The Burden of the Banner

Thursday, March 14, 2002

Reprinted from Fairplay International Shipping Weekly--If the US-based shipbuilder constructing your vessel files for bankruptcy protection and you've secured your position by buying bonds that guarantee its completion no matter what, would you be protected?

US-flag owner and independent operator Van Ommeren USA thought so, but is learning the hard way that there are no guarantees in the US shipbuilding industry. The Stamford-based company is now battening down the hatches with the Department of Justice for a protracted legal battle with its surety company, Travelers Casualty and Surety Co of America.

In a joint venture called Pasha Hawaii Transport Lines, Van Ommeren ordered the 13,000 DWT, 4,500-car carrier Jean Anne at Friede Goldman Halter's yard at Pascagoula, Mississippi. It was meant to be delivered next month, but FGH filed for chapter XI bankruptcy protection in April 2001. The surety company – Travelers Casualty – then declined to step in and fund the ship's completion as Van Ommeren believed it was contractually obliged to do. Van Ommeren's John Love said the US government required these performance and payment bonds to secure the position of Pasha Hawaii and that of the US government, which provided $70M in loan guarantees under the Title XI shipbuilding loan guarantee programme.

"One of the biggest differences between the US flag and others is that it is very difficult to build ocean-going ships," says Love. He's not just talking about Van Ommeren's current legal dilemma but the wider problems affecting US owners generally. The US flag is regarded as the world's most expensive, with the government imposing costly regulations and safety requirements. "At the moment there appear to be more of us that's leaving than coming in. We could have dinner in a small restaurant of all the CEOs of US-flag steamship companies. We wouldn't need a banquet hall," Love said. All US cabotage cargoes are reserved for the US flag under Jones Act provisions.

But the flag's highly protected position is under attack from all sides, especially from the Bush administration.

President Bush has made no secret that he is also pushing to eliminate the Title XI shipbuilding loan guarantee programme, under attack since the collapse of US-flag cruise company American Classic Voyages (AMCV). The Maritime Administration (MarAd), which administers Title XI, lost more than $330M in the collapse.

Love said US owners generally believe Title XI is critical for the merchant marine's success and is concerned that the project is under attack. "It is very difficult in every sense of the word," says Love of running highly taxed US-flagged ships. "From a regulatory to a human resources standpoint. It is truly a niche business… you have to understand it to survive. We at Van Ommeren are specialised in this; it's our entire work. But many players have dropped out because it is not profitable for them."

Van Ommeren has three ships and partial ownership of two others, as well as its 29 per cent share of the Jean Anne under Pasha Hawaii. One of its ships is pre-positioned under a Department of Defense contract.

Others compete for cargoes reserved under various government preference programmes, which themselves took a hit in the 2003 Budget. Food aid cargoes, for example have been cut from five million to 3.7M tonnes.

Love has several folders ten centimetres thick for each ship, painstakingly listing vessel repairs and each piece of equipment used to fulfil "bizarre" Customs regulations. That said, "The government is very supportive of the US-flag fleet such that it is," Love said. That support looks to extend to Van Ommeren's battle with Travelers Casualty. The US Maritime Administration has thrown its weight behind the company's attempts to obtain the bond's performance, says Love.