Deep Sea Domestic Transportation of Freight

SIC 4424

Companies in this industry

Industry report:

This industry consists of establishments primarily engaged in operating vessels for the transportation of freight on the deep seas between ports of the United States, the Panama Canal Zone, Puerto Rico, and U.S. island possessions or protectorates. Also included are operations limited to the coasts of Alaska, Hawaii, or Puerto Rico. Establishments engaged in operation of vessels for transportation on the deep seas between the United States and foreign ports are included in the entry for SIC 4412: Deep Sea Foreign Transportation of Freight. Establishments primarily engaged in transportation of freight on the Great Lakes and St. Lawrence Seaway are included in SIC 4432: Freight Transportation on the Great Lakes--St. Lawrence Seaway. Establishments performing transportation of freight on the intracoastal waterways paralleling the Atlantic and Gulf coasts are classified in SIC 4449: Water Transportation of Freight, Not Elsewhere Classified.

Industry Snapshot

Deep sea domestic transportation of freight is part of a massive interrelated system of transport of manufactured and raw materials. The nature of the U.S. deep seas domestic freight is predicated on the Merchant Marine Act of 1920, which was renamed the Jones Act in 2006. The Jones Act requires that ships carrying cargo between domestic ports must be U.S. flag ships, owned by U.S. citizens, and built in U.S. shipyards, thus protecting domestic trade from foreign competition. According to Transportation Institute, by the late 2000s the U.S. flag fleet consisted of almost 40,000 vessels, including 27,937 dry cargo barges, 4,250 "super jumbo" tank barges (over 250 feet in length), 90 tankers that were under 10,000 deadweight tonnage [dwt]), 55 tankers that were over 10,000 dwt, 959 dry bulk containers, 75 containerships (over 10,000 dwt), 24 railroad car floats, and 39 roll on/roll off vessels.

Although the health of the industry depends in large part on the state of the overall U.S. economy, domestic deep sea transportation plays an important role in the nation's private and public interests. Oceangoing domestic vessels facilitate business between various areas of the country by providing relatively low-priced shipping service and are part of the vast network of trains, trucks, and inland water carriers that keeps the nation's commerce moving. The industry also supports millions of other jobs at shipbuilding yards, seaports, and terminals. In addition, the domestic waterborne shipping industry is vital to national defense interests, as it has relieved rail congestion and provided transport of military equipment and supplies during periods of national emergency.

According to the U.S. Transportation Department's Maritime Administration (MARAD), the domestic marine transportation industry accounted for $7.7 billion in freight revenues annually in the early 2010s. The industry handled more than 1.1 billion short tons of cargo in 2009, or about 23 percent of the ton-miles of all domestic surface transportation traffic.

Organization and Structure

The U.S. deep sea fleet consists of three categories of service: liner, nonliner (or tramp), and tanker service.

Liner service includes regular, scheduled stops at ports along a designated route. The operators either own or charter the ships and must accept any legal cargo they are equipped to carry, unless it does not meet the minimum freight requirements. Liner service usually carries manufactured goods. Often, two or more carriers form "conferences" in order to regulate rates and competition along a route. All conference members must charge the same freight rates, although the laws of supply and demand may affect rates from one sailing to the next. Frequency of trips depends upon the demands for shipping along the route.

Nonliner, or tramp, service is scheduled individually by a customer who, in essence, is chartering the ship to carry its cargo. Tramps generally carry only one type of bulk cargo, usually a raw material such as coal, ores, grain, lumber, or sugar. On occasion, two shippers of the same commodity charter a ship jointly.

Merchant ships have become increasingly more specialized, especially during the last half of the twentieth century. Special ships are designed to carry bulk cement, coal, iron ore, liquefied natural gas, wood chips and pulp, refrigerated foods, and heavy equipment. These ships, operating as nonliner service, are often on long-term lease by one company. Because the ships are so expensive to build, the ship owner can require the company to sign a long-term lease for most of the life of the vessel before beginning construction.

