Commentary: At 100, the Jones Act has many wrinkles – FreightWaves

The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates.

The Merchant Marine Act (1920) outlines one of the most consequential non-tariff barriers (NTBs) in U.S. history, and June 5th will mark its 100th anniversary. Often called the Jones Act after its sponsor, Sen. Wesley L. Jones (R-WA), the intent was to incentivize the building and maintenance of a domestic fleet of commercial ocean vessels that would be owned and operated primarily by U.S. citizens. The Jones Act set this requirement to ensure both national defense and a “proper growth of commerce” using the “best type of ships.” Regulators have since interpreted this to mean that the vessels must also be built by U.S.-owned shipyards. Most countries have some form of cabotage restrictions but the U.S. stands out with its domestic build and repair requirements in the maritime sector.

Cabotage is defined by Merriam-Webster as the “trade or transport in coastal waters or airspace or between two points within a country.” The Jones Act covers not only coastal commerce but the commerce of U.S. territories and possessions. As such, port-to-port transport of freight from the contiguous U.S. to Alaska, Guam, Hawaii, Puerto Rico, etc. can only be handled by U.S.-flagged vessels (meaning U.S.-built, U.S.-owned and U.S.-crewed). Section 27 of the act includes the same prohibitions on transport by land as well as by water. Of course, as the commercial air industry grew after World War II cabotage restrictions were applied there as well. In practice cabotage restrictions of some kind apply to all point-to-point domestic transport of passengers and/or freight regardless of mode.

Source: FreightWaves

Why the Jones Act was enacted

The Jones Act was certainly a creature of its times and it made some economic and political sense. Economically, the U.S. emerged from World War I with a need to expand its commercial fleet while protecting its growing domestic commerce from foreign vessels. Supporting U.S. shipbuilding capabilities to meet the expectations of the Jones Act is a classic example of the “infant industry argument” in support of trade protection. Politically, U.S. coastal states with large shipbuilding interests would benefit from the act’s restrictions on cabotage. Sen. Jones himself no doubt benefitted from giving his constituents in Washington State a near monopoly on shipping to and from Alaska. Of course, the problem with infant industries is knowing when to wean them off of the mother’s milk of trade protection so that they can try to survive and thrive in the cold world of international competition. Avoiding this simply incentivizes an industry to remain cost-heavy and uncompetitive.

As an NTB the Jones Act has its supporters as well as its detractors. Supporters laud its spirit of national defense. This means that in time of war or emergency any vessel and crew operating along U.S. coasts and rivers would be “American” and thus not of questionable loyalties if commandeered to move military equipment and/or personnel. Detractors see the Jones Act as antiquated and serving only to keep transport costs higher than they would be otherwise. This is due, the argument goes, to the stifling of foreign carrier competition in domestic freight markets and propping up U.S. shipyards with their lower economies of scale and higher labor costs than those in Asia. This is the classic conflict between free trade versus ensuring stable domestic industries and employment.

Image credit: Maritime Cabotage Task Force

Today the Jones Act enjoys bipartisan support in Congress and it is hard to imagine President Trump setting aside his mercantilist tendencies to support any large-scale reform. Yet the Jones Act has enough wrinkles, loopholes and exceptions to keep politicians, regulators, transportation lawyers and even professors of logistics on their toes.

Political pressure for cabotage reform does arise from time to time. The latest was at the G7 Summit in August 2019 when U.K. Prime Minister Boris Johnson encouraged President Trump to consider supporting U.K. vessels wishing to engage in U.S. cabotage. Currently, EU nations can engage in multimodal cabotage among themselves. It would be interesting to see if a post-Brexit U.K. could maintain its cabotage rights with EU nations and, at the same time, successfully build such rights into a bilateral trade agreement with the U.S. However, it should be remembered that U.S. cabotage options with neighboring Canada and Mexico are very limited – despite each being a much larger merchandise trade partner than the U.K.

Some Jones Act wrinkles

The U.S. build and repair requirements apply only to domestic water vessels. U.S. airlines can buy airplanes from Airbus, Bombardier and Embraer, etc. U.S. motor carriers can buy Volvo trucks (or Mack trucks, which has been a Volvo subsidiary since 2000). Municipal governments offering light rail transit and bus services can buy their conveyances from Siemens and New Flyer, respectively.

container terminal in Honolulu
U.S. Rep. Ed Case (D-Hawaii) wants to open the trade between ports on the U.S. West Coast and Honolulu to foreign flag ships. (Photo credit; Flickr/Bernard Spragg. NZ)

Of course exceptions to the rule barring foreign companies from offering domestic transport can occur in times of emergency or when a domestic vessel is not available for the required move. These assessments are made by the Executive Branch or by Congress. Notable emergency exceptions to the Jones Act were made for foreign vessels to assist with the clean-up of the Exxon Valdez oil spill in 1989 and relief after Hurricane Katrina in 2005.

Regarding domestic vessel availability, Alaska has the dubious distinction to have played a part in the largest Jones Act fine in U.S. history. In 2011, the U.S. Department of Justice (DOJ) fined Furie Operating Alaska (then known as Escopeta Oil & Gas) $15 million for using a Chinese-flagged heavy-lift vessel to haul a jack-up drilling rig from the Gulf of Mexico to Alaska’s Cook Inlet. In 2017 both parties negotiated a settlement and the payment was reduced to $10 million. Ironically, Escopeta was granted a Jones Act waiver in 2006 to use a foreign vessel for the haul. But the haul did not proceed until March 2011 and by then the U.S. Department of Homeland Security (DHS) declined to renew the waiver. At any rate the haul proceeded from the Gulf of Mexico, around South America, and up to Vancouver, British Columbia, where U.S.-flagged tugboats took over and completed the trip in July 2011. Escopeta claimed that its tight timeline to reach Alaska before its tax breaks on drilling expired had forced it to use the foreign-flagged vessel. DHS did not agree and the fine was assessed by DOJ. Fast forward to 2019 – citing production difficulties in Alaska and unpaid debts, Furie filed for Chapter 11 bankruptcy protection in August of that year.

Special air cargo circumstances in Alaska

Alaska has a more positive cabotage story regarding foreign air cargo. Ted Stevens Anchorage International Airport (ANC) is centrally located at 9.5 hours flying time to 90% of the industrialized world. This makes it an excellent air cargo trans-shipping point. This operational advantage is accentuated by an exception to the Jones Act. ANC’s innovative air cargo transfer program allows belly-to-belly transfer of U.S. bound cargo between a foreign air carrier’s aircraft or between those of two different foreign air carriers. This would be illegal at any other airport in the contiguous U.S. Furthermore, when the foreign airplane continued to another U.S. airport it would constitute cabotage. Why is this allowed at ANC?

(Photo credit: Ted Stevens Anchorage International Airport)

Basically, Alaskans can thank the advocacy of the late Sen. Ted Stevens, when he wrote this unique operation into a re-appropriation bill for the Federal Aviation Administration (FAA) back in the mid-1990s. Regulators now consider foreign air cargo landed at ANC and destined for the contiguous U.S. to still be “international” and therefore not a cabotage move in the spirit of the Jones Act. Despite this liberalization, ANC’s management team has had to work hard to convince skeptical Asia-based carriers that this quasi-cabotage activity is quite legal. What makes it hard to believe at first is why the U.S. would offer such a unilateral trade benefit to countries like China and Japan.

