“If you want a guarantee, buy a toaster.”
The blue water overnight passenger business is comatose. Will a vaccine make 2021 a profitable year? Or at least a break even year? Right now it looks like the industry might not even resume anything that might be called “service” until the second quarter of 2021.
But I believe that there may be hope for the domestic day passenger operators. The day tours, lunch and dinner cruises, whale watching, and charter fishing companies.
With a vaccine, a day trip – mostly open air, small group, and limited hours – may be psychologically acceptable to more people. Avoiding crowded travel and within one’s new discretionary funds budget, we have the Staycation.
While large international operators like Carnival are selling off “excess” assets, a review of the pages of Boats & Harbors, the national commercial marine marketplace classified ad paper, showed little activity in ads for day passenger vessels of all kinds.
Looking over the issues from January to the first issue of November the number of vessels being offered and their asking prices, where shown, barely changed. Most ads were unchanged over that 10-month span. There were a few added, which is not unusual at the end of a summer season, and there was only one dropped price.
A broker I spoke with stated that sales of day passenger vessels over the past 6-months have been slow but steady, and deals are more indicative of Fair Market Value than duress sales.
In speaking with people in the business, we heard opinions from several front-line sources that most operators want to hold on to their boats as they believe that replacing them when the market changes might be expensive. If they can sit out 2020, they have expectations that in 2021 they can resume business at a level where they can cover expenses or even make up a bit for the losses of 2020.
Owners/operators have help in holding on as most lenders have no interest in calling in loans and ending up with the expense of protecting an asset on top of a failed loan.
A recent issue of Foghorn, the magazine of the Passenger Vessel Association, had an article on how to “stay alive” during this financial crisis. The bottom line was to guard the bottom line by acting as if you had a startup company with no income. Keep your overhead as low as possible and watch the income carefully. If you are in a competitive market, price yourself competitively, but at least at a break-even level. In a better market, price yourself fairly until you can slowly build the business back and then price tickets for a better margin. Then you might be able reach a point where you can recover some of the losses of 2020.
There are some tips for holding on. Operators should be able to lower their overhead. The cost of fuel is down. And just as I have gotten a rebate from my automobile insurer due to reduced mileage, vessel owners can act similarly. If the vessel is not operating at all there is only the need for port risk insurance. If one is operating at a reduced schedule and capacity, both should be grounds for negotiating reduced premiums. And renegotiate ones dockage or slip fees.
In the Gulf of Mexico offshore market, it is not unknown for crewboats to adjust their Certificate of Inspection to fit a contract. While the boat may be able to carry 72 passengers out 20 miles, if it should get a contract where it will only carry less than 50 passengers on a 5 mile route, the COI can be amended for that. That can affect the insurance premium and also slightly reduce maintenance cost by not having to maintain as many life jackets, and possibly rafts. Such a change may even lower the required number of crew.
And owners can also be preparing to be the first ones in operation when the demand returns. Now is the time to prepare the boat for spring. Have you put stabilizer in the fuel? Are you draining condensate water from the fuel tanks?
Have you checked all hoses and clamps for condition and age? Don’t miss a trip for some minor maintenance failure.
And, do you renew a COI now? Spending money now, with no income, can be a tough call. But you can’t catch customers if you are waiting in a queue for a Coast Guard inspector.
The proverbial gorilla in the industry, Hornblower, is making news. Besides the expansion to Niagara Falls, Moody’s has mentioned Hornblower’s weak liquidity and there is mention that the company had only $28,000,000 in cash on hand in mid-September. Having a large number of their 157 vessels idle cannot help cash flow. Operation of the NYC Ferry System, subsidized by the city of New York, has been badly hit by the work-from-home movement and the closure of restaurants and bars.
As with all cities, sales and amusement related tax income has been flattened so the city of New York may have problems justifying the subsidy. But it is reported that the city and Hornblower feel that service will grow in 2021 through resumption of some office work and reports of expanded taxi route service.
Hornblower’s contract for the Statue of Liberty/Ellis Island tours comes up for renewal in early 2021, but the rumor is that there will be no opposition.
Crestview Partners took over Hornblower in 2018 and have provided support funding, but just recently Caspian Capital backed half of a $90 million dollar loan to Hornblower at a reported 11% interest. Caspian is noted to be a company that specializes in investment in troubled companies.
