Tuesday, November 8, 2011

Alaska and Hawaii: Still Looking for the Upswing

By Jim Shaw

The 49th and 50th states are awaiting an economic recovery that may still be several years off. Hawaii in particular has been hit by an economic stagnation that has crippled its tourism industry. This has also affected its cruise business. But an upswing may be in the making because of Disney Cruise Line’s decision to sail its Disney Wonder out to the islands twice next year. Although not a large commitment, island businesses catering to tourism are hoping that the publicity from this move may help generate more interest in Hawaiian cruising, especially while NCL America struggles to keep its one remaining ship, the 80,439-gt Pride of America, fully booked.

On the cargo front the financial problems being experienced by Horizon Lines have shippers in both states worried. This year Horizon incurred a first quarter loss of $33.3 million followed by a second quarter loss of $5.4 million. On August 15th the company defaulted on $330 million in convertible notes and since midsummer its share price of common stock has fallen below one dollar.

Horizon’s loss through bankruptcy would mean that Matson Navigation would become the sole provider of liner container services between the United States West Coast, Hawaii and Guam while Totem Ocean Trailer Express (TOTE) would be in the same position in the Alaska Trade. Fortunately, Horizon was able to complete a $655 million refinancing package in early October that should place it on somewhat stronger financial legs but its long-term health still holds a question mark.

Cruise Recovery
This past summer Hawaii’s Department of Business, Economic Development & Tourism (DBED&T) was forced to lower its projections for growth over the next year because of the still troubled domestic economy as well as the problems being experienced in Japan following the March earthquake and tsunami. Japan has traditionally been a major provider of tourists to the islands, as well as business investors. According to the DBED&T, Hawaii’s economy is expected to continue positive but experience slower growth for the rest of this year and well into 2012.

Measured by real gross domestic product (GDP) the state’s economy is projected to show a 1.3 percent increase through the remainder of this year, down 0.3 of a percentage point from the 1.6 percent growth the department projected last quarter. That growth is expected to increase only 1.8 percent by the end of 2012.

At the same time, visitor arrivals to the islands are expected to increase 3.0 percent, 0.8 of a percentage point lower than the department’s previous forecast, while 2012 arrivals are expected to increase slightly less, at about 2.9 percent.

One bright spot is the recent decision by Hawaiian Airlines to open up a new direct flight between Honolulu and Fukuoka, Japan starting in April, which will hopefully bring an additional 100,000 visitors to the islands annually.

Can Disney Help?
In the cruise sector, Florida-based Disney Cruise Line will also be helping out as it has decided to operate two cruises to the islands next year using its 83,000-gt Disney Wonder. The ship, which operated its first Alaska season this past summer, will sail from Los Angeles to Kahului, Nawiliwili, Hilo and Honolulu via a call at Ensenada, Mexico to satisfy cabotage requirements. The first 15-night Hawaiian itinerary will depart Los Angeles on April 29, 2012 while the second, featuring a 14-night itinerary, will depart Los Angeles on October 14.

The 12-year-old Disney Wonder will not be the only foreign-flag cruise ship venturing out to the islands next year as similar voyages are to be operated by Princess Cruises’ Golden Princess, Ocean Princess, Star Princess and Sapphire Princess, as well as Holland American Line’s Oosterdam and Rotterdam. While these vessels will operate round-trip cruises from the mainland via either Mexican or Canadian cabotage stops, several overseas ships, such as the German-operated Europa and Aurora, will also be calling among the islands while on longer worldwide itineraries.

The Port of Honolulu, on Oahu Island, will host most of the cruise liners but the Port of Hilo, on the Big Island, will also gain traffic. In fact, Hilo expects to see a 30.5 percent jump in its cruise numbers next year, a major boost following a miniscule increase this year.

Inter-island cruises will continue to be operated by NCL America’s Pride of America, now the only US-flagged cruise ship serving the state, but bookings for this ship have also suffered because of the economy.

Hawaii’s Forgotten Ferries
On the ferry front Hawaii has proven to be an unhappy hunting ground for vessel operators trying to make a profit running point-to-point services. The two boats once operated by what was formerly the largest operator in the islands, Hawaii Superferry, are now in Virginia where their current owner, the US Maritime Administration (MarAd), is attempting to find new owners. MarAd put the two vessels – Alakai and Huakai – up for sale on an “as is, where is” basis in late June and received only four bids. It is now working expeditiously with these bidders, as well as other “interested parties,” in evaluating options for the boats, with the intention of maximizing the government’s return.

The government, through MarAd, took possession of the twin ferries in July 2009 after a bankruptcy judge ruled that Hawaii Superferry could abandon them to lenders which, at the time, were owed nearly $160 million. MarAd, which had guaranteed construction loans for both boats, took them over and moved them to Norfolk where they were examined but apparently passed over by other government agencies.

Ironically, another vessel that attempted to establish a working ferry service in the islands, the catamaran Melissa Ann, is having a much better go of it in Puget Sound where the King County Ferry District and the US Coast Guard recently gave it the green light to carry more passengers on the Vashon-Seattle run. The ferry has been traveling full and has had to leave riders on the dock more than 80 times this year because of a lack of capacity. In 2007/09 the small cat operated a pilot ferry program between Kalaeloa and Honolulu for $2 per passenger but operating costs and low ridership meant that the boat would have required a ticket price of more than $200 per person just to break even on the government-sponsored experimental run.