Transit by ship and tour buses

Now consider tourism. Many cruise ship passengers embark on their trips to Alaska from the Port of Seattle. They will cruise up the West Coast and dock at various Alaska ports. Interestingly, these foreign cruise ship companies rarely use U.S.-flagged vessels. But how is it not cabotage if the passengers are steaming from one U.S. port to another by foreign-flagged vessels? Certainly, most of Alaska’s ocean freight is delivered from the Port of Tacoma (Washington) by TOTE Maritime and Matson, which by law must use U.S.-flagged vessels. Why the difference?

Such Alaska cruises may be a cabotage move by definition but it is actually a type of cabotage move not covered by the Jones Act. Cruise ship and ferry activities in the U.S. fall under the Passenger Vessel Services Act (PVSA; 1886). As long as the domestic trip is “broken” by a visit to a foreign port along the way the cruise would be legal under the PVSA. Besides, passengers usually do not complain if their trips to Alaska are topped-up by a stop at the Port of Vancouver or Port of Victoria, British Columbia. On the other hand things might seem odd when a cruise from San Diego to Hawaii is interrupted by a quick stop at the Port of Ensenada in Baja, Mexico. Yet this move is necessary for the foreign-flagged vessel to comply with the PVSA.

Canada- and Mexico-based tour bus companies certainly do not fall under the PVSA but they do enjoy a similar protection. Foreign tour buses can pick up passengers in the U.S. and take them on a roundtrip tour of Canada or Mexico, as the case may be. The key requirements are that most of the tour takes place in a foreign country (i.e., it is international commerce) and the passengers are returned to their U.S. point of origin. Picking up and dropping off passengers at different U.S. points along either leg of the tour, however, would constitute illegal cabotage. 

Cross-border truck freight between the U.S., Canada and Mexico was $64 billion or 63.1% of all cross-border freight during September, according to data. (Photo credit: U.S. Customs and Border Protection)

Motor carriers and freight

The U.S. motor carrier sector is particularly tricky since a Canada- or Mexico-based conveyance is covered under customs laws, while their drivers are covered under separate immigration laws. These laws and regulatory interpretations do not conform to one another. For example, U.S. customs regulations allow for very limited options for foreign motor carriers to engage in cabotage. The move must be “incidental” to a well-defined export or import move. Another option is to carry cabotage freight while “repositioning” between well-defined export or import moves. Typically, the cabotage move must be “outward” – meaning, for example, that the conveyance is traveling northward from the U.S. back to Canada. Canada, on the other hand, allows repositioning moves to be east-west and this creates confusion in the trans-border motor carrier sector. Simply put, different countries can have different laws and regulatory interpretations. Of course, the moves noted above apply only to conveyances. U.S. immigration regulations are not as liberal – which means, in practice, these cabotage moves are often rendered impractical.

Foreign drivers would, however, be able to undertake incidental or repositioning moves if they were dual citizens, held a Green Card or were at least 50% by-blood members of a First Nation tribe in Canada. Canada extends the same courtesy to similar persons from U.S. tribes. This derives from the Jay Treaty (1794). The quick history is that the United States and British North America, while drawing their common border, did not want to zig-zag it around tribal lands. Today, for all intents and purposes a U.S. or Canadian native with an appropriate Band (tribal) Card is treated like a dual U.S.-Canadian citizen. Trans-border motor carriers doing business in the U.S. and Canada might find it revenue-enhancing to hire such people for their fleets or use them as owner-operators. 

A long line of trucks wait to enter the United States from Canada at the Blue Water Bridge linking Ontario and Michigan. Photo credit: U.S. Customs and Border Protection

In 2020, does the Jones Act necessarily add to U.S. national security or is it just a jobs program? If this is an example of the infant industry argument, the baby is turning 100 years old this year. Economics and politics always make for strange bedfellows. 

Commentary: Air cargo looks for lift in 2020 – FreightWaves

Air cargo industry forecasts for 2020 are now out and company revenue budgets are locked in. Air cargo is cautiously looking for a mild 2% turnaround on volumes in 2020, according to the International Air Transport Association (IATA), after its worst year since 2009. A rebound would be welcome news for air cargo stakeholders – airlines, air cargo handlers, airports, freight forwarders, trucking and expedited delivery companies. Some recent developments would appear positive for air cargo – a long-awaited U.S.-China “Phase One” agreement is taking firmer shape, more clarity on the U.K. political situation and Brexit, and continued strength in the U.S. economy. At the same time, other developments, such as Boeing halting production on its 737 MAX aircraft, may actually have negative traffic impacts on supply chains.  

Nighttime loading of the main deck of a freighter aircraft.
(Photo credit: Shutterstock)

The broader trends hold some surprises

Where will the new growth come from? For a leading global economy like the U.S. that both consumes and produces products of all kinds that are shipped by air in large quantities, there are long-running structural trends that challenge growth. Air cargo industry data specialist WorldACD points to the large year-over-year global shrinkage in general cargo traffic moved by air for most of 2019, most recently down 8.2% in October, while many but not all of the specialty cargo products – pharmaceuticals, vulnerable/high tech and perishables – continue to show growth. As a group, specialty products grew 2.7% in the latest report. The general cargo numbers are much larger globally, roughly 66% of the tonnage total. To achieve overall growth, those big numbers would need to do a quick “about-face.”  

SONAR Tickers: AIRRTM.USA, AIRRTM.APAC, AIRRTM.EMEA, AIRRTM.LATAM.
U.S. airline volumes show marginally positive domestic growth this year, led here by UPS and FedEx, but Amazon’s larger year-over-year domestic volume growth by air is not shown

Domestic air cargo in the U.S. continues to be a relatively bright growth area moving in line with a stronger U.S. economy, but the largest domestic volumes – well over 85% – are flown by FedEx, UPS and Amazon, while U.S. airlines and niche operators service the rest of the U.S. E-commerce growth has been and will continue to be a key driver for North America, with that growth skewed to just a few players so far.

Looking at international air cargo, our analysis of U.S. trade data by mode since 2010, after the Great Recession ended in the U.S., has some eye-opening findings: 

  • The value of U.S. trade by air has increased, with imports growing 50% in that period while exports have grown only 26% (based on a full-year 2019 forecast). 
    • In contrast, containerized ocean import value is up slightly less, at 45%, but ocean export value has risen 36%, 10 points more than air.  
    • Containerized ocean traffic is the closest surface mode competitor to air cargo.
  • The gross weight of U.S. trade by air shows very different results. Import tonnage has grown 17% in the nine-year period, but export tonnage is actually down 4%. 
    • For containerized ocean traffic, volumes are up much more – 40% higher for imports and 34% more for exports.
    • U.S. export tonnage by air has barely grown since 2010, with positive y/y growth in only two of the nine years. 
Source: U.S. Census Bureau, USA Trade Online

Underlying these figures is the dramatic change in how shippers are using air cargo – increasingly for more valuable cargo. 

  • In 2010, air imports averaged $110.63/kilogram (kg) in value and air exports averaged $114.48/kg in value. 
  • Nine years later in 2019, air imports are up to $142.11/kg, a 28% increase, and air exports average $150.78/kg, a 32% rise. 

That suggests shippers are managing their spend tighter and being more selective about their use of air cargo.

