The maritime industry believes this study proves once and for all that the Jones Act is a big plus. Now it’s up to critics to prove them wrong. Or not.
OK, sitting down? Ready for some news? Here it is: The Jones Act is a tremendous competitive advantage for Puerto Rico, creating a closed loop of shipping routes to and from the U.S. mainland, and offering other benefits that combined, save retailers and manufacturers more than $120 million each year on their cargo shipments.
This, according to a new landmark study by consulting firm Estudios Técnicos that was commissioned by the Puerto Rico Maritime Alliance, or Crowley Maritime Corp., Horizon Lines Inc., Sea Star Line LLC and Trailer Bridge Inc.—the island's four shipping companies—as reported exclusively by CARIBBEAN BUSINESS two weeks ago.
The study does confirm what the March 2013 report on the Jones Act by the federal Government Accountability Office (GAO) said, except that the federal study was heavily criticized for not justifying its results with the numbers. This study fills the gap with numbers that are stunning even to industry executives.
"This is the first time we have a conclusive study that actually calculates the explicit and implicit costs and benefits of the Jones Act for shippers in Puerto Rico," said Eduardo Pagán, Maritime Alliance president and Sea Star vice president & general manager for Puerto Rico & the Caribbean.
"It proves once and for all that all those criticisms levied on the Jones Act are simply wrong. I challenge anyone to take a close look at this study and either come up with an equally empirical and convincing case against the Jones Act or accept that the closed loop created by the law is a big plus to doing business in Puerto Rico," he said.
In other words, unless someone can deliver a solid counterpunch, this should be the knockout blow that finally ends the heated, drawn-out bout between proponents and detractors of the Jones Act. "Otherwise, if the opposition persists, it would reveal itself as pure politics," added José Nazario, Crowley's senior director on the island.
"Most politicians who oppose the Jones Act approach the subject with a bias against the law," said Joaquín Villamil, chairman of Estudios Técnicos. "They make the assumption that this is bad for Puerto Rico without any empirical basis, except some flawed reviews of the law made over the years."
The most talked about was an April 2002 review of the Jones Act by University of Puerto Rico economist José Alameda, that said it costs companies on the island as much as $400 million in higher shipping costs, which they would avoid if the Jones Act didn't exist, a conclusion thrashed by the Maritime Alliance's new study.
"That's absurd, particularly when considering that the entire shipping industry in Puerto Rico invoices $704 million a year," Villamil said.
To be sure, Alameda himself refers to the figures in his study as "estimates" that lack hard data and that shouldn't be used to set policy or change the law (CB, Aug. 4, 2011).
The Jones Act, which dates back to 1920, forces all shipping between the U.S. mainland and off-coast states and territories, including Puerto Rico, Hawaii and Alaska, to be done on ships built in the U.S. and manned by American crews. In the case of Puerto Rico, that covers 77% of all cargo, whether shipped in bulk or containers. The latter, representing 61% of all cargo shipped to the island, was the subject of the Maritime Alliance's study.
LIKE AIR ROUTES
So, what are these huge Jones Act benefits? For starters, the closed loop the study points to refers to the practice by all four carriers of sailing directly between the Port of San Juan and a U.S. mainland port without stopping anywhere else to pick up or drop off cargo.
They are called dedicated routes and are akin to airline flights that depart and arrive on a strict schedule with precious few delays—few, that is, when considering the number of flights that take off and land on any given day.
According to the study, ships serving Puerto Rico have a 98% on-time delivery within what is called a two-hour tolerance.
"If it was supposed to arrive at 7 a.m. and actually gets here after 9 a.m., then it didn't fall within the two hours," explained Crowley's Nazario.
That compares with the 80% average prevailing among international carriers, according to the Maritime Administration of the U.S. Department of Transportation, also known as Marad.
