Time To Strengthen Our National Maritime Strategy With Tangible Goals And Initiatives

Seapower, the official publication of the Navy League, states its principal mission is to educate Congress and the American people about the activities, requirements and accomplishments of America’s sea services, which they define as the Navy, Marine Corps, Coast Guard and U.S. flag Merchant Marine. I first read Seapower over five decades ago when my dad would pass along his copy to me. My early fascination with the largest movable objects built by mankind had much to do with the later course I’d set leading to a commercial career in the maritime sector. Seapower has been around for over one hundred years and continues to be an outstanding magazine, but not enough people read it. Over the postwar period, the American people have unfortunately become less aware than they should be on the continuing importance of the U.S. flag merchant marine.

The U.S. has the largest economy in the world, the largest Navy in the world and the 20th largest merchant marine in the world. Just after the end of WWII, the U.S. also had the largest merchant marine in the world. There are structural reasons behind that decline including growth in U.S. income and the emergence of flags of convenience, but it is imperative that actions are taken to stop that relative decline now.

The appearance of flags of convenience played a direct role in transitioning flag registry away from the domicile of the ship owner. The U.S. was not alone in being affected by this and it impacted most western industrialized countries. Ironically, it was U.S. action in 1939 that was the key catalyst for broader participation in the first flag of convenience registry in Panama. President Roosevelt’s desire to avoid having any shipments from the U.S. going to Germany or Italy resulted in the Neutrality Act. Roosevelt realized this same act prevented U.S. flag vessels from moving supplies to Great Britain and France when war with Germany appeared imminent. Having previously served as Assistant Secretary of the Navy, he was very familiar with the U.S. flag shipping industry and had championed the passage of the Merchant Marine Act of 1936. To get around the Neutrality Act, Roosevelt pushed to have it amended to allow supplies to move on non-U.S. flag ships. With that change, his administration then encouraged and gave permission for American ship owners to transfer some of their ships to Panamanian registry. With that flag, those ships would not be subject to U.S. law and could move vital supplies to Great Britain and France. Panama was chosen because the U.S. owned the Canal Zone and exerted considerable influence on Panama. As such, it was a suitable country to host foreign registered but U.S. owned vessels and there was sufficient confidence there would be no interference with the vessels achieving their mission. In providing supplies to allies, that mission was indirectly related to America’s own national security interests.

Just as the initiative that gave rise to a transition away from vessels flying the U.S. flag back then can be linked to national security, the actions and initiatives we should undertake today to grow the ships flying the U.S. flag is directly related to our national security interests. A basic difference is that back then we had plenty of U.S. flag vessels and today we don’t.

Goals

We should have a tangible goal of moving up on the leader board of cargo ships ranked by the flag they fly. That goal would establish a clear metric that is forward looking and compares us to all other flag registries. For example, setting our sights on having the 18th largest merchant marine by 2025 and the 16th largest merchant marine by 2030 is a stretch target but it is an attainable goal. It can be a starting point for longer term goals that may be set in the future.

Would we have landed on the moon when we did if JFK hadn’t announced his target eight years earlier? There is something about a tangible goal of putting a bold stake in the ground that galvanizes focus, effort and initiative. Committing to having the 16th largest merchant marine in the world by 2030 is a maritime Moonshot of sorts, but it is a goal we can reach. The flag state that is now in the 16th slot, Italy, has no discernable advantages that preclude us from getting to that position.

Focus, effort and initiative are essential to building our merchant marine. In setting a goal of moving up in relative rank, a period of consistent decline is replaced by one of forward momentum in both our international and domestic merchant marine segments. The interplay between all three factors can have success with one lifting the others. All of these factors are outlined below with detail on commercial initiatives, including tangible examples that could play a role in growing the U.S. flag merchant marine.

Focus

Focus starts with reminding Americans on the continuing importance of the U.S. flag merchant marine. As an industry, it is in a special position because of the vital national security role that it plays both in peace and certainly in times of conflict. America is not alone in recognizing this. There is certainly no ambivalence today in China on whether a strong merchant marine should be an integral part of their national security strategy.

Earlier generations of Americans readily recognized the national security role of our own merchant marine, in no small part because we couldn’t have won our greatest conflict without it. As no less a subject matter expert than General Eisenhower noted just before the allied victory “When final victory is ours, there is no organization that will share its credit more deservedly than the merchant marine”. During WWII, one in 26 of our mariners were killed providing vital supply lines, a higher mortality rate than any of the other services. Unfortunately, awareness of this service and sacrifice has dissipated with succeeding generations. The image at the top of this article isn’t just a reminder of the life line to freedom that American mariners created generations ago and the legacy they left behind. It’s a reminder that they still may need to be called upon.

It is incumbent on those with subject matter expertise to speak out and to educate the public and everyone in a policy making role that our merchant marine still plays a vital national security role today. This is particularly true given recent efforts by certain parties to tear down portions of our merchant marine through the spread of misinformation.

Nobody knows precisely what the future holds, but we most certainly know that any projection of military force will require a supply line that can only be provided with certainty by our own merchant marine. Not having an adequate merchant marine isn’t a problem…until it is a problem. And at that point, it’s a real big problem.