Air and ocean growth and share shift

Air cargo is considered a premium transport mode. Depending on the market, it can range from five to 20 times more expensive, kilo for kilo, than surface transportation. Air cargo’s challenge is to overcome that initial large cost difference in competing with sea freight or trucking to make its value case by better meeting the overall needs of the end customer or project at a competitive total cost of ownership.

While some products will always use air 100% of the time due to sensitivity, extreme perishability or tight transit time requirements, much of what moves by air cargo is vulnerable to potential downgrading to surface or expedited surface modes under the right conditions.

Tokyo’s fish market and the tuna trade support a robust global air cargo industry, including from the U.S., for tuna to Japan.
(Photo credit: Shutterstock)

The evolution of transport modes can work in a number of ways. New and/or highly desirable consumer products air freighted for product launches or while sales are hot ultimately see supply chain rationalization to surface modes to reduce costs and improve supplier margins as the product’s life cycle matures and competitors enter and create more price competition. Improvements in packaging, security, storage and shipping technologies for perishable, vulnerable and pharmaceutical products lengthen product shelf lives and enable less sensitive or shorter distance segments of that product to be safely diverted to surface modes. Company budget pressures and the need to achieve financial goals make use of air freight an easy target during recessionary and leaner times, forcing shippers or buyers to develop savings initiatives around surface transportation solutions.

Our review showed several examples within the U.S. trade data of a shift from air cargo to the containerized ocean mode: 

  • Packaged retail medicines that moved 46% by air to the U.S. in 2010 are now moving 24% by air in 2019 (year-to-date).
  • Fresh asparagus imports that moved 79% by air in 2010 are now moving 46% by air.
  • Even vulnerable products like cell phones, with volumes air-freighted at 98% in 2010, have slipped to just under 94% this year.
  • Electrical machinery, which moved 10.8% of its 2010 imports by air, is now at 7.7% in 2019.
  • U.S. pharmaceutical exports were shipped 46.3% by air in 2010, but now stand at 38.4%, an eight-point share drop
  • Overall, 14 of the top 20 two-digit air export HS codes saw shrinking shares for air in 2019 compared with 2010, indicating a shift in favor of containerized sea freight.  
  • Similarly, 14 of the top 20 two-digit air import HS codes also saw modal share shift away from air in 2019 compared with 2010.
Preparing shipments at the Aalsmeer Flower Auction in the Netherlands. Over 95% of global fresh flower shipments to the U.S. are flown by air cargo, but surface modes are slowly making inroads in some areas of supply.
(Photo credit: Shutterstock)

Growing and re-growing the business

So in a sense, air cargo is reselling and replacing lost kilos on a continuous basis. Its growth depends on both the organic growth of the underlying products being shipped but also the ability to continually upsell those products to air. It has to keep proving its value proposition to win kilos from surface modes. Once shippers learn how to safely manage their supply chains using surface modes to satisfy their buyers’ overall needs, it can be difficult to fully reverse that in favor of air unless those chains are broken. 

That means air cargo also depends on new products of all kinds entering in early stages of their life cycles and maintaining growth in the air cargo mode as long as possible before stabilizing at some level. New pharmaceuticals, perishables and high tech consumer and other technology products often lead the charge in this area. Project cargo, which can involve substantial tonnages for energy or construction shipped over defined periods, also can help drive growth, but has its own ups and downs. It also must compete against sea transport and ultimately by definition come to an end.

While air cargo has been down in nearly all regions of the globe this year (other than Africa), faster air cargo growth can be expected from less developed countries, often for perishables or lower value manufactured goods such as textiles.

E-commerce continues to be a hot topic for the industry, which can clearly see the promise of consistent and steadily increasing demand whose time element fits perfectly into air cargo’s value proposition. As noted earlier, Amazon, UPS, FedEx and DHL Express set the pace here for North America, along with others in Europe and Asia. Other logistics providers and airlines are looking to develop this area, but many are trying to figure out the best way to play. There are numerous complexities to overcome to achieve speedy and seamless processes across multiple vendors and stakeholders, so progress in this area to this point is generally uneven. Whether enough airlines and freight forwarders can break through and ultimately carve out large enough niches in e-commerce remains to be seen. 

SONAR Tickers: ISM.PMI, ISM.MEXP, ISM.MIMP
Primary indicators used to forecast air cargo activity are all below the 50 benchmark, indicating contraction, but with trends still mixed.

So turning the corner on 2019 and moving into a growth mode for air cargo in 2020 requires airlines and forwarders to arrest the general cargo decline and keep up the growth in specialty areas. That said, tonnage growth doesn’t drive everything. Yields matter a great deal as well. Faster growth of higher value products that have specialized requirements and handling needs can, if managed well, mean flatter volumes but still higher and more profitable revenue. But overall sustained higher volumes for general cargo normally comes with more economies around the world doing well and without too many tariff burdens that suppress trade. We will need to see much quicker progress in that direction than we saw in 2019.

Outlook for North America

For a mature economy like the U.S., what are the implications for air cargo of continuing along the current path? We see several outcomes:

  • Despite various individual company efforts, e-commerce growth in the end leaves only a few clear winners among airlines and forwarders.
  • Lack of significant U.S. export growth means continuing strong price competition as airlines and forwarders fight for whatever tonnage is available.
  • Pricing pressures may grow over time as air cargo belly capacity continues to expand with more airlines flying newer and higher cargo capacity passenger aircraft like the Boeing 787-9, 787-10 and 777X, along with Airbus A350-900 and A350-1000 on more U.S. routes.
  • Export shippers will benefit from the price competition, but airline cargo revenues will strain to grow.
  • Airlines will need to work hard to differentiate service offerings to maximize revenue where they can from specialty products and value-added services supporting them.
  • Even more pressure will fall upon freighter carriers to stay agile, moving routes and schedules around to hot cargo markets to keep flying profitable.
  • Assuming tariff issues can be managed, import growth should continue to outpace export growth and help fill new capacity, but any new trade wars with Europe or elsewhere can put major tonnage at risk, and overall growth as well.
  • U.S. trucking companies doing airport work will continue to see more traffic opportunities from airports to interior points and similar or only slightly greater traffic from interior points back to airports. 

The new decade and year 2020 are only a few days away. Time’s a wastin’ to get a start on growing back air cargo in the new year.

New trade war threat to trans-Atlantic box trade – FreightWaves

A slowdown in U.S. new car sales and the threat of trade war between the European Union (EU) and the U.S. are casting long shadows over the trans-Atlantic container trade. Even so, another year of 3%+ growth is expected by Drewry Maritime Research.

After expanding 5.4% in the first half of 2019, westbound trans-Atlantic container shipments increased by just 0.5% in the third quarter – the lowest quarterly growth since the last three months of 2016.

However, a pickup in demand at the start of the fourth quarter saw the trade enjoy record year-to-date growth of 3.7% through October, with U.S., Canada and Mexico imports up 4.4%, 1.5% and 2.8%, respectively, compared to 2018.

Source: SONAR

Declining U.S. car sales

One reason for the slowdown during the second half of the year was a drop-off in shipments of motor vehicle components to U.S. plants, with American new car sales still in retreat from the 2015 record of 17.5 million purchases.

“Despite a strong economy, falling unemployment and rising consumer confidence, there has been a gradual decline in numbers sold and this year the figure is likely to total 16.9 million,” noted Drewry.

