Are We Heading Into The 3rd Surplus of Bottoms?

In maritime connotations, a “surplus of bottoms” means there is a general surplus of ships which can mean marginal loads to survive and worse a fare and freight war occurs. When this happens some shipping companies do not survive and so a “correction” (this term is used in Business and Economics) occurs but that can mean ships going to the breakers or being idled.

The first surplus of bottoms happened in the start of the 1980’s and that happened in the year 1980 and in the succeeding years. It became even more pronounced when the financial and political crisis hit the country in 1983 after the assassination of the opposition political leader Ninoy Aquino.

What triggered the surplus of bottoms in 1980 was the arrival of the new container ships which changed the system of carrying cargo. Before their arrival it was the passenger-cargo ships which carried the express cargo (the cargo that have to be moved fast). There were actually only a few cargo liners (cargo ships that have regular routes and schedules) before the arrival of the container ships. Passenger-cargo ships before 1980 have voluminous cargo holds (holds because there were not RORO liners before 1980 except for two, the third Don Carlos of Sulpicio Lines which arrived in 1977 and the Don Johnny of Lorenzo Shipping which arrived in 1976).

But when Sea Transport Company, Aboitiz Shipping Corporation, William Lines, Sulpicio Lines and later Lorenzo Shipping Corporation and Central Shipping Company (the vargo company of Sweet Lines) invested in container ships, suddenly the old passenger-cargo ships especially the former “FS” ships suddenly had no enough load and many were laid up and they rotted and were later sold to breakers especially during the financial and political crisis of the mid-1980s when the country’s growth rate turned negative.

Cargo is the bread and butter of shipping and it is not the passengers that make them viable. The major shipping lines were just too happy then to invest in container ships for they can move cargo without employing too many crews that go with the operation of passenger-cargo ships. With container ships there won’t be complaints about delays, insurance goes down, there is no need to stack up on food, etc. Operation became more simple with less risk. But that paradigm change meant a lot of old passenger-cargo ships will have to go because of a surplus of bottoms and that surplus became more pronounced when the mentioned crisis  hit.

There were more than a dozen shipping companies which did not survive this first surplus of bottoms especially in the crisis and among them were the old venerable Compania Maritima (which was the biggest shipping company for decades already), the various small shipping companies to Bicol and the Eastern Visayas which were also greatly affected by the development of intermodal shipping, the Northern Lines, Madrigal Shipping Company, Tomas del Rio & Company (the former Rio y Olabarrieta) and others.

The second surplus of bottoms period hit at the tail end of the administration of Fidel V. Ramos and it spilled into the terms of Joseph Estrada and Gloria Macapagal Arroyo. This period covered the late 1990s and the early 2000s and this was more pronounced in the liner sector like the first surplus of bottoms period.

The cause of the second surplus of bottoms period was actually the incentives given by Fidel V. Ramos to shipping when the acquisition of surplus ships from Japan quickened fast and many new players emerged not only in the  liner sector but also in the tramper sector which is actually in competition with the cargo liner sector. This second surplus of bottoms was exacerbated by the emergence of the budget airlines and the intermodal trucks and buses which took passengers and cargo from the liner sector.

In the second surplus of bottoms period the negative effect was more widespread. It happened in the High Speed Craft (HSC) sector when the arrival of the SuperCats, Sea Angels, Weesam Expresses, Bullet Expresses and others were simply too fast for the actual passenger growth. And this was worsened too by the Asian Crisis of 1997 which dampened business. One result was that we needed to sell High Speed Crafts outside the country.

In some short-distance ferry routes like in Batangas and Zamboanga this surplus of bottoms resulted in dog-eat-dog completion where fare and rate wars erupted. It was good for the passengers, car owners and shippers initially but this also meant that the financially weaker (but not necessarily smaller) shipping companies won’t survive. Among the notable casualties in Zamboanga were the Sampaguita Shipping Lines and SKT Shipping which later reincarnated into the KST (Kong San Teo) Shipping (but which also went under).

In Batangas, the formerly dominant Viva Shipping Lines and its legal-fiction companies also sank along with some other smaller shipping companies. In Cebu there was also a show of surplus bottoms but not as great as in Batangas and Zamboanga. Funnily, someone who has no knowledge of shipping, Myrna S. Austria made a Ph.D. thesis of this period and declared that so many routes lack competition. And the many routes and shipping companies disappeared because in truth there was so much competition (her data was incomplete and she didn’t know that parallel routes compete).

