 It's Think Tech. I'm Jay Fidel. It's Thursday morning. We're here with Mike Hansen to talk about how Captain Enos makes his case for Young Brothers, which was an op-ed that appeared in the Star Advertiser. And Mike wrote a piece about it, too. Good morning, Mike. It's so nice to have you here. Good morning to you, Jay. And it's nice to be with you again. Mike is the Shippers Council, and Mike follows Maritime Affairs in Hawaii. And here we are talking about probably the most important maritime issue in our state, and that is the lifeline. Moving things around, not only from the mainland, but among the islands, between the islands, inter-island traffic right now. And shipping from one island to another is critical to our supply line. And our supply line is critical to our future here in the time of COVID. So Young Brothers is one of the few, if not the only, inter-island Shippers, Mike. All right. Young Brothers is the only inter-island carrier that carries goods between the islands. And it's licensed to do so by the Public Utilities Commission. And it's under the Hawaii Water Carrier Act of 1974. And they've been issued a certificate of necessity and convenience by the PUC to operate as what's known as a natural monopoly. So in the time of COVID, Shippers are under pressure. It was only three weeks ago that the Sauce Brothers out of the West Coast terminated their route to Hawaii, which sort of raises the issue about whether the Shippers can make sufficient money to warrant continuing to ship. And we saw in the paper a couple of weeks ago that Young Brothers was looking for $25 million as a bailout from the state legislature, because they were also having, you know, financial issues and shipping among the islands. So how real is that, Mike? Are they really in trouble? What is that? What's the reason for their request for the $25 million? Yeah. Going back to Sauce Brothers. Sauce Brothers, they had planned to leave the Common Carrier Trade between the West Coast and Hawaii prior to the advent of COVID. So that's completely unrelated to that. They were making a decision to get out of the Common Carrier Trade, which is the Common Carrier means that they're accepting shipments from anybody and having to file tariffs and comply with a set of regulations that are particular to the Common Carrier Trade. Could they have continued serving Hawaii? Oh, sure. If they had made a decision too. But they sold to their competitor, American Marine Lines. Okay. Well, thanks for that. Let's go to Young Brothers. They exited the business because they were, I was told that they were facing the need to make very large capital improvements in their vessels, et cetera. And they just were unwilling to take that next step and stay up with the business. Yeah, particularly in the time of COVID when the market is uncertain. So what's the shipping market like in the time of COVID? And how does that market affect Young Brothers? Shipping markets worldwide are down significantly, both in the Common Carrier side, which is typically container shipping today, and also on the contract carriage side, which is with your bulk cargoes like oil and dry bulk cargoes, et cetera. So what brings Young Brothers to the legislature to ask for $25 million? What are they saying? Well, Young Brothers had sharply declining profits in 2016 and 17. And in 2018 and 19, they had actual losses in the range of about $10 million per year. So they've had some significant financial problems prior to COVID. Are they a Hawaii company? A negative. They're home by owners on the mainland. They were a Hawaii company, but they were sold in 1999 by Hawaiian Electric Industries to a company based in Seattle known as Salt Chuck Resources, Inc. And that company is a privately held company, so they don't make any of the usual disclosures. They're operating in other markets then, so I'm sure. All right. For example, they own a Loha cargo. They bought that out of the bankruptcy of Loha Airlines. And they own Maui Petroleum, for example. They have several holdings here in Hawaii. And outside of Hawaii? Outside of Hawaii, they own one of the major tug and barge companies on the West Coast of, known as Fos Maritime. And actually, Young Brothers is a subsidiary of Fos Maritime. I see. Just in turn, a subsidiary of Salt Chuck. Salt Chuck also has a deep sea shipping business known as TOTTE. And they operate under the TOTE brand services from Washington State to Alaska, basically from Tacoma to Anchorage with container ships. And they also... So it's a big company. Salt Chuck is a big company. Their revenues in 2019 were around $2.5 billion. So a large company, yeah. It strikes me that they needed $25 million. That's a small amount when you compare the revenues of $2.5 billion. Why didn't the parent bail them out? That was in 2019. And who knows what... I mean, these are reported revenues. They're not filed with the SEC, for example, like you would be if you were a publicly held company. So these are just people guessing what their revenue is. So why didn't Salt Chuck bail them out? It's a small amount compared to those revenues. Right. But Young Brothers is not working. And basically, they said they don't want to put in good money after bad. So I guess the threat they make to the legislature to ask for $25 million is, if you don't bail us out, we're going to go out of business. Well, the