"That degree of precision in the high seas that Puerto Rico enjoys simply doesn't happen with international lines outside the U.S. It only happens in the Jones Act trade," added Richard Rodríguez, general manager of Horizon Lines in Puerto Rico. "That's because international lines try to make sure their ships are filled to capacity, and that means staying in port longer, waiting for cargo, or stopping at other ports along the way to pick up cargo. This produces delays, so they give clients a range of days or weeks in which to expect their merchandise. In Puerto Rico, we give clients a precise schedule, and they can count on their merchandise getting to Puerto Rico, in the case of southbound traffic and to the States for northbound cargo, on such and such day, at such and such time."
Nazario referred to a previous advertising campaign by one of the companies that told clients they could set their watch to the precision of the company's shipping routes.
"Sometimes, depending on the product and the country it comes from, a shipment can take months," Crowley's GM added. "The impact of this cannot be underestimated. The biggest is inventory management. Our clients go from ship to store because they know exactly when they will be receiving the merchandise. Otherwise, if they didn't have that benefit, their customer service would suffer, and they would have to account for far more warehousing, which is added costs."
According to the study, more warehousing means greater capital investments, energy costs, other utilities, labor, insurance, cash fl ow and the obsolescence of certain products, particularly perishable food items.
How would this impact consumer prices at the checkout counter? The study hypothesized with one product, poultry, and found its price would jump from $1.69 a pound (at January prices) to $1.90 a pound, or an increase of 12.5%.
"I don't know of any other jurisdiction with service as reliable as Puerto Rico's," Pagán said. "This has become one of our primary selling points when we approach a client, because we know the huge difference it can make in their business."
$120 MILLION PRODUCTIVITY BOOST
The study seems to strengthen a second big selling point. Not only do dedicated routes save money because of greater speed and reliability of deliveries, but Jones Act carriers also make those deliveries on containers that are far larger and can therefore carry more merchandise per trip, saving clients even more money.
For decades, the standard container sizes had been 20 and 40 linear feet. In the late 1980s and early 1990s, the ground transportation industry in the U.S. began adding larger sizes, resulting in an additional three sizes: 45 feet, 48 feet and 53 feet. Canada soon followed the U.S. lead.
It would be, as fate should have it, a U.S.- and Canada-only innovation not replicated anywhere else. As ground transport companies invested in retooling trucks, trains, routes and berths, so did Jones Act shipping lines, Nazario explained.
That included a new generation of ships and the retooling of existing ones to accommodate five sizes instead of two, as well as significant port investments in loading and unloading equipment and technology.
"It isn't the case that ships can handle any container size you throw at them," Pagán added. "The space on deck and the structure of the ship must be built to fit a certain kind of cargo, and that includes the size of the containers used. That's why international ships can't easily switch to anything other than 40-foot containers."
Jones Act carriers have also developed a tie-in with stateside port and ground transportation companies to handle any container size seamlessly.
The other adjustment made has been with clients in Puerto Rico and suppliers on the U.S. mainland. "The new sizes meant they had to adjust their planning, information systems, accounting, shipping & receiving and other aspects of their logistics management to take full advantage of what the variety of container sizes means for their businesses," Nazario added.
Topping the list of advantages is productivity. A 53-foot container, as used in Puerto Rico routes, represents 43% more cubic feet than a 40-footer, Villamil said. "That's an enormous difference. It means you can fit a lot more merchandise in the same container and take far fewer trips than you would otherwise. When you have a range of sizes, you can plan your routes with far greater flexibility depending on the size of the shipment, the nature of the product, the destination and other considerations. We were able to put a number on the savings, but the benefits stretch way beyond a number."
The number, though, is important. The annual savings when combining the avoided warehousing (thanks to the dedicated routes) and the larger containers, amounts to $120.8 million for companies in Puerto Rico that ship goods to and from the U.S. mainland, under the Jones Act. The larger sizes translate into some 35,319 fewer 40-foot containers used each year on the island.
Only 31.3% of all cargo shipped in and out of Puerto Rico is still put in 20- and 40-foot containers. Larger sizes now command more: 17.5% for 45-footers, 3.8% at 48 feet and 26% at 53 feet.
"This study finally quantifies what we have spent years arguing conceptually," Nazario continued. "This enhances a client's productivity across the entire logistics chain: loading and unloading, ground transportation, maritime transportation, warehousing and so much more."
