At the helm of change
New leadership will guide a restructured Port of Virginia facing fierce competition.
- August 28, 2013
Each week, massive cargo ships stocked to capacity with U.S. exports set sail from the Port of Virginia, heading to the Middle East and then Asia. These ships, each almost the width of a football field and slightly longer than the Eiffel Tower is tall, draw up to 49.5 feet of water under their hulls, pushing up against the port’s 50-foot channel depths.
Ships this size are calling on ports up and down the East Coast, but the Port of Virginia, with its deep and unobstructed sea lanes and channels, is the most capable of handling these vessels when fully laden.
Since 2012, Mediterranean Shipping Co.’s Golden Gate Service has called twice at the Port of Virginia in each East Coast journey with these ships, which have a capacity of more than 9,000 TEUs (20-foot equivalent units). Hampton Roads is its second stop on the East Coast, but more importantly, also its last, when the ships load up on U.S. goods before heading back through the Suez Canal to Jeddah, Saudi Arabia, and then on to Asia. Port officials hope this pattern is a sign of things to come — as more shipping lines use Virginia’s deep harbors to handle their first-in or last-out calls on the U.S. East Coast, when their ships are at their fullest.
Fresh off their best-performing fiscal year in history, Virginia Port Authority (VPA) officials are bullish about the port’s future. “I’m really optimistic about not only our competitive advantage but the opportunity to strengthen those advantages over the next five years,” says Rodney Oliver, interim executive director of the VPA. “The 1990s were probably the Port of Virginia’s decade, the 2000s were Savannah, [Ga.]. I think it’s back to the Port of Virginia for the 2010s.”
The Port of Virginia and the international maritime industry are at the helm of change. In the wake of its latest rejection of multibillion-dollar offers to privatize operations, the state-owned port is restructuring, trying to better align the port authority with its longtime operator, Virginia International Terminals (VIT). After a management shakeup and the adoption of a reorganized business model, the next generation of port leadership will navigate it into a new era of international shipping. The VPA board of commissioners could announce a new executive director of the port as soon as September.
During the next few years, trade routes will adjust to the completion of an expanded Panama Canal (scheduled for 2015) and the increased use of these massive vessels in general (deemed “Post-Panamax” because they are too big to fit through the canal today).
Leadership will be crucial as the Port of Virginia fights to retain its advantages as other East Coast ports, most of which serve larger population centers, race to deepen their channels and improve their facilities to capitalize on the changing shipping market. “We realize that other ports are going to dredge to 50 feet of water,” says Oliver. “We’re going to have a new round of advantages that we hope we’ll put in place to continue to differentiate us for years to come.”
A new structure
VPA and VIT are embarking on a new way to do business. In March, for the second time in four years, the VPA board of commissioners chose to stick with VIT over private bidders who had offered billions to run port operations — a move that Fitch Ratings deemed was likely to prevent other major port privatization plans.
VPA, the political subdivision responsible for the state’s port facilities, created VIT as a nonstock, nonprofit corporation to manage Virginia’s consolidated maritime facilities in 1982.
But after the latest round of bids, the VPA’s board of commissioners was interested in more than the status quo. While staying loyal to VIT, they also voted to restructure both organizations, hoping to save money, improve efficiencies and offer a more streamlined message.
“There was a lot of redundancy and duplication,” says Jeffrey Wassmer, a member of the board since 2011 who was elected chairman in July. “We decided this is a real opportunity to reduce costs and to make it a little bit more efficient and more understandable and manageable.”
The restructuring process is expected to take six months to a year to complete, and the board hopes the change will reap $3 million to $6 million in annual savings. The biggest change, says Oliver, who has been interim executive director of the port since the departure of Jerry Bridges last October, will be presenting a unified image as the Port of Virginia, instead of two separate organizations. “What we want our customers and the public to know is that we are all working together as one big entity even though we have two legal entities,” says Oliver. “And that way we can speak with a unified voice, work more closely together to improve customer service and operations, and streamline where we can.”
