FEATURES

The State of the US-Flag Commercial Fleet

By Charles Diorio, General Manager, American Roll-On Roll-Off Carrier

Photos courtesy American Roll-On Roll-Off Carrier

On 15 June 2016, American Roll-on Roll-off Carrier’s (ARC) M/V Endurance departed from the port of Beaumont, Texas, laden with Army cargo. M/V Endurance had loaded a mix of tanks, trucks, tractors, wreckers, fuel tanks, cargo handlers and various other items bound for Kuwait. While Endurance is among the most militarily-useful, multi-purpose, and largest roll-on, roll-off vessels in the world, she is also one of a small number of commercial cargo vessels trading internationally in the United States-flag fleet. The US-flag international fleet has declined steadily since the end of World War II. The US oceangoing merchant marine fleet has declined by 82 percent since 1951, when the fleet peaked at 1,268 vessels. 1 At the end of 2014, the US-flag international fleet was down to 73 vessels, a reduction of 25 percent in just four years. 2 With the addition of two new vessels in 2016, ARC may soon operate 10 percent of the US-flag international fleet, but the overall trend line for the industry is steadily downward. The reality is that in order to provide the assets, mariners, networks and readiness the Department of Defense (DOD) requires, US-flag carriers must have cargo. Cargo fills the ships, ships employ mariners, those mariners are in turn available to crew government reserve vessels, and

the ships and related intermodal networks provide readiness to the US military. Unfortunately, cargo preference volumes have declined dramatically in just the past few years. The main driver for this is the cessation of combat operations in Iraq and Afghanistan, and the concurrent overall reduction of US forces’ overseas footprint. The Maritime Administration calculated that government-impelled cargo fell from a high of 5.6 million tons in 1991 to 2.2 million tons in 2014, with the majority of the decline from DOD cargo. 3 Military cargo is estimated to reach a nadir of 1 million tons per year in 2016. 4 As a result of these cargo reductions, the international fleet has expe

rienced a precipitous decline. Holding on to these remaining American vessels is a national security priority, one that the Maritime Security Program (MSP) was meant to ensure.

MARITIME SECURITY PROGRAM The Maritime Security Program is a federal maritime financial sustainment program that provides for a fleet of modern US-flagged and US-crewed militarily use ful sealift assets operating in international trade. 5 The MSP fleet enables the US government to provide sealift for US armed forces utilizing the resources of the US-flag commercial fleet. The MSP fleet provides a US national security asset at a lower cost than the government owning and maintaining an equivalent capability. MSP is critical to our nation’s ability to defend itself in time of war or national emergency, as it provides for a framework where the active, commercially viable, privately-owned US-flag commercial shipping fleet can be utilized by the US government. Indeed, as US Transportation Command Commander General Darren W. McDew wrote, “it is clear the United States must maintain the flexibility to deploy a decisive force at the time and place of our choosing.” 6 The Maritime Security Program, an amendment to the Merchant Marine Act of 1936, was first passed in 1996, and originally comprised a fleet of 47 US-flag, militarily-useful vessels. 7 The program was reauthorized in 2003 for effect until 2015, and simultaneously expanded to a fleet of 60 militarily-useful vessels. MSP was extended again, this time to 2025, by Congress in 2013. 8 MSP provides its US-flag, ship-operating participants with a readiness retainer that helps to offset the higher costs of flagging, crewing, and operating a US-flag vessel. MSP permits companies to re-flag foreign-flag vessels less than 15 years old to US registry, thereby providing US-flag operators with the flexibility and increased efficiency to remain competitive in the international marketplace.

The MSP program also requires all participating carriers to sign the Voluntary Intermodal Sealift Agreement (VISA), which sets forth ironclad obligations to the Department of Defense specifying how the companies’ vessels and intermodal systems can be utilized in support of US national emergencies. ARC is the largest ro-ro operator in MSP and VISA, providing nearly 50 percent of the total Ro-Ro square footage in the MSP fleet. Funding for the Maritime Security Program is subject to the annual appropriations process. The continued full funding of MSP is vital to the economic and military security of our nation. MSP not only ensures that our nation has the commercial sealift capability it needs, but also that the country will continue to have the American citizen merchant mariners necessary to crew government and private vessels that sail in support of and supply our armed forces overseas. Congress authorized the current sixty-ship MSP fleet on the basis that it was, and continues to be, the most prudent, economical, and necessary solution to address the current and projected sealift requirements of the United States.