"The introduction of these sizes has represented a significant complexity to Jones Act carriers in terms of equipment inventories, vessel design and configurations, rebuilds, and higher costs," the study reads. "This is a good example of how Jones Act carriers developed innovative offerings to make transportation services and costs more beneficial to customers, in line with intermodal solutions across the U.S."
Not only have international shipping lines, port administrators and ground transportation companies outside the U.S. shown zero interest in making the same conversion, but they also show no signs of becoming interested in the years to come.
"Every new ship being built and ordered for the international trade remains only fit for 40-foot containers," Pagán revealed. "It's pretty clear that no one in the international trade wants to take the plunge and make these big investments, so our clients in Puerto Rico and companies in the States will continue to be the only ones benefiting from this menu of sizes for a long time to come."
NET SAVINGS FOR PUERTO RICO COMPANIES
On the other side of the ledger is what the Jones Act does cost companies in shipping and logistics. On that front, the study confirms what a previous industry study had already shown.
As previously reported (CB, Aug. 4, 2011), a 2003 study commissioned by the industry and conducted by Boston-based consultancy Reeve & Associates found that if U.S.-Puerto Rico trade were opened to international carriers, they would incur exactly the same costs as Jones Act carriers do today, with only two exceptions: the higher cost of ship-building and depreciation; and the higher wages paid to American crews onboard the ships.
"Every other cost is the same for all carriers: wharfage, dockage, fuel, port fees, inland transportation, sales and administration," Rodríguez outlined. Wharfage is a fee charged by every port authority, including in Puerto Rico, based on cargo tonnage, while the dockage fee is based on the size of the ship.
According to the Estudios Técnicos study, vessel and crew costs represent only 16% of the $670 million in total shipping costs, and of that, less than half, or $48.5 million, is attributable to the Jones Act—the higher labor costs and depreciation.
So, the Jones Act represents $48.5 million in incremental costs that wouldn't be borne by companies in Puerto Rico if the island were exempt or if the law was repealed and U.S.-Puerto Rico trade opened to international carriers.
That, in turn, yields a $72.3 million net gain for the island: the $120.8 million benefit minus the $48.5 million cost.
"It's actually more than that," Villamil cautioned. "Recall that the Jones Act gives Puerto Rico companies a big advantage in terms of offering better service and delivery times to consumers, and that is incalculable." Such benefits include improved relationships, greater customer retention and referrals, more loyalty, and other attributes that lead to higher sales. "How much is that worth to a company?"
LOWER RATES, LOWER PROFITS
Impossible to say. There is another impossible-to-say angle of this entire Jones Act debate that is rarely mentioned, but which the Maritime Alliance study makes sure no one misses.
The study asked, if the U.S.-Puerto Rico trade were to be opened to international carriers, who is to say that they will actually pass along those $48.5 million and offer better shipping rates, rates low enough to even compensate for the lost savings from larger container sizes and dedicated routes?
"We took a close look at international trade," Villamil said soberly, "and what we found was an industry essentially controlled by very few carriers that go as far as setting global shipping rates. There is a lot of collusion going on, and small markets such as Puerto Rico usually end up on the wrong end of the stick. It is a lot harder for a company in Puerto Rico to negotiate international rates than Jones Act domestic rates."
The study adds: "Eliminating the Jones Act wouldn't place Puerto Rico in a competitive market, but instead one characterized by significant concentration. More than 40% of all global cargo is concentrated in three lines: Maersk Line, Mediterranean Shipping Co. (MSC) and CMA CGM Group."
The study tracked global shipping rates and shows that they have risen steadily since the end of the 2008- 2009 Great Recession and "have gone through the roof" since 2011.
Today, the average cost of a container is 33% higher in the international trade than it is in the U.S.- Puerto Rico Jones Act trade, the study says.
About 29% of all exports from Puerto Rico and 54% of imports are international (non-U.S.), "so we had a wide base to study and compare," Villamil said.