In legal terms, VIT is slated to become an LLC (limited liability company) after the port receives approval from the Internal Revenue Service and paperwork is filed with the State Corporation Commission.
While each of the organization’s departments will be affected by some of the changes, the restructuring will impact senior management the most because of shifting responsibilities. In addition to Bridges’ departure, longtime VIT CEO Joe Dorto retired this year. The new executive director will oversee both organizations, and the VIT board of directors will serve in an advisory role only.
The reorganization, however, will not mean major layoffs. Buyouts have been offered to some employees but only a handful were expected to accept. Any reduction in force is expected to be accomplished through attrition, according to Oliver.
Not everyone was pleased by the decision to restructure the organizations. Three members of the VIT board of directors resigned after its decision to change operations. One of them, Bill Grace, says VIT’s independence is important because of its relations with labor unions and because its board is outside political decisions. In 2011, Gov. Bob McDonnell replaced 10 of 11 VPA board commissioners because he was disappointed with port performance. A port spokesman says labor relations would not be changed by the new structure because the Hampton Roads Shipping Association handles negotiations.
Meanwhile, the General Assembly’s watchdog, the Joint Legislative Audit and Review Commission (JLARC), is conducting a new study of port operations and Virginia’s competitiveness. A briefing on the report is expected in October. Another JLARC report earlier this year concluded that the port’s operations were fiscally sound and outperformed other East Coast ports during the 2008-09 recession but that VPA and VIT had redundancies, particularly in the areas of human resources and finance.
The new study, according to Delegate S. Chris Jones, R-Suffolk, will provide a more in-depth look. “I felt it was critically important to get direction for reform but also have a study of the operations to see what efficiencies could be achieved that would help the port and the commonwealth,” he says.
A record year in rocky times
Amid turmoil at the port — caused by unsolicited private bids, changes in leadership and the start of the reorganization — its marine terminals had a record-setting year. The Port of Virginia handled 2.165 million TEUs in fiscal year 2013, up 10 percent over the previous year.
Port officials are crediting an increase in discretionary cargo headed to the Midwest and more shipping lines taking advantage of Virginia’s deep channels by loading up Post-Panamax vessels when they visit. In addition, the port has expanded its market reach with rail service to Greensboro, N.C., and increased container traffic moved via rail overall, up 17 percent in fiscal year 2013. “The last 18 months have been an incredible ride for us,” says Oliver. “Post-Panamax vessels are calling with greater frequency, through the Suez Canal, and we are the logical port of choice for discretionary cargo.”
But can this last? Not everyone is optimistic about the port’s future in the race for international freight. Some maritime observers believe it will become more difficult for the Port of Virginia to compete with New York and Savannah, the largest East Coast ports, particularly because Hampton Roads does not have access to a major population center. “Norfolk can’t overcome the natural advantage that New York has in terms of a population center, and as a practical matter, they can’t overcome the advantage Savannah has in terms of warehouses they have and the access to the Southern populations,” says Thomas Finkbiner, senior chairman of Intermodal Transportation Institute at the University of Denver.
Ted Prince, a maritime supply chain consultant and principal of T. Prince and Associates LLC, has a similar assessment. He believes that, as an increasing number of ocean carriers add larger ships to their rotations, they will call on only one or two ports on the East Coast. This happened, Prince says, as these mega-ships started calling on the West Coast. “As vessels got larger, the number of port calls shrank, and the reason is that when you get these big vessels, you only make money when you’re moving,” he says. “The economies of scales are in line-haul, not sitting in ports.”
Virginia will face competition from other ports that want to match or get closer to its 50-foot depth. In anticipation of the Panama Canal expansion, East Coast ports are undergoing major infrastructure projects. Many maritime and logistics experts believe that canal expansion actually will have little effect on East Coast ports, which have used the event to justify spending billions of dollars beefing up facilities. Shipping lines are unlikely to use a route that will take seven or eight days longer through the canal, says Finkbiner of the Intermodal Transportation Institute.