A key part of the value proposition of MSP is the network of global services provided by the carriers. A study prepared for the National Defense Transportation Association (NDTA) by Reeve & Associates in August of 2006, “The Role of the United States’ Commercial Shipping Industry in Military Sealift,” indicated that the cost to the US government to replicate the vessels provided for by MSP is estimated at $13 billion, and added that it would cost the government a further $52 billion to replicate the related global intermodal system provided by the carriers that participate in the MSP program. This is compared to the moderately small sum of $186 million paid in total each previous year to the MSP participants. 9

CURRENT AND FUTURE ISSUES US-flag international carriers depend on the MSP readiness retainer to help offset the additional costs of flying the American flag. In recent years, the industry has reached a point where the current MSP stipend was not sufficient when combined with the drastically declining cargo base. With DOD cargoes alone down by upwards of 70 percent from the recent peaks in 2009-2010, a rebalancing was needed. Various studies to examine the operating cost differential between US-flag vessels participating in MSP and foreign flag vessels determined that when such factors as insurance, vessel maintenance and repair, total crew costs and ship management are considered, US-flag vessel operational costs are approximately $5 million to $7 million more than the costs for equivalent foreign flag vessels. 10

The commercial maritime industry, through MSP, is currently providing DOD with sixty vessels and follow-on intermodal systems and networks at a cost to the taxpayer of only $210 million, or $3.5 million per ship, for FY-2016. On a positive note, MSP stipends were recently authorized at $5M per vessel from FY-2017 through FY2021, but still need to be appropriated. 11 An increase in appropriations for MSP to this level would provide this essential sealift capability to DOD at a cost of only $300 million, still only a fraction of the estimated $65 billion that it would cost our government to replicate this capability.

One non-monetary way to counteract cost factors is to extend the age of MSP eligibility out an additional five years. Ships are long-term assets, eligible to participate in MSP for 25 years. Many shipping lines operate vessels in a commercial capacity out to 30 years of age or more, and US govern

ment reserve sealift assets are often operated to age 50 or more. There is little appreciable difference in the condition of an American vessel from 25 to 30 years. Most importantly, this would give the government five more years of MSP vessel usage at no additional cost to the federal budget. Adding five years to the expected life of a new vessel acquisition makes the investment calculations more favorable for American shipping lines.

CONCLUSION The current state of the US-flag fleet is dire. The number of liner vessels in the international-trading, US-flag fleet has declined from 151 in 1990 to 73 at the end of 2014. These remaining 73 vessels are facing strong headwinds on preference cargo. The Export-Import Bank of the United States charter expired for a time in June 2015, and food aid is under attack from a variety of fronts. In addition, the industry may face yet another round of consolidations. When ARC’s M/V Independence II arrived on 17 May 2016 at the port of Szczecin, Poland to discharge Army cargo to be used as part of Exercise “Anakonda 2016”, a multinational exercise with 24 NATO and other partner nations, she was doing so as one of a small number of American vessels in the international trades. M/V Independence II and her 72 other US-flag counterparts are on the brink of a new reality. The cargo preference laws and programs that have sustained them in the past may not be enough incentive to continue in trade in the future. With Operations Enduring Freedom and Iraqi Freedom now in the rear-view mirror, what is next for the US-flag fleet? As we encounter another change in the tide, it is worth reflecting that historically, our most important and enduring maritime laws were passed in the wake of the nation’s most challenging overseas wars, including the Merchant Marine Act of 1920 after World War I, the Cargo Preference Law of 1954 in the wake of World War II and the Korean War, and the previously noted Maritime Security Program of 1996 after the Gulf War. Lt. Gen. Stephen Lyons, Deputy Commander of US Transportation Command, recently wrote that “we must recognize and advocate for the critical combat enabler known as our nation’s strategic sealift… without strategic sealift, we join the ranks of most of the world’s armies— relegated to an in-garrison force that is likely ineffective at deterring its enemies.” 12 The time for action is now, before the already small US-flag fleet shrinks further and puts our military readiness and national security at risk. Strengthening the Maritime Security Program is a place to start, but more action is needed. DTJ

1 “Study of the Impediments to US-Flag Registry Final Report,” Price Waterhouse Coopers. September 20, 2011. 2 US Maritime Administration, US Department of Transportation, “A Report to Congress – Impacts of Reductions in Government Impelled Cargo on the US Merchant Marine” (April 21, 2015) at 3. 3 US Maritime Administration, US Department of Transportation, “A Report to Congress – Impacts of Reductions in Government Impelled Cargo on the US Merchant Marine” (April 21, 2015) at 3. 4 Id., at 5. 5 Maritime Security Act of 1996, Pub. L. No. 104–239 as amended (46 U.S.C. App. § 1171 et seq.) 6 Darren W. McDew, “Losing our sea legs,” Virginian-Pilot, January 17, 2016. 7 Maritime Security Act of 1996, Pub. L. No. 104–239 as amended (46 U.S.C. App. § 1171 et seq.) 8 National Defense Authorization Act for Fiscal Year 2013, Pub. L. No. 112–239, § 3508 (2013). 9 Id. 10 US Maritime Administration, US Department of Transportation, “Comparison of US and ForeignFlag Operating Costs,” September 2011, at 1. 11 Consolidated Appropriations Act, 2016, Pub. L. No. 114-113 (2015). 12 Stephen Lyons, “Sailing to the fight, marching to victory,” Army Sustainment, May-June 2016.