Effort

More effort by a larger number of elected officials in Washington will translate into additional government support for our merchant marine. While this will be driven by their recognition of its national security role, it can also be favorably influenced by greater public awareness of the continuing importance of a U.S. flag merchant marine. Projects like the recent Tanker Security Program involving 10 ships to target specific identified shortcomings need to be replicated and funded. The subject of direct government support is controversial with many, but the simple truth is that the withdrawal by the government of previous types of support is the proximate cause for much of the reduction in the number of U.S, flag vessels operating internationally. At the same time we’ve withdrawn support, other countries have sharply stepped up direct support of their own merchant marines.

For instance, just one Chinese shipping company, China COSCO Holdings, has disclosed total direct government subsidies of $1,632,446,000 in the fifteen years it has been partially owned by the public. The Chinese government remains the majority owner, which underscores the importance it places on the sector. Those direct subsidies work out to an average of $108,830,000 per year. In eight out of those fifteen years, the direct subsidy exceeded the reported profit of the company. The direct government subsidies at that shipping company has been trending up as it totaled $932,020,000 over the last five years, or an annual average of $186,404,000. In three of those last five years, the subsidies exceeded reported profits. This is only one of many shipping companies in China that receive direct government subsidies that have been in the billions of dollars. In addition, Chinese shipping companies are known to receive additional support in the form of their dealings with other state owned enterprises as both a customer and a vendor. While not as extensive as the direct and indirect subsidies in China, shipping companies in other Asian countries are also actively supported by their governments.

The operating cost difference of a U.S. flag vessel compared to a typical foreign flag vessel is currently $13,689 per day. To put that difference into perspective and highlight what a program that funded it could deliver, assume a new program targeted at the types of vessels most needed for potential military sealift and supply line needs was created involving 10 vessels operating internationally. A program size of 10 ships duplicates the common sense and targeted focus of the Tanker Security Program. The cost of such a program would be equivalent to 0.00664% of our current national defense budget. To underscore how small that amount is relative to the entire national defense budget, it is equivalent to 35 minutes of spending. On the benefit side, a group of 10 such vessels could form a transoceanic conveyance system that would deliver the equivalent of some 20,000 tons of cargo each day. Such a supply line would provide everything needed to sustain several divisions of warfighters if that were necessary. A military division generally includes 15,000 soldiers. With that cost to benefit ratio, is there any reasonable multiple in terms of the number of such programs that military experts say are needed for sealift that shouldn’t be supported by rational members of Congress?

Even a group of just 10 U.S. flag ships could not only play a critical role in any one of a number of situations, but they would provide jobs for hundreds of American mariners. Having additional seagoing billets for the highly trained seafarers that come out of our maritime academies and schools needs to be a top priority. All of our efforts in building back our merchant marine need to take into account the impact they will have on maintaining a pipeline of trained mariners as any decline there could have dire consequences. No matter the number of cargo ships on hand or that could be built in an emergency, what value are they without skilled American mariners to operate them?

When the relatively small cost of the 10 ship example above is balanced with what it would deliver if called upon, the cost to benefit ratio from a national security standpoint certainly looks attractive. Most national security expenditures fundamentally relate to situations that everyone hopes will never occur. Sealift capability in particular needs to be looked at in that light. It is such a critical function that if it isn’t sufficient, it can literally obviate the ability to use military force. With the widely reported disruption in container shipping over the past year, both policy makers and the public have learned firsthand how much the economy and products they buy are connected to maritime supply chains. As aggravating as that has been for businesses and consumers, the ramifications of an inadequate military maritime supply chain go well beyond empty store shelves during the holidays.

Given these facts, it is imperative that adequate sealift capability across the wide spectrum of all potential needs be fully covered. Like not having enough fuel in a plane, the dire consequences of not having enough require never getting anywhere near empty. All of this should have policy makers making the effort to ensure that there are in place whatever multiples of the 10 ship example above to ensure that America will have adequate sealift capability under all scenarios.

Initiative

Change happens from plans and actions that challenge the status quo. That is certainly what history has demonstrated on America’s role as the thought leader in the shipping industry. Most would agree with that characterization of our past role, but I believe it still applies today. We need go beneath the surface and access all the strengths we have as they go beyond the current size of our merchant marine. When that is done, the wheels start to move, forward motion occurs and the thought leadership we have wakes up more.

Initiatives based on fresh ideas and new approaches offer a path for organic growth going forward in both our international and domestic merchant marine fleets. That statement is made mindful of the issues that have challenged this in the past, but keenly aware of America’s history of innovation in the maritime sector. It is America in the postwar era where container shipping was invented, the supertanker was born and the design for the bulk carrier was created. The commercial initiatives that gave rise to the three primary segments comprising the modern shipping industry today came from individuals who brought a fresh look and worked to come up with something fundamentally different and better. We should constantly be looking for ways to tap into our maritime heritage of innovation as many of the same elements that gave rise to it still exist.

For instance, our current merchant marine ranking broadly understates the involvement of Americans in the global maritime industry. In terms of the domicile of ship owners, we rank #4 in the world if ranked by total ship value, just behind China, which is #3. We score even higher with regard to the capability of our naval architects and engineers. Our maritime lenders, consultants and professionals are among the top in the world. In terms of seafaring ability, no country can match the quality of the graduates from our maritime colleges. America is the undisputed leader in shipbuilding skill in that we can construct complex naval vessels that no other country is capable of building. We are the home of the largest container shipper in the world along with numerous other top container shippers. American companies are also the dominant shippers of most types of dry and liquid bulk products in and out of the country. We are clearly the undisputed world leader in the digital technology that is playing an increasingly important role in all shipping segments, most particularly container shipping.