“One explanation for this trend is that after many years of strong sales, many American consumers are now driving vehicles that do not need to be replaced so often. Newer vehicles tend to be more durable and hold up longer than cars made even a decade or two earlier.”

WTO escalation threatens trade

The demand outlook on the trans-Atlantic headhaul trade is also being muddied by the threat of an escalating trade war. At the beginning of October, the World Trade Organization (WTO) authorized the U.S. to apply new tariffs of 25% on $7.5 billion of EU imports following a 15-year dispute over illegal aircraft subsidies granted to Airbus, the European aerospace company.

“The new tariffs went into effect on Oct. 18 and thus between the WTO’s decision and application date there was precious little time to fast-forward any shipments, unless it was by air freight,” said Drewry.

The analyst believes tit-for-tat tariffs could continue in 2020. It notes that the U.S. had originally sought permission to apply the tariffs to $11 billion of goods, which would have affected items ranging from “wine, cheese, yoghurts and olive oil to fine wool suits, jumpers, bed linen and even women’s nightwear.”

Moreover, the EU has threatened to retaliate against U.S. goods. “The WTO is expected to decide sometime next year on what tariffs can be imposed against the U.S. for its subsidies to Boeing,” noted the analyst.

Resin exports boost backhauls

Backhaul volumes from the U.S. to Europe between January and October rose by 2.9%, which translates into an additional 50,000 twenty-foot equivalent containers (TEUs) during the course of 10 months. “Almost two-fifths of those extra boxes were loaded with resin shipped out of the Gulf Coast, where gains to date have registered over 17%,” said Drewry.

“New resin plants have been established along the Gulf Coast, fueled by access to low-cost shale gas produced in the region. More capacity to produce resin is on its way and that should ensure that overall eastbound volumes should continue to grow in 2020.”

With so many unknowns on the headhaul trade, Drewry admits that making 2020 trans-Atlantic forecasts is tricky.

“When tariff wars come into the mix, forecasting future demand becomes a difficult science as one cannot be sure how consumers will react,” said the analyst.

“Given, though, the current strength of the American economy and high levels of consumer confidence, Drewry believes the headhaul trade will continue to grow next year by around 3%.”
More FreightWaves and American Shipper articles by Mike

Airlines resume operating IAI-converted freighters following safety alert – FreightWaves

Operators of B737 aircraft converted by Israel Aerospace Industry have begun flying the planes with loading restrictions after a safety notice two weeks ago from the Israeli government led to a halt in flights.

Alaska Airlines, Australian flag carrier Qantas and Indian low-cost carrier SpiceJet say they have returned the planes to service after a temporary grounding.

Alaska Airlines pulled its three 737-300 freighters from service for two days in mid-December and substituted for the lost capacity by utilizing B737-800 and 737-900 passenger planes as dedicated freighters, “combined with utilizing our larger passenger planes when possible for extra freight,” a spokesperson said. The airline also temporarily stopped accepting new shipments on routes used to supply Alaskan towns from the Pacific Northwest.

The converted freighters are operating again after an internal assessment, but Alaska Air is limiting the loads for the time being, the official said. 

Each aircraft has a 42,000-pound maximum capacity.

In a Dec. 12 airworthiness directive, the Israeli Transport Ministry said 47 aircraft (300, 400 and 700-series) had a defect in the rigid barrier wall that protects the cockpit from shifting loads during sudden deceleration. The defect was discovered during an internal examination of IAI’s facilities.

IAI Communications Manager Lital Ben Ari, downplayed the situation, saying the aircraft can fly normally with only a slight reduction in weight. “IAI was very conservative regarding the apparent damage. All experiments done by now show no problem at all in the rigid barrier. But we’re not done checking. In any case, no rigid barriers were replaced or are expected to be replaced in the future. Any damage that is discovered will require a minimal fix,” he told FreightWaves.

Ben Ari stressed that there has never been an accident involving the 9G barrier and that no additional oversight of IAI operations has been mandated. “All manufacturing, production and assembly process are completely open to the Israeli authority and checked on a regular basis by IAI and the authorities,” she added.

Alaska Public Media reported that Alaska Air was retrofitting the barrier wall in the three freighters.

Qantas Airways is operating its four B-737-400 freighters converted by IAI with some restrictions, in line with the airworthiness directive, a spokesperson confirmed.  

In a regulatory filing, SpiceJet, which operates three B737-700 aircraft that were grounded on Dec. 13, said it returned those aircraft to service on Dec. 23.

Shipper-owned containers bring much-needed flexibility to maritime shipping – FreightWaves

Within the container market segment in maritime trade logistics, there is polarity in the way containers are procured — with shippers either opting for carrier-owned containers (COCs) or shipper-owned containers (SOCs). 

Choosing between an SOC and COC depends entirely on the shipper’s needs. COCs usually are opted for standard shipments on stretches with a high volume of cargo flow. In that context, there is little incentive for large shippers to use their own containers, especially since the container line in question typically charges a flat fee for moving their freight while taking away logistical complexities for shippers to trace their containers. 

SOCs, on the other hand, are typically preferred by shippers when the trade route is between ports that do not handle high volumes and may not be sophisticated enough to process containers as and when they land. 

When COCs are left waiting at the port, demurrage and detention charges kick in, exponentially increasing the cost of hauling for the shipper. However, with SOCs, shippers can circumvent this issue as they bring their own boxes and cut the carrier line from the picture once they deliver the containers at the destination port.  

German-based SOC sourcing startup Container xChange recently published a report on the popularity of SOCs in the maritime ecosystem by approaching large freight forwarders disguised as a shipping company to glean insights into their approach toward SOCs. 

Florian Frese, director of marketing at xChange, explained that the industry is seeing a fundamental shift as it ambles toward democratizing the use of SOCs, which traditionally were offered by freight forwarders only to large and trusted shipping partners. 

“What we found while doing the study was that freight forwarders only offered SOC options to shippers who gave them very high volumes because it was hard for them to find SOCs on time as there is no market transparency,” said Frese. “At xChange, we buck that trend by providing shippers greater visibility into SOCs, helping them lease out SOCs and effectively avoid demurrage and detention charges.”

For the benchmarking study, xChange posed as a shipper and connected with the top 50 global freight forwarders to ask for SOC shipment quotes. Frese said that about 50% of the forwarders got back with a quote but only after incessant emails asking for a quote. In total, a paltry 18% of the forwarders ended up offering SOCs, which Frese contended was because these containers require a lot of manual effort in handling. 

“Lack of transparency is a huge determinant. Some freight forwarders have their own capacity and set agreements in place, but for most freight forwarders, helping a shipper depends purely on luck — whether they can source SOCs or not,” said Frese. “There are no tools available, not even Excel sheets where they can go and identify partners.”

For freight forwarders to offer SOCs, they would have to search manually across the ecosystem, vet their potential partners, set up legal agreements and book container insurances. The complexities involved in this process force several forwarders to drop the idea or only offer it to customers who can give them better margins by shipping high volumes. 

Nonetheless, SOCs are good for the maritime market at large, as it frees up capital and increases the availability of containers. Frese explained that SOCs roughly make up 50% of the total container strength in the market. With the possibility of short-term leasing and one-way container moves, SOCs can provide massive flexibility to shippers — unlike COCs that usually have long-term leases that run into several years. 