threat that the Salt Chuck made was they said that after the end of June, they would not be providing Young Brothers any further funding for their losses. So essentially, Young Brothers is on its own quote unquote in seeking some redress from the state, both in terms of they're looking for emergency funding in the short term. Did they get any money out of the CARES Act? There were two pieces of legislation that were moving through the regular session of the Hawaii state legislature, and they both died. And neither one of them was proposing to use CARES Act funding. Although that was what the request from YB was, was for $25 million in CARES Act funding to carry them through the end of the current year. Okay, so. But legislatively, what the legislation called on using the Harbor Special Fund. Which is just not related to the CARES Act at all. That's correct. And the Harbor Special Fund here in Hawaii. Yeah, Harbor Special Fund is what the Harbor uses to operate with and also to fund their capital improvement projects. And because. What happened in the legislature, Mike? I mean, I'm just trying to, you know, you can't go to the legislature now. It's been, it's only the only access is through Olelo. So it's hard to really know what was going on there. I'm guessing that there was. That they pursued an approach that just at the end of the day just wasn't going to work. When both pieces of legislation, one which had begun prior to COVID had been introduced in January. And was was directed towards subsidizing the small island service. That is the service from Honolulu to Molokai and Lonai. And that is traditionally been never paid for itself and had to be cross subsidized by the service that was provided to the larger four ports. So did that did that get through the ledge? No, that did not. And what happened is that later in the in the session. After the after the end of May announcement by YB asking for $25 million, they amended the legislation to start dealing with that. But they kept the harbor special fund funding for the measure. And in that particular piece of legislation, they actually called for a receiver. But without any kind of compensation. So one of the things that young brothers said in their testimony is that this is in violation of the takings clause of the US Constitution. You can't government just can't take these assets without some kind of compensation. And there was no provision for compensation. The other problem is harbor special fund is covered by the the covenants for their capital improvement project bond issues. And there's only certain things you can do with this. And in the second piece of legislation. That was a piece of legislation that had been introduced in 2019. Funding for some project on Cue Hill Highway on the island of Kawaii. They gutted that and replaced it. With a new language dealing with the young brother situation. And it was a larger piece of legislation than the first one. But it still included harbor special fund funding. And the Department of Transportation in their testimony pointed out that there's covenants on this guys. We can't probably use this for that purpose. And so the whole thing just, you know, dropped away. This reminds me of an old adage is never underestimate, you know, the political complexities of the waterfront in Hawaii. But I mean, you know, these these legislation were not very well thought out and and basically harbors. I mean the Department Hawaii Department of Transportation in their testimony said, please consider the use of general fund monies. You know, make this a little straight more straightforward if you want to do this. But it's completely died. They said the regular session ends on the 10th, which is tomorrow. So nothing's going to happen in the regular section. Maybe something will happen if they call a special session. Who knows? You think they're going to call a special session over this? No, but they'll probably call a special session dealing with some other COVID related issues. And this could, you know, be brought in at that time. Okay. So in the absence of either small support for the small islands or larger support as they have requested. Where is Young Brothers now? They're quote on their own. What does this mean? Yeah, it's kind of a funny situation. I mean for the parent company to simply cut the, you know, more or less cut the funding strings. It's almost as if they've done a spin off, but they really haven't. And then Young Brothers is talking about, you know, liquidity issues and possible insolvency and a reorganization plan. And that sounds like something out of bankruptcy court. Doesn't it? Yeah. And I mean, where are we, but, you know, Solchuk hasn't given up the ownership of the equipment, etc, etc. You know, this is a, this is a big problem. Now, enter Captain Enos. He's a pilot and he knows the waterfront and, you know, he knows what happens with with barges and Young Brothers, and he writes an op-ed for the Star Advertiser. Can you, can you give us a thumbnail and what that op-ed said? Right. Basically, Captain Enos, the reason I responded to that op-ed is because he basically represents or his views represent the typical point of view of the domestic Hawaii maritime industry, the the Mattsons, the Poshas and etc. of the world. And the Young Brothers. So he's on the Young Brothers side of this. Right. But that