All of those facts are ingredients that we can draw on related to the prime mission growing our merchant marine. Initiatives related to both our international and domestic maritime segments can benefit from even more linkage with our capabilities and innovations in the road and rail transport sectors. It’s one large interconnected supply chain. The better the fit between modes in our country, the more efficient and less congested it operates.

It is from new commercial initiatives that we will have to primarily rely on for growth in our merchant marine. The factors of more focus on the national security role and more government funding through the efforts of policy makers will hopefully play a part. But counting on everyone having my father’s or General Eisenhower’s view of the vital role of our merchant marine or Congress signing all military sealift checks put in front of it isn’t a strategy. Commercial initiatives percolating up from industry, including the broader U.S. transport sector, are the most reliable factor to concentrate on. Success in that area can actually flow over and lead to the other factors assisting more in what could be a virtuous circle of growth in the U.S. flag merchant marine.

International Commercial Initiatives

Container shipping is the transport mode making the majority of world trade possible. In addition to being a vital segment, the composition of its costs is very different than the other shipping segments. In container shipping, costs related to the ship itself are the minority of the overall costs for which the carrier is responsible. In contrast, in other shipping segments, most of the costs incurred by the owner relate to just the ship itself. Container shipping is therefore the segment where the crewing cost difference is the smallest percent of total costs. This fact makes the container shipping segment the one that U.S. flag vessels operating internationally could be the most competitive before taking into account further differentiating characteristics.

It is unfortunate that U.S. flag representation today on the major liner trade lanes is de minimis, particularly given the fact that no country has more inbound loaded containers than the U.S. That was not the case when I started in container shipping and U.S. flag ships had large representation on all the major trade routes. There has certainly been a multitude of changes in container shipping since then. Even with those changes, and in fact in large part because of some of those changes, there is now a path where a differentiated U.S. flag container service operating ultra large container ships in the world’s largest trade lane can be successful. A key reason for this is that the geometric increase in the size of container ships, with the largest now seven times bigger than when I first started in the industry. This change has had the effect of making crewing costs an even much smaller percentage of total carrier revenue and costs.

With those facts in mind, a commercially successful new U.S. flag container service can be outlined along with what the relevant numbers would look like. The exercise will be based on a weekly Asia to U.S. West Coast service involving five vessels in a 35-day voyage rotation. Going back to the $13,689 per day operating cost differential for U.S. flag vessels, the incremental cost per TEU (Twenty-foot Equivalent Units, the standard vessel size and volume measure in container shipping) can be calculated for various vessel sizes. That calculation will be based on loaded TEU’s using 90% utilization in the eastbound headhaul direction and 30% in the westbound backhaul direction. Those are typical overall utilization levels in that trade lane but below recent actual experience.

The average vessel size now in the Asia to U.S. West Coast trade lane is 8,816 TEU, which results in a U.S. flag differential of $45.29 per loaded TEU. If the largest vessels in that lane (19,273 TEU based on the recent arrival of the COSCO Aquarius) were operated, the differential goes down to $20.72 per loaded TEU. Drewry, a leading independent maritime research consultancy, tracks container rates and shows the latest spot rate on October 7 in that lane was $5,587 per TEU. That results in differentials equivalent to 0.81% and 0.37%, respectively, of the revenue carriers are now receiving for such movements.

Those percentages are relatively inconsequential and would still be small if the differential was compared to rates before they increased sharply due to the current supply/demand imbalance in container shipping. For instance, when compared to Drewry’s year ago spot rate of $2,031 per TEU, barely one third of the current rate, those percentages are 2.23% and 1.02%, respectively. There is no attempt here, however, to make the case that the incremental U.S. flag operating costs are so inconsequential as to not be relevant. The focus should be on absolute cost differences resulting from any new service, as it is those differences that are sustainable in all market conditions and result in either competitive disadvantage or competitive advantage. It is other cost aspects of the new U.S. flag container service that will differentiate it. Those aspects will not only result in cost benefits that fully mitigate the additional crewing costs, but will actually produce overall cost benefits that give it a competitive cost advantage.

Before outlining the specifics of such a new U.S. flag container service, it should be noted that this is a favorable time to consider such a new service. The total earnings of the container carriers have set new record levels in each of the last three reported quarters. When actual results are reported for the third quarter of 2021, they will set another record. Net income to revenue for the entire industry is in the 33% range. The industry has gone from often performing near breakeven with inadequate returns on equity to significant profits that result in well above average returns on equity. Congestion and bottlenecks have exacerbated the tightness in container shipping supply that has driven the improved results. This has resulted in schedule disruption and views among shippers that service reliability has never been worse.

The increase in both spot and contract rates that has accompanied the supply/demand imbalance in container shipping has been accompanied by agitation on the part of shippers with regard to both pricing and service. While some of the increases in rates are expected to reverse, there is an increasing belief by analysts that there has been a fundamental change in how carriers will control capacity going forward. Large shippers are reviewing options that include chartering ships themselves in order to obtain better pricing and service for their own shipments. All of this creates an environment where shippers will be open to the launch of the envisioned new service. The unprecedented rate and service issues shippers have experienced for more than a year will be long remembered.

