Horizon Lines Troubles Show Need for Reform of US Build Requirement

BY MICHAEL HANSEN– Recent news indicates that Hawaii and Guam ocean carrier Horizon Lines, Inc is in a precarious financial position.  The loss of Horizon could mean that Matson Navigation Company, Inc. would become the sole provider of liner container service between the United States West Coast, Hawaii and Guam.

Similarly, Horizon is one of two liner operators in the domestic Alaska trade, and one of four in the domestic Puerto Rico trade.

There have been at least two common carriers in the domestic Hawaii and Guam liner trades since the mid 1960’s when Seatrain Lines inaugurated service calling on the Pier-51A container terminal in Honolulu Harbor then on to Guam and the Far East.

Seatrain competed with Matson in Hawaii and American President Lines at Guam.  Horizon’s Hawaii and Guam services are direct successors of Seatrain; that service was taken-over in succession by U.S. Lines, Sea-Land Service and CSX Lines – before The Carlyle Group purchased the CSX Line operation and established Horizon in 2003.

This year Horizon incurred a first quarter loss of $33.3 million and a second quarter loss of $5.4 million.  In March they announced their U.S. West Coast/Guam/Far East service, which was restructured in 2006, has yet to become profitable.  On May 31^st, the New York Stock Exchange put Horizon on notice that their market capitalization had fallen below the minimum requirement to remain listed and were given 18 months to rectify the situation.  On August 15^th Horizon defaulted on $330 million in convertible notes.  And, since June, the share price of their common stock has fallen below one dollar, which can be a sign of potential corporate failure.

Delisting on top of the debt default and operating losses would dramatically further reduce Horizon’s ability to raise capital and take on new debt.  Horizon is put further in a difficult financial position by their very old domestic Jones Act fleet, which they inherited from U.S. Lines and Sea-Land, and now very much need to be replaced with new more efficient modern ships if they have any hope to survive as an operating company.

It will be prohibitively expensive for Horizon to build new replacement containerships in the U.S. as required by the Jones Act – ship construction costs in the U.S. are 2.5 and 3 times comparable international costs.  In any event, ships are not readily available from U.S. builders as they would be from foreign shipyards that specialize in the class of containerships needed by Horizon to operate efficiently in the domestic trade lanes of Alaska, Hawaii and Puerto Rico.  Given their current financial condition, it is highly unlikely that Horizon could raise the approximately $2 billion in capital necessary to construct a series of at least a dozen large containerships in the United States on a schedule that would address their domestic Jones Act requirements.

Contributing to their financial problems is the poor performance of Horizon’s restructured Guam / Far East service – often referred to as their China Service – which at its inception was envisioned as a partial solution to their vessel replacement issues.  Before 2006, Horizon operated a string of U.S.-Built U.S.-Flag containerships from the U.S. West Coast to Honolulu, Guam and the Far East – as did Seatrain and all of its successors.  Horizon replaced their aging U.S.-Built containerships with a string of five new Foreign-Built (South Korea) U.S.-Flag 2,824 TEU (Twenty-foot Equivalent Unit) containerships and eliminated the Westbound call at Honolulu.  The employment of Foreign-Built ships is allowed because the domestic Guam trade is exempt from the U.S.-Build requirement of the Jones Act – but Foreign-Built ships can’t carry cargo from the U.S. West Coast to Honolulu and that Jones Act prohibition lead to the elimination of the Honolulu port call on this route.

Although switching to a lot younger, more efficient and much cheaper Foreign-Built ships in the Guam / Far East trade route meant that Horizon could retire their oldest least efficient U.S.-Built ships, they had to forgo the lucrative Jones Act cargo previously carried by this service on the U.S. West Coast-Honolulu leg.  It also means that their competitor, Matson, who operates fully Jones Act U.S.-Built U.S.-Flag containerships on the U.S. West Coast / Guam trade lane, will carry most of the military preference cargo to Guam and the Far East as their ships enjoy a higher Voluntary Intermodal Sealift Agreement (VISA) priority rating.  These Jones Act cabotage restrictions on Horizon’s restructured Foreign-Built U.S.-Flag Guam / Far East Service operation have lead directly to their losses on the route.