"For competitive reasons and because of the deeper economic slowdown here at home, freight rates in Puerto Rico are actually the same today as they were back in 1996," Nazario said. "It's cheaper for a truck to go from New York to Jacksonville [Fla.] than for a ship to sail from Jacksonville to San Juan, which is amazing when one considers that costs have risen mercilessly during this time. It's been a struggle for those of us in the shipping business,but here we are, offering the service as always."
The fact the Great Recession began sooner and has run longer in Puerto Rico than it did stateside and elsewhere, has had a lot to do with that, the study adds.
"Our ships aren't sailing at full capacity, not even southbound," said Rodríguez, referring to the marked difference between vessels that bring merchandise to the island from the States, and northbound ships making the return trips.
Historically, southbound trips have arrived full of cargo, while northbound ones return mostly empty. According to the Maritime Alliance study, southbound trips represent 81% of total volume and 87% of all revenue in the trade, but they are sailing at 80% capacity, a deep dive from the 95% capacity prior to 2005. Northbound ships are faring worse, at roughly 20% capacity, or 80% empty—about 35% less than in previous years.
That cuts heavily into carrier profits, but the fl ip side is that their clients, the companies placing the orders, are now paying lower rates on shipments to the U.S. mainland than to foreign countries.
"Most critics of the Jones Act, when they compare Puerto Rico and international rates, consider only southbound rates, which are higher than northbound," Villamil explained. "But to get a more accurate picture, one has to weigh in the far lower northbound rates to then arrive at an average. That's when you see the math working in Puerto Rico's favor."
At least in the clients' favor. The carriers? Not so much. "Having dedicated routes means that our ships will sail on the hour with whatever cargo we have inside," Rodríguez said. "That's the way the Jones Act trade works. If that means less profitability for the carriers, well, that's what it means. We just have to hold on until the economy picks up and we get greater volume, and that's what we are all doing."
'THE ONLY CONCLUSION'
The strained net income, combined with the huge investment required to compete in a market accustomed to multiple container sizes, has also meant that international carriers have shown no interest in entering the U.S.-Puerto Rico trade.
"If this were as onerous to Puerto Rico companies and as profitable for carriers as the skeptics make people believe, we would have a line of international carriers breaking down the doors of Congress asking for repeal or exemptions," Villamil said. "But that's not the case at all. These global chains aren't going to stop in Puerto Rico just to pick up 100 to 200 containers. They want to keep making stops to fill the ship. Dedicated routes are the last thing they want to do."
Not only are they not clamoring for a change, but "they also have never stepped forth with a study showing that switching from the Jones Act closed-loop market to the open market of international trade would be more advantageous to companies and the economy of Puerto Rico," Pagán said. But then again, "no one in Puerto Rico has ever produced a study with empirical evidence in favor of repealing the Jones Act. We believe this study should end the debate. The numbers don't lie. Unless a critic takes a look at the data and draws a different conclusion, this is the only conclusion to be drawn."
Reporter Dennis Costa contributed to this story.
New study picks up where the GAO left off
Seldom have expectations been as high for a federal agency report to be completed as was the March release of the Government Accountability Office (GAO) report on the Jones Act, which was universally expected to support the arguments of Jones Act detractors— that the law leads to higher shipping costs on the island.
And seldom has a federal agency report been as blasted as this one was. Detractors argued fiercely that the GAO sided with Jones Act carriers and the U.S. defense establishment in preserving the law's protectionism, while Jones Act proponents lamented the lack of figures and rigorous research that would have sealed their position—that the law yields critical benefits that make up for the higher costs.
The Estudios Técnicos study featured in the main story of this Front-Page coverage substantiated three of the proponents' arguments, corresponding to the following sections of the GAO report, quoted extensively below:
"The nature of the service provided between Puerto Rico and the U.S. mainland could be affected by a full exemption from the Jones Act. In particular, foreign carriers that currently serve Puerto Rico as part of a multiple-stop trade route would likely continue this model to accommodate other shipping routes to and from other Caribbean destinations or world markets, rather than provide dedicated service between the mainland and Puerto Rico, as the current Jones Act carriers provide.