The new service will be an express service between just China and the U.S. West Coast. It will move only 53’ containers on ultra large container ships specifically configured for that purpose. That size is legal in China (where all the 53’ containers used in U.S. domestic doublestack rail service are made) and is the same size that has exclusively been used for domestic road and rail movements in the U.S. for over two decades. The objectively compelling attractiveness of a regular weekly service built around 53’ containers should be well received and planning should focus on using five ships with a capacity of 19,273 TEU’s, the largest now in service. Configured for 53’s, each equivalent to 3 TEU’s, that translates into 6,424 53’ containers. With ships of that size, the U.S. flag operating cost differential is equivalent to $20.72 per loaded TEU. While that is an inconsequential percent of current and even recent rates, we aren’t suggesting the U.S. flag ship owner absorb that additional cost. With a unique modal that actually takes several steps out of the typical process and therefore reduces both cost and time, that incremental cost can be more than mitigated, as we will show.

The first process that 53’ containers take out is container handling expense on both the discharge and loading operations. A ship configured for 53’ containers will involve 33% less moves on each end to handle the same amount of TEU’s compared to a ship moving typical 40’ marine containers. While a 53’ container is equal to 3 TEU’s, a 40’ marine container is equal to 2 TEU’s. The cost per container move, or pick as it is referred to in industry jargon, is a variable cost that is effectively the same whatever the size of the container. That variable cost will be different at various ports and terminals, but having 33% less moves will typically result in a similar reduction in that expense and the time involved in that activity. While the larger absolute savings will be at the U.S. West Coast destination ports, there will be similar percentage savings at the China origin ports. The cumulative amount of these savings will be at least several times the $20.72 per TEU incremental U.S. flag cost. In other words, using the equipment size that already works best within America’s domestic transport system fully inoculates the U.S. flag operating cost differential.

The next process that 53’ containers take out occurs the majority of the time, but it only applies to the U.S. side. It relates to situations involving follow-on land moves beyond local deliveries, most particularly the moves by rail. When that happens, it offers even more cost and time savings than from less cargo handling at the ports. It is an axiom that the cargo inside inbound containers to the U.S. eventually ends up where people are in a correlation that is very high. While some 50% of the inbound containers to the U.S. are discharged at West Coast ports, that coastal range is closer to only 24% of mainland population. That fact underscores that a large percent of those containers move on to final destinations in the middle and eastern parts of the country. The U.S. domestic transport system is highly efficient and most inland movements over 500 miles now move on doublestack unit trains exclusively carrying 53’ containers. The efficiency of that mode is such that in the decades the 53’ container has been the standard for domestic shipments, it has created significant transloading activity near all West Coast ports. In that activity, the cargo in three 40’ containers is unloaded and put in two 53’ containers. This adds at least $250 per TEU in costs and 2–3 days of time, but is deemed to be worth the inland efficiencies that are gained in moving 53’s long distances on doublestack unit trains. The cost of transloading will vary widely based on contents, pallets, floor load and stickering. From communication yesterday with individuals actively involved in transloading on the West Coast, $500 per 40’ marine container ($250 per TEU) is the minimum, but it can range up to $2,000. That entire step in the process and the related cost and time is removed if the cargo moves in 53’ containers from China because it is already in the best size for the most efficient inland transportation.

Large retailers have established distribution centers next to ports where the outbound 53’s are loaded with individual store merchandise in a process that would need to happen at some point anyway. They may not consider the transloading activity to involve net additional cost and time. There are still however large numbers of 40’s that are transitioned near the port into 53’s solely to achieve net savings in inland transportation. This is a sub-optimal form of containerization as the best cost and time results when the same loaded equipment unit moves seamlessly from one mode to another. The way the highly efficient U.S. domestic transport system has dealt with traditional 40’ marine containers is to stop them at the port and make the long follow-on movements in more efficient 53’ containers.

That unnecessary process is completely removed in the envisioned new service with 53’ containers. In an additional benefit that is particularly relevant given the widely reported congestion on the West Coast, port area congestion is reduced as short drives from port terminals to transloading facilities are eliminated. The existing transloading activity is a significant use of local trucking capacity at most of the West Coast ports. By obviating the need for that activity with the new 53’ service, it has the affect of improving trucking capacity. There is growing awareness that a shortage of truck drivers is a contributor to port congestion. With capacity freed up from transloading activity by the new service, presumably it can be focused on getting more containers out of terminals faster which could materially improve the congestion situation.

A broader port congestion remediation initiative that a service built around just 53’ containers lends itself to better than marine containers is direct on-dock discharge to doublestack shuttle trains moving containers dozens of miles to new inland terminals. Such an initiative would be a good way to invest the time saved by having 33% less container crane moves with a ship carrying only 53’ containers. These greenfield terminals outside of any city limits with plenty of acreage would allow room for the preferred fully wheeled operation where each container sits on a chassis, allowing a quick pickup for whatever mode it would take to get to the final destination. Traditional marine containers don’t lend themselves as much to such a process because many are not ready to move on and first need to be unloaded and then reloaded into 53’s. The ability of the 53’s in the new service to be immediately “next-mode ready” with the port congestion relief that can provide is a major associated benefit of such a new service.

