A bigger Puget Sound port sails ahead

Tacoma and Seattle are still exploring the issues that would face a formal alliance, but they have every reason to work together.

By Stephen H. Dunphy, December 5, 2014, Crosscut

Over its more than 100-year history, the Port of Seattle has been no stranger to controversy or, for that matter, big ideas. It was born out of a fierce debate over who controlled the waterfront – the people or the railroads. In the 1960s, it took a gamble on the new idea of containerized cargo, setting the stage for future growth. A third runway at Seattle-Tacoma Airport took more than a decade to complete amid a plethora of legal actions.

 

Yet in mid-October, the port acted to end one of its longest running controversies — an at-times bitter competition with the Port of Tacoma, 24 miles to the south. In a ground-breaking move that could be copied by other ports around the world, the two ports agreed to unify the management of marine cargo terminals and related functions at both ports under a single Seaport Alliance.

 

The Alliance concept appears to be moving steadily forward. On Dec. 1, the agreement passed the initial 45-day federal review period with no problems, allowing the ports to now launch a due-diligence process examining the details necessary to form the Alliance. The two ports will now examine business objectives, terminals, financial information, organizational structure, as well as communications and public engagement.

 

But why, after nearly a century of competition, should the two ports more or less suddenly decide to join forces — at least on the waterfront? The answer lies in myriad issues including geography, the use of ever-larger ships, the economy, fuel prices and consolidation among the shipping companies. Simply put: Separately, the ports could no longer compete on the world’s oceans, so their only choice was to stop competing on Puget Sound.

 

“We came up with a solution that was very practical, one that worked for us,” said Clare Petrich, chair of the Port of Tacoma Commission. Courtney Gregoire, co-president with Stephanie Bowman of the Port of Seattle Commission, said the idea worked for both ports’ five-member commissions. “There were 10 commissioners all dedicated to working through it,” Gregoire said. Not lost on many observers was the fact that women head both of the once fiercely-rivalrous commissions. “There is something to that,” said Petrich, “keeping people looking at the goal.”

 

While the action by the commissions seemed to come out of the blue, the idea apparently had been kicked around for some time. Port of Seattle Commissioner Bill Bryant and Petrich talked about it as long as five years ago. Tay Yoshitani, the former Seattle port CEO, also had discussed the idea of a partnership.

 

But Petrich said those ideas were usually in the realm of a merger, a difficult process to accomplish given state law and governance issues. For example, any merger would probably fall prey to the “one man, one vote” rule, meaning King County would dominate any potential merged entity.

 

“It all drove Tacoma crazy,” said Petrich, adding that the governance issue was always the stumbling block. In Tacoma, the port is a major part of the economy — people pay attention to it. In Seattle, it’s different. The port is seen as almost an after-thought behind Boeing, Amazon, etc.

 

One immediate result of the agreement is that, even with the details still under review, the ports have begun working together more directly. In mid-December, a team of executives from both ports will travel to Asia to visit customers in China, Hong Kong, Taiwan and South Korea. It is the first time the two ports have made sales calls on their respective customers together. Two members from each organization will make the trip — John Wolfe, CEO of the Port of Tacoma; Linda Styrk, managing director of the Port of Seattle’s Seaport Division; Petrich and Bowman.

 

Following the due-diligence period, the two port commissions intend to submit to the Federal Maritime Commission a more detailed agreement to form the Seaport Alliance. That could happen around the end of March 2015, according to a statement from both ports.

 

As Petrich alluded to, the Alliance is not a merger. Both ports remain independent, governed by their locally elected commissioners. Seattle-Tacoma International Airport, cruise ship terminals, Fishermen’s Terminal and real-estate holdings remain part of the Port of Seattle. Tacoma’s industrial properties remain part of that port’s operations, and its shipping operations will play a key role as one of the major drivers of the Pierce County economy. The Alliance is essentially a management organization running both marine terminals in a 50-50 partnership between the ports.

 

There is virtually no opposition to the Alliance. Labor, shippers, terminal operators all seem to agree that it is a good move on the part of both ports. Maritime experts and analysts also agree, though they see some shoals ahead.

 

“The common ultimate interests of the port authorities gives Seattle and Tacoma more chance of success than other possible port authority co-operation agreements around the world,” said Neil Davidson, senior analyst at London-based Drewry, a company that specializes in the maritime industry. “Fragmentation of terminal capacity in the two ports will make the task more complex and difficult, though.” He’s referring to the management challenges of having eight different owner/operators of terminals at the two ports, plus labor and other contracts to worry about.