“For example, shippers can just rent a SOC from Hamburg to Valencia and then return it at their partner’s depot,” said Frese. “At xChange, we are pretty convinced that this is how the future will look like. With technology and transparency at play, shippers will have an option that is not only flexible but also much cheaper than the COC alternative.”

Commentary: Air cargo looks for lift in 2020 – FreightWaves

Air cargo industry forecasts for 2020 are now out and company revenue budgets are locked in. Air cargo is cautiously looking for a mild 2% turnaround on volumes in 2020, according to the International Air Transport Association (IATA), after its worst year since 2009. A rebound would be welcome news for air cargo stakeholders – airlines, air cargo handlers, airports, freight forwarders, trucking and expedited delivery companies. Some recent developments would appear positive for air cargo – a long-awaited U.S.-China “Phase One” agreement is taking firmer shape, more clarity on the U.K. political situation and Brexit, and continued strength in the U.S. economy. At the same time, other developments, such as Boeing halting production on its 737 MAX aircraft, may actually have negative traffic impacts on supply chains.  

Nighttime loading of the main deck of a freighter aircraft.
(Photo credit: Shutterstock)

The broader trends hold some surprises

Where will the new growth come from? For a leading global economy like the U.S. that both consumes and produces products of all kinds that are shipped by air in large quantities, there are long-running structural trends that challenge growth. Air cargo industry data specialist WorldACD points to the large year-over-year global shrinkage in general cargo traffic moved by air for most of 2019, most recently down 8.2% in October, while many but not all of the specialty cargo products – pharmaceuticals, vulnerable/high tech and perishables – continue to show growth. As a group, specialty products grew 2.7% in the latest report. The general cargo numbers are much larger globally, roughly 66% of the tonnage total. To achieve overall growth, those big numbers would need to do a quick “about-face.”  

SONAR Tickers: AIRRTM.USA, AIRRTM.APAC, AIRRTM.EMEA, AIRRTM.LATAM.
U.S. airline volumes show marginally positive domestic growth this year, led here by UPS and FedEx, but Amazon’s larger year-over-year domestic volume growth by air is not shown

Domestic air cargo in the U.S. continues to be a relatively bright growth area moving in line with a stronger U.S. economy, but the largest domestic volumes – well over 85% – are flown by FedEx, UPS and Amazon, while U.S. airlines and niche operators service the rest of the U.S. E-commerce growth has been and will continue to be a key driver for North America, with that growth skewed to just a few players so far.

Looking at international air cargo, our analysis of U.S. trade data by mode since 2010, after the Great Recession ended in the U.S., has some eye-opening findings: 

  • The value of U.S. trade by air has increased, with imports growing 50% in that period while exports have grown only 26% (based on a full-year 2019 forecast). 
    • In contrast, containerized ocean import value is up slightly less, at 45%, but ocean export value has risen 36%, 10 points more than air.  
    • Containerized ocean traffic is the closest surface mode competitor to air cargo.
  • The gross weight of U.S. trade by air shows very different results. Import tonnage has grown 17% in the nine-year period, but export tonnage is actually down 4%. 
    • For containerized ocean traffic, volumes are up much more – 40% higher for imports and 34% more for exports.
    • U.S. export tonnage by air has barely grown since 2010, with positive y/y growth in only two of the nine years. 
Source: U.S. Census Bureau, USA Trade Online

Underlying these figures is the dramatic change in how shippers are using air cargo – increasingly for more valuable cargo. 

  • In 2010, air imports averaged $110.63/kilogram (kg) in value and air exports averaged $114.48/kg in value. 
  • Nine years later in 2019, air imports are up to $142.11/kg, a 28% increase, and air exports average $150.78/kg, a 32% rise. 

That suggests shippers are managing their spend tighter and being more selective about their use of air cargo.

Air and ocean growth and share shift

Air cargo is considered a premium transport mode. Depending on the market, it can range from five to 20 times more expensive, kilo for kilo, than surface transportation. Air cargo’s challenge is to overcome that initial large cost difference in competing with sea freight or trucking to make its value case by better meeting the overall needs of the end customer or project at a competitive total cost of ownership.

While some products will always use air 100% of the time due to sensitivity, extreme perishability or tight transit time requirements, much of what moves by air cargo is vulnerable to potential downgrading to surface or expedited surface modes under the right conditions.

Tokyo’s fish market and the tuna trade support a robust global air cargo industry, including from the U.S., for tuna to Japan.
(Photo credit: Shutterstock)

The evolution of transport modes can work in a number of ways. New and/or highly desirable consumer products air freighted for product launches or while sales are hot ultimately see supply chain rationalization to surface modes to reduce costs and improve supplier margins as the product’s life cycle matures and competitors enter and create more price competition. Improvements in packaging, security, storage and shipping technologies for perishable, vulnerable and pharmaceutical products lengthen product shelf lives and enable less sensitive or shorter distance segments of that product to be safely diverted to surface modes. Company budget pressures and the need to achieve financial goals make use of air freight an easy target during recessionary and leaner times, forcing shippers or buyers to develop savings initiatives around surface transportation solutions.

Our review showed several examples within the U.S. trade data of a shift from air cargo to the containerized ocean mode: 

  • Packaged retail medicines that moved 46% by air to the U.S. in 2010 are now moving 24% by air in 2019 (year-to-date).
  • Fresh asparagus imports that moved 79% by air in 2010 are now moving 46% by air.
  • Even vulnerable products like cell phones, with volumes air-freighted at 98% in 2010, have slipped to just under 94% this year.
  • Electrical machinery, which moved 10.8% of its 2010 imports by air, is now at 7.7% in 2019.
  • U.S. pharmaceutical exports were shipped 46.3% by air in 2010, but now stand at 38.4%, an eight-point share drop
  • Overall, 14 of the top 20 two-digit air export HS codes saw shrinking shares for air in 2019 compared with 2010, indicating a shift in favor of containerized sea freight.  
  • Similarly, 14 of the top 20 two-digit air import HS codes also saw modal share shift away from air in 2019 compared with 2010.
Preparing shipments at the Aalsmeer Flower Auction in the Netherlands. Over 95% of global fresh flower shipments to the U.S. are flown by air cargo, but surface modes are slowly making inroads in some areas of supply.
(Photo credit: Shutterstock)

Growing and re-growing the business

So in a sense, air cargo is reselling and replacing lost kilos on a continuous basis. Its growth depends on both the organic growth of the underlying products being shipped but also the ability to continually upsell those products to air. It has to keep proving its value proposition to win kilos from surface modes. Once shippers learn how to safely manage their supply chains using surface modes to satisfy their buyers’ overall needs, it can be difficult to fully reverse that in favor of air unless those chains are broken. 

That means air cargo also depends on new products of all kinds entering in early stages of their life cycles and maintaining growth in the air cargo mode as long as possible before stabilizing at some level. New pharmaceuticals, perishables and high tech consumer and other technology products often lead the charge in this area. Project cargo, which can involve substantial tonnages for energy or construction shipped over defined periods, also can help drive growth, but has its own ups and downs. It also must compete against sea transport and ultimately by definition come to an end.

While air cargo has been down in nearly all regions of the globe this year (other than Africa), faster air cargo growth can be expected from less developed countries, often for perishables or lower value manufactured goods such as textiles.