And like in first surplus of bottoms era a “correction” happened. What is sad here is we lost so many liners and liner routes. WG&A and Cebu Ferries Corporation shrank to just about a third of its former size and SuperCat to just less than half of its peak. The pioneer in fastcrafts Bullet Express (later Bullet Xpress) also disappeared along with some other High Speed Crafts operators.

After this the acquisition of ships went into doldrums that for a good ship spotter it became hard to maintain interest in shipping. But recently the ship spotters were jolted by new acquisitions especially since many are actually brand-new. The FastCat series started this trend and was followed by the Starlite series. Many other shipping companies are quickening their acquisitions including in High Speed Crafts and Medium Speed Crafts (MSCs). Competition drives many of these new acquisitions. But in the case of Island Water and Shogun Shipping theirs is trying the waters their own way.

These developments happened in the backdrop of the development of a new paradigm, the Cargo RORO LCTs which take rolling cargo away from the overnight ferries and the short-distance ferries. There are many shipping companies now in this sector and the LCTs involved here are nearing the two dozen mark. Like when the container ships first arrived, the operation of a Cargo RORO LCT is simpler than that of a ferry and they are wanted as suddenly they became the solution to the second-class treatment of trucks in ferries.

At the moment these new developments are beneficial to the passengers, car owners and truckers/shippers as there had been a lowering of rates in some routes and places. Plus there are more options and schedules now.

MARINA (Maritime Industry Authority), the regulatory body of the government with regards to the maritime sector will always push for the acquisition of new ships in their goal of ship modernization. And they will always think that more is better. And everybody is happy when a new ship arrives.

The question is will this lead to the 3rd surplus of bottoms? Well, it’s a little early to say but we know the shipping companies are still in the acquisition mood and we do not know up to when this optimism will end. The banks are open now for loans unlike before and the series of FastCats which can sail for as long as they want and the Starlites are not yet finished in arriving. Ferry companies have also discovered China sources now both in brand-new and surplus.

What is the antidote to a surplus of bottoms? That is the threat of MARINA to cull old ships, most of which are still running reliably and many of their companies have no record of losing a ship. Almost all are opposed to this and MARINA knows that. That is also not popular to the public as we are sentimental of our old ships.

We will have to see how this episode plays out.

 

The Leyte Ports to Cebu

Talking of Leyte, I am referring to the old Leyte province which included Biliran, Southern Leyte and Panaon island. The reason is port and route competition does not actually respect current political boundaries. Biliran and Panaon islands are connected by bridges to Leyte hence there is no practical physical division separating them from the main island of Leyte.

In the recent past and including ports used by RORO Cargo LCTs, there were many Leyte ports with scheduled connections to Cebu. Starting from Cabalian (San Juan), that includes, counter-clockwise, the ports of Liloan, Sogod, Maasin, Bato, Hilongos, Hindang, Baybay, IDHI Port (Albuera), Ormoc, GGC (Ormoc), Pingag (Isabel), Isabel, Palompon, Villaba, San Isidro, Naval and Tacloban. This list does not include ports that lost connection to Cebu much earlier like San Francisco, Malitbog and Calubian. There are so many Leyte ports with Cebu connection because Leyte is economically tethered to Cebu. And Cebu is the true regional center of the middle of the Visayas.

However, in recent years, some of these ports waned with the development of the roads and land transport including the ubiquitous commuter van. Cabalian, Liloan and Sogod, all in Southern Leyte, lost its regular connections to Cebu. Even the supposed main port of entry to the province, the Maasin port was much weakened. The reason for this was the rise of commuter vans and buses connecting to the arriving and departing ships. Bato and Hilongos became the main ports of entry for Southern Leyte even though they are located in another province. From these two ports, connecting vans and buses rolled to Maasin and to towns beyond. The vans and buses also passed through the shortcut mountain road to go as far as Sogod, Cabalian, Silago and Panaon island. These land transports have dedicated connections with the ferries and tickets can be bought even in Cebu or aboard the ferry.