Why aren’t 53’s being used now? Standardization in traditional marine equipment sizes, actual legal and physical constraints in many countries, long lived vessel and equipment assets, concern about competing with yourself and desire for vessels and equipment to be interchangeable across many countries all play a role in existing container carriers not moving ahead with a serious 53’ initiative. For all those reasons and even a couple more, don’t expect any existing container carrier to go down this path soon. For an industry that was literally born from the application of innovative thinking, it often appears that carriers are reluctant to do things that separate themselves from other industry participants. Many are also unfamiliar with the U.S. domestic transport system and the efficiency gains it has achieved in recent decades. Most leaders in the container shipping industry would dismiss 53’s, noting the cargo they move doesn’t need that space and that the oddball size only has limited applicability. Individuals in the maritime industry refer to 53’ containers as oversize or jumbo, as if marine containers are the standard and others have only limited use. The reverse of that is actually true in U.S. domestic freight markets. What works best in those markets will be the focus of the new service. While the 53’s might not work in other markets as existing carriers say, that doesn’t matter, as the envisioned service won’t be in those markets and will be focused exclusively on what works best for the U.S. freight market. The view that traditional marine containers are big enough belies the significant transloading activity now happening, and not just with select cargo but with most cargo. But this view will actually work to the significant advantage of the company that starts the envisioned service. If existing container carriers aren’t candidates to start the new U.S. flag container service, which company is the best candidate to do that?

J.B. Hunt is one of the largest freight transportation providers in the U.S. with total revenue now in the $13 billion per year range. They went from being the largest truckload carrier to broadening the services they provided by operating doublestack train service between major points throughout the mainland. J.B. Hunt is the largest owner of 53’ containers in the world with more than 100,000 presently owned not including a recent order to buy 12,000 more from a manufacturer in China. Their largest domestic freight lane is outbound freight from Southern California moving in 53’ containers that originally was discharged at ports in traditional marine containers. They know that market well because they already participate in it. Integrating backwards with a shipping service from China built around 53’ containers is extending the supply chain they know in a manner that gives them a cost advantage relative to traditional container carriers even with the higher crewing costs of their U.S. flag ships. While service will be limited to just China where 53’s are made and legal, half of U.S. inbound containers come from China. That isn’t a significant limitation for a company that wants to remain focused on customers in the U.S. and moving their freight as efficiently as possible.

The underlying cost and time advantages of the new U.S. flag service and the ability of shippers to have their cargo move seamlessly from China to its final U.S. destination in the same 53’ container should be readily embraced by shippers. The same shippers have been exclusively utilizing 53’ equipment for their domestic shipments for two decades and they don’t need to speculate on the loadability of their particular products in 53’s. The fact that this will initially be the only weekly 53’ service means the focus can be on shippers that can fully utilize all 3,830 cubic feet of space inside a 53’ container. Among other customers, there is a certain retailer in Northwest Arkansas well known to J.B. Hunt that we can anticipate will want to be the first to reserve space with bookings.

J.B. Hunt is in a unique position to gain other meaningful economic benefits from the new service. As noted earlier, all the 53’ containers used in domestic intermodal moves, a fleet currently estimated at 300,000, are now made in China. Of the tens of thousands that come here each year, transport is typically arranged on the decks of bulk carriers. While revenue is sought, it generally just reduces the cost of positioning the equipment. The random and divergent movements from non-traditional ports make those moves mostly cost centers rather than profit producers. A consistent predictable service from traditional ports with 53’s completely changes that dynamic. At the most basic level, J.B. Hunt, itself the largest purchaser of 53’ containers in China, turns a liability into an asset in terms of the 53’ containers it will keep in its domestic service. For those thousands of containers retained in its domestic system, it also won’t need to load them back as empties on the weak backhaul leg. Those one way boxes aren’t in sufficient number to have J.B. Hunt avoid loading any empties back, but it gives them a further inherent advantage in terms of not having to load back as many containers as were discharged. Nobody can match that and the resulting cost and time savings are not insignificant.

J.B. Hunt was selected as the company to initiate the new hypothetical U.S. flag China to West Coast service as they seem to be ideally situated. There are, however, other American companies directly and indirectly involved in domestic transportation and appreciative of the benefits of 53’ containers that are also candidates. The first company that comes to mind is Amazon. Reduced to its core, it’s the world’s largest logistics company and one that is growing significantly. Just as Prime Air makes sense, at some point there will be Prime Water and it will be focused on 53’ containers for products coming to the U.S. Other domestic intermodal freight providers that would be candidates to originate the new U.S. flag 53’ service from China include Hub Group, Schneider, Swift and XPO Logistics. If rates stay near where they are now, its also conceivable that major retailers or a consortium of major retailers will also consider launching such a service. Stating the obvious, the largest benefit will accrue to the first company to move ahead on a 53’ service between China and the West Coast.

