Wednesday, March 25, 2009

"Conspiracy Ferry: Did we get taken for a ride by Hawai‘i Superferry?"

Another very good article by NYT's freelance reporter Chris Pala:


Conspiracy Ferry:
Did we get taken for a ride by Hawai‘i Superferry?

Hawai‘i’s Superferry ended its choppy ride last week, leaving tantalizing clues, but no proof, that the whole venture was about more than providing “reliable commercial service in these islands,” as CEO Thomas B. Fargo insisted at his dawn press conference.

“You look at the players involved, you have to question their motives, there are some pretty significant defense contracts involved,” said Rep. Hermina Morita, who chairs the House Energy and Environmental Protection Committee.

The defense contracts come in two categories.

First, the construction of the two ferries by Austal USA helped the young company get a contract to build a military version of the fast cargo and troop-transport ship—with an option for nine others—for a total of $1.6 billion, according to defense analysts and Austal USA itself. It also played a role in getting a contract for a Littoral Combat Ship prototype, a separate project to build up to 50 fast, aluminum warships at more than twice the price for each. The question is: was that the real purpose of building the Superferry?

Second, there are the ferries themselves. Now that the Hawai‘i Supreme Court has freed them of any obligation to serve the Islands, which has proved to be a money-losing operation, are they going to fetch a better price elsewhere? If they do, was that the main point for building them and bringing them here?

Austal and INCAT are the two giants of the big, fast aluminum catamaran business that have been supplying the world market for decades from their shipyards in Australia. Unlike most countries, the United States can’t buy foreign vessels for internal or military use: the Jones Act specifies they must be built domestically. So to crack the American market, Austal and INCAT needed to set up shipyards in the United States. Austal USA set up shop in Mobile, Ala., in 2001 and INCAT partnered with Bollinger Shipyards, Inc. in South Lockport, La., both with their eye on a contract for a military version of the Superferry.

By the summer of 2004, when work started on the first Superferry, Austal USA had built eight ships, all smaller than the Superferry. “Bollinger/Incat [USA] was a credible threat,” Bill Pfister, VP for external relations at Austal USA, said in a telephone interview from Mobile. “Building the Superferry was very helpful in demonstrating that we can build these ships in the United States as well as Australia, it was a major part of our credibility, almost a prerequisite,” he said. “It allowed us to build up the work force and the facilities.” Once the first Superferry was finished, that work force moved to the Littoral Combat Ship prototype, he said. And last November, as work was ending on the second Superferry, the Huakai, Austal beat Bollinger/Incat USA for the contract for the military version of the Superferry, called the Joint High Speed Vessel—essentially a Superferry with a helipad in the back.

In an interview together last year, Tig Krekel, vice chairman and partner of J.F. Lehman & Company, an investment bank in New York, and John Garibaldi, a former Hawaiian and Aloha Airlines executive who was CEO of Hawai‘i Superferry when it launched service, described how Garibaldi, Tim Dick and Terry White started the project together, financing it out of their savings until early 2004, when they raised $3.3 million. In September 2004, Lehman & Company took over the company and its principal, John F. Lehman, signed a deal to provide $85 million for the first Superferry.

“The ship started being built in summer of ’04, basically on spec,” Garibaldi said. “It was done on verbal assurances from Lehman and me that we would not leave them with the ship.” By the fall of 2005, Krekel said, Lehman was chairman of the board and the Maritime Administration was ready to guarantee $140 million of the $185 million loan.

Garibaldi said the shipyard had started building the ship “on spec” because the project’s financial success was so obvious “it was a no-brainer.” Krekel added, “We expect service to grow to five ships, the market’s there.”

But Alan Lerchbacker, the founding CEO of Austal USA, painted a different picture in an interview in Honolulu with Pacific Business News published on January 19, 2007, the same week Hawai‘i Superferry took delivery of the Alakai.

“I just worry about getting enough business to cover costs because of the sheer size of it,” he was quoted as saying. “They may need 400 to 500 passengers to break even.” Indeed, Hawai‘i Superferry executives had said the financial break-even point lay at 50 percent capacity, or 143 cars and 433 passengers, which the Superferry rarely attained.

Lerchbacker said he had suggested a 220-foot vessel, but the company chose the 326-foot model–and then another one of 344 feet.

Still unclear is whether Austal started building the Alakea “on spec” because it was the perfect way to prove its mettle to the military procurement community or because it believed that whatever the Hawai‘i plan’s merit, the ship itself would be attractive to the military. Also opaque is J.F. Lehman & Co.’s financial interest in Austal’s success. Atlantic Marine, which the company purchased recently and has a shipyard that adjoins Austal’s in Mobile, works with steel ships and “has no connection to Austal,” said Tim Colton, a shipping analyst in Florida.

The second kind of military contract that may be involved has to do with what would happen if the Superferries fail in their mission to make money in Hawai‘i or are prevented from operating by the courts.

On Thursday, Superferry CEO Fargo said, “We’re going to have to go out and find other employment for Alakai.” He added, “There are other ferry operations that would like to expand their service. Certainly the military may very well want to lease this particular ship.”

In July, BYM Marine and Maritime News reported, “Austal was recently awarded a new contract to provide additional features and equipment on the second Hawaii Superferry to facilitate its use by the military. This follows on from the long-term charter, since 2001, of the Austal-built 308-foot vehicle-passenger catamaran WestPac Express by the III Marine Expeditionary Force based on Okinawa, Japan.”

Pfister, the Austal vice-president, sidestepped in an e-mail exchange the question of whether a contract had been signed with the military to lease the Huakai. He explained that modification in question is a ramp that allows the ship to discharge cargo pretty much anywhere. It’s not usually used in civilian service because it’s heavy and cuts the number of cars by about 20 to 25, he wrote.

Lori Abe, a spokeswoman for Hawai‘i Superferry, said the ramp was added for use in the Big Island and that BYM is wrong.

Loren Thompson of the Lexington Institute in Arlington, Va., said leasing the superferries to the military would be difficult to pull off. “Leasing military equipment is not popular in Congress,” he said. Another analyst, who asked to remain anonymous, added: “Tolerance for leasing rather than buying ran out. Another lease now could be a hard sell.”

But Colton, the analyst, said that if anyone can pull it off, it’s Lehman. The Navy secretary in the entire Reagan administration who famously advocated a 600-ship navy (from about 500) was a major adviser and fund-raiser for John McCain and was seen as his likely his chief of staff. “He’s much better positioned than anyone else to get these boats leased,” Colton said.

While we may never learn what interest Lehman had in helping Austal get the military contracts, the value of the two civilian superferries should soon become apparent.

If Lehman fails to lease them out and stops servicing the loan, the federal maritime administration, the loan’s guarantor, would have to take over the ships and likely sell them to the Navy. That could trigger headlines like “Feds Bail Out Another Well-Connected Fatcat.”

And there would be some irony in Obama’s Navy bailing out one of his most powerful opponents.

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