E-commerce continues to be a hot topic for the industry, which can clearly see the promise of consistent and steadily increasing demand whose time element fits perfectly into air cargo’s value proposition. As noted earlier, Amazon, UPS, FedEx and DHL Express set the pace here for North America, along with others in Europe and Asia. Other logistics providers and airlines are looking to develop this area, but many are trying to figure out the best way to play. There are numerous complexities to overcome to achieve speedy and seamless processes across multiple vendors and stakeholders, so progress in this area to this point is generally uneven. Whether enough airlines and freight forwarders can break through and ultimately carve out large enough niches in e-commerce remains to be seen. 

SONAR Tickers: ISM.PMI, ISM.MEXP, ISM.MIMP
Primary indicators used to forecast air cargo activity are all below the 50 benchmark, indicating contraction, but with trends still mixed.

So turning the corner on 2019 and moving into a growth mode for air cargo in 2020 requires airlines and forwarders to arrest the general cargo decline and keep up the growth in specialty areas. That said, tonnage growth doesn’t drive everything. Yields matter a great deal as well. Faster growth of higher value products that have specialized requirements and handling needs can, if managed well, mean flatter volumes but still higher and more profitable revenue. But overall sustained higher volumes for general cargo normally comes with more economies around the world doing well and without too many tariff burdens that suppress trade. We will need to see much quicker progress in that direction than we saw in 2019.

Outlook for North America

For a mature economy like the U.S., what are the implications for air cargo of continuing along the current path? We see several outcomes:

  • Despite various individual company efforts, e-commerce growth in the end leaves only a few clear winners among airlines and forwarders.
  • Lack of significant U.S. export growth means continuing strong price competition as airlines and forwarders fight for whatever tonnage is available.
  • Pricing pressures may grow over time as air cargo belly capacity continues to expand with more airlines flying newer and higher cargo capacity passenger aircraft like the Boeing 787-9, 787-10 and 777X, along with Airbus A350-900 and A350-1000 on more U.S. routes.
  • Export shippers will benefit from the price competition, but airline cargo revenues will strain to grow.
  • Airlines will need to work hard to differentiate service offerings to maximize revenue where they can from specialty products and value-added services supporting them.
  • Even more pressure will fall upon freighter carriers to stay agile, moving routes and schedules around to hot cargo markets to keep flying profitable.
  • Assuming tariff issues can be managed, import growth should continue to outpace export growth and help fill new capacity, but any new trade wars with Europe or elsewhere can put major tonnage at risk, and overall growth as well.
  • U.S. trucking companies doing airport work will continue to see more traffic opportunities from airports to interior points and similar or only slightly greater traffic from interior points back to airports. 

The new decade and year 2020 are only a few days away. Time’s a wastin’ to get a start on growing back air cargo in the new year.

New trade war threat to trans-Atlantic box trade – FreightWaves

A slowdown in U.S. new car sales and the threat of trade war between the European Union (EU) and the U.S. are casting long shadows over the trans-Atlantic container trade. Even so, another year of 3%+ growth is expected by Drewry Maritime Research.

After expanding 5.4% in the first half of 2019, westbound trans-Atlantic container shipments increased by just 0.5% in the third quarter – the lowest quarterly growth since the last three months of 2016.

However, a pickup in demand at the start of the fourth quarter saw the trade enjoy record year-to-date growth of 3.7% through October, with U.S., Canada and Mexico imports up 4.4%, 1.5% and 2.8%, respectively, compared to 2018.

Source: SONAR

Declining U.S. car sales

One reason for the slowdown during the second half of the year was a drop-off in shipments of motor vehicle components to U.S. plants, with American new car sales still in retreat from the 2015 record of 17.5 million purchases.

“Despite a strong economy, falling unemployment and rising consumer confidence, there has been a gradual decline in numbers sold and this year the figure is likely to total 16.9 million,” noted Drewry.

“One explanation for this trend is that after many years of strong sales, many American consumers are now driving vehicles that do not need to be replaced so often. Newer vehicles tend to be more durable and hold up longer than cars made even a decade or two earlier.”

WTO escalation threatens trade

The demand outlook on the trans-Atlantic headhaul trade is also being muddied by the threat of an escalating trade war. At the beginning of October, the World Trade Organization (WTO) authorized the U.S. to apply new tariffs of 25% on $7.5 billion of EU imports following a 15-year dispute over illegal aircraft subsidies granted to Airbus, the European aerospace company.

“The new tariffs went into effect on Oct. 18 and thus between the WTO’s decision and application date there was precious little time to fast-forward any shipments, unless it was by air freight,” said Drewry.

The analyst believes tit-for-tat tariffs could continue in 2020. It notes that the U.S. had originally sought permission to apply the tariffs to $11 billion of goods, which would have affected items ranging from “wine, cheese, yoghurts and olive oil to fine wool suits, jumpers, bed linen and even women’s nightwear.”

Moreover, the EU has threatened to retaliate against U.S. goods. “The WTO is expected to decide sometime next year on what tariffs can be imposed against the U.S. for its subsidies to Boeing,” noted the analyst.

Resin exports boost backhauls

Backhaul volumes from the U.S. to Europe between January and October rose by 2.9%, which translates into an additional 50,000 twenty-foot equivalent containers (TEUs) during the course of 10 months. “Almost two-fifths of those extra boxes were loaded with resin shipped out of the Gulf Coast, where gains to date have registered over 17%,” said Drewry.

“New resin plants have been established along the Gulf Coast, fueled by access to low-cost shale gas produced in the region. More capacity to produce resin is on its way and that should ensure that overall eastbound volumes should continue to grow in 2020.”

With so many unknowns on the headhaul trade, Drewry admits that making 2020 trans-Atlantic forecasts is tricky.

“When tariff wars come into the mix, forecasting future demand becomes a difficult science as one cannot be sure how consumers will react,” said the analyst.

“Given, though, the current strength of the American economy and high levels of consumer confidence, Drewry believes the headhaul trade will continue to grow next year by around 3%.”
More FreightWaves and American Shipper articles by Mike

Airlines resume operating IAI-converted freighters following safety alert – FreightWaves

Operators of B737 aircraft converted by Israel Aerospace Industry have begun flying the planes with loading restrictions after a safety notice two weeks ago from the Israeli government led to a halt in flights.

Alaska Airlines, Australian flag carrier Qantas and Indian low-cost carrier SpiceJet say they have returned the planes to service after a temporary grounding.

Alaska Airlines pulled its three 737-300 freighters from service for two days in mid-December and substituted for the lost capacity by utilizing B737-800 and 737-900 passenger planes as dedicated freighters, “combined with utilizing our larger passenger planes when possible for extra freight,” a spokesperson said. The airline also temporarily stopped accepting new shipments on routes used to supply Alaskan towns from the Pacific Northwest.

The converted freighters are operating again after an internal assessment, but Alaska Air is limiting the loads for the time being, the official said. 

Each aircraft has a 42,000-pound maximum capacity.

In a Dec. 12 airworthiness directive, the Israeli Transport Ministry said 47 aircraft (300, 400 and 700-series) had a defect in the rigid barrier wall that protects the cockpit from shifting loads during sudden deceleration. The defect was discovered during an internal examination of IAI’s facilities.

IAI Communications Manager Lital Ben Ari, downplayed the situation, saying the aircraft can fly normally with only a slight reduction in weight. “IAI was very conservative regarding the apparent damage. All experiments done by now show no problem at all in the rigid barrier. But we’re not done checking. In any case, no rigid barriers were replaced or are expected to be replaced in the future. Any damage that is discovered will require a minimal fix,” he told FreightWaves.