The envisioned U.S. flag service from China would have relative cost benefits and the same would be true for a hypothetical service to the East Coast. To provide the minimum weekly service required, it would need 10 ships. At the maximum Panana Canal capacity of approximately 14,000 TEU, that would translate into a U.S. flag operating cost differential of $57.04 per loaded TEU. That amount is equivalent to 0.75% of the spot rate on October 7 from Drewry. The absolute difference driven by crewing costs would be mitigated by the reduced cargo handling from one third less container crane moves, although the percent difference would likely not be as favorable as with the West Coast service. Further cost advantages would accrue from the efficiency of follow-on inland movements, whether via road or rail.

The economic benefits of a China to East Coast service built around 53’s would act to draw cargo that was previously discharged as traditional marine containers on the West Coast, unloaded and reloaded into 53’s and then moved cross country via doublestack rail. As such, that service would offer congestion and emissions benefits that would be significant. This transition would improve West Coast congestion by bypassing it entirely. Congestion relates not only to the port and its immediate area, but to more than a dozen go through states as the unit trains make their way across country. The improvement in emissions from such a transition would be more dramatic and fits with climate change goals embraced by policy makers and shippers alike. The quickest way to reduce the carbon emissions of freight now moving by land by over 90% is to make it freight moving by water. That happens immediately when intermodal cargo is drawn to the new China to East Coast 53’ service.

Excluding container ships, the vessel segment where the incremental U.S. flag operating would typically represent the smallest percent of total cost are LNG tankers. Driven by the very high capital cost of LNG tankers, the incremental U.S. flag cost compared to the total operating, fuel and capital cost of a foreign flag LNG tanker equates to approximately 10%. Recently on Fareed Zakaria’s GPS show, Pulitzer Prize winning columnist Thomas Friedman referred to the U.S. as being the Saudi Arabia of natural gas and called for building additional facilities so it can be liquefied and exported. The gas is our natural resource and a requirement that a portion of such growing exports move on U.S. flag LNG tankers makes sense. Such a requirement would encourage reflagging existing vessels. Given the relatively modest impact, this would be an efficient way to increase the number of U.S. flag vessels operating internationally.

Other situations that could lend themselves to using individual U.S. flag ships where foreign flag ships were previously used may exist. It starts with a shipper asking about what the incremental costs would be if a U.S. flag option exists or could be developed.

To encourage and reward shippers who utilize U.S. flag ships for international movements, relevant government agencies should develop programs that recognize and highlight such shippers. Whatever their motivation is, shippers are the ultimate decisions makers. By casting a light on desired actions by shippers, we can expect to see more of those actions.

Several large corporations have the ability to single handedly be a catalyst for growth in the U.S. flag merchant marine by indicating a preference. It fits squarely with their current ads. Amazon is running a current commercial saying it is buying more than $120 billion worth of supplies, services and equipment from businesses in the U.S. in 2021. Walmart recently announced it would spend an additional $350 billion on products made, grown or assembled in the U.S. over the next ten years. Recognition programs targeted at freight decision makers and traffic departments can create a virtuous circle benefiting everyone involved.

Domestic Commercial Initiatives

More focus should be placed on commercial initiatives to transition pure domestic cargo now moving via rail and road to water. It is a larger amount of cargo compared to the potential in feeding marine cargo to and from major ports. It also lends itself to new smaller scale land operations on both ends that don’t require the infrastructure needed at major ports. As such, the fixed costs outside of the linehaul cost on the water will be less. Those costs are often the key determinant for transitioning freight to water. There are numerous U.S. flag vessel configurations that result in less linehaul cost per 53’ mile compared to rail and road alternatives. While that will decrease as size increases, the planning must focus on overall cost including the setup costs at each end. The vessel should be adapted to fit best with minimizing those costs. Smaller is better in many respects in terms of overall cost and that also improves frequency which will be important in drawing freight from the rail and road modes. The key priority, however, must still be on developing alternatives for domestic cargo that result in lower overall cost than rail and road.

Note that any new commercial initiatives to move domestic merchandise cargo by water needs to be built around 53’s containers. That is the size the cargo is now being moved in and using a smaller less efficient size won’t be sellable to shippers. The template to look at and attempt to duplicate in terms of the setup cost at each end is the current experience of the U.S. railroads in loading and discharging 53’ containers. In the most efficient rail intermodal operations, the arriving 53’ containers are loaded directly on to the doublestack railcar at origin and unloaded directly unto the chassis pulled by the shippers local trucker at destination. This operation eliminates the cost of a large terminal as well as the cost of re-handling cargo if it is first placed in a terminal. The workers loading and unloading 53’ containers for the railroads are Americans paid prevailing wages.

If the all-inclusive cost of moving a 53’ container on and off doublestack trains can be duplicated, that will generally ensure a lower cost as there are many U.S. flag vessel configurations, including smaller vessels, that have lower linehaul per unit mile costs than railroads. In situations where it would be lower cost compared to rail moves, it is always an even larger difference compared to truckload over the road moves.

While economic costs should be the North Star in modal decisions made related to freight, the emissions and congestion benefits of moving cargo that previously moved by rail or road to new domestic 53’ services over water are extraordinary. In general, carbon emissions will be immediately reduced by more than 90% as a result of any such switching. This becomes even more important for shippers who are beginning to track the overall emissions of activities they control, including freight movements. As more corporations embrace emissions reduction targets and programs are likely developed that put an economic cost on emissions, the significant benefit from switching will play a larger and more direct role in shipper decisions. Similarly, any congestion resulting from rail and road movements is completely eliminated when the same 53’ loads move via water. In many states, the majority of the rail and road traffic moving through it has nothing to do with the economy or citizens of that state. Is it fair to those states to be exposed to the emission and congestion affect of freight that is just passing through if a better alternative is available?

