Bloomberg Government (bgov.com)
April 26, 2012
Maersk Gains From U.S. Military’s $11.5 Billion War Shipments
By Brendan McGarry
The Alliance St. Louis docked at the Port of Beaumont in Texas this month and rolled out 179 armored trucks. Two weeks later, it was at a Delaware port loading 1,000 General Motors Co. cars and trucks bound for overseas.
This mixing of military and commercial cargo is a shift for the 11-deck container ship operated by A.P. Moeller-Maersk A/S. Until 2008, it ferried commercial freight between the U.S. and Asia. Maersk dropped that route for one to the Middle East, where the Alliance St. Louis picks up desert-tan trucks and other equipment that survived the Iraq war.
The Department of Defense is increasingly shipping war supplies on commercial lines. Since 2001, companies such as Maersk and Neptune Orient Lines Ltd. have been awarded at least $11.5 billion in defense contracts and have handled more than 90 percent of all military cargo to and from Iraq and Afghanistan.
“The Defense Department doesn’t have enough ships by itself to do all of that in a timely manner,” Gordon Holder, a retired Navy vice admiral, said in an interview. “It would take a decade, it would be more expensive and it would detract from its ability to do other missions. The partnership with our commercial carriers is essential.”
Maersk, owner of the world’s largest shipping line, has benefited the most from the U.S. military’s dependence on commercial lines.
The company, based in Copenhagen, received almost half the military’s $1.82 billion in contracts last year to ship supplies and equipment around the globe, most of it tied to Iraq and Afghanistan, according to Defense Department data. Maersk also arranges rail and truck transport as part of the agreements.
Maersk got $800 million from the Pentagon in the fiscal year that ended Sept. 30, up almost sixfold from the previous year, according to data compiled by Bloomberg. That represents 1.3 percent of the company’s $60.2 billion in 2011 revenue, and 2.9 percent of its container shipping business.
While the military accounts for a small share of Maersk’s revenue, the work tends to offer higher margins because of its specialized nature, said Jacob Pedersen, an analyst with Sydbank A/S in Denmark. It also may help offset a commercial shipping slowdown tied to a glut of new vessels, he said.
“It is quite logical that the Afghanistan exit would increase the business done with Maersk Line — but of course only temporarily,” Pedersen said in an e-mail.
American President Lines Ltd., part of Neptune Orient Lines Ltd. of Singapore, received $421 million in defense contracts in fiscal 2011. That represented 4.6 percent of the the parent company’s revenue of $9.21 billion in 2011, and 5.4 percent of Neptune’s shipping business.
A spokesman for American President Lines didn’t return an e-mail request for comment.
With the Iraq war’s end last year and the planned withdrawal from Afghanistan in 2014, the market may not support the number of commercial ships now operating, according to Eric Ebeling, vice president and general manager at American Roll-on Roll-off Carrier LLC, part of American Shipping & Logistics Group Inc. of Park Ridge, New Jersey.
The fleet increased to 60 ships from 47 ships in 2005 to accommodate war demand, yet military cargo volume will probably decline by 50 percent or more by 2015, he said.
“The present fleet size and cargo pool are becoming unsustainable,” Ebeling said in an interview. If the government doesn’t re-examine the size of the fleet and how much it pays carriers, “some may reconsider participating in the program.”
The military estimates it has saved $5.7 billion on equipment transportation costs since fiscal 2003, partly by relying more on the cheaper and more efficient commercial carriers, according to the U.S. Transportation Command, based at Scott Air Force Base in Illinois.
Even so, U.S. lawmakers accuse the Defense Department of wasteful spending on shipping containers. The containers are supposed to be returned to the commercial lines within 15 days. Instead, troops in Afghanistan sometimes use them for storage, shelter or even offices.
The Defense Department has spent at least $649 million on container late fees since fiscal 2001, according to a Jan. 30 letter co-signed by Senator Tom Carper, a Democrat from Delaware.
Wasting “hundreds of millions of scarce taxpayer dollars as a result of late fees and poor contracting on shipping containers is unacceptable,” Carper said in an e-mail.
Beaumont is the largest U.S. commercial port handling gear from the war zones, according to John Roby, a port spokesman. About 40 miles upstream of the Gulf of Mexico, it’s centrally located with rail and highway access to military bases and depots across the country. Commercial ports such as Charleston, South Carolina, and Jacksonville, Florida, also handle war equipment.
As the U.S. military’s shipping business has grown, the Navy’s gray warships have gradually been displaced by commercial vessels at Beaumont and other ports.
“When the war first started, it was all gray bottoms,” Jim Heldreth, a transportation officer for an Army battalion based at the Texas port, said in an interview, using the local term for the warships’ color. He said he hadn’t seen a Navy ship in months.
The Alliance St. Louis, which is 656 feet long and capable of carrying 6,500 cars, typifies the commercial vessel being used by the military.
It is part of a fleet of so-called “ro-ro” ships owned by Jericho, New York-based Alliance Navigation LLC and operated by Farrell Lines, part of Maersk Line Ltd. The term is short for roll-on, roll-off, applied to vehicular cargo.
The ship left the Texas port on April 2. From Beaumont, it headed up the East Coast, docking in Jacksonville, Charleston and Wilmington, Delaware, before crossing the Atlantic for stops including Egypt, Jordan, Saudi Arabia and Kuwait.
Companies often combine military and commercial cargo on the same ship to maximize space and profit, said Army Lieutenant Colonel Michael Arnold, the battalion commander.
“You would have never heard of anything like that during the Gulf War, with GM cars on the upper deck and MRAPs down below,” he said in an interview, using the military moniker for Mine Resistant Ambush Protected trucks.
With the last U.S. armored truck returning from Iraq scheduled to arrive at Beaumont next month, the military and its shipping contractors are now focusing on Afghanistan.
“If the drawdown takes place the way we envision it, there will be some opportunities,” Rick Boyle, a vice president at Maersk Line Ltd., a U.S. subsidiary of Maersk, said of the exit from Afghanistan.
Pulling out of the landlocked, mountainous country is more expensive after Pakistan closed two key NATO supply routes, Navy Commander Bill Speaks, a Pentagon spokesman, said in an interview. The price of moving supplies through the north is $15,800 per container, compared to $6,200 per container through Pakistan, he said.
Pakistan in November closed the routes after a coalition air strike killed two dozen Pakistani soldiers at a border post. The decision forced the U.S. and NATO allies to move equipment from a longer, northern route through countries such as Tajikistan, Uzbekistan and Russia.
“It is two completely different worlds,” Navy Captain Kevin Carrier, operations director for the Military Surface Deployment and Distribution Command, said of the differences between the Afghanistan and Iraq drawdowns. “It will be much, much more difficult.”