Ben Ari stressed that there has never been an accident involving the 9G barrier and that no additional oversight of IAI operations has been mandated. “All manufacturing, production and assembly process are completely open to the Israeli authority and checked on a regular basis by IAI and the authorities,” she added.

Alaska Public Media reported that Alaska Air was retrofitting the barrier wall in the three freighters.

Qantas Airways is operating its four B-737-400 freighters converted by IAI with some restrictions, in line with the airworthiness directive, a spokesperson confirmed.  

In a regulatory filing, SpiceJet, which operates three B737-700 aircraft that were grounded on Dec. 13, said it returned those aircraft to service on Dec. 23.

Spanish shipbuilder Navantia digitalizes supply chain with SAP Ariba – FreightWaves

Software technology company SAP Ariba has helped modernize the supply chain of Spanish shipbuilding company Navantia by digitalizing the purchasing and procurement sections of its logistics. In its statement, SAP Ariba claimed that technological intervention had led Navantia to increase the efficiency of its purchasing processes by 52% while reducing its supply cycle time by 25%. 

FreightWaves spoke with Pat McCarthy, senior vice president and general manager of SAP Ariba, to discuss the impact his company has had on improving Navantia’s operations. 

McCarthy initiated the discussion by explaining that the fundamental problem traditional companies struggled with was the absence of digitalization, forcing them to work with paper documents and occasional email reports, making them hugely inefficient in the process. 

“There is no efficiency or effectiveness at scale as information is constantly learned or relearned due to communication channels being incredibly fragmented,” said McCarthy. “All of those communications within Navantia were one-to-one, which made them look at how they can collaborate more effectively with their suppliers and stay competitive in the market.”

SAP Ariba set about digitalizing Navantia’s supplier interactions and its internal infrastructure, which helped settle business processes at the point where they started. McCarthy explained that pushing forward the idea that everything that is done within the company will be reportable and accountable to the public was equally critical to the digitalization process, as Navantia is owned and run by the Spanish government. 

This helps with the brand image of Navantia, as the company maintains critical international business relations with countries like the U.S., India, Norway, Turkey, Brazil, Australia and Saudi Arabia. Digitalization bridged the gap Navantia had with transparency and traceability in its procurement processes, helping the company to march toward its transformative solution named Shipyard 4.0.

By automating communications with suppliers, Navantia can now confirm orders online, increase transparency in the bidding process and trace the volume of tenders and the number of suppliers involved in the process. The company also can continuously monitor its weekly progress, which can shed light on the areas of improvement and help increase efficiency. 

Still, the path to digitalization was not without its share of complexities. “I think change is hard. When you introduce technology, it has to be consumable by the persona. So if that’s someone in sourcing, the technology has to be built and applicable to a sourcing professional,” said McCarthy. “That was our goal with Navantia, to see if we were really addressing the persona — be it the sourcing professional, procurement professional or the supplier.”

The partnership with SAP Ariba has yielded great results for Navantia, with the shipbuilder planning to continue its association to gain ground in innovation across its supply chain. McCarthy maintained that the relationship SAP Ariba has forged with Navantia will keep appreciating over time and that there was “no end in sight.” 

Navantia understands that the future of its supply chain lies in sustainable procurement as it continues to focus on accounting for every dollar it spends. “Sustainable procurement is a huge topic for companies around the globe, particularly where public money is being spent,” said McCarthy. “Companies have always wanted to do good by procuring sustainably. But it is only now that the math, logic and financials have added up to make sure doing good is also good business.”

Commentary: At 100, the Jones Act has many wrinkles – FreightWaves

The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates.

The Merchant Marine Act (1920) outlines one of the most consequential non-tariff barriers (NTBs) in U.S. history, and June 5th will mark its 100th anniversary. Often called the Jones Act after its sponsor, Sen. Wesley L. Jones (R-WA), the intent was to incentivize the building and maintenance of a domestic fleet of commercial ocean vessels that would be owned and operated primarily by U.S. citizens. The Jones Act set this requirement to ensure both national defense and a “proper growth of commerce” using the “best type of ships.” Regulators have since interpreted this to mean that the vessels must also be built by U.S.-owned shipyards. Most countries have some form of cabotage restrictions but the U.S. stands out with its domestic build and repair requirements in the maritime sector.

Cabotage is defined by Merriam-Webster as the “trade or transport in coastal waters or airspace or between two points within a country.” The Jones Act covers not only coastal commerce but the commerce of U.S. territories and possessions. As such, port-to-port transport of freight from the contiguous U.S. to Alaska, Guam, Hawaii, Puerto Rico, etc. can only be handled by U.S.-flagged vessels (meaning U.S.-built, U.S.-owned and U.S.-crewed). Section 27 of the act includes the same prohibitions on transport by land as well as by water. Of course, as the commercial air industry grew after World War II cabotage restrictions were applied there as well. In practice cabotage restrictions of some kind apply to all point-to-point domestic transport of passengers and/or freight regardless of mode.

Source: FreightWaves

Why the Jones Act was enacted

The Jones Act was certainly a creature of its times and it made some economic and political sense. Economically, the U.S. emerged from World War I with a need to expand its commercial fleet while protecting its growing domestic commerce from foreign vessels. Supporting U.S. shipbuilding capabilities to meet the expectations of the Jones Act is a classic example of the “infant industry argument” in support of trade protection. Politically, U.S. coastal states with large shipbuilding interests would benefit from the act’s restrictions on cabotage. Sen. Jones himself no doubt benefitted from giving his constituents in Washington State a near monopoly on shipping to and from Alaska. Of course, the problem with infant industries is knowing when to wean them off of the mother’s milk of trade protection so that they can try to survive and thrive in the cold world of international competition. Avoiding this simply incentivizes an industry to remain cost-heavy and uncompetitive.

As an NTB the Jones Act has its supporters as well as its detractors. Supporters laud its spirit of national defense. This means that in time of war or emergency any vessel and crew operating along U.S. coasts and rivers would be “American” and thus not of questionable loyalties if commandeered to move military equipment and/or personnel. Detractors see the Jones Act as antiquated and serving only to keep transport costs higher than they would be otherwise. This is due, the argument goes, to the stifling of foreign carrier competition in domestic freight markets and propping up U.S. shipyards with their lower economies of scale and higher labor costs than those in Asia. This is the classic conflict between free trade versus ensuring stable domestic industries and employment.

Image credit: Maritime Cabotage Task Force

Today the Jones Act enjoys bipartisan support in Congress and it is hard to imagine President Trump setting aside his mercantilist tendencies to support any large-scale reform. Yet the Jones Act has enough wrinkles, loopholes and exceptions to keep politicians, regulators, transportation lawyers and even professors of logistics on their toes.

Political pressure for cabotage reform does arise from time to time. The latest was at the G7 Summit in August 2019 when U.K. Prime Minister Boris Johnson encouraged President Trump to consider supporting U.K. vessels wishing to engage in U.S. cabotage. Currently, EU nations can engage in multimodal cabotage among themselves. It would be interesting to see if a post-Brexit U.K. could maintain its cabotage rights with EU nations and, at the same time, successfully build such rights into a bilateral trade agreement with the U.S. However, it should be remembered that U.S. cabotage options with neighboring Canada and Mexico are very limited – despite each being a much larger merchandise trade partner than the U.K.