These connecting rides are actually faster compared to the old ferries going to Sogod, Liloan and Cabalian. With dawn arrivals of the ships in the entry ports, most of the passengers will be at their homes by breakfast. Even in the farthest destinations it will be well before lunch when the passengers will arrive. Compare this to the near or lunch arrivals of the ships to Sogod, Liloan and Cabalian before. And besides these new ferry plus van modes are cheaper than the old ships to Southern Leyte. In the process, Bato and Hilongos ports became more important.

Going to Cebu, these same vans and buses also brought the passengers to the ships. Besides, it is also easy for people of Southern Leyte to take the local bus and local van to Maasin. If there is a ship there then they can take that. If there is none, it is so easy for to take another ride to Bato port. Others can also take the national highway to Mahaplag junction. From there it is just a short distance away to Baybay port where there are also daily and multiple departures like in Hilongos and Bato.

This syndrome is a fine example that shows it is not only shipping companies within a route that compete. Actually, several parallel routes and the shipping companies plying those are all competing and superior routes can sometimes sink inferior routes like the Cebu routes to Sogod, Liloan and Cabalian. Well, such parallel competition can even sink ship companies as shown in recent Leyte history when the shipping companies serving Cabalian, Liloan and Sogod went under. This syndrome is clearly not known or understood by the research paper on shipping competition done by Myrna S. Austria.

http://pascn.pids.gov.ph/files/Discussions%20Papers/2002/2002-04.pdf

Another far port of Leyte that lost its connection to Cebu is Tacloban port. Passengers learned to use Palompon, Ormoc and Baybay ports as ports of entry and then just transfer to a van or a bus. The land transport terminals of the three localities just lie outside the port gates so transferring is no problem. With this mode, passengers will arrive in Tacloban earlier and at less cost. Going to Cebu from Tacloban, the riding process is just reversed and it is that easy too. Besides, in Ormoc and Baybay there are many ships departing and in Ormoc there is even a day departure. Also, there are High Speed Crafts in Ormoc for those who are in a hurry or who just wants more comfort. So, slowly the Tacloban ships lost patronage until they finally stopped sailing. Again, such syndrome was not known or understood by the research paper on shipping competition by Myrna S. Austria which compartmentalized routes and assumed that other routes have no effect or influence on one particular route.

If that were so, then the likes of Maypalad Shipping Corporation that held Liloan, Sogod and Tacloban routes might have survived. This was the fate too of other shipping companies that held routes to Villaba, Tabango and San Isidro like M.Y. Shipping and Rose Shipping. Daily there are many ships to Ormoc while the service to those three towns were not daily. There is even a day ship and High Speed Crafts from three companies. In Ormoc the land transport terminal is just outside the port gates and there are a lot of buses and vans to Villaba, Tabango and San Isidro on the northwest corner of Leyte. With the competition from the Ormoc ships, the shipping companies serving Villaba, Tabango and San Isidro quit and now there are no more ships to those ports from Cebu. They were simply torpedoed by a parallel route which is Cebu-Ormoc. Again, the paper on shipping by Myrna S. Austria did not see or understand that.

Naval in Biliran, as a port, was also weakened by parallel routes like the port of Maasin and to think both are ports of provincial capitals and supposedly the main ports of entry to their provinces. Naval is also impacted by the parallel route to Ormoc because from Ormoc there are plenty of vans and buses to Biliran. And Ormoc has daily departures from Cebu while Ormoc does not have such. For those who failed to catch the night ship there are also the High Speed Crafts and day ferries to Ormoc. Naval simply does not have such option. Besides, if there is a ship to Palompon the traveler to Biliran can also take that and again the bus terminal is just outside Palompon port. Clearly, Myrna S. Austria never dreamed provincial ports can be weakened by far and near parallel routes. That was her mistake in treating routes and ports as insulated from one another. This might be unknown to her but people of Leyte know that even from a young age since they come and go to Cebu.

In Myrna S. Austria’s research paper, the routes I enumerated above that lost ships are generally classified as having “no competition”. Ports lost ships, routes were dropped and shipping companies sank because there was “no competition”?? With regards to Leyte, her paper is obviously erroneous (it is erroneous in other parts of the Philippines too and I will show that in future articles).

Even with less players the routes from Cebu to Leyte are all vibrant and shipping companies compete well. Now, it is even more dynamic with the arrival of the RORO Cargo LCTs which compete now with the traditional Cebu-Leyte shipping companies. With them there are new routes and new ports in use. The traditional shipping companies have already reacted to them and one way is by also joining the fray or their mode. They are friendlier now to rolling cargo as the intermodal way is obvious already that that is the way of the future.

