Young Bros. says an increase is needed due to competition
POSTED: 1:30 a.m. HST, Dec 23, 2010
Young Bros. Ltd., Hawaii's regulated interisland ocean cargo transportation firm, says it needs to raise average rates 24 percent -- the highest increase in at least 30 years.
Young Bros. filed an application yesterday with the state Public Utilities Commission seeking the rate increase, saying it is necessary to provide the company a reasonable profit as cargo volume declines and competition from Pasha Hawaii Transport Lines is expected to soon end the regulated monopoly Young Bros. has held for decades.
A hike is subject to approval by the commission, which often grants increases that are less than what regulated companies seek.
If approved, the increase is expected to take effect in August, and would follow a 13.5 percent rate increase the PUC approved for Young Bros. effective August 2009 based on a 19 percent rate hike request.
Any increase in interisland shipping rates would follow an estimated 10 percent increase Matson Navigation Co. is putting into effect Jan. 2 for shipping cargo between the West Coast and Hawaii, which is an unregulated market.
Mark Teruya, chairman and chief executive officer of Armstrong Produce Ltd., which ships much of its product between islands, said any increase in shipping costs hurts businesses and consumers, given the shape of the economy. But the proposal by Young Bros. would be extra painful in the context of the Matson increase and the previous Young Bros. increase.
"Thirty-seven percent over a few years -- that's kind of huge," he said, referring to the prior and proposed increases by Young Bros.
Mike Jones, president of the local Schuler Division of home builder DR Horton, said companies in many industries will feel the pinch of higher interisland shipping rates. "Everybody's trying to keep their costs down," he said. "Any increase puts a damper on keeping prices low."
Rate increases proposed by Young Bros. vary by commodity. For instance, rates for automobiles, livestock and general cargo in 40-foot containers would rise about 15 percent. Lumber, cement and canoes would cost about 35 percent more to ship.
A pallet of canned soup would cost $68.68 to ship from Honolulu to Kauai, representing an extra $17.80, or 35 percent. The price for shipping 2,000 pounds of cabbage from Maui to Honolulu would rise by $26.49, or 35 percent, to $102.20.
Young Bros. said it needs to raise rates to maintain service and earn a reasonable return on revenue. Under PUC regulation, the company is entitled to a roughly 11 percent rate of return, but actual returns have been around or below 1 percent this year and last year.
Increasing rates by an average 24 percent is projected to raise revenue for Young Bros. next year from an estimated $60 million to $74.4 million, and raise the company's return from 1.23 percent to 14 percent, according to the rate petition.
Roy Catalani, vice president of strategic planning and government affairs, said the company sought to minimize its planned rate increase by factoring in projections for modest volume increases in 2012 and 2013 instead of only a weaker projection for next year. If the rate increase were based only on 2011 projected volume, the requested increase would have been 29 percent.
"Young Bros. is doing what it can to keep costs stable and reasonable," he said, calling the three-year average volume calculation a significant concession on behalf of the company.
The company said its rate request would have been lower, but still necessary, if the PUC hadn't granted approval in September for Pasha to operate a more limited and lucrative service.
Pasha plans to begin transporting cargo between Honolulu, Kahului and Hilo every two weeks. No stops are possible on Molokai or Lanai because the harbors there are too small for Pasha's ship, the Jean Anne. The Jean Anne is limited to carrying cargo that can be driven onto its decks. Livestock and refrigerated cargo won't be carried.
The competitor, which already transports cargo to Hawaii from San Diego, previously said it aimed to begin interisland service by the end of the year. The PUC approved Pasha's rate schedule on Tuesday.
Young Bros. operates 12 weekly shipments to neighbor island ports, and contends that Pasha is cherry-picking more profitable trade segments, which will take away valuable business from Young Bros.
In its rate petition, the company said three-quarters of its requested increase (18 percent) is needed to counter a sharp drop in cargo volume caused by the poor economy since 2008. The other quarter of the proposed rate increase (6 percent) is to counter expected business lost to Pasha.
Without higher rates, Young Bros. said it would have to cut service. "The company is clearly at a point where either rates have to increase or service frequency has to decrease," said Glenn Hong, president. "Our commitment has been to continue providing frequent, reliable service while controlling costs so that we can maintain reasonable rates for our customers."