Tankers carry shipments of liquid cargoes, especially crude oil and petroleum products. Oil companies can own and operate their own tanker fleets and charter privately owned ships as needed. The transport of oil in bulk began in the late 1880s. Tankers in the following 100 years changed dramatically, with ship work handled more by computers, thus cutting back on the size of the crew. The enormous size of the tankers of the modern era has also increased the risk of oil spills and the impact such spills can have on the environment. The Alaskan oil spill in Prince William Sound by the Exxon Valdez in 1989, which caused significant ecological damage to the area, served as a catalyst in the institution of strict environmental regulations for tankers and other vessels. In April 2010 the explosion on the offshore drilling rig Deepwater Horizon, working in the Gulf of Mexico off the coast of Louisiana, replaced the Exxon Valdez incident as the largest oil spill in history. By the time the well could be capped, almost three months later, hundreds of millions of gallons of oil had spilled into the ocean. The Gulf accident prompted further legislation regarding marine transportation of oil and other hazardous products.

One innovation in oil product shipment was the tug-barge. The bow of the tug fits into a notch in a barge weighing up to 20,000 tons and pushes the barge. This vessel was devised as a way to cut shipping costs on tanker routes from the Gulf of Mexico north along the eastern seaboard of the United States. The tug-barge requires only a fraction of the crew needed aboard a tanker.

Domestic shipping includes coastwise, intercoastal, and noncontiguous services. Coastwise shipping refers to movement of cargo along the coastlines of the 48 contiguous states, which includes shipment of goods between the Atlantic and Gulf coasts. For the most part, tankers and ocean tug-barge systems carry petroleum and tramps carry dry bulk cargoes along this route.

Intercoastal shipping includes movement of cargo between Gulf and Pacific ports and between Atlantic and Pacific ports. Most traffic of this type consists of oil tankers carrying their cargo from Alaska to Gulf ports. Noncontiguous shipping includes service to Alaska, Hawaii, and U.S. territories and possessions. Outbound Alaskan shipping consists largely of petroleum products and crude oil while inbound service carries consumer goods for state residents. Hawaii and Puerto Rico rely on deep-sea freight to transport goods in and out of their islands.

Several federal agencies promoted and regulated the U.S. merchant ships before the Maritime Administration (MARAD), part of the Department of Commerce, was given jurisdiction in 1950. The Merchant Marine Act of 1970 strengthened and expanded the MARAD's function. It brought the many facets of the merchant marine together in order to ensure the strength of the industries involved, including shippers, shipbuilders, and ship owners, as well as the various unions in each of those industries. MARAD guarantees loans for shipbuilding as well as providing other subsidies and tax benefits for construction of new ships by fleet owners.

Background and Development

Cargo ships showed little design improvement between 1850 and the late 1950s. Cargo of various shapes and sizes was stored in five different cargo holds. However, in the late 1950s and the 1960s, ship design and the shipping industry were revolutionized.

In 1956, when the T-2 tanker Ideal X left Houston, Texas, a new era of deep-sea shipping was launched. Ship owner Malcolm P. McLean had initiated a new approach to shipping cargo by which the functions of both truck and ship were combined in an integrated transportation system. McLean had modified a 35-foot-long tractor-trailer so that the "container" holding the cargo could be lifted off the tractor-trailer chassis. These containers could then be loaded onto the ship by crane and stacked in rows. When the cargo reached its destination, each container was lifted off the ship and put back on a truck chassis. The cargo no longer had to be loaded and unloaded onto trucks at the ship terminal. The containers were packed and sealed by the shipper, then unpacked by the recipient of the goods at their ultimate destination rather than at the terminal. The containers could also be transported aboard freight trains. This new integrated transportation system saved time and drastically reduced the number of times a crate or pallet of packages had to be handled, thus eliminating instances when damage could occur.

Further development brought the addition of a shipboard crane so that the ships could unload at any port as long as there was a dockside apron large enough to accommodate a truck-tractor. The use of the container shipment method also cut down on the number of hours a ship had to be in port loading and unloading, thus resulting in less "down time." This improvement reduced the number of ships needed to maintain a specified frequency of service on a scheduled route. This revolutionary method of shipping quickly caught on among domestic and foreign carriers.