There is “lack of competition”? Nah, that is only a figment of imagination in Myrna S. Austria’s paper.

Why Ship’s can’t compete with trucks and buses on Parallel Routes.

written by: Mike Baylon

In recent years, there have been attempts to match ships against trucks and/or buses on parallel route using HSCs (High Speed Crafts) and MSCs (Medium Speed Crafts). All of them failed because for one, they failed to reckon with history and second, they were blind to the economics. Among these were the off-and-on attempts to establish an HSC ferry link from Manila to Bataan. From the 1970s to the recent attempt by SuperCat all failed along with various attempts in the past two decades by the likes of Mt. Samat Ferry Express and El Greco Jet Ferries. These attempts all tried to offer an alternative to the Manila buses to Bataan.

Port of Lamao, Bataan
Lamao Port, Bataan ©Edison Sy
SuperCat 25 at Manila
SuperCat 25 at Manila ©Nowell Alcancia

In the same area a few years ago Metro Ferry tried the Mall of Asia to Cavite City route and folded in a short time with the shipping company now trying to sell its ferries. It was simply competing against the Cavite bus and that bus goes further up to Lawton. With HSCs the fight is more of a ferry versus bus encounter.

In Davao Gulf, Dans Penta 1 tried a route from Davao to the Lupon town of Davao Oriental. It ceased operations in a few months and the fastcraft laid idle until it was sold. They did not notice that the SuperCat and Oceanjet started service from Cebu to Dumaguete from the 1990s but they were recently driven away by the Ceres Liner bus crossing the sea by Maayo Shipping LCTs.

Dans Penta 1
Dans Penta 1 ©Aristotle Refugio

For a very long time, Illana Bay in southern Mindanao was ruled by the wooden motor boats when there was still no road connecting Pagadian and Cotabato City. There were motor boats from Cotabato to Pagadian, Malabang and Balabagan as there was a motor boat from Tukuran to Caromatan. When the Narciso Ramos Highway connecting Cotabato City and Pagadian was opened suddenly all the motor boats of Illana Bay were gone. Also gone were the Zamboanga-Cotabato ferries.

This was also true for the ferries connecting Ipil, Margosatubig and Pagadian from Zamboanga. There were a lot of steel ferries there before but when the Zamboanga-Pagadian road was cemented slowly the ferries gave way and now they were gone from those routes. That was also what happened to the “3S” area of Zamboanga del Norte, the towns of Sibuco, Sirawai and Siocon. When the roads were built, the ships were gone. Now only motor boats go to Sibuco.

Nikel Princely [Aleson Shipping]
Nikel Princely at Pagadian Port ©pagadian.com thru Mike Baylon

There was also a Guiuan, Eastern Samar to Tacloban connection before using steel-hulled ferries and big motor boats. But when the new road was built connecting Guiuan to Basey through the southern coast of Samar was built the ships there had to transfer to new routes. Mati City once had a sea link to General Santos City but with the Davao-Gensan road built and the Mati road now cemented and safe this route is now gone.

Actually, the lesson that ships can’t beat land transport can first be gleaned in Luzon. In the late 1940s there were still ships from Manila to Salomague, Currimao, Claveria and Aparri. But when the roads were slowly built the passenger-cargo ships were gone before the end of the 1950s. In Bicol passenger-cargo ships from Manila were calling on Sorsogon, Bulan, Legazpi, Tabaco, Nato, Tandoc, Mercedes and Larap ports until the end of the 1970s. With the completion of the Maharlika Highway the ships left as they can no longer compete with the trucks and buses.

BFAR fastcraft in Mati port
Mati Port ©Mike Baylon

In the big, underdeveloped islands of before like Mindanao, Samar, Mindoro and Palawan when there were still no roads connecting the towns it was wooden motor boats that served as the link (in Mindanao the link included steel ships). That is also true in peninsulas without roads then like the southern tip of Bondoc peninsula and Zamboanga peninsula.