This entire industry is an interesting one to follow as appraisers of marine equipment. While day tour and whale watch boats, and even passenger ferries, can be similar in design and utilization, dinner cruise vessels are different. There is certainly their size, capacity and operating range, but also their outfitting. As a floating restaurant, the food, service and ambiance can vary and the ultimate income producing ability of the vessel can be based on the service side as much or more that the particulars of the vessel.
DLS Marine, having surveyed and appraised these vessels for decades, still find it interesting to look into the individual markets, search for comparables, talk to operators, and understand how the passenger vessel being valued fits its present market and possibly markets of interested purchasers.
** ADDENDUM **
After I finished the above piece, I met Captain Mike Valentino. He and his wife were in New Orleans last weekend playing tourist the right way. They visited the Sculpture Garden at the Museum of Art and some of the city’s famous cemeteries. Outdoors, open air, no crowds, and free. For several decades Captain Valentino has operated Trigger Happy Fishing, a six pack charter fishing business launching off the beach at Grayton Beach, Florida, on the Panhandle of the Florida Gulf Coast.
Since Captain Valentino’s business might be the smallest fish (ahem) in the marine passenger business, I wanted to get his input on 2020. What he told me surprised me yet gave substance to my statement in the third paragraph above.
He told me he had a good year. His business was just about the same as 2019. His usual clientele are vacationers, mostly from the southeast United States, who come to the coast and rent hotel rooms, condos, and beach homes. As we know, tourism disappeared in 2020.
However, many of the owners of the rental condos and second homes found themselves working from home and with children out of school. Why isolate at home in say, Atlanta or Charlotte, when they could be using their property along the coast. They are people with discretionary money, but now with no amusement parks, movie theatres or restaurants in which to spend it. A fishing trip with the family is adventure, outdoors, and isolated from crowds. Hence Captain Valentino’s COVID clientele. (Having driven LCVP’s and LCM’s through the surf and on and off beaches in the southern part of California and Vietnam I can attest to the additional excitement Captain Valentino’s beach launching can add to a day trip.)
He told me that when he was starting the business a big concern was whether he would have money available or enough credit to replace a vital boat part to keep his business operating. As some readers may already be aware, some of the winners in 2020 have been the manufacturers and vendors of exercise equipment, bicycles, and fishing gear, including boats and motors. Captain Valentino’s concern now is that if his 150 HP Yamaha outboard has a problem will he even be able to quickly find a replacement.
I’ve learned that Staycation may be viable and that the old adage Location, Location, Location can apply in the domestic day passenger industry.
In last month’s blog I talked about the cost of going green and possible offsets for corporations by making ESG (Environmental, Social and Governance) a marketing tool. A number of shipping companies, the large container players MSC and CMA CGM among them, have announced plans where if shippers move their cargo on specific eco-ships, mainly those LNG fueled, offset environmental footprint credits can be earned by the shipper.
So Bad Air becomes a new currency. Although Cap and Trade and Carbon Credits have been around for a while we are now seeing this as a factor in marine trade and is becoming a factor in the value of some types of vessels. More information on ship performance is being gathered and some of that is being posted in vessel reference sites such as Clarksons. DLS uses Clarksons World Fleet Register as one of our appraisal tools.
If you’d like to keep this conversation going, send me an email at nlaskay@DLSmarine.com. I’ll share future insights to my LinkedIn each month. -Norm Laskay
“That’s the way it is in life- you get a position or a map but not both at the same time.”
William Least Heat Moon
Maritime vessel owners and operators are being pressured by international authorities and port state regulations to comply with regulations forcing vessel operations to be “clean”. That is, sea transport producing greatly reduced greenhouse gas emissions, reduced spread of invasive bio species through ballast water treatment and clean hulls, and reduction of overboard wastes.
All of this costs money, starting with the large capital outlays for the design, testing and building of ships of entirely new designs. In the long run over the life of a ship, much of this will be recovered by reduced annual operating and maintenance costs.
Meanwhile…Along comes ESG, Environmental, Social, and Governance compliance. In the past corporations followed CSR, Corporate Social Responsibility. Make a profit but along the way be good to your employees, customers, community and the environment. While CSR sounds wonderful, ESG now has corporations having to produce the metrics that show that they are actually working toward the CSR goals and making a difference.
In the environmental area this might be showing a reduction in carbon emissions, kilowatts of energy saved, reduction in tons of waste, reduction in water usage, and progressive targets for each year. This can be done with the older standards like ISO 9001 and the newer ISO 14001-Environmental Management System (EMS), and ISO 50001-Energy Management.
What does this have to do with the marine industry? Shipping has many similar regulations that have been put in place by the International Maritime Organization (IMO) forcing the “greening” of the industry. And ESG is used as a key assessment marker for investors.