Roll-on/roll-off (ro-ro) ships are a variation of the container ship: Containers are placed on wheeled conveyors that are driven aboard the ship through huge cargo hold doors in the sides and stern of the ship. The containers are moved by ramps and elevators to their places in the cargo hold. The driver's cab is detached from the conveyor and driven back on shore. The container and conveyor remain on board to be unloaded at their destination. Roll-on/roll-off ships are used to convey vehicles or other large cargo.

A speedier version of the container ship is the LASH (Lighter Aboard Ship) vessel. LASH ships are about 800 feet long. Barges (lighters) loaded with cargo are hoisted on board the LASH vessel by a crane on board the ship and stored in cargo holds.

Much of the success of the U.S. deep sea domestic industry in the late twentieth century was reliant on oil drilling in Alaska. After the 1989 oil spill disaster, new laws designed to prevent oil spills in U.S. waters became a serious concern for U.S. shipping companies. The Oil Pollution Act of 1990 required that all oil products be conveyed in double-hulled ships in order to prevent a repeat of the Exxon Valdez spill. The law also required each carrier to provide a guarantee of financial responsibility in the event of a spill.

The federal government has long held that a strong merchant marine was in the best interest of the country, both militarily and economically. Various laws and acts have been passed by Congress to protect and promote the merchant fleet operating in foreign and domestic trade. In March of 1997, legislation to allow confidential contracting between individual ocean common carriers and shippers was proposed by Congress to reform the Shipping Act of 1984. Called the Ocean Shipping Reform Act of 1998, the bill essentially eliminated the Federal Maritime Commission (FMC) and transferred remaining functions to an expanded and renamed Surface Transportation Board.

Although the domestic fleet was considered relatively old in the late twentieth century, ship owners were reluctant to replace their aging ships very quickly because of low profit margins. In 1994, for example, one merchant vessel capable of carrying 7 gross tons and one tanker capable of hauling 17 gross tons were constructed, according to figures available from the U.S. Maritime Administration. No new ships were constructed in 1993, and in 1992, three merchant vessels with a total of 44 gross tons hauling capability, one cargo vessel capable of carrying 32 gross tons, and two tankers with a hauling capability of 12 gross tons, were constructed.

According to the U.S. Industrial Outlook, published by the U.S. Department of Commerce, ship owners faced stricter laws governing hazardous materials, waste disposal, vapor recovery, crewing requirements, and inspections. New regulations affected profits and expenses of fleet owners.

Presidential administrations have also supported proposals to help boost the U.S. shipping lines and make them more competitive. In the wake of the Exxon Valdez oil spill in Alaska, however, the Oil Pollution Act of 1990 called for stronger regulation of oil transport. One of the provisions of the rule was a $75 million cap on damages that an oil-shipping firms would have to pay for damages and clean-up costs in the case of oil spills. In 2010, however, the Obama administration supported raising that cap in view of the massive damage done by the Gulf oil spill in April of that year.

Overall, in the late 1990s and early 2000s the market in the domestic deep sea industry remained flat, due to several factors, including a weak foreign market, high fuel costs, and excess cargo tonnage. In June 1999, Peter Finnerty, vice-president of Public Affairs for Sea-Land Service, Inc. and of Maritime Affairs for CSX Corporation, testified before the U.S. Congress on behalf of the proposed United States Flag Merchant Marine Revitalization Act of 1999. The House bill proposed several tax rule changes that would generate private investment capital for new U.S. flagships. In 1999, Sea-Land Service, Inc. operated a fleet of 100 container ships under both foreign and domestic flags. However, declining revenues forced its sale by CSX Corporation, its parent, to A.P. Moller-Maersk Line for $800 million. CSX retained Sea Land's domestic shipping business, worth $700 million. Despite the one-time charge-off of $315 million in profits as a result of the sale, CSX nonetheless reported third-quarter 1999 earnings of $123 million. To help finance a cargo terminal to be used by the new Maersk-Sea-Land merger interests, the Port of Los Angeles announced in November of 1999 that it would sell $300 million in bonds in 2000. The merger of the two shipping interests created the largest shipping company in the world.

