NTSB El Faro Report Meeting

Professional Mariner Forum
82

Tote reorganized a few years ago, the bean counters see shipping as a engineering/maintenance problem. Their attitude with regards to the condition on the ops side, including the hull / lashing etc seems to be if it’s OK with the regulators than it’s OK.

ABS and Coast Guards attitude seems to be that the company must know what it’s doing and so give them what they want.

It’s the frog in boiling water thing. At what point did the El Faro become unseaworthy? That point passed without being noticed.

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83

Probably 20 years ago?!?

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84

It’s interesting that TOTE and the USCG and ABS in Jacksonville found that EL JUNKIE was seaworthy and fit for extreme weather service in the Alaska trade, but immediately thereafter the USCG in Seattle found it totally unseaworthy. It had so many and so serious longstanding structural problems with compromised watertight integrity that it had to be towed to the scrapyard in Texas.

It appears as if Many shipping companies take a similar approach: as long as we can hoodwink the USCG and ABS into passing it, it’s good enough, drive her hard and generate as much revenue as possible, before they catch on.

It also restates an open secret: the quality of both USCG and ABS inspections are inconsistent and suspect.

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85

I would bet that the chance of Civil Lawsuits had something to do with them #1, getting her out of Jacksonville and to the West Coast and #2, after finding what they did and knowing that the findings would be made public they sent her to the scrapyard as fast as they could.

At first, I wondered why they spent to money to get her to the West Coast but after thinking about it they did what they could do to find her.

86

ABS was not mentioned once by name in the report but the remark number 20 under’ Recommendations’ is clearly meant for them and is rather deadly. With this in your pocket you can better close shop.

Review and implement training of Coast Guard inspectors and accredited classification society surveyors to ensure that they are properly qualified and supported to perform effective, accurate, and transparent vessel inspections, meeting all statutory and regulatory requirements.

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87

Why is this done though? Why in the USA are ships run far past their usable lifespan?

Is it because the USCG and ABS keep passing the POS on inspections? Is it because it is not possible to replace the ship with a newer one?

Do other first-world countries have this problem of hunks of junks continuing to sail in the deep sea fleets?

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Shades of the Marine Electric

89

From CG MBI report:

After the 2006 conversion, EL FARO’s total cargo loading capacity changed
and the vessel’s maximum allowable draft was increased by over 2-feet. The change also
reduced the vessel’s freeboard which lowered hull openings by the same distance.

Don’t know if 2 feet was make or break but it didn’t help.

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90

I can offer one explanation. Executives are compensated based on stock price, either directly or indirectly. Stock prices are driven these days by fashion, not fundamentals. The current fashion is for the Silicon Valley/Venture Capital model. It’s a form of pump-and-dump scheme. You spin up a corporation, show spectacular growth, and sell it off, generally after the IPO. In the old days every Silicon Valley startup’s business plan ended with getting sold to Microsoft. Now it’s getting sold to Amazon, Apple, Facebook or Google.

Let’s say you want to run an old-fashioned capital-intensive corporation that just sat on on a pile of equipment and threw off cash year after year with little or no growth. The VCs would ignore you, the business schools would sneer at you, and if you were a public corporation the robots that run Wall Street trading would put your stock in the doldrums. There’s a good chance one of these so-called “activist investors” would then take you over, fire everybody starting with the most senior, and milk the company until it was dead. As Cornelius Vanderbilt supposedly said about the “activist investor” Jay Gould: “Any fool can make a railroad pay.” You just stop maintenance while still collecting revenue. In a little while you don’t have a railroad (or a shipping line) anymore but that doesn’t matter because the “activist investor” has cashed out by then.

So what happened to TOTE was not unique (except getting busted for price fixing, itself a sign of an operation that’s on the ropes) it was systemic, inherent in the way decision-makers are compensated in today’s “grow or die” business environment. The only losers are the poor souls who are dumped out on the street or who get injured or killed when that under maintained equipment breaks.

Case in point: look at what Carl Icahn did to Transocean in November 2015.

Earl

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91

You make a number of smart and articulate observations about what drives the short term thinking of modern publicly traded corporations. They are a close fit with what goes on at many publicly traded companies.

However, TOTE is a closely held family business owned by Saltchuk Resources (a family holding company), which is owned by the founder’s three daughters. As I recall, TOTE (Seattle) was created by the founder, a top Seattle lawyer.

TOTE (Jacksonville) was bought by Saltchuk and renamed fairly recently, maybe about five years ago. I think the price-fixing activity pre-dated Saltchuk ownership, but Saltchuk got stuck with the multi-million dollar fine. It maybe that the Jacksonville management continued the price fixing after the sale. It’s been awhile since I heard the story, so I don’t remember.

It might be that the price-fixing was an effort by old management to pump up the enterprise value of the company, and their bonuses, which may have resulted in Saltchuk overpaying for the Jacksonville company. I cannot remember the name of the company before it got merged into TOTE. So, the observations that you made might be a pretty good fit with the behavior of company management preparing to sell the company at the time of the price fixing scheme.

