't really know what's going on. So hold that thought, because I want to get back to the far-reaching hand and grasp of Matson, not only from mainland to Hawaii, but also in other islands. We're going to take a quick commercial break. I'm Tim Apachele here with Mike Hansen. We're talking about Matson and maritime industry here in Hawaii. We'll be right back. Dave Stevens, host of the Cyber Underground. This is where we discuss everything that relates to computers that just kind of scare you out of your mind. So come join us every week here on thinktecawaii.com 1 p.m. on Friday afternoons. And then you can go see all our episodes on YouTube. Just look up the Cyber Underground on YouTube. All our shows will show up, and please follow us. We're always giving you current, relevant information to protect you. Keeping you safe. Aloha. Welcome back. I'm Tim Apachele. I'm here with Mike Hansen. He's president of the Hawaii Shippers Council, and we're here talking about Matson and maritime industry here in Hawaii. And before the break, we were talking about how Matson had purchased Horizon. They took over the new ships in Alaska service, and they sold the old ships off to Pasha in order to avoid a monopoly situation. Matson, in the middle of 2015, acquired Horizon Line, which was deep in trouble. Matson retained Horizon's Alaska service with their three best newest vessels. And they sold the Hawaii service, including four old steam-driven container ships, to Pasha. And the reason that they had to sell the Hawaii service to Pasha is because Matson already had a dominant position in the Hawaii trade, and they were facing antitrust issues. And so they needed to sell that off to a so-called... To avoid the antitrust, the Sherman Act. Yeah, the competitor. So what point or what percentage does the antitrust kick in to say, Matson, you own too much of the service and coverage here to Hawaii? The federal government has been quite okay with Matson having somewhere between 70 and 80 percent of the market. And if you remember back in the middle of last year, there was a company from Seattle by the name of Salt Chuck Resources whose subsidiary, Tote, attempted to break into the Hawaii market. And the big fight was over the new container terminal that the state of Hawaii is constructing in Kapa Lama in Honolulu Harbor. And from what I understand, the agreements had not really been in place for Pasha to acquire the lease to the new container terminal when it's completed in 2022 or 2023. And so attempted to come in. Tote actually, their sister company, Fos Maritime, owns Young Brothers. So they had a presence here. They not only own Young Brothers, but Salt Chuck, the parent, also owns Aloha Cargo. So they've got quite a lot of operations here in Hawaii. I'm just, the reason I'm kind of digging in this one area is because as a consumer, I want to see more shipping companies come out here because ultimately competition is better for pricing. Right. But Tote would be facing the same problem that Matson and Pasha are facing. They have to build ships in the United States. Okay. So the Jones Act affects every shipping company no matter what. Every shipping company that chooses to operate in a domestic service. In order to reduce the cost of shipping, you need to reduce the cost of the capital investment in shipping, which is the vessels. Right. That's not going to happen. Well, who knows what's going to happen. I know this show wasn't geared towards the Jones Act, but do you ever think there's ever going to be an opportunity in the near future or even distant future about some maybe amendments to the Jones Act that... Well, yeah. I mean, people think that the Jones Act is just one law. But actually, it's a series of laws which come under the rubric of maritime cavatage. And the Jones Act is, there's no such law known on the law books as Jones Act. I see. Okay. That's a misnomer. I didn't know that. It's a popular name. Yeah. So people take a whole conglomerate of different laws and just say, it's not Jones Act, right? Right. Okay. Well, let's get to know. Thank you. And the Jones Act can actually refer to section 27 of the Merchant Marine Act of 1920 as amended. If you're using Jones Act in its strictest usage, that's it. But most people don't. Most people refer to all of the maritime cavatage laws, regulations, and even judicial rulings as the Jones Act. Gotcha. What happened in 1920 to prompt these laws to kind of come into place? Right after World War I. Some of the laws that we've referred to as Jones Act laws precede the turn of the century. Okay. For example, the Passenger Services Vessel Act, Passenger Vessel Services Act is 1885, I think it is. So they go back a long ways. What the section 27 of the Merchant Marine Act of 1920 did is it restated a number of laws that went back to the first Congress of the United States after enactment of or after ratification of the Constitution. You know what I like about Think Tech Hawaii? We come up with guests like you that really can fill in the blanks and, you know, and help us, you know, the residents here in this island that really understand that. And the reason that it came about in 1920 is because during World War I, so many ships had been a requisition for the war effort that there were exceptions made. And for example, foreign flagships were allowed to carry passengers and cargo between Hawaii and the West Coast. And there was also another law that had allowed foreign built vessels to come into the U.S. flag fleet. And so the 1920 law was, you know, one of its purposes was to close all those loopholes. Got you. With the advent of jet engines and, you know, the 707, the Boeing 707, how long did it take for passengers, tourist passengers ship service to kind of just not be profitable and just kind of go away? Not very long at all. Was it a couple of years or? I mean, I was a TWA Pan Am. They really just killed the Matson tourist shipping market. Yeah, I think the regularly scheduled Matson passenger ships between here and the West Coast ended around 1970. Oh, okay. I didn't realize it extended that late. Yeah. And of course, the wide-body jets came in during the 60s. Right, 67, 66, you know, it's over there. But it didn't, it wasn't very long. I mean, you know, maybe 10 years and the passenger ship business was gone. Yeah. You recently just wrote an article about Matson extending service to Tahiti. Right. Matson started in 2016, I believe it is, service that they called the South Pacific Express. And what it does, it operates from Honolulu, from Matson's terminal on Sand Island, in a similar way that the barge services do to the neighbor islands. Okay. What they're trying to do is extend, is to get more cargo on their mainline ships from the mainland to Hawaii and then use the terminal, which is a large efficient operation there, to put the cargo on foreign flag ships. Oh, okay. And operate from Honolulu Harbor. This is the third iteration of their service, South Pacific Express service. And it's, I think the jury's probably still out on whether or not it's going to work. Is this going to be, is this good for Tahiti? Is this good for Hawaii? Well, there's existing services off the West Coast directly to Tahiti and Samoa. So it's in competition with those other services. And those other services are operated by quite large international shipping companies. So the competition is probably very quite fierce. And whether Matson can make this work or not is still up in the air. But they operate from Hawaii to, the latest iteration is two ships operating, what's called a fortnightly service, or every two weeks. Two weeks, yep. You study Shakespeare, you'll know what a fortnight is. The rest of the world uses the term fortnight, and it's used widely in the ship, international shipping. But if you say that to an American, they go, what's that? Anyway, the current routing is, is Honolulu, Papayete, Pongo Pongo, and American Samoa, Apia, and what used to be called Western Samoa, and now is West, just Samoa Plain, and then to Nuku Alofa in Tonga, and then Honolulu. Okay. Well, guess what? We've run out of time. And I know there's a lot more on that page that we can get to. And I hope you come back again, Mike. And, wow, thanks for the history lesson. I just had no idea. And again, that's one of the nice things about Think Tech of Hawaii is that we bring guests like you and you can really educate us and make us, make us, make us far more knowledgeable about what's going on. Okay. I enjoyed it. Thank you, Tim. Thank you very much for coming on the show. Okay. This is Tim Apachella and Aloha.