During the early 2000s, companies engaged in the deep sea domestic transportation of freight faced several challenges. On the economic front, reduced levels of consumer and corporate spending, as well as lower production levels, affected shipment volumes. Economic conditions worsened even more after the terrorist attacks of September 11, 2001. Popular tourist destinations like Hawaii and Puerto Rico--key industry shipping routes--saw tourism levels plummet.

In March 2003, the United States invaded Iraq on a scale that many considered to be greater than the first Gulf War during the early 1990s. According to the Transportation Institute, during the first conflict the United States' domestic fleet of oceangoing vessels played an important role in supporting the U.S. military under provisions of the Jones Act, which allows U.S. ships, shipyards, and crews to be used for military purposes. On its web site, the institute cited commentary from VADN Francis R. Donovan, USN Commander, Military Sealift Command, explaining that some 80 percent of sea cargo was carried by U.S. flagged ships during the first war. Donovan remarked that the military "tapped the U.S. maritime industry and thousands of merchant mariners to help augment the government's strategic sealift forces." In February 2003 the U.S. Department of Transportation's Maritime Administration announced that the Military Sealift Command had ordered 36 ships to be activated to support the nation's war on terror, also known as Operation Enduring Freedom.

The Jones Act also affected the industry in another way during the early 2000s. As the Transportation Institute explained, the Jones Act "specifies that domestic waterborne commerce between two points within the United States and subject to coastwise laws must be transported in vessels built in the United States, documented under the laws of the United States, and owned by the citizens of the United States." In the fall of 2002, dock workers at 29 coastal ports staged a lockout that lasted ten days when the International Longshore and Warehouse Union failed to come to terms with the Pacific Maritime Association. The lockout created a number of significant problems, including stranded ships, financial losses for shipping companies, and a negative impact on the larger U.S. economy. After the lockout ended, a backlog of inbound shipments remained. In order to expedite the movement of these shipments to their intended destinations, the National Industrial Transportation League petitioned the U.S. Customs Service for a 90-day Jones Act waiver so that foreign vessels could provide assistance. However, this led to protests from groups like the Sailors' Union of the Pacific, which argued the move would jeopardize national security.

In the mid-2000s the domestic shipping industry worked to reform the Jones Act. In 1996 Congress amended the act to loosen restrictions on the use of foreign capital for building new ships. Widely supported at the time, industry advocacy groups, including the Offshore Marine Service Organization, Maritime Cabotage Task Force, the American Waterways Operators, were lobbying for change in 2005 under the contention that the change created a loophole for foreign companies to set up affiliate companies to operate in the domestic trade by developing de facto ownership under long-term lease agreements.

Controversy was also sparked in August 2005 as there was some speculation that the Jones Act fleet took a direct hit from Hurricane Katrina. The overall impact to the fleet was minimal. Even so, President Bush issued a limited blanket waiver of the Jones Act on September 1, 2005, for some petroleum products. A second waiver to the Jones Act was issued on September 26, 2005, after Hurricane Rita further damaged the hard-hit area. These waivers allowed foreign-owned vessels to transport domestic cargo, specifically petroleum products, while the U.S. flag fleet was idled. The second waiver expired in October 2005; however, there was concern that these waivers set a potentially dangerous precedent for integrity of the Jones Act.

According to the U.S. Department of Transportation's Maritime Administration (MARAD), in 2004 U.S. domestic ocean freight totaled 200 million metric tons. Of this total, 48 percent was transported by tankers, 29 percent by tank barges, 18 percent by dry cargo barges, and 4 percent by roll-on/roll-offs and containerships. Compared to 2000, which recorded nearly 206 million metric tons in trade, in 2004 tanker trade was down 4 million metric tons, and every other category, with the exception of tank barges, was at least 1 to 2 million metric tons less than 2000 levels. The decline in domestic tanker trade from 2000 to 2004 was mainly due to a decline in petroleum product shipments, which showed up in import substitution.