It is reported that as of early 2019 a quarter of the world’s professionally managed investment funds only invest in companies that have sound ESG credentials.
A recent article in the New Orleans newspaper noted that Nationwide Insurance just invested in a Louisiana 50 megawatt 197,000 solar panel solar farm as part of its ESG stance. This electricity will be sold to a Fortune 500 Entergy Corporation who now has around 190 megawatts of renewable energy in its portfolio including waste heat recovery, biomass, and hydro power. Entergy states that in the past two years about 25% of the electricity used in Louisiana came from carbon free sources. This is in a major oil producing state and follows up on my data on the drop in coal usage.
So, it can be many of the usual lenders that will find it in their interest and part of their new mission statement to fund new marine construction and conversions in the next decade. Working with owners and shipyards green loans can be made as part of the portfolio of loans to a company along with normal funding.
It is agreed that it is good to be green and many throw their “greenness” in front of lenders, investors and the public. But the truth is that there are no agreed to bases for measuring green.
Various sides push LNG, low sulfur fuel oil, ammonia, bio-fuels, hydrogen, methane, lithium power packs, etc., but like good sales people they accentuate the positive and eliminate the negative.
What are “zero emissions”? All airborne emissions? Is that just the current headliner CO2, or does that also include the collection of Green House Gas (GHG) and/or lead? Is it just air emissions or also emission into the water through hull biofouling or the exhaust from open circuit exhaust gas scrubbers? And how about the emissions on shore from the production of these fuels or battery packs and the coal or LNG power plants that charge the batteries.
But there are interested and powerful parties that are working toward developing “score cards” that will measure the ecological soundness and advantages of environmentally sound designs and practices.
The Green Shipping Project is sponsoring the Sustainable Shipping Initiative (SSI) which will define criteria for new fuel’s sustainability. They will then work with other bodies to create a form of certification.
The main bodies interested are of course the IMO which has been working on emission standards for several decades, and probably classification societies and port state authorities that will be signing off on certifications.
Another step is the recently announced rating system put forward by the International Chamber of Shipping (ICS) where every vessel under IMO regulations for emissions (greater than 5000 G.T. will receive and operational efficiency rating, much like a report card. They will each have a grade, possibly A to E, or A to G, which can be updated annually. This grade will be included in each vessels IMO specifications so that anyone, be it shipper, charterer, or prospective buyer, knows where the ship stands in efficiency.
This system has been presented to the IMO to be made into a regulation. One might expect that when ratified, vessel operators with vessels under 5000 G.T. might seek credentials as part of green marketing.
DLS Marine will be watching this and the many other design and regulatory factors that may be affecting vessel values in 2021 and forward. As if the economy in 2021 and forward is not enough to research and consider in our valuations.
“Traveling by boat is the best way to travel, unless one can stay at home.”
SOME DATA ON THE RIVER OPEN HOPPER BARGE MARKET
I recently received a question on the market for river service open hopper barges.
The answer starts with information from the U.S. Energy Information Agency (EIA). EIA statistics show that the Capacity Weighted Average Construction Cost of solar voltaic generators has fallen about 50% between 2013 and 2018. Offshore wind generator costs are down 27% and natural gas 17%.
The average construction cost in 2018 for wind farms were $1676 per MW for 25-100 MW farms, $1435 for 100-200 MW farms, and $1268 for 200+ MW farms. All these per megawatt costs have been steadily dropping since 2014.
The cost of natural gas fired generators in 2018 was a low of $604 for turbine units and twice that, $1211 for internal combustion engines. These annual cost vary with the cost fluctuations of natural gas.
EIA also states that from 2011 to mid-2020 75 gigawatts of coal capacity was shut down or switched to a different fuel source. Another 25 GW is slated to be shut down by 2025.
From 2008 to 2018 domestic coal shipments to the U.S. power sector, by all forms of transportation, fell about 57%. In 2018, the coal shipped to power plants by barges dropped 9%.
The U.S. Army Corps of Engineers (USACE) Waterborne Commerce Tables show that coal shipments from 1997 to 2014 averaged around 300,000,000 short tons, plus or minus no more than 10%. In 2015, it fell to 233,900,000 ST, and in 2016, the latest in the table, 197,700,000 ST.
Domestic coal production peaked in 2008 and in 2018 it was the lowest it has been since the coal miner’s strike in 1978.
The statistics show the trend away from coal is obvious and can’t be ignored.