whole group of people. Okay. And so it was useful as a starting point because of that particular perspective that he has. And the first thing that he dealt with was the Jones Act. And his thing was, well, because the Jones, he's quite, he's very strong supporter of Jones Act as a member of the Pilots Association and as a member of the Master Mason Pilots Union. It's a union position. All the maritime unions are in support of it because it helps them. But the broader domestic maritime community in Hawaii and across the nation supports the Jones Act. And he's part of, you know, he believes as they do, as the group does, that it's important. And basically what he's saying is that most people in Hawaii think that the Jones Act applies to stevedoring, which it doesn't. And so he castigates people for thinking that. And now they're thinking about those personal injury cases, Mike. That's what they're thinking about, you know, about lawyers who go to court and make claims under the Jones Act and lieu of filing. He's more sophisticated than that. But he's playing a ruse. And so he's saying, because all these people in Hawaii think that the Jones Act regulates stevedoring, which it doesn't, that people are barking up the wrong tree in blaming the Jones Act for any of the young brothers' problems. And that because you can't do anything about the union stevedores, then you can't really do anything about YB's costs. But that's correct, isn't it? The Jones Act and this problem we're talking about are unrelated, aren't they? Not necessarily. One of the problems that YB has had, and any of the, for example, one of the reasons South decided to sell its common carrier service was the cost of new construction in the United States. Young brothers bought us four new tugboats. They were $20 million a piece. That's an outrageous amount of money. And so their capital cost goes way up and their requirement for revenue goes up accordingly. The cost of new construction in the United States, even for tugs and barges now, is a multiple of four or five times what it is in other countries. If I have a tug or a barge that does inter-island shipping, is that the coastal trade? Is that the trade that the Jones Act reaches? Of course, yes. Any trip between any island and any other island is subject to the Jones Act. Exactly. Or more formally, that's known in American jurisprudence as the coast-wise laws of the United States. And the basic requirements are that you have to have a U.S. built vessel which has never been rebuilt in a foreign place. It has to be U.S. flag, I mean registered as a vessel of the United States, has to be owned by U.S. citizens, that's a three quarters percent ownership requirement, and crewed by U.S. citizens. There's a small number of the crew can be green card holders, but basically you've got citizens on board. So you pay way more to make the trip with a Jones Act vessel than without a Jones vessel that is made or crewed foreign. But why is that effect? Why does that have anything to do with Young Brothers' problems right now? Within the inter-island trade, even in the total absence of the Jones Act or the coast-wise laws, you still wouldn't be able to operate with foreign flag or foreign crew. So if Captain Enos is pitching to try to help Young Brothers, and if we, the state, wants to make it better for Young Brothers, why don't we just try to get an exemption from the Jones Act for them so they won't have these extra expenses? This is the same problem that existed for the Hawaii super ferry. They had to have a U.S. built vessel. So instead of getting these second-hand vessels that were built by the same company in Australia that owns the shipyard that built the Hawaii super ferries in Alabama, they could have gotten these second-hand vessels that were built in Australia at a much reduced capital cost. What I don't understand, Mike, is if Captain Enos is pitching to help Young Brothers, to keep Young Brothers solvent and all that, why is he also supporting the Jones Act with respect to Young Brothers' operation? Because that goes the other way. That's costing them more money, not less money. The one part of the Jones Act that could be exempted and help Hawaii and the other non-contiguous jurisdiction to the United States that are subject to the coast-wise laws would be to exempt them from the U.S. build requirement. That would lower their capital cost tremendously. I think, of course, there's arguments both ways, and you've talked about them, but my feeling is that at a time of crisis, business crisis for Young Brothers, wouldn't it be better to reduce their costs? Here's a guy who's trying to help them, but also advocate for the Jones Act, which hurts them. It just doesn't seem consistent. I would caution you on terms of broadly mentioning Jones Act and saying that all of that needs to go. Basically, what we're looking at is the capital cost. If we can reduce that and we can get more innovative kinds of vessels in from the international shipbuilding market, then that gives us a lot more flexibility in what we can do. But we're shut out from all of that by what's known as the domestic build requirement. What else is he talking about aside from the Jones Act? I know there was much more in there. If he went into the small island service, that's Molokai Lanai. Traditionally, for Young Brothers, that's operated at a