Domestic freight in 53’ containers moves in hundreds of major lanes across the mainland. A systematic review of rail waybill data and truckload movement data available from service providers would highlight the best opportunities for new 53’ water services. Characteristics of the latter include high volume lanes that are near water on each end and where the water distance is fairly close to the land distance. An ideal route would be where the water distance is actually less than the land distance. Those situations are, however, limited given the geography of the mainland. Note that when the term water is used, it is meant to go beyond coastal waters and to include all navigable inland waterways. Indeed, the opportunity to move domestic cargo in 53’ containers along our inland waterways offers many interesting possibilities.

Before highlighting those, there is one case where domestic cargo moving in 53’ containers makes sense even with the water distance well above the land distance, in part because it would be a hybrid service piggybacking on U.S. flag tankers already serving the U.S. Gulf to U.S. Northeast route. A tanker that was adapted to allow 53’ containers to be loaded on its deck above all of its piping and put in a regular scheduled service between Houston and Philadelphia would offer compelling economics with a base cargo of crude oil northbound and 53’ containers in both directions. The container moves would be fairly balanced with the northbound movement of plastics and resin beads the dominant product. While combining two fundamentally different types of cargo on the same ship has challenges, they can be overcome and the improved cost economics resulting from better overall utilization are compelling. There are also other situations within the existing domestic blue water or coastal market where such hybrid services may make sense.

In terms of new services moving domestic cargo in 53’ containers in coastal markets, if the principles outlined above are followed and achieved, there are numerous examples where scheduled services can result in total costs below what shippers are now experiencing with rail and road. Everything else equal, that cost advantage will increase as distance grows. For instance, a blue water route between the Miami area and the New York area, with new terminals with no more infrastructure than is needed for shallow draft vessels, is compelling. It is a very large freight lane where the water miles are actually less than the 1,276 land miles. Such a 53’ service focused solely on domestic freight would offer cost benefits to shippers at the same time it would offer emission and congestion benefits to everyone living along the I-95 corridor.

The inland waterway system of the U.S. has almost as many miles of navigable rivers as the rest of the world combined. This is an extraordinary asset and its cost efficiency in moving grain to export facilities is the primary reason the U.S. is the largest exporter of food products in the world. The inland waterways are also a major highway for the movement of coal, crude oil and petroleum products. The cost efficiency of such movements is such that railroads can’t effectively compete with towboats. It is the north-south orientation of the major river systems that had the largest railroads focusing on an east-west orientation for their lines. They didn’t want to compete with a mode they recognized as having lower costs. Despite the extraordinary efficiency from moving these bulk products with towboats, almost no containers move on the inland waterways. The minimal numbers that move are traditional marine containers in feeder services. The reasons for this are manifold. Speed, tradition and lack of focus on domestic cargo opportunities are among them.

It is irrefutable that our inland waterways offer us a more cost efficient way of moving 53’ containers than either rail or road. Transit time can be an issue, but where inventory carrying cost is the primary variable related to transit time, it is rare for a mode that adds a modest amount of known time to tip the scales. A new 53’ service on the Mississippi River is one example of a more cost efficient way of moving domestic cargo between Chicago, St. Louis, Memphis and New Orleans, all large domestic freight centers.

One way to establish such a service would be to setup agents at various sites along the river, similar to a model used by Landstar System, a $6 billion annual revenue logistics company built around a network of agents and third-party capacity providers. The agents would solicit loads and arrange for the local pickup. When the 53’ load arrived at the agent’s facility, it would immediately be lifted from the chassis by a reachstacker that would then place it on a standard river barge adapted to move 53’ containers. The barge would be docked at the agent’s facility where all 27 slots for 53’ containers could be accessed by the reachstacker. The barge would in effect act as the terminal until it was joined up with an existing river tow. These towboat companies would be the capacity providers. Arrangements would be made to provide that locomotive service in exchange for a fee varying by the points where the barge was attached and detached. Those operations are fairly straightforward and involve lashing and unlashing a river barge to an existing tow of up to 18 same size barges.

The initial focus should be on 53’ loads going longer distances, such as between areas near Chicago and New Orleans. The setup costs on each end would be low and reflective of a straightforward operation not involving many people with limited infrastructure. Each site would need a small dock, one reachstacker and a small feeder towboat to assist with coupling and de-coupling barges with 53’ containers. A parent corporation similar to Landstar System would provide the booking and tracking systems, handle billing and fund or otherwise support some of the site infrastructure, depending on the revenue share arrangement entered into with the agents. It would also negotiate and pay the locomotive fee to the existing operators and acquire the barges needed to move the 53’ containers. That fee should be reasonable given the modest incremental costs that come with providing that service.