A lot of vessel owning companies are privately held, and their financial structure more closely resembles a commercial real estate project, than a company with publicly traded stock. They think longer term.

Many vessel owning companies are inadequately capitalized and struggling. It can be a feast or famine business. At some of the the Mom and Pop companies, when business is slow or bidding is very competitive, Mom and Pop are living at home on cash flow that is created by deferring maintenance on the boats. If they did the required maintenance, they wouldn’t eat. And yes, some of them are just greedy and living beyond their means.

Word around the Seattle waterfront is that Saltchuk is hurting financially. I hear that the pain is also being felt at Foss, a Saltchuk owned company. I assume that the reason behind this, if it’s true, is the high cost of the new TOTE ships, the EL FARO disaster, and the unexpected scrapping of EL JUNKIE. Those are bitter pills for any family held company to have to swallow in rapid succession.

92

I stand corrected on the nature of TOTE.

According to the Hawaiian newspaper, Saltchuk owned 45% of the Jacksonville company Sea Star and bought the rest from the other owners (Matson and Puerto Rican investors) in 2001, taking full ownership. The price-fixing occurred between 2005 and 2008, after Saltchuk took 100% ownership. Sea Star was was renamed TOTE after the price-fixing convictions at the end of 2013. So the imputed motives in my earlier post are probably not applicable in the case of TOTE.

A chart showing settlements etc. as of December 2013 appears here:

http://www.hawaiifreepress.com/Portals/0/Article%20Attachments/HSC-587a%20(Table%20-%20PR%20rate%20fixing%20case).pdf

I don’t know what the dispositions of the cases in the far right column were.

Cheers,

Earl

93

@tugsailor this from Tote website. Was Interocean the company you were thinking of?

October 1, 2012 – Interocean American Shipping Corporation is now TOTE Services.

The name may have changed, but the company continues its proud history of providing operation and management services for third-party ship owners of both foreign and U.S. flag vessels owned by affiliated companies. TOTE Services was originally founded as Interocean Management Corporation in Delaware in 1975 as the result of a merger between two established maritime companies – Cities Service Tanker Fleet and Interstate, a tug and barge firm owned by the Hooper Family. TOTE Services has been known by several names in its lifetime – Interocean Management Corporation, Interocean Ugland Management Corporation, Interocean American Shipping and now TOTE Services.

The name change comes nearly a year after the company’s parent organization, TOTE, Inc., changed its name from American Shipping Group. TOTE Services is one of six operating companies owned by TOTE, Inc. TOTE Services’ five sister companies are organized in to two lines of business: TOTE Maritime includes operating companies Totem Ocean Trailer Express and Sea Star Line. TOTE Logistics companies include Alta Logistics, Alta Transportation and Spectrum Logistics. TOTE, Inc. and all of its subsidiaries are members of the Saltchuk Resources family of brands. Saltchuk is a family-owned private investment company located in Seattle, WA.

94

Just because they are privately held does not mean they aren’t taking big Wall Street money.

95

My recollection was that they bought Sea Star around five years ago, and put the Tote name on it, but maybe I’m confusing that with when they bought Tropical Shipping (foreign flag serving the Caribbean). There was maritime press coverage of the purchase, including the relatively modest price. I may have the two companies confused and be completely wrong about when they got into Sea Star.

Of course, I have no idea what sort of debt/equity mix they use to buy up other companies.

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96

Why is this done though? Why in the USA are ships run far past their usable lifespan?
Is it because the USCG and ABS keep passing the POS on inspections? Is it because it is not possible to replace the ship with a newer one?
Do other first-world countries have this problem of hunks of junks continuing to sail in the deep sea fleets?

I suppose that this has something to do with the special circumstances which prevail in the US maritime system due to which free competition is prevented. In a real world situation fuel guzzling turbine dinosaur ships like the El Faro would have been replaced already long ago as they soon became uneconomic due to sharply increasing fuel prices and therefore were unable to compete in the market place. In the real world the extra costs generated by these ships cannot be added to consumer prices as the market will not accept this, but can in the case of Puerto Rico and Hawaii. I suppose that for practical reasons the present system is unsustainable in the long run and that something got to give in the end.

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97

One thing that stands out when you look at the corporate history is an emphasis on financial maneuvering – acquisitions, name changes, the split of TOTE into two companies – at the expense of operational concerns. It appears to be this strange little transportation conglomerate with a bunch of marginal operations (do they still have the air freight company?) and assets being moved around in dodgy-appearing ways.

Cheers,

Earl

98

Like any US company, they spend a lot of time and effort structuring everything they do to minimize high US corporate taxes.

Given that Tote was founded by a top lawyer who also founded one of Seattle’s best large firms, a lot the structuring undoubtedly is driven by efforts to limit liability.

Saltchuk owns several transportation companies, including air freight, tug and barge, and trucking.

99

This is from another thread:

This is Earl’s post.

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100

22 posts were split to a new topic: Jones Act and The Age of U.S. Ships

109

This is from the NTSB findings:

35.Although there is no direct evidence that the company applied pressure regarding the
vessel’s schedule, inherent pressure could have influenced the captain’s decision to continue on despite the weather