There were seaboards that were once beyond a mountain range and isolated that were dependent on sea links. That was the case of the eastern seaboard of Mindanao which was rich in forest products then. It was ships that linked the towns there, the reason there so many ports then there and some even have connections to Manila or Japan like Mati, Lambajon, Bislig and Tandag. It’s the same case too in the southern shores of the old Cotabato province beyond the mountains. Lebak and Kalamansig towns linked to Cotabato City through the motor boat.

Port of Bislig
Bislig Port ©Janjan Salas

The intermodal transport system where islands and regions are linked by the short-distance RORO is an extension of the defeat in Luzon of the ships. When Samar was connected by RORO to Matnog, the intermodal trucks and buses drove out the liners in Samar and now freighters from Manila only arrive in Samar intermittently. Even in the next island of Leyte the liner from Manila is practically gone and container shipping there is on the retreat. That process is also at work now in Masbate and Bohol.

Mindoro was once linked by ship from Manila. Now that is all gone and even the next island of Panay is severely impacted by the intermodal transport system. Only Negros, Cebu and Mindanao islands among the major islands are left with just a small dent from the intermodal.

What is it with land and intermodal transport that beats ferries and cargo ships? Land transport is cheaper and it is also faster. With a small unit like a truck or a bus the threshold where one can leave with a trip that will earn profit is much lower. The acquisition cost is much smaller too and land transport can stop anywhere, go different routes and offer more options. In ubiquity and flexibility, sea transport can’t beat land and intermodal transport.

port of lilo-an leyte
Lilo-an Port, Leyte ©Jaz Prado

Shipping is also weighed down but much stringent requirements. An old ship has to be drydocked every two years and each drydocking costs many millions. There is no equivalent in land and intermodal transport of a regular, mandatory overhaul of every two years. I do not know if authorities are overacting. A ship where the engines conk out still has the flotation and stability of a barge. All it needs to safely reach port is a tug if it can’t restart its engine/s. With a new rule which says no ships can sail at 30kph winds, almost all danger is removed as such winds will not even produce a half-meter of swell. A steel-hulled ship is not a banca but to government authorities it seems they look like the same.

The two types of transport also has different crewing requirements. A bus will only have a crew of two and a truck three. Deck officers of a ship are already half a dozen and engine crew the same. Plus there is ancillary crew like the purser, the cooks and other service crew including security. A ferry will need stewards, galley and restaurant crew and many others. All of those have to be paid money and crewing less than required or if not qualified will result in penalties or even suspension of the ship.

M/V Nathan Matthew
Nathan Matthew ©.BITSI_DoMiNiC_

Since water resistance is much greater than rolling resistance and ships have great weights the fuel consumption of ships is also greater by comparative unit. Where fuel requirement of trucks and buses is measured in liters, those of ships are measured in tons of fuel. Ships also have a lot of equipment like bridge and auxiliary equipments that needs maintenance while a truck will run with only the oil pressure gauge and ammeter working and replacement of those is dirt cheap.

Simply put it is much more expensive to acquire, crew and maintain a ship than land and intermodal transport. While ships and shipping companies have to live with the hassles and mulcting in ports and by the authorities, the “forced donations” of trucks in checkpoint is loose change compared to what ships and shipping companies have to cough up with and buses are even exempted. Insurance is much higher too in shipping.

Raymond 3788 in Pasacao port
Raymond 3788 in Pasacao Port ©Mike Baylon
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Danica Joy and an Oil Tanker ©Barry

So it is no wonder that there are a lot of businessmen that are eager to invest in buses and trucks while in shipping few get attracted now and the ships just get older and older. Maritime and port authorities having been drawn not from the ranks of mariners and shipping professionals have consistently shown a lack of understanding of shipping and cannot even support and lead properly the sector they are supposed to be administering.

It will be no wonder for me if in the future only the short-distance ferry sector will grow as that is needed by the intermodal transport system. The cargo RORO LCT sector will also grow but the long-distance shipping sector will wilt while the overnight ferry sector will just remain steady although threats are emerging against them from the intermodal transport sector. In efficiencies, in speed, in lack of hassles including port problems and Metro Manila road congestion, in price comparison, the ship really cannot compete. This is lost completely on so-called “shipping experts” who always assume that the traditional shipping they know “is always superior” because that was what they were taught in school and by habit they no longer check the empirical situation. If they do they will find out that trucking goods is faster and cheaper than moving it by ship.

It will be reality that will teach them this lesson.