loss. The way that's been dealt with within the regulatory framework is known as a cross subsidy. The Young Brothers, the regulated common carrier of goods between the islands that has a certificate of necessity and convenience to operate as a monopoly, is required to provide service to the small islands, at a loss, and subsidize that from profit monies that they earn at the major ports. So what was his position on that? Basically, he said, well, what can we possibly do for these people? Essentially, he claimed that the PUC is keeping rates too low up to the small islands. And presumably that would mean, okay, go ahead and raise the rates. Yeah. But that's not the way that it's been handled. And the small island service has never been a really big loss for Young Brothers. And if Young Brothers, other problems were corrected, this would not be a problem going forward in the future. Got it. What else is in his op-ed? Okay. Then he touches on the Hawaii super ferry. Enos is a supporter, was a supporter of the super ferry, and is a supporter of what's known as fast ferries. And he believes that the super ferry was treated unfairly by the state, especially by the state courts, and forced out of business. Yeah, we're with him on that. Yeah. There are problems, though, with what he said. First of all, a super ferry was not able to maintain schedule in heavy weather. And secondly, they were not, they didn't have the revenue necessary to cover their expenses. In other words, they were operating at a loss. I told you before the show, we followed the super ferry very closely, not aware of them not meeting schedule. They had Thomas Fargo as the CEO, Rick Rash was the ex-O. Yeah, they were outstanding maritime managers. And they were running it like a clock. That's what my information was. They took hull damage in heavy weather, and they had to cancel service in certain, as a result of that. They had, I think they had a lot of problems because they were being sued, and they had to turn all the records over all the time, respond in deposition in court, and they lost twice in the Supreme Court. And the second, Kurt Caldwell tried to help them after the first decision. The first decision was you guys need an EIS, and Kurt Caldwell tried to give them kind of an extension by saying they could operate without an EIS until, while they were looking for an EIS, doing an EIS. And then the Supreme Court ruled on that and said, no, that's not going to work. You can't operate while you're working on an EIS. And as Supreme Court closed them down on short notice, and then this really tragic, and then Lehman Brothers, their funders in New York, and the management said, enough of this, we can't spend all our time in court. We're quitting. And they stopped operating and sold the ferries. It was one of the great tragedies of our time, Mike. Anyway, that's another story. Then they went to the less than container load cargo, and this is the issue of taking basically palletized cargo, as opposed to container load cargo. And young brothers started life back in 1947 as a pallet carrier. And this was very convenient for the small shippers, both wholesalers in Honolulu shipping to small customers on the outer islands or the neighbor islands, and for neighbor island farmers to ship in. Okay. So we're running out of time. And it's really, I'm too bad because there's more here. But let me ask you, you wrote a response to the op-ed piece. He was pitching that, I suppose, the legislature should give him $25 million. He was supporting young brothers in their efforts to get state money to continue operating, which failed. But then you wrote a kind of a review of his position on this. What was yours? Can you summarize that for us? Yeah. One of the basic problems that, well, one of the things that he did say is, please let young brothers' current management work through this, fund them and let them work through this problem. What's at issue there is young brothers' management has not successfully dealt with these problems over many years. Hawaiian Electric, when they had young brothers for 13 years, sold it at a loss because it was not as profitable as they should have been. Salt Chuck has owned young brothers for 21 years, not a short period of time. And the last four years, they've had a really rough go of it. Can young brothers' current management actually fix the problems? This is a major question. And this is a question that the Hawaii PUC has had regarding young brothers. Do you support his position, namely that the legislature should provide a funding? Or do you have questions about that? Where do you end up on it, Mike? I have lots of questions. And the questions are related to what we spoke about previously regarding how the owner of Young Brothers, Salt Chuck in Seattle, has dealt with their relationship with young brothers. They said, we're not going to cover any more of your losses. Fine. But that sounds like we're cutting the strings and we're going to spin you off and let you operate as your own business. That hasn't been done. In addition, Young Brothers is talking like it's in bankruptcy court. It's got liquidity problems, maybe facing insolvency. And we need a reorganization plan. Well, isn't that the next step? I mean, and the question in my mind is why would the state fund Young Brothers when Salt Chuck still owns all the assets? When you