 

The ports acted none too soon. If you want to know why the ports finally decided to cooperate, all you have to do is look at the figures. The combined West Coast market share of both ports has been falling for several years and currently stands at about 11 percent of the shipping along the Pacific Coast, according to Wolfe, down from around 14 percent at its height in the middle of the last decade. The combined ports would still be the third largest container gateway in the nation, behind Los Angeles/Long Beach and New York/New Jersey.

 

Total container volume at the two ports has remained stagnant for a decade, with the only changes the crippling effects of one shipper occasionally moving from one to another. Total TEUs (20-foot equivalent units, the standard measure for ports’ ability to handle containers 20 feet long) were 3.57 million in 2004 and 3.48 million in 2013. Through October, container traffic totaled 2.93 million, which puts the ports on track for another year of about 3.5 million TEUs.

 

Meanwhile in British Columbia, Vancouver and Prince Rupert have been steadily winning overall market share from the two Seattle-Tacoma ports. In 2013, the two B.C. ports had about 3.4 million containers, rivaling Seattle. The provincial and Canadian governments cooperate with the ports, helping them to provide a seamless delivery system from port to the Canadian National Railway to the U.S. Midwest. And Prince Rupert, which did not even exist 20 years ago, can use the same marketing device that helped Puget Sound — it’s a day shorter sailing from Asia.

 

The Canadian ports are cutting into what is called “discretionary traffic”: shipments that are bound for markets elsewhere, and thus have discretion about where to be unloaded. Seattle and Tacoma rely on discretionary traffic for 70 percent of their container volume. So, more than two-thirds of all the cargo that lands on the docks here is bound elsewhere, mostly to the Midwest and beyond.

 

LA/Long Beach, on the other hand, has more than 30 million people within its market, meaning that most of the cargo that lands there stays there. Twenty years ago, Seattle-Tacoma volume was within spitting distance of the big mega ports to the south – about 2.5 million TEUs here to 5.2 million there. Seattle-Tacoma are now at 3.5 million while LA/Long Beach are clost to 15 million TEUs.

 

A number of other factors are influencing the Alliance plan:

 

Geography: Vancouver and Prince Rupert are closer to Asia than Puget Sound is, making them attractive. Meanwhile Panama Canal expansion and improvements on the Suez Canal make those routes increasingly feasible for reaching many U.S. markets.

Fuel prices: They affect big ships as well as our own cars. Just like cars, if you go a bit slower you can save a lot of fuel.  So the big ships were traveling slower anyway, meaning it mattered less where they landed. Also an increasing number of container ships meant that there were more of them on the open sea at any given time, affecting “rotations” through ports and, again, where they stopped.

Consolidation: The major shipping lines are consolidating into a few large mega-shippers. It means there are fewer customers, and more competition for the existing customers. Also, shippers are moving away from leasing their own facilities at ports, a plus for the Alliance. Negotiating new leases would be time consuming for the new Alliance.

Bigger ships: Container ships are now huge. The Mary Maersk is more than 1,300 feet long – that’s about two Space Needles – and can carry up to 18,000 containers. Ten years ago, a big container ship carried about 5,000 containers. There is not a U.S. port that now can handle the big ships.  Seattle or Tacoma would be a good site for a mega-ship terminal, but only one would be feasible. The Alliance likely would make that decision rationally, not based on political rivalries.

Where would a mega terminal go? Two choices are likely — Terminal 3/4 in Tacoma or Terminal 5 in Seattle. Terminal 5 could have the inside track — drive over the West Seattle Bridge and that vacant land you see below you is Terminal 5.

 

So, what’s next and will it succeed?

 

The Alliance will become a reality — there is just too much logic and support behind it for it to fail. Will it resolve the problems? Unlikely. The shipping industry is changing rapidly itself, so much so that ports just don’t know what to do. There is a growing reluctance among ports worldwide to use precious capital on trying to serve the mega ships.

 

At the same time, the economy is changing. Europe is near recession again. China’s growth is slowing. Japan is sinking back into recession. Russia is forecasting a recession in 2015 because of sanctions. The U.S. is the only major economy that is growing, and even here income inequality, sluggish labor markets and a dysfunctional federal government present long-term issues.

 

Port districts came into being in 1911 and today there are about 75 independent, locally run port districts in Washington, more than any other state, according to HistoryLink. And the state’s two biggest ports Seattle and Tacoma are the largest ports in the world with directly elected commissioners.

 

Now an alliance will write a new chapter in the history of ports here: Welcome to the Port of Puget Sound.

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