"If this were to occur, some stakeholders expressed concerns about the effect that such an altered shipping service would have on the reliability of service to and from the mainland. For example, longer multi-port trade routes make it difficult to ensure that scheduled service will be consistently reliable, because carriers are more likely to experience weather delays or delays at ports, and could even intentionally bypass ports on occasion to make up lost travel time.
"According to some shippers, reduced reliability of service could result in increased warehousing and inventory-related costs for companies in Puerto Rico. Importers' inventory management rely on prompt and regular shipping and receipt of needed goods to stock shelves, which is less costly than warehousing goods on the island.
"Additionally, some stakeholders expressed concern about the possible loss of convenient and inexpensive backhaul (northbound) service. If, under new market conditions, carriers choose not to provide dedicated service, then backhaul services from Puerto Rico to the mainland would also be part of longer multi-port trade routes and may not be direct from Puerto Rico to the mainland. Because of limited volumes in this market, the result could be sporadic service or higher rates."
"While foreign-flag carriers involved in international trade use standardized 20- and 40-foot containers, some Jones Act carriers provide shippers with a range of larger container units. The carriers' larger containers are the same size and type of equipment currently operated within the domestic U.S. trucking and rail transportation systems. Thus, shippers can use the same packing systems they use for other modes of U.S. transportation, a benefit that provides cost savings to the carriers and shippers. This also enables more efficient loading and unloading of containers and trailers, and delivery to their final destination on the island."
"Freight rates are based on a host of supply and demand factors in the market, some of which are affected by Jones Act requirements. However, because so many other factors besides the Jones Act affect rates, it is difficult to isolate the exact extent to which freight rates between the mainland and Puerto Rico are affected by the Jones Act."
New Houston-Puerto Rico shipping line launched
NSA becomes fifth carrier to serve the U.S.-P.R. Jones Act trade
With its maiden trip having left yesterday (May 29) from Houston and due to unload its containers at the Port of San Juan next Monday, National Shippers of America (NSA) has become the island's fifth maritime carrier, joining Crowley, Horizon, Sea Star and Trailer Bridge as the only companies serving the Puerto Rico-U.S. mainland Jones Act trade.
Isla Verde Express, as the service is called, will carry containers on a fixed southbound and northbound route every two weeks between the Port of Houston and the Port of San Juan. Horizon serves the same route on the weeks NSA doesn't sail, which means the island now enjoys weekly service from the fourth-largest city and seventh-busiest maritime port in the U.S.
NSA will carry cargo originating west of the Mississippi River on the ship MV National Glory, a U.S.-flagged vessel with a capacity of 570 TEUs (20-foot equivalent containers). The ship has been refurbished to use low-sulfur diesel to minimize emissions, leading to NSA's claim that it is the greenest vessel in the U.S.-P.R. trade.
"Shippers west of the Mississippi [River] have few options to move cargo to and from Puerto Rico without having to use an East Coast port," said Torey Presti, president of NSA. "A significant percentage of the [U.S.] mainland-Puerto Rico cargo is from Texas and the western states. We offer a central U.S. location, which together with synchronized intermodal connections, enhances the options for shippers and keeps their supply chains predictable and steady."
Agent services at both ports are provided by Norton Lilly International, headed in San Juan by Miguel Latimer.
In Houston, NSA will sail from the Jacintoport terminal and will use the Intership terminal in San Juan, offering direct rail links stateside and such value-added services in both ports as warehousing, crossdocking, transloading and bagging.
For both southbound and northbound trips, cargo will leave port on Thursdays and arrive the following Tuesday, with the merchandise available at 3 p.m., providing the rest of the week for delivery to distribution centers or intermodal transport without a weekend delay, according to the company's website.
NSA was founded in 2007 by C.C. Chen, an industry executive with years of short-sea shipping experience in Asia as founder (in 1962) & president of Wan Hai Lines. A company fact sheet describes NSA as a "flat organization [that] ensures quick decision-making and responsive customer service."