Future of the Pacific Liner Trades U.S. Flag Perspective

1. Future of the Pacific Liner TradesU.S. Flag Perspective John D. Selleck Director, Strategic Development Matson Navigation Company

2. Future of the Pacific Liner TradesU.S. Flag Perspective John D. Selleck Economist Disclaimer: “The views expressed here do not necessarily represent the views of the Matson Navigation Company”

3. Future of the Pacific Liner Trades Is the U.S. flag relevant?

4. Excellent Source for Maritime Statistics: www.coltoncompany.com

5. Source: www.coltoncompany.com (Data from MARAD)

6. Source: www.coltoncompany.com (Data from Lloyd’s)

7. Reasons to Operate U.S. Flag Ships in Foreign Service • Indirectly subsidized by preference cargo • Westbound cargos (Trans-Pacific backhaul) • Directly subsidized by the U.S. government • MSP

8. U.S. Flag Pacific Markets and Operators • Commercial • Hawaii—Matson, Horizon, various barge operators • Alaska—TOTE, Horizon, various barge operators • Guam—Matson, Horizon • Military • Japan—NOL, Maersk • Okinawa—NOL, Maersk • Korea—NOL, Maersk • Kwajalein—Matson • Other—NOL, Maersk

9. U.S. Flag Fleet Engaged Exclusively in Foreign Trade • 58 U.S. flag cargo ships* • Of which 46 (79%) are containerships of which 40 (87%) are owned by two companies: NOL and Maersk • 47 MSP Slots • 13 more slots to be added, but 5 for tankers • However, military wants more militarily useful ships (ro/ro, heavy lift, self-sustaining, tankers… not large containerships). • Prediction: • Future rationalization of U.S. flag container vessels carrying preference cargos with MSP. • Whatever the future of the MSP program, the U.S. flag will remain a relatively small niche. *Source: www.coltoncompany.com (data from Lloyd’s)

10. U.S. Flag Domestic Fleet Engaged in Foreign Trade (Trans-Pacific) • 8 container ships built with CDS • Prohibited from purely domestic service • All call Guam, or Hawaii and Guam • All carry eastbound freight from Asia • Last Horizon Lines ship turns 25 in 2005 • Last Matson ship turns 25 in 2007 • Highest and best use—purely domestic service • Foreign-built, U.S. flag ships can be used to Guam • Fewer ships needed for domestic service • Cost of new ships

11. New Jones Act Ships 2003 MV Manukai CV2600 – $110 Million

12. New Jones Act Ships 2003 MV Midnight Sun Orca Class Ro/Ro – $170 Million

13. Relevance of the Future of the Pacific Liner Trade to U.S Domestic Trades and Vice-Versa • Increasing size of post-Panamax ships opens-up opportunity for U.S. feeder services • Matson, Columbia Coastal • Increased road/rail congestion has prompted MarAd to pursue the Short Sea Shipping Initiative • 2nd Annual MarAd Conference is next month • As more of U.S. commerce is international trade (90% of which is shipped by sea) and arrives at a seaport, it is more feasible for that freight to continue on to domestic points via ocean

14. Market Factors Affecting U.S. Domestic Operators:Matson’s Experience Two Markets: Domestic Market Differs from International Feeder Requirements • Shippers want frequency • Favors smaller ships • Transit times are critical • Barges not competitive over long distances • Coastwise services need cooperation of trucking companies • Pricing based on avoided cost • Costs largely determined by international trade • Specialized equipment needs • Reefers, flat racks • 53’ containers

15. Cost Factors Affecting U.S. Domestic Operators • U.S. Ship building costs are relatively HIGH • Crew costs are relatively HIGH • Stevedoring costs (and time) are relatively HIGH • Environmental concerns are relatively HIGH Comparative Advantage In: • Fuel (speed) • Technology

16. U.S. Domestic TradesPotential Developments • Increased use of larger boxes • Ro/Ro • Increased automation for cargo handling? • Fast ships? • Faster tugs/barges? • Exclusively domestic ports? • Special manning/stevedoring rates? • Low-cost building (through automation?) • Government subsidies? • Other???

17. U.S. Domestic Trades—Past and Future (?) Incubator for Innovation Innovations developed for, and perfected in, the U.S. domestic trades can be introduced to the foreign trades Matson’s first fully containerized vessel, the SS Hawaiian Citizen in 1958