say he owns all the assets, certainly Young Brothers owns its own tugs and barges, right? Salt Chuck owns Young Brothers, that's all. Yeah, but Salt Chuck owns them. Yeah. So let me go to the last question, which is the public policy issue. This is a crisis for the neighbor islands. It's also a crisis for the people in Honolulu that ship and do business with the neighbor islands. Okay. Yes, absolutely. And so we have, talk about reopening, talk about preserving the economy or at least preserving it so that we can reopen later. This is a real threat. I don't know if a fellow on the street fully appreciates what kind of a threat it is to Hawaii, because to put a tug and barge company together from scratch is a real hassle. And who will do that? And will Wall Street fund it? Remember Wall Street got burned bad on the super ferry. Who is going to fund that? Who's going to put that money in? It is not going to be the state legislature, you know, for hundreds of millions to start it up again. There's a fair chance there will be a chapter 11 on this. I'm not sure what happens in a chapter 11, where it's an essential industry. How do you, how do you continue it? How do you make sure it stays in business? Certainly you can't liquidate it because then, oh my gosh, the effect on the state economy would be extraordinary profound. So gee, what can happen here? It sounds to me like this has got to be at the top of the priority list for the legislature, but the legislature doesn't see it that way. And so young brothers is on its own. Now, this is, this is not a good situation. Are you, do you agree with me? Yeah, in most, in most of what you said, the legislature's approach to YB and their two pieces of legislation was not very good. And the big problem that, I mean, essentially Saltchuk could say to young, to the people, young brothers one day, would you please sail all the equipment back here to Seattle? They still own all the equipment. Well, they own it derivatively through young brothers. Young brothers is a company that is, sounds like from what you say, is insolvent. The next step has to be some kind of relief for creditors. And that probably means the chapter 11, which will enable them to continue to operate for a time. But it's not healthy, not healthy for them or the state. So the question I put to you finally is what's going to happen here? Oh, we don't know. I mean, very simply. And I can, you know, I'm sure Saltchuk wants to get paid for their equipment. And they're going to do whatever they need to do. You're talking about liquidation. Liquidation would have to be in a chapter proceeding in the bankruptcy court. And if they, you know, if they just transferred that equipment somehow magically to Saltchuk, then that's going to be subject to the review of the bankruptcy court. And is it probably a voidable preference? But, you know, what you have here is a real problem. And I think it speaks of the effect of COVID on things that the guy in the street, the woman in the street, they don't think about much, that our state is dependent on inter-island shipping. We were a water-based state. We're surrounded by water. We only live and breathe because we can cross the water and ship things. The same thing applies to matching and shipping from the mainland. We really need to have this service. Right. And it's not at all clear to me what's going to happen as it is to you. 80% of what we consume in Hawaii is imported. Yeah. So somebody has to step up, whether it's the governor or the legislature, somebody has to step up, whether it's business interests who would buy the company back, buy it at a cheaper price, who knows what. Something has to happen to make it healthy again. And right now it's significant. You need management that can actually operate the service sufficiently. Yes, that too. This all suggests that you and I are not done with our conversation. I have not seen a good solution out there to the problem. So who knows what's going to come up? Yeah, well, if we let it go by default, we may regret that. It could go the way of the super ferry, presumably. It will be a struggle. It will be painful one way or the other. And, you know, given the economies of scale that are operating there, it's difficult to see where I think he knows was right. They say that it's the prospects for someone else, another operator to come in and set up a fully fledged inter-rival shipping service, are not really very great. And if another operator, and it's got to be a Jones Act operator within the domestic U.S. system, it can't be somebody from outside of the United States. And when they look at how the treatment, how young brothers, the difficulty they've had dealing with the PUC and getting freight increases authorized, you know, the average operator that might even consider doing it is going to say, why would I want to get into that boiling pot? Yeah, it's got to pencil out. Yeah. Mike, we got to go. That's Mike Hanson, the Shippers Council, who follows this stuff closely and who writes about it. We really appreciate that. And as I said before, it's not done. It's not over. There's more to come. There's more to find out. There's more for us to be educated about. Thank you so much, Mike. We'll see you soon. I know. And if people want to read my pieces there on the Facebook at Hawaii Shippers Council. Thank you so much, Mike. Aloha.