Some Jones Act wrinkles

The U.S. build and repair requirements apply only to domestic water vessels. U.S. airlines can buy airplanes from Airbus, Bombardier and Embraer, etc. U.S. motor carriers can buy Volvo trucks (or Mack trucks, which has been a Volvo subsidiary since 2000). Municipal governments offering light rail transit and bus services can buy their conveyances from Siemens and New Flyer, respectively.

container terminal in Honolulu
U.S. Rep. Ed Case (D-Hawaii) wants to open the trade between ports on the U.S. West Coast and Honolulu to foreign flag ships. (Photo credit; Flickr/Bernard Spragg. NZ)

Of course exceptions to the rule barring foreign companies from offering domestic transport can occur in times of emergency or when a domestic vessel is not available for the required move. These assessments are made by the Executive Branch or by Congress. Notable emergency exceptions to the Jones Act were made for foreign vessels to assist with the clean-up of the Exxon Valdez oil spill in 1989 and relief after Hurricane Katrina in 2005.

Regarding domestic vessel availability, Alaska has the dubious distinction to have played a part in the largest Jones Act fine in U.S. history. In 2011, the U.S. Department of Justice (DOJ) fined Furie Operating Alaska (then known as Escopeta Oil & Gas) $15 million for using a Chinese-flagged heavy-lift vessel to haul a jack-up drilling rig from the Gulf of Mexico to Alaska’s Cook Inlet. In 2017 both parties negotiated a settlement and the payment was reduced to $10 million. Ironically, Escopeta was granted a Jones Act waiver in 2006 to use a foreign vessel for the haul. But the haul did not proceed until March 2011 and by then the U.S. Department of Homeland Security (DHS) declined to renew the waiver. At any rate the haul proceeded from the Gulf of Mexico, around South America, and up to Vancouver, British Columbia, where U.S.-flagged tugboats took over and completed the trip in July 2011. Escopeta claimed that its tight timeline to reach Alaska before its tax breaks on drilling expired had forced it to use the foreign-flagged vessel. DHS did not agree and the fine was assessed by DOJ. Fast forward to 2019 – citing production difficulties in Alaska and unpaid debts, Furie filed for Chapter 11 bankruptcy protection in August of that year.

Special air cargo circumstances in Alaska

Alaska has a more positive cabotage story regarding foreign air cargo. Ted Stevens Anchorage International Airport (ANC) is centrally located at 9.5 hours flying time to 90% of the industrialized world. This makes it an excellent air cargo trans-shipping point. This operational advantage is accentuated by an exception to the Jones Act. ANC’s innovative air cargo transfer program allows belly-to-belly transfer of U.S. bound cargo between a foreign air carrier’s aircraft or between those of two different foreign air carriers. This would be illegal at any other airport in the contiguous U.S. Furthermore, when the foreign airplane continued to another U.S. airport it would constitute cabotage. Why is this allowed at ANC?

(Photo credit: Ted Stevens Anchorage International Airport)

Basically, Alaskans can thank the advocacy of the late Sen. Ted Stevens, when he wrote this unique operation into a re-appropriation bill for the Federal Aviation Administration (FAA) back in the mid-1990s. Regulators now consider foreign air cargo landed at ANC and destined for the contiguous U.S. to still be “international” and therefore not a cabotage move in the spirit of the Jones Act. Despite this liberalization, ANC’s management team has had to work hard to convince skeptical Asia-based carriers that this quasi-cabotage activity is quite legal. What makes it hard to believe at first is why the U.S. would offer such a unilateral trade benefit to countries like China and Japan.

Transit by ship and tour buses

Now consider tourism. Many cruise ship passengers embark on their trips to Alaska from the Port of Seattle. They will cruise up the West Coast and dock at various Alaska ports. Interestingly, these foreign cruise ship companies rarely use U.S.-flagged vessels. But how is it not cabotage if the passengers are steaming from one U.S. port to another by foreign-flagged vessels? Certainly, most of Alaska’s ocean freight is delivered from the Port of Tacoma (Washington) by TOTE Maritime and Matson, which by law must use U.S.-flagged vessels. Why the difference?

Such Alaska cruises may be a cabotage move by definition but it is actually a type of cabotage move not covered by the Jones Act. Cruise ship and ferry activities in the U.S. fall under the Passenger Vessel Services Act (PVSA; 1886). As long as the domestic trip is “broken” by a visit to a foreign port along the way the cruise would be legal under the PVSA. Besides, passengers usually do not complain if their trips to Alaska are topped-up by a stop at the Port of Vancouver or Port of Victoria, British Columbia. On the other hand things might seem odd when a cruise from San Diego to Hawaii is interrupted by a quick stop at the Port of Ensenada in Baja, Mexico. Yet this move is necessary for the foreign-flagged vessel to comply with the PVSA.

Canada- and Mexico-based tour bus companies certainly do not fall under the PVSA but they do enjoy a similar protection. Foreign tour buses can pick up passengers in the U.S. and take them on a roundtrip tour of Canada or Mexico, as the case may be. The key requirements are that most of the tour takes place in a foreign country (i.e., it is international commerce) and the passengers are returned to their U.S. point of origin. Picking up and dropping off passengers at different U.S. points along either leg of the tour, however, would constitute illegal cabotage. 

Cross-border truck freight between the U.S., Canada and Mexico was $64 billion or 63.1% of all cross-border freight during September, according to data. (Photo credit: U.S. Customs and Border Protection)

Motor carriers and freight

The U.S. motor carrier sector is particularly tricky since a Canada- or Mexico-based conveyance is covered under customs laws, while their drivers are covered under separate immigration laws. These laws and regulatory interpretations do not conform to one another. For example, U.S. customs regulations allow for very limited options for foreign motor carriers to engage in cabotage. The move must be “incidental” to a well-defined export or import move. Another option is to carry cabotage freight while “repositioning” between well-defined export or import moves. Typically, the cabotage move must be “outward” – meaning, for example, that the conveyance is traveling northward from the U.S. back to Canada. Canada, on the other hand, allows repositioning moves to be east-west and this creates confusion in the trans-border motor carrier sector. Simply put, different countries can have different laws and regulatory interpretations. Of course, the moves noted above apply only to conveyances. U.S. immigration regulations are not as liberal – which means, in practice, these cabotage moves are often rendered impractical.

Foreign drivers would, however, be able to undertake incidental or repositioning moves if they were dual citizens, held a Green Card or were at least 50% by-blood members of a First Nation tribe in Canada. Canada extends the same courtesy to similar persons from U.S. tribes. This derives from the Jay Treaty (1794). The quick history is that the United States and British North America, while drawing their common border, did not want to zig-zag it around tribal lands. Today, for all intents and purposes a U.S. or Canadian native with an appropriate Band (tribal) Card is treated like a dual U.S.-Canadian citizen. Trans-border motor carriers doing business in the U.S. and Canada might find it revenue-enhancing to hire such people for their fleets or use them as owner-operators. 

A long line of trucks wait to enter the United States from Canada at the Blue Water Bridge linking Ontario and Michigan. Photo credit: U.S. Customs and Border Protection

In 2020, does the Jones Act necessarily add to U.S. national security or is it just a jobs program? If this is an example of the infant industry argument, the baby is turning 100 years old this year. Economics and politics always make for strange bedfellows.