U.S. Shippers Shop for Flags

What’s left of the nation’s once mighty oceangoing merchant marine is threatening to jump ship if the government does not ease burdensome taxes and regulations.

American President Lines and Sea-Land--the two largest U.S.-flagged shipping lines--have put government agencies and unions on alert that, with maritime operating subsidies coming to an end and military shipments declining, the benefits of flying the U.S. flag are fast disappearing for commercial carriers.

Come 1995, they say, they might be compelled to switch to foreign registry to avoid sailing into the red. “We feel comfortable that we could compete (internationally) if we weren’t under the restrictions that a U.S. flag carrier is under,” said John Lillie, chairman and chief executive of American President Cos., the Oakland-based owner of APL.

APL and Sea-Land, owned by CSX Corp. of Richmond, Va., both transport cargo containers, APL in the Pacific Basin and Sea-Land worldwide. The two rivals’ joint campaign, coming after a period of industry discord over what reforms to seek, has caught the attention of many regulators in Washington.

“These are not hollow threats,” said Christopher L. Koch, chairman of the Federal Maritime Commission, which regulates rates and looks after U.S. carriers’ interests in trade disputes.

In response to President Bush’s call for a review of regulations that might hinder U.S. companies’ competitiveness, the carriers have sent the Department of Transportation 85 pages of rules relating to vessel design, equipment and operating standards that they want changed or eliminated. The carriers are also seeking reforms in tax treatment, union rules and the system used to procure transportation for government cargo.

Koch and others acknowledge that carriers pay a variety of economic penalties for operating under the U.S. flag. For example:

* U.S. vessels are required to use larger, more expensive U.S. crews.

* Overseas fleets generally receive far greater support from their governments, including liberal depreciation schedules.

* The IRS taxes U.S. carriers’ incomes, yet many foreign-flag competitors pay no taxes to either the United States or their own governments.

* U.S.-flagged ships must pay a 50% tariff to the U.S. government on any repairs made in foreign shipyards.

* The U.S. Coast Guard imposes requirements on U.S. vessels beyond those set for foreign-flag ships calling at U.S. ports.

Some of the extra cost of U.S. crews has been offset by subsidies, Lillie explained, but those expire in 1997. Another incentive to fly the U.S. flag has been a requirement that certain government and military cargoes be carried on U.S.-flag ships. However, the pullback of troops from overseas cuts sharply into that business, he said.

Because of the burden of higher costs, the nation’s third-largest carrier, New Orleans-based Lykes Bros. Steamship Co., recently chartered a new ship built in the Netherlands. Renamed last month at a ceremony in Baltimore, it has a German captain and a Filipino crew and sails under the Panamanian flag.

“Just because the United States government doesn’t want to pay for an American flag fleet, Lykes doesn’t want to see its fleet diminish,” Eugene F. McCormick, president of Lykes Lines, told the Baltimore Sun.

Lillie, McCormick and other industry executives note that it is no longer practical to have oceangoing container ships built in the United States, where they cost three times as much as those built in overseas yards.

If current trends continue, the U.S. Maritime Administration predicts that the U.S.-flag container ship fleet will plunge to just 30 ships in 2005 from 141 in 1990. Since 1957, the U.S.-flag share of liner trade between the United States and other nations has dropped to 19% from 39%.

A wholesale shift to the flags of such nations as Liberia and Panama could result in enormous disadvantages for U.S. importers and exporters, Lillie said, by making them dependent on shipping lines of their offshore competitors. They could be hit with higher rates and limits on capacity.

Perhaps more important, the absence of a U.S. merchant fleet could put the country at the mercy of foreign lands in times of national emergency. For Operation Desert Storm, cargo containers from the United States were carried on U.S.-flag vessels, but carriers had to charter foreign vessels for some other types of cargo. Some of those foreign-flag crews balked at taking their ships into the Persian Gulf.

It is too soon to say how a reflagging by APL and Sea-Land would affect West Coast ports, where the two are key operators. At the Port of Oakland, spokesman Robert Middleton said he can understand why the two are seeking a “level playing field.”

“Our clients have to do what’s in their best interests,” he said.

Although APL’s subsidies won’t expire until 1997, Lillie said the company must be able to count on reforms sooner so it can plan ship purchases. “If we wait until 1997,” he said, “it will be a fait accompli. “