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That is the end of the quote. Initially water rates, including waterrail and water-motor rates, have been maintained at levels differentially lower than all-rail rates, principally because of the inherent disadvantages in the water services of uncertainty. By that I mean the perils of the sea-slower transit time, and infrequency of sails.

Based on these factors, and the tremendous importance to our shipping public as well as all of the provisions of the Interstate Commerce Act which should be administered and enforced with a view to carrying out the declared national transportation policy, in toto, not in part, it appears necessary that a rate differential or relationship be prescribed by the Commission in order to foster the development and preservation of these coastal and intercoastal water carriers.

In view of the critical condition of these carriers we plead and respectfully request that favorable action be taken by your committee to protect the public interest and our national defense.

The CHAIRMAN. Thank you, Mr. Callahan. You have had a lot of experience, being a shipper. Do you think that as a general policy a company which is a large shipper, expected to stay in business a long time, gets any real benefit out of a temporary reduced rate? Mr. CALLAHAN. No; they do not. Definitely not.

The CHAIRMAN. Thank you very much.

Let the record indicate that Mr. Harry J. Breithaupt, general attorney for the Association of American Railroads, Transportation Building, Washington, D.C., has requested permission to make a statement, which request will be granted, of course.

We will be in recess until 10 o'clock tomorrow morning.

(Whereupon, at 12:30 p.m., the subcommittee was adjourned, to reconvene at 10 a.m., Friday, February 19, 1960.)

DECLINE OF COASTWISE AND INTERCOASTAL

SHIPPING INDUSTRY

FRIDAY, FEBRUARY 19, 1960

U.S. SENATE,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,
SUBCOMMITTEE ON MERCHANT MARINE AND FISHERIES,
Washington, D.C.

The subcommittee was called to order at 10 a.m., in room 5110, New Senate Office Building, Hon. E. L. Bartlett presiding.

Senator BARTLETT. The subcommittee will be in order.

The committee will be glad to hear at this time from Chairman Morse of the Federal Maritime Board.

STATEMENT OF HON. CLARENCE G. MORSE, CHAIRMAN, FEDERAL MARITIME BOARD, WASHINGTON, D.C.

Mr. MORSE. We have a prepared statement which we will read, if it suits your pleasure.

Senator BARTLETT. Surely.

Mr. MORSE. Mr. Chairman, I have long been concerned, and have frequently expressed the Maritime Administration's concern regarding the decline in this country's coastwise and intercoastal shipping industry, particularly the dry-cargo common carrier segment thereof. I am happy, therefore, that your committee deemed the matter to be of such importance as to schedule this hearing.

I shall first discuss the present status of this segment of our U.S.flag merchant fleet vis-a-vis its status immediately prior to World War II.

In total numbers of ships engaged in our deepwater domestic trade excluding the Great Lakes-the fleet today is equal to just 47.8 percent of the active fleet in existence in 1939. There are today a total of 323 ships in the coastwise and intercoastal trade as compared to 675 ships in this activity in 1939. To appreciate the full significance of this decline in our deepwater domestic fleet, I must break down these figures with additional statistics. Of the 675 ships in the trade in 1939, 297 were tankers, whereas today, of the total of 323 ships in the domestic deepwater fleet, 252 are tankers. It is obvious, therefore, that the significant decline in our coastwise and intercoastal shipping industry is in the dry-cargo segment of the fleet. There are just 71 such ships in operation today as compared with 378 which were active in 1939; of the 71, only 61 are exclusively and regularly employed in the domestic trades.

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While I dislike constant reference to merchant marine requirements purely in terms of national defense, I do believe that the significant impact of the figures just cited on our total U.S.-flag ocean shipping capability in time of emergency should not be overlooked in the course of considering the peacetime transportation and economic aspects of this problem.

The 61 regular domestic-service dry-cargo ships referred to are operated by 20 different shipping companies. Eleven of these companies operating 25 of the ships are in the category of "industrial and contract carriers" engaged primarily in the transportation of bulk cargoes. The remaining nine companies constitute the total common carrier segment of our coastwise and intercoastal shipping. These 9 companies operate a total of just 36 ships.

In these days of industrial expansion and booming economic growth, it becomes too obvious that there must be something wrong where our coast wise and intercoastal shipping is concerned.