Such a system would get better as its density and volume improved which would come from adding additional sites run by agents with their own business operation. The smaller units of capacity represented by the river barges holding 27 53’ containers lends itself to daily or even more frequent departures which would be attractive to shippers. Many sites would have two such barges docked at the agents facility, one for 53’ loads moving north and the other for 53’ loads moving south. Having agents focus on particular destinations in both directions would maintain the efficiency of de-coupling barges at the best point for all 53’ loads. The process involved when full barges arrive at a particular site would be the reverse of what the agents did when they loaded 53’s on the barges. With barges going out and coming in at all sites, something close to balance should be attainable. To the extent that it doesn’t occur, arrangements for re-balancing between sites with the empty barges also moved by the towboats can be made.

The envisioned 53’ service moving domestic cargo along the Mississippi River corridor will have costs low enough that it will be able to offer a compelling value proposition to shippers presently moving the cargo on rail or road modes. The more significant congestion and emissions reduction will also play an increasing role in shipper freight decisions. All of these factors should at least partially mitigate concerns regarding end to end transit time. While it will take much longer than truckload service and moderately longer than rail service, by adhering to schedules and keeping shippers advised, the compelling cost savings will be attractive to many shippers.

As the service gains momentum with shippers, it may make sense to look into purpose built capacity that maintains the above model with agents and smaller units loaded but adds more power unit speed. With less random forces at work, the flat water in the inland waterways lends itself to various options of linking capacity units with power units.

There are other inland waterways that lend themselves to moving domestic cargo in containers. Other high value cargo could also benefit from these underutilized water highways. New cars certainly come to mind. We are approaching the two hundredth anniversary of the opening of the Erie Canal, the freight artery that connected the eastern seaboard with the interior of the country and made New York the largest city in the U.S. It would be fitting if someone came up with a way to move new cars from near where they are built to New York City in purpose built low profile water trains that pulled car capacity units that were linked together one after another.

A new type of vessel, known as a turbine installation vessel or TIV, is necessary to install the components of an offshore wind turbine. The efficiency of these very large turbines is as such that they have emerged as one of the most preferred forms of renewable power. While the U.S. is presently behind Europe in the use of offshore wind, utilities are moving quickly to install offshore wind farms. Such installation work must be performed by TIV’s built in the U.S. and owned and crewed by U.S. citizens. Only one TIV is presently being built in the U.S. but my analysis shows that at least another four will be needed just for known projects through 2030. As you go out further in time, that number could grow geometrically from additional wind farms and the expected need to replace turbine blades every twenty years.

American shipyards can build high specification TIV’s for something less than 50% above the cost of the same TIV built in a foreign yard. These high cost vessels are important work for our shipyards and will provide jobs in a very fast growing segment for our mariners. The incremental cost of using U.S. built, U.S. crewed TIV is just 1.4% of the total cost of an offshore wind turbine. This most modern of vessel types is a key niche that can grow our domestic merchant marine while providing attractive jobs for our mariners. There should be an all of government effort to support initiatives involving TIV’s and a similar opposition to oppose any loopholes that would lessen U.S. flag opportunities in this important area.

Summary

We need to reverse the decline in the size of our merchant marine. For national security reasons, we must be assured that in all circumstances we have sufficient U.S. flag ships for sealift and adequate trained mariners to operate them. More ships means more jobs, and more jobs means we’ll have the trained mariners if and when we need them. That’s the best way we can honor the legacy of the young man in the image at the top of this article.

Setting a tangible goal of moving up in relative rank replaces a period of consistent decline with one of upward momentum going forward. To achieve those goals requires focus, effort and initiative. The area of commercial initiatives is where we need to concentrate. It is the path to more sustainable organic growth.

It’s about communication. Making people aware of the national security aspects. Promoting more government funding. Encouraging commercial initiatives. Those are communications that can and should be had by everyone involved in or supportive of our U.S. flag merchant marine. Dialogue with transportation providers, vessel owners and shippers can result in new initiatives. Shippers in particular, the decision makers at the top of the supply chain, are important sources of ideas and feedback. What initiatives make sense to you? Under what conditions will they give preference to a new U.S. flag service? Are you asking carriers about the impact of U.S. flag registry on costs? What is the role of national security considerations in your freight decisions? How should American shippers support American carriers with U.S. flag vessels?

A shipper recognition program managed by the Maritime Administration, the DOT agency responsible for promoting waterborne commerce, would also be an effective way to use communication to assist in growing our merchant marine by both rewarding past actions and encouraging future actions.

The strongest voice related to the direction of our merchant marine will come from the Administrator of the Maritime Administration, who has yet to be nominated by President Biden. He or she will be actively involved in all aspects of our country’s maritime supply chain. That individual will be the single most important person in terms of what kind of growth path our merchant marine will be on over the next several years. Much of that will be driven by commercial initiatives where the incoming Administrator can play a critical role in developing and encouraging those initiatives. With the importance of such thought leadership, the ideal Administrator will be someone with a deep commercial background across the maritime supply chain with creditability and contacts with decision makers at transportation providers, vessel owners and shippers. In summary, he or she needs to make commercial things happen that will grow the U.S. flag merchant marine.

John D. McCown has four decades of experience in the maritime sector including serving as CEO of a U.S. flag container shipping company he co-founded and leading transportation investments at a multi-billion dollar hedge fund. Mr. McCown is the holder of two patents and a MBA from Harvard Business School and is the author of the recently published book “Giants Of The Sea: Ships & Men Who Changed The World”.