Mercer report finds U.S. flag container shipping companies play critical, cost-effective role in U.S. military sealift.

BOSTON--(BUSINESS WIRE)--March 20, 1995--Continued reliance on the U.S. merchant marine is in the best interest of the United States during both peacetime and times of national emergency, according to a recently released report from Mercer Management Consulting Inc.

In a presentation to the Military Sealift Committee last week at Scott Air Force Base in St. Louis, Mercer Vice President John Reeve stated that U.S. flag liner shipping companies play a critical role in the U.S. military sealift strategy and offer cost-effective, technologically advanced services.

According to the Mercer study, the freight rate levels paid by the U.S. Department of Defense (DoD) are comparable and, in some cases, lower than the rates charged to commercial shippers for transport of similar commodities, moving under similar terms and conditions. Additionally, the Mercer report concludes that U.S. liner carriers offer significantly more value than the government could receive from a standard commercial relationship with a foreign carrier.

Mercer Management Consulting was retained as an independent counsel by a group of U.S. liner shipping companies including American Auto Carriers, American President Lines, Crowley Maritime, Farrell Lines, Lykes Lines, and Sea-Land Service. The study was commissioned to objectively examine historical and current data to determine the value the United States derives from the use of the U.S. flag commercial carriers in military sealift, the comparative cost of services provided by these carriers relative to commercial benchmarks, the anticipated costs and risks to the government of using alternative services, and the potential additional value U.S. liner carriers could provide to the DoD through improved partnering with the private sector for certain intermodal logistics services.

"The current cargo preference program provides significant value to the U.S. Department of Defense and the nation," Reeve said, noting that the report recommends improving the current relationship between the DoD and U.S. flag carriers by streamlining and updating the procurement process, and adopting best commercial practices to focus on the value of service delivered, not just price. "Reengineering the way that the DoD and U.S. commercial carriers work together can provide additional value in developing a cost-effective total intermodal logistics system in partnership with the private sector to support the nation's sealift mission," he explained.

Mercer's findings run counter to a recent U.S. DoD report, which claim that using U.S. flag commercial vessels cost taxpayers approximately $194 million more than it would have cost if the military had been free to use foreign carriers. "DoD pays no more to ship U.S. military cargo on U.S. flag vessels than it would pay to ship the same cargoes on foreign flag vessels," Reeve said. Maintaining that the "alleged premium of $194 million does not exist," he reported that the U.S. Department of Defense's analysis was fundamentally flawed in methodology and substance. "After correcting for the misleading averaging of unweighted data, inaccurate and false comparisons, and the arbitrary application of rate differences from one sector to entirely different routes and agreements, it is clear the there is no U.S. flag premium for military preference cargo," he said.

The report also compared the services provided by U.S. commercial carriers to alternative sources such as Effective U.S. Controlled (EUSC) fleet, foreign-controlled foreign-flag vessels, or a fleet of full-time government-controlled vessels, either owned or long-term chartered.

According to Reeve, alternatives to U.S. flag commercial liner shipping companies can be highly risky or very costly. "Neither the current EUSC fleet nor fully foreign flag options provide a pool of maritime labor necessary to operate DoD's reserve fleet of sealift vessels," he said, "and depending on foreign-based companies carries a significant risk in time of war." In addition, Reeve noted there is an incorrect impression that foreign carriers are necessarily cheaper than U.S. carriers. "It has been reported that during the Gulf War the DoD's cost of shipping per ton of cargo on foreign carriers was $174, while the cost per ton on U.S. carriers was $122."

Mercer Management Consulting Inc. is a leading international management consulting firm, serving manufacturing, service, financial, and governmental organizations. Its transportation group counsels senior management on critical issues of strategy and performance across all modes of transport -- rail, water, air, motor carrier, and intermodal -- on a global basis.

CONTACT: Mercer Management Consulting Inc., Lexington, Mass.

Julie Cook, 617/674-3323