United States Lines, the venerable steamship company now owned by trucking magnate Malcolm McLean, has stunned the world maritime industry with a deal to buy 14 of the largest container vessels ever built from a Korean shipyard, with financial aid from both the U.S. and South Korean governments.
The mammoth ships, each more than 900 feet long, will be able to carry a third more containers than any vessel now afloat, but each will have a crew of only 22. Even the galleys will be automated, shipping industry sources say.
McLean originally planned to build the ships at the Avondale yard in Louisiana, but went abroad with the $784 million order when the Reagan administration scrapped the federal ship-construction subsidy program, according to Avondale executives.
The loss of shipbuilding work to foreign yards is the price administration officials have said they are prepared to pay to curtail subsidy outlays and at the same time encourage U.S.-flag ship operators to modernize their fleets. Even with the financial aid that the Maritime Administration has agreed to give U.S. Lines for the Korean deal, federal officials say, the terms of the transaction will eventually reduce federal subsidy outlays.
The Korean deal represents a spectacular move in what had been a torpid, declining U.S. merchant marine. With American-flag ships now carrying only about 5 percent of American international trade, the Reagan administration has encouraged shipping companies to go abroad for the ships they need to be competitive again, breaking a 45-year tradition of giving federal operating subsidies only to ships built and overhauled in U.S. yards.
Up to now, Sea/Land Industries, a containerized shipping line created by McLean in the 1950s, has been the only major line willing to forego subsidies to operate cheaper, more efficient foreign-built vessels. Under the new rules, several companies have contracted with foreign yards for renovation and expansion of existing ships. U.S. Lines is the first to order new vessels.
Foreign ship owners, who have prospered for decades as the U.S. merchant fleet dwindled because the Americans could not compete with lower-cost foreign lines, have already begun to express fears that McLean's new ships will create a worldwide glut of containership capacity. And U.S. Lines' domestic competitors are complaining that the terms of the deal give U.S. Lines an unfair edge, because they apparently allow U.S. Lines to acquire the biggest, most efficient ships afloat with a minimal outlay of its own capital.
But the transaction has electrified many in the troubled maritime industry, who see it as a sign that U.S. merchant ship operators may again be prepared to challenge foreign competitors and reverse the long decline in the share of international commerce carried by U.S. vessels.
The Joint Maritime Congress, research and lobbying arm of the Marine Engineers' union, hailed the advent of "modern ships, with fuel-efficient diesel engines, carrying big cargoes, and manned by small crews," which it said were concepts that "used to sound too good to be true" for the U.S.-flag fleet.
Albert E. May, executive vice president of the Council of American-flag Ship Operators, said U.S. Lines is "going to get a good ship, delivered on time," and powered by the fuel-efficient, slow-speed diesel engines standard in other nations' fleets but rare in American vessels built for speed instead of economy. "Everybody is looking to where they can move to equipment of this kind," May said.
U.S. Lines itself has said little about the complex, innovative transaction. The company is privately held by McLean, a press-shy tycoon who pioneered in the development of containerized shipping, first at McLean Trucking Co. and later at Sea/Land Industries, which is now a subsidary of R. J. Reynolds Corp. and, ironically, feels itself threatened by its founder's latest deal.
William Berdon, U.S. Lines general counsel, said the ships will be used on round-the-world routes, and on routes linking the East Coast to Europe and the Far East. He declined to discuss either the financing of the deal or the specific characteristics of the giant ships, which he said were designed by the company's own naval architect and are "proprietary."
According to the Maritime Administration and other maritime sources, the unusual transaction will work like this:
Once the Department of Transportation gives its final approval, which officials there say is assured, U.S. Lines will contract with Daewoo Shipyards for the 14 ships, at a cost of $56 million each. Most of the purchase will be financed by a loan carrying a 9 percent interest rate from South Korea's Export-Import bank, several percentage points lower than any domestic financing.
Each ship will carry 4,148 of the 20-foot steel containers that are now the standard mode of transportation for manufactured goods in international trade. The biggest ships currently afloat can carry about 3,000 boxes, and even the most modern have an average crew size of 37, according to a study by the General Accounting Office.