Alaska’s Ailing Ferries
The State of Alaska has also been suffering ferry problems. Last year the state’s attorney general’s office, acting on behalf of the Alaska Department of Transportation and Public Facilities (Alaska Marine Highway System), filed a lawsuit concerning the engines fitted into the two fast ferries Fairweather and Chenega, both built by Connecticut’s Derecktor Shipyards during 2004/05.

The defendants – Robert E. Derecktor Inc., MTU Friedrichshafen and MTU Detroit Diesel Inc. – have already accomplished substantial repairs on the engines, all MTU diesels, but the state believes these repairs have not properly remedied the problem and that the boats are still prone to breakdowns. Because of this it has filed a motion with Alaska’s superior court seeking a preliminary injunction in the ongoing dispute that would require the builder to provide new engines for both vessels.

Although the original engines were warranted to last 25 years and 100,000 operating hours the state feels the engines are wearing out far faster than their warranties promised and that replacing all eight diesels could cost the state in the range of $20 million. Through legal action it hopes to gain new engines for both vessels before they suffer mechanical failures that could take each ferry out of service for a prolonged period of time.

The 2004-built Fairweather, based at Juneau, has been operating between Sitka and Petersburg while the 2005-built Chenega, based in Cordova, has been running between Valdez and Whittier.

The Alaska Class
While it awaits a legal ruling on the Fairweather and Chenega case the Alaska Marine Highway System is moving forward with its plans to build a new class of ferry, the “Alaska” class, to operate intermediate runs as well as eventually replace some of its older mainline ships that are now approaching a half-century of service. Wanting to keep as much of this project in-state as possible the Alaska Department of Transportation & Public Facilities (ADOT&PF) has taken over the project from the Federal Highway Administration (FHA) and selected Alaska Ship & Drydock (AS&D), which operates the Ketchikan Shipyard at Ketchikan, as construction manager and general contractor.

Seattle-based Elliott Bay Design Group has been selected as the state’s naval architect and engineering contractor for the project, taking over from the FHA, which had already spent about $1.7 million on preliminary design work but is now to be refunded. The ferries envisioned would be “day boats” measuring approximately 350 feet in length and having a capacity of 500 passengers and 60 vehicles. They would make use of a yet-to-be chosen propulsion system and be environmentally friendly. When the final design is ready AS&D will have the first opportunity to negotiate a contract with the state for construction of the lead vessel. “By participating in the design, ASD will have thorough knowledge of the vessel and what it will take to construct it,” said ADOT&PF Commissioner Marc Luiken.

“AS&D can then submit a bid to build the vessel. This puts AS&D in a partnership with the state, an arrangement that should limit costly change orders and cost overruns. Luiken added that the new selection process “fulfills our responsibility to maximize the value of public funds while providing an opportunity for economic development and jobs in Alaska.” ADOT&PF officials hope to eventually have three of the Alaska Class built, with the first ship slated for the Lynn Canal route between Skagway, Haines and Juneau while the second would sail between Ketchikan and Prince Rupert. The third vessel would serve ports in the Prince William Sound area.

Anchorage Expansion
A project taking even longer than the state’s new Alaska class is the expansion of the Port of Anchorage. The estimated costs of this project, meant to double the number of berths at the port, have tripled since 2005, to more than $1 billion. Nearly $280 million has been spent so far, with much of the funding coming from the federal government. Federal auditors are now looking into the project to determine why there have been significant cost overruns.

Although the port is a city entity the Anchorage Assembly agreed in 2003 to give the federal Maritime Administration (MarAd) a lead role in the project, even though that agency had never managed such a project before. Since then, changes have been made to give the city a bigger role in overseeing the effort while MarAd is stationing one of its officials at the site on a full-time basis. Under port director Bill Sheffield, a former Alaska governor, the project design went from a dock-on-piling structure, similar to the port’s existing piers, to one in which U-shaped cells of steel are installed, then backfilled to create new land. This was eventually to see a wall of steel created that would stretch for 1.5 miles and create 130 acres of new land. Unfortunately, the placement of the steel sheet has not gone to plan and many of the interlocking panels have been bent or shifted out of position during installation, requiring their removal and reinstallation.

This past summer a bulldozer operator was killed when dirt collapsed beneath him during this operation. It is now estimated that the originally proposed project, to have been completed this year, may have to be scaled back to contain construction costs while the project’s overall completion will have to be moved to 2021.

ExxonMobil’s Order
In the Trans Alaska Pipeline System (TAPS) trade, ExxonMobil is hoping for a much shorter construction period and much more attention to budget after confirming orders for two 115,000-dwt crude carriers at the Aker Philadelphia shipyard in October. Construction of the first 730,000-barrel capacity ship is scheduled to begin next year for delivery in 2014 with the second ship following shortly after. When completed both tankers will be deployed by ExxonMobil affiliate SeaRiver Maritime on the Alaska-West Coast run, replacing the aging Kodiak and Sierra.

These vessels, built as the single-hull Kenai and Tosina in the late 1970s, were converted to double-hull for operation by BP/Alaska Tanker Company before moving into the SeaRiver fleet in 2005/06. Prior to reentering service they each received extensive refits in Singapore but Kodiak suffered a well-publicized breakdown at sea in 2010 after it lost power when an aft steam generator overheated.

For the new tankers, South Korea’s Samsung Heavy Industries is being brought in to provide technical support, with the twin ships expected to cost roughly $200 million each to build. This will be approximately three times more than what Samsung would charge if the ships were built at its home yards in Asia.

The new tankers will be the first TAPS ships built by a US shipyard in more than a half decade, the last being the four-ship order completed for BP by San Diego’s NASSCO in 2004-2006.