Most coal is carried by rail, but some of this is from inland coal areas, such as the largest coal producer Wyoming. Rail cars take some of it to rivers for transshipment to barges, but rail car loadings are down about 50% now over a high of around 100,000 carloads in early 2018.
EIA indicates a 25-30% decrease in exports in 2020 from the same period in 2019, and sees this 30% drop through all of 2020.
Where does this leave the demand for open hopper barges?
The USACE marine tonnage tables as of 2018 showed a total of 8122 open hopper barges. This number includes the 175 x 26 and 195 x 26 open hoppers in upper river service, like the Ohio River.
The oldest open hopper was built in 1972. A total of 978 (12%) were older than 35 years, and 1464 (18%) were younger than 10 years. The two largest construction years shown in their tables were 2007 and 2008 when a total of 589 barge were delivered.
Closer to most market interest are the statistics on just the standard Jumbo 195/200’ x 35 x 12/13/14’ open hoppers. The IEG Vantage Barge Fleet Profile 2019 lists, as of 2018, a total of 5909 in that specific category. It should be noted that the Barge Fleet Profile works with operators by sending out questionnaires and there is not 100% participation. Barge operators, large or small, may not provide data. The average age of these barges is 17.6 years. (The average age of covered hopper barges is 13.5 years.) The Profile also shows that in 2015, 338 open hoppers were built, a statistic not noted by the USACE. However, in another table it shows that there were only 117 2015 built open hoppers in use in 2019. This may be due to some operators of 2015 barges not participating in the Profile.
A wider overview on demand factors
International trade is one factor. But the big name in trade uncertainty, China, is not an important market for U.S. coal exports. The largest importer is India with their demand for steamer coal for electricity generation. Next is Japan with a near equal need for metallurgical and steamer coal. The Netherlands is 3rd as mainly a transshipment hub for the rest of Europe, mainly Germany.
Other top ten buyers are Brazil (metallurgical), South Korea (steam), Canada and the Ukraine (metallurgical), Egypt (steam), and Italy and Morocco (mainly metallurgical).
Weather affects utilization, with cold or hot weather increasing home and commercial electrical demand. Storms and icing shut down navigation causing barges to sit as temporary floating storage units. This latter situation can also occur when the Corp of Engineers has to shut down a lock system due to damage or maintenance.
There can also be individual operators that have to spend capital on Subchapter M upgrades to tug boats making the operation of some utilization/low income open hopper barges of no interest.
A small silver lining in this market is that some of the barges have been used to ship wind farm blades. But this will not balance the loss of coal, or the softer market for things like fracking sand.
The market place
Hopper barges in general do not often come up on the open market. They can change hands among lessors at the end of lease transactions but these are usually en bloc sales with the numbers rarely public knowledge.
Currently brokers have shown a few of these open hoppers on the market. Sales have ranged from a single barge to a group of 19. Their ages ranged from the mid 1970’s to the year 2001 with asking prices running from around $125,000 to $250,000. These asking prices equal about 25% to 50% of replacement costs.
The catch here is that replacement costs over the last 10 years has varied greatly between around $450,000 and $600,000, depending on the cost of steel and the leverage the builder had with profit margins. And there is no apparent connection between the ages of these barges and their asking prices. Age and asking price had no connection.
From this information it seems that the asking market price is going to vary by the specific condition of the barge and the owner’s interest in selling.
INTERNATIONAL VALUATION STANDARDS
Lenders are familiar with the domestic Uniform Standards of Professional Appraisal Practice (USPAP) the standards for appraisal reports on Real Property, Personal Property and Business Valuation. With our appraisers all being members of the American Society of Appraisers, our appraisal reports have been USPAP compliant for over 20 years.
Internationally, a non-profit registered in the United States and headquartered in London, The International Valuation Standards Council, has worked with interested parties throughout the world to produce standards for appraisal reports that international investors and accounting firms can rely on for detailed, transparent and unbiased valuations. These standards are in many ways similar to USPAP. DLS has followed the progress of IVS and has had several engagements with international banks where an IVS compliant appraisal was requested.
Most of the thrust of IVS is on Business Valuation and the value of intangibles, but Personal Property is included in their guidelines. For now, because the U.S. works under the rules of GAAP (Generally Accepted Accounting Standards) and internationally it is IFRS (International Financial Reporting Standards), USPAP and IVS have similar goals via slightly different routes. However it is in the interest of worldwide industry and investors to have common regulations and FASB and IASB, the U.S. and international accounting standards boards, are working towards one standard.
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