Philadelphia Shipyard Fights Again for Its Life
The Philly Shipyard, a remnant of America’s former shipbuilding might, is once again on hollow ground with two-thirds of its staff gone, a blank order book and tens of millions of dollars in fresh losses.
Philly’s fortunes are tied to the Jones Act, a 1920 law mandating that ships moving goods between U.S. ports must be American-built, -owned and -operated. The law is supposed to protect the American shipbuilding industry and thereby preserve a national security interest.
The yard has delivered more than half of all Jones Act oceangoing vessels since 2003, including container ships, product tankers and crude oil tankers. But those ships cost four times more than vessels built by foreign competitors, while U.S. owners must shoulder higher insurance premiums and heftier salaries for U.S. sailors compared with operators that use foreign crews.
On top of that, the business for such ships is largely limited to goods shipped from the continental U.S. to Hawaii, Alaska, Puerto Rico and Guam. Otherwise, all but a small share of U.S. international maritime cargo moves through American ports on foreign-flagged ships.
That has left orders rare and far apart at the yard along the Delaware River in South Philadelphia. It posted a $44 million loss last year, laid off 800 workers and contractors and said it could close down unless it gets new ship orders. The cutbacks left the yard with 400 workers by the end of the year.
“There is a material uncertainty that exists that may cast significant doubt as to whether the Group will be able to continue as a going concern. In this scenario, the Group may elect to undergo an orderly-liquidation process,” the Philly Shipyard said in its 2018 annual report.
Philly, which has been bailed out twice by taxpayers, said in the report that it is in talks for possible orders in the modernization of the U.S. Navy’s auxiliary fleet, which moves supplies to U.S. forces around the world.
But it is up against stiff competition by General Dynamics Corp. and Huntington Ingalls Industries Inc., which specialize in military ships.
A bipartisan bill called the Energizing American Shipbuilding Act introduced in the U.S. Senate last year calls for the construction of roughly 50 Jones Act vessels to handle fast-growing U.S. liquefied natural gas exports. But the bill, which would require a share of LNG exports be transported on American-made vessels, is unlikely to gain any traction because of the high costs of operating such vessels.
Oceangoing LNG carriers, which are predominantly built in Asian yards, cost around $180 million each. Such vessels built in the U.S. under the Jones Act would cost around $700 million apiece.
Some 9,500 vessels have been built under the Jones Act in about 100 yards across the U.S., but most are tugs or small tankers and bulk carriers.
“There are only a handful of yards like Philly that can build bigger vessels, so it may be in the national interest to keep it in business at any cost,” said Basil Karatzas, chief executive of New York-based Karatzas Marine Advisors & Co.
Philly Shipyard officials declined to comment on the potential for a fresh bailout. Executives at majority owner Aker AS A, based in Norway, and the Philadelphia governor’s office did not return calls for comment.
Aker’s share price on the Oslo stock exchange has fallen 51% over the past 12 months.
U.S. government agencies doled out $438 million in 1997 to make the yard, on the site of a former Navy facility in South Philadelphia, operational after a long period when it was idle. In 2011 the quasi-public Philadelphia Shipyard Development Corp. bought $42 million worth of the yard’s equipment and leased it back to the yard with an $8 million tax deferral.
People with knowledge of the matter said there has been discussion of selling the yard. But “given the limited scope of business under the Jones Act, there is no interest from any potential buyers,” according to one person.
The yard is in the process of delivering its last order, a container ship for Honolulu-based Matson Inc., but said it lost money on that project.
Ships operating under Jones Act business, meantime, are showing their age. Maritime executives say many Jones Act vessels have been at sea for over 30 years, well beyond the 15- to 20-year average age of foreign-flagged ships.
The U.S. was the world’s biggest shipbuilder as recently as 1975, when nearly 80 vessels of all types were under construction. But shipbuilding has shifted, moving first to Japan and then to South Korea and China, which over the past four decades have heavily subsidized their own yards.
Source: Wall Street Journal