Let us look at the major problems confronting the U.S, domestic deepwater shipping industry.

The economic problems of the industry date back to the period immediately preceding World War II, but we believe the postwar period is the only one which need be studied. The Maritime Administration made a comprehensive study of this subject in 1955. The conditions prevailing and reflected in the study entitled "A Review of the Coastwise and Intercoastal Shipping Trades" remain essentially unchanged, although the adverse effects of these conditions upon the patient in the case have progressively worsened. The conditions or problems which are basically responsible for the decline in coastwise and intercoastal shipping are

(1) Unsatisfactory ships in operation and the high cost of new ship construction;

(2) Increased labor costs, cargo handling as well as shipboard; and

(3) Freight rate structures.

I have said that these items are basically responsible for the decline in the industry-I believe it could be more appropriately stated that these items have prohibited the attempts to successfully reestablish this segment of our merchant fleet. The order in which I presented these items is not necessarily the order of their significance to the overall problem. I do believe that the Administration's 1955 study, which was made available to this committee, and can again be made available to those who have not seen it, placed a little more emphasis on the increased cost of labor as compounded by unsatisfactory ships and terminal facilities. I suspect, however, that in the testimony which will be presented during this hearing we will find more emphasis placed on the rate structure problem.

The problems of coastwise and intercoastal shipping are most acute in the break-bulk dry-cargo common carrier trades and my discussion will accordingly be directed primarily to this area. While the entire dry-cargo segment of the domestic fleet has suffered constantly from high operating costs and inadequate revenues, the dilemma is most critical for the break-bulk common carrier. The bulk carriers, both liquid and dry, are more efficient in their loading and discharge procedures, are largely under proprietary industrial ownership or charter, and are, accordingly, better able to keep their heads above water.

Briefly, the entire problem stems from World War II when the Government found it necessary to take over all of the ships in the coastal trades to meet the demands for oversea shipping. As a consequence, the inland carriers, principally the railroads, absorbed the domestic traffic formerly carried by sea. Since the war, a few hardy souls have battled tirelessly to reestablish the domestic deepwater common carrier services with Government surplus war-built ships. The war-built ships which were placed in the bulk trades, especially petroleum, have in general proved competitive in the postwar transportation economy. However, those placed in service by the breakbulk operators were the basic dry-cargo ships designed for wartime use in foreign commerce and have turned out to be considerably less successful in recovering the prewar traffic.

As a result, these operators are in a considerably less favorable economic situation than are the bulk carriers. It is in this type of operation that the increased cost of labor has been most damaging. It is in this operation that the cost of handling cargoes alone takes more than a 50-percent bite out of every dollar of revenue. When you add to this the cost of manning the ships and maintaining the equipment, plus normal overhead expenses, it becomes increasingly apparent that the enterprise is not one which assures a fair return of profit.

At this point we must reflect that the increased cost of labor is a natural development in a growing economy and that as long as we maintain healthy economic growth, labor costs will continue to increase. This we cannot escape and there should be no requirement to settle labor costs as long as production remains commensurate. In a free economy this is regarded as a responsibility of labor and management, not Government.

The labor cost factor must, therefore, be contended with, and the answer has to be through construction of improved equipment involving the application of new principles of technology; however, this, in turn, must be accompanied by the application of a realistic rate policy which will assure a fair return on investment. I don't believe that these requirements can be satisfactorily separated, and like the "chicken and the egg," I cannot be sure which comes first. I must frankly state, however, that I for one, assuming that I had or could acquire the necessary financial resources, with or without Government aid, would be disinclined to undertake the financial venture without assurance of sympathetic rate regulation which would make me competitive.

In other words, improved revenues through appropriate rate structure are conducive to capital investment in appropriate equipment which, in turn, will appreciably alleviate the labor cost factor.

New ship construction for domestic dry-cargo operations is confronted by an extremely discouraging financial problem. Our laws require that ships operated in our dometsic trades be built in the United States. However, this requirement is not accompanied by provisions which would alleviate the difficulty of accumulting ship-replacement reserves in order to meet today's high cost of new ships. Since 1947 there have been just two new ships constructed exclusively for the domestic dry-cargo trades. There have been, in addition, seven rather extensive conversions. These constitute a total of just nine major projects undertaken in the past 12 years.

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