When the new ships come into service in the middle of the decade, they will fly the U.S. flag and carry American crews, providing a shot in the arm to a merchant fleet that admits it is generally uncompetitive on the world market. But under the unique deal that U.S. Lines has made with the Federal Maritime Administration, the new ships will not receive any federal operating subsidies. Instead, the government will give U.S. Lines a big infusion of cash to operate its current fleet.
This year, for the first time, Congress authorized American shipping companies to receive operating subsidies on foreign-built vessels, because the termination of the subsidies for domestic construction made it economically impossible to build competitive vessels in this country.
The new U.S. Lines ships, built abroad at half the cost of building in the United States, equipped with an efficient propulsion system, and carrying more cargo with fewer crew members than any other ships, were designed to be competitive without subsidies.
By foregoing subsidies, the ships will be free of buy-American and minimum-speed requirements that have discouraged U.S. companies from installing fuel-efficient diesel engines that turn over slowly and sacrifice speed for economy. A Maritime Administration official said the per-vessel cost of powering these giant ships would be $1 million to $2 million a year less than the cost of running them with the steam-turbine engines hitherto standard in the American fleet.
In exchange for McLean's agreement to register the ships in the United States, build them to American seaworthiness standards, staff them with American crews, and operate them without subsidies, the Maritime Administration has agreed to a temporary sharp increase in the annual subsidies U.S. Lines receives on its current fleet.
Operating subsidies are designed to make up the difference in cost between U.S. crews and foreign sailors. At present, U.S. Lines is receiving subsidies on only four ships, at an annual total of approximately $7 million. When the Korean deal is finalized, the Maritime Administration will subsidize 19 ships, for $37.6 million a year, giving McLean an immediate infusion of no-cost cash to tide his company over while the new ships are being built.
Maritime Administration officials said the government will come out ahead because U.S. Lines will give up all subsidies after five years. The maximum total subsidy over the five-year period, the officials said, will be $165 million. The government saves money in the long run, they said, because the four ships currently subsidized have 20-year contracts, with outlays escalating as costs rise, and would consume more than $165 million by the time they expire.
"We know we're going to save bucks in the long run," a Maritime Administration official said. "We gave up something, and McLean gave up something."
"This is a brilliant deal for McLean," said an admiring competitor. "He understands the present value of money. He'd rather have the guaranteed $165 million now than who knows what in 2001."
Not all McLean's competitors are enthusiastic, however. Both American President Lines and Waterman Steamship Co. have petitioned Transportation Secretary Drew Lewis to review the Maritime Administration's decision to approve the deal.
Sea/Land, the industry maverick that has proudly foregone subsidies to gain freedom from the cumbersome restrictions that go with them, is complaining that the deal gives U.S. Lines both subsidies in the short run and the competitive freedom in the long term. "It eliminates the advantages of being unsubsidized," Sea/Land President Charles Hiltzheimer said. "If you can build abroad, as we do, and still get subsidies, as they are doing, why shouldn't we get them too?"
Other Sea/Land officials said that the money now earmarked for the U.S. Lines subsidy was originally reserved for Farrell Lines, an economically troubled company that has been selling off ships and giving up routes. Since Farrell isn't going to get it, they said, it would not be spent at all, except for the decision to transfer it to U.S. Lines, making it a taxpayers' gift to McLean.
At a maritime conference here last week, a senior European shipping executive warned that expansion plans such as those of United States Lines could exacerbate the current problems of a maritime industry plagued by overcapacity.
"The lunacy of overbuilding continues," said Harl-Heinz Sager, deputy chairman of Hapag-Lloyd A.G. of Hamburg. "Large orders of new containerships have been and are being placed, and if lines like Evergreen of Taiwan and United States Lines are serious with their plans to start additional round-the-world service with large vessels, there is no hope for stability."
That complaint drew a thin smile from William Bru, president of United States Lines. "You didn't hear us complaining when the Germans took delivery of new containerships," he said.