By 2004 tankers carried about 96 million metric tons of which crude oil and petroleum products made up approximately 95 percent and the remainder consisted of chemical shipments. Tank barge trade was up slightly in 2004 to nearly 59 million metric tons. Twenty-two new or reconstructed tank barges for coastline use were delivered to U.S. operators in 2003 and 2004, with another 13 tankers on order by the end of 2005 for delivery through 2009.

About 63 percent of domestic fleet activity in the mid-2000s took place on the coastline of the contiguous United States. Of the remaining noncontiguous trade, 22 percent went to Alaska; 11 percent, Puerto Rico and the Virgin Islands; 3 percent, Hawaii; and a fraction of a percent to the U.S. Pacific Territories. About 32 percent of domestic trade (by weight) originated from the Gulf Coast. The Pacific Northwest shipped about 28 percent of all tonnage, 18 percent originated in the North Atlantic, and 12 percent and 11 percent shipped from the South Atlantic region and the Pacific Southwest region, respectively.

Current Conditions

According to Dun & Bradstreet's Industry Reports, the deep sea domestic transportation of freight industry was worth $4.2 billion in 2010. About 274 establishments employed 7,855 workers in the industry. More than 70 percent of firms employed fewer than 25 people; however, businesses that had more than 25 employees accounted for about 78 percent of total industry revenues.

Although still dealing with the effects of the economic recession of the late 2000s, the industry received a boost in 2010 when the federal government launched America's Marine Highway Program, a program that was designed to promote water transportation of freight in an effort to, among other things, cut down on U.S. highway traffic. Initially, eight projects and six initiatives were approved for federal funds totaling $65 million. Targeted areas were along the West, East and Gulf Coasts, at the Great Lakes, and along inland waterways. According to Maritime Administrator David Matsuda, "These projects will help make better use of America's Marine Highway by reducing gridlock, improving the environment, and putting skilled mariners and shipbuilders to work."

Industry Leaders

Among the industry's leading firms in 2010 was Charlotte, North Carolina-based Horizon Lines, Inc., which operated the largest U.S. domestic container fleet with 17 U.S. flag vessels. Horizon Lines, which had a fleet of 20 containerships and 18,500 cargo containers, ran routes between the U.S. mainland and Alaska, Guam, Hawaii, and Puerto Rico. About 85 percent of its revenue came from its Jones Act business. In 2009, with 1,895 employees, the company posted $1.1 billion in sales. The company, which originated as CSX Lines, a part of the CSX Corporation, changed ownership three times during the first half of the 2000s. In 2006 the company finalized its initial public offering and obtained full public company status.

Other leaders in the industry included Crowley Maritime Corp., based in Jacksonville, Florida. Founded in 1892, Crowley Maritime was one of the largest tug and barge operators and also had containerships, roll-on/roll-off ships, and tankers. With 200 vessels in its fleet and 4,300 employees, Crowley Maritime posted revenues of $1.9 billion in 2009.

Oakland, California-based Matson Navigation Co. was the main subsidiary of Alexander & Baldwin, Inc., which reported total revenues of $1.4 billion in 2009. Matson Navigation had 1,130 employees and a fleet of container ships, barges, and tugs. It was a market leader in the shipment of automobiles to Hawaii and Guam. Another industry leader was Overseas Shipholding Group Inc (OSG), which was headquartered in New York City and focused on the transport of crude oil and petroleum products. With a fleet or more than 100 vessels, OSG had 2009 annual sales of more than $1 billion and 3,600 employees. Finally, APL Limited of Scottsdale, Arizona, was an established player in the container ship segment as a wholly owned subsidiary of Singapore's Neptune Orient Lines.

Research and Technology

Shipping lines have invested in more sophisticated computer equipment to help track cargo and display information about the size, weight, origin, or destination of specific containers. Computers are typically used to perform many of the tasks that crew members once performed on board. Technology has also allowed shippers to access information about the progress of their own cargo. By the mid-2000s shipping companies were using global positioning systems for navigation and tracking purposes.

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