Consumer conundrum

LIHUE — The Horizon Lines sale of its Hawaii trade route to Pasha Group has stirred speculation about how the family-run company will compete with market giant Matson.

It’s also left some local store owners and shipping experts wondering what the change will do to importing costs on Kauai.

“Shipping is huge with us and we are looking at getting more information,” said Sherry Moniz, Cost-U-Less, Kapaa store manager. Moniz said shipping is of interest all over Hawaii and the South Pacific but the store wasn’t banking on costs changing anytime soon because of the business deal. “At this point, we are not too concerned.”

When the deal was announced last week, Pasha spokeswoman Emily Sinclair said the company will become a significant competitor by providing a viable alternative to consumers who seek convenience and good prices, but what changes could be made won’t be looked at until after the sale is final.

Ali Nikhoo, Horizon senior vice president and Hawaii trade lane manager, said he expects Pasha will be moving the same cargo, using the same ports and with the same people loading and unloading it.

“It is not going to be any different,” Nikhoo said. “It is business as usual moving forward with no concern about service to consumers on that beautiful island.”

Horizon has no employees on Kauai but does have an arrangement with Young Brothers inter-island service that will likely remain under Pasha, Nikhoo said. Horizon has no present concerns about Kauai, but Pasha will make its own evaluation.

“Everything is always under review,” he said.

Kauai Coffee President Wayne Katayama said the grower is a “back hauler” which is someone who exports more cargo off-island than they bring back. This “dead hauling,” as it’s called, fills cheaper, otherwise empty containers with coffee on the return leg to the Mainland.

That is good business, Katayama said. Kauai Coffee worked with Horizon’s predecessor, Sea-Land Companies, and they also use Young Brothers for inter-island service.

“Our service is fine,” Katayama said. “For us, we see no impact. We have always had good rates anyway with the containers available.”

Jeffrey Ono, the Hawaii Consumer Advocate, said competition is always good but that the Department of Justice and the Attorney General’s office will determine the market concentration and decide if the deal is competitive or not. It is clear that Horizon was facing challenges to its ability to continue as viable business, he said, and Pasha is in position to take over.

“This has the potential to be very good if Horizon couldn’t make the investment to upgrade their vessels,” Ono said.

Horizon contracted with Young Brothers to barge unregulated inter-island cargo from Honolulu to the Neighbor Islands. If Pasha were to use its own barge it could affect Young Brothers’ volumes, Ono said.

One concern for some locals is what the purchase can mean for local jobs.

“In this case, we’re hoping that all or many of Horizon’s employees will be hired by Pasha,” County of Kauai Director of Economic Development George Costa said. “Whatever happens, we will work with WorkWise Kauai to see how the county can assist the employees in the transition.”

As for the impact on consumers, Costa said it is too early to speculate but from what is known, it appears the sale will have little or no impact even though it reduces the competition from three companies to two.

“We certainly hope they’re right,” Costa added about Pasha’s statement that the deal will be beneficial for consumers.

Roy Catalani, vice president, strategic planning and government affairs for Young Brothers, said that Pasha and Horizon are well positioned, both financially and operationally to continue transporting cargo between Oahu and the islands of Kauai, Maui, Molokai, Lanai and the Big Island.

“Young Brothers has worked in partnership with Horizon, Pasha and Matson for many years to efficiently integrate interstate and intrastate cargo shipping to serve residents across Hawaii,” Catalani said.

The non-contiguous states and Puerto Rico rely heavily on reliable ocean transportation to import and export goods that are vital to their economies, he added. By picking up the additional Jones Act qualified vessels for Hawaii routes and not the Puerto Rico routes, Pasha is showing confidence that Hawaii is a strong market.

Randy Francisco, Kauai Chamber of Commerce president, echoed Costa in that he hoped Pasha’s statement will prove true about consumers locally benefiting.

“Along with the hope that the acquisitions create a long-term stability for ocean transportation, we hope to see that the remaining, financially stronger companies, begin to offer more competitive prices to their Hawaii customers,” Francisco said.

Others said even though the business changes, it doesn’t always mean volume does.

In economics, the term competition is a characteristic of competitive markets, said Paul Brewbaker of TZ Economics in Kailua. The Matson-Pasha duopoly is a strategically competitive rivalry of a two-agent, dynamic game where capacity does not change even if the brands do.

“It’s rivalry, not competition,” he said.

The number of container vessels and tonnage is a more important than the number of cargo carrier owners, he added, particularly when the third carrier is acquiring the second. Matson is still outperforming with bigger, faster and nearly twice the number of container ships as Horizon and Pasha combined.

Pasha currently operates one roll-on/roll-off cargo ship with bi-weekly runs from San Diego to Honolulu, Kahului and Hilo. It is contracted with the military Voluntary Intermodal Sealift Agreement to carry Department of Defense-sponsored vehicles and rolling stock. A second roll-on/roll-off vessel is due to enter service between Southern California and Hawaii in 2015.

The Jones Act of the federal Merchant Marine Act of 1920, requires a vessel to be U.S. built, flagged, crewed, owned and managed to transport cargo by water between two points within noncontiguous domestic shipping routes to include Alaska, Guam, Hawaii and Puerto Rico.

Mike Hansen, president of the Hawaii Shippers Council, said Horizon’s four Hawaii container steamships were built in 1980. The average age of a ship in noncontiguous U.S. trade is 30 years, and 12 years for international carriers.

The ships are due for special surveys, technical inspections and emissions regulations tests that have a lot to do with the sale, he said. Steam ships were exempted until recently and if they don’t pass the review they could not operate.

Ship owners and operators under the Jones Act want to protect their domestic markets with a duopoly arrangements, he said, while competitors want an exemption to allow purchase of cheaper foreign-build merchant ships. Keeping old fleets creates artificial scarcity and controlled freight rates that ultimately impact the cost of living.

Replacing them by allowing less expensive foreign built ships would reduce freight rates through lower capital costs and competition from new companies to have a positive impact on the economy, he said.

“These ships are getting long in the tooth,” Hansen said.

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