The nation's two largest operators of cargo ships have cut the rates they charge the Navy by as much as 50 percent and regained contracts they lost when a newcomer underbid them last year.
A federal judge refused yesterday to block the new contracts between the Navy's Military Sealift Command and the two giant carriers, United States Lines and Sea-Land Service Inc., a subsidiary of R. J. Reynolds Industries. As a result, they will regain Friday the shared monopoly on carrying freight to U.S. military bases in northern Europe.
American Coastal Line, a two-ship company organized only last summer, was deriving 72 percent of its revenues from the contracts, according to company officials. At a hearing on its request for an injunction last week, American Coastal's lawyer, Edward J. Sheppard, said repeatedly that the new company would "go out of business" if it lost the Navy contract.
U.S. District Judge Charles R. Richey observed at the hearing that Sea-Land and United States Lines either were "egregiously overcharging" the Navy before American Coastal entered the game or must now be offering rates lower than their costs, which would be illegal. But in his opinion yesterday, he said confidential cost data submitted to the court by Sea-Land and U.S. Lines "undermine" American Coastal's claim that the new rates are illegally low.
American Coastal asked Richey to preserve its current 27 percent share of the Navy's North Atlantic cargo while the Federal Maritime Commission conducts a full investigation of its claim that Sea-Land and U.S. Lines not only are charging unfairly low rates, but also that they conspired to do so. The judge's refusal to step in leaves the FMC case pending, but American Coastal argued that, without the Navy cargo, it could not survive long enough for the FMC to complete its analysis.
American Coastal was organized last year by Henry J. Bonnabel, a veteran maritime operator who was the owner of the ill-fated S.S. Poet. The Poet sank in a storm with 34 men aboard in 1980.
Aided by partners from Sweden and Texas, Bonnabel acquired two small ships of World War II vintage from a Puerto Rican line and set out to acquire Navy contracts--not to "fight the big guys," he said in an interview at the time, but to ensure revenue for a "small company specializing in personalized service for commercial shippers."
The Navy lets its contracts for six-month cycles. For the four cycles preceding American Coastal's bid last October, Sea-Land and U.S. lines had the North Atlantic cargo to themselves because no other American line bid on the route. According to undisputed figures, they raised their rates each cycle, from less than $40 a ton to about $50.
When American Coastal bid $46.62 a ton for the October-through-March cycle, the Navy awarded the new company the rights to carry as much cargo as it could handle in its tiny fleet. American Coastal took about $25 million in cargo billings, or 27 percent of the total, away from its bigger rivals.
But for the cycle beginning Friday, U.S. Lines slashed its proposed rates by 46 percent; Sea-Land, by 50 percent--saving the Navy an estimated $72 million for the coming six months, and cutting American Coastal out of the trade.
American Coastal officials argued that, if their company goes to Davy Jones' locker, Sea-Land and U.S. Lines will be free to drive the rates up again. Richey did not address that issue. He ruled only that American Coastal had not met the requirements for an injunction that would freeze current cargo shares while the full case is considered by the Federal Maritime Commission.
In a related case, Richey also turned down a request by the struggling Farrell Lines Inc. to block the Navy's contract with Sea-Land for carrying military cargo to U.S. bases in Italy. Farrell, whose lawyers say it has a negative net worth of $11 million, also told Richey it could go out of business unless he intervened. But Richey said he found no evidence of "irreparable injury" to Farrell.