Still, as more of these big ships are added into shipping line rotations, East Coast ports want to take advantage of them. Post-Panamax vessels coming from Southeast Asia, India and the Middle East already are calling on the East Coast through the Suez Canal. That is one reason Virginia’s port officials believe the Panama Canal expansion’s effects will be tempered on the East Coast. Large ships are already calling — well ahead of predictions. “Saying that, a 1 percent shift from the West Coast to the East Coast is significant for the East Coast ports,” says Oliver.
Today, these massive ships make up about 16 percent of the worldwide container fleet but hold 45 percent of the fleet’s capacity, according to Col. Paul Olsen, commander of the Norfolk District for the U.S. Army Corps of Engineers, which maintains the shipping channels approaching the Port of Virginia. “By 2030, they are expected to make up 27 percent of the world’s container fleet, accounting for 62 percent of its capacity,” Olsen told the VPA board of commissioners at its meeting in July.
The Port of Virginia was the first U.S. East Coast port to dredge its channels to 50 feet, but recently the Port of Baltimore established a single 50-foot-draft berth. The Port of New York, which is currently digging its channels to 50 feet, also needs to raise the Bayonne Bridge. Other ports, including Savannah, Charleston, Jacksonville and Miami, all are deepening their harbors to better handle big ships.
Not resting on its laurels
Virginia’s port officials recognize the competition, and they aren’t resting on their laurels. In addition to its restructuring, the Port of Virginia is working on a number of projects, large and small, to remain competitive.
While the port already may have a depth advantage, it wants to go even deeper. The drafts of some of these fully loaded, huge ships are a foot or so from the bottom of the channel. “That’s a little too close for comfort,” says Olsen of the U.S. Army Corps of Engineers. “If you have some wind and some wave action and that ship starts tilting back and forth, you can see how that foot and a half can run out very quickly.”
Virginia is the only port on the East Coast with authorization to dredge to 55 feet, which would require federal funding. The estimated cost would be $150 million to $175 million.
Another project awaiting federal funds is construction of Craney Island in Portsmouth, a future marine terminal that eventually could handle 5 million TEUs once all four phases were built.
Craney Island is a unique expansion opportunity that no other East Coast port has. The Army Corps of Engineers already has built the dikes that will contain the 600-acre foundation forming the base of the terminal. “Most of the initial work is completed,” says Olsen. “The dikes have now come out of the water. The eastward expansion sits a foot or two above water, but we have not seen federal money to take it to the next level.”
So far, federal support remains in question for the $3 billion project. Virginia has contributed $73.9 million so far, while the federal government has spent $31 million. The federal and state governments are supposed to split the cost of the $900 million expansion of the foundation that will eventually hold the terminal.
The port also has begun other initiatives to improve operations, such as updating technology and reworking truck gates at Norfolk International Terminals. In addition, the port authority hopes to be more aggressive in pursuing new business because of a law passed by the General Assembly giving it powers similar to an industrial development authority.
For example, IDAs can make counteroffers in competing for business prospects with states that offer tax breaks. Port officials are exploring how they can best use this new tool, but they believe it could make a big difference in attracting business investments. “Long-term we think it will be very beneficial for the port,” says Oliver. “It can be a game changer in certain situations.”
The port also believes it will benefit from other proposed economic development projects in Virginia, such as construction of the new U.S. Route 460 connecting Hampton Roads with the Petersburg region and megasite developments along U.S. Route 58 in Southern Virginia.
Gaining more federal investment is a key goal for Wassmer, the VPA’s new board chairman. “Of the nine [East Coast] seaports, Virginia ranks number eight for dollars we’re going to get in 2014,” he says. “We really need to make the case for Virginia investment in federal dollars. In a time of tightening money, it doesn’t make sense to get every port to 50 feet.”
Wassmer says port officials have made their goals very visible. “When you drive around Hampton Roads, one of the first things you notice is the cranes,” he says. “When you see the cranes up, that means we’re not doing business. So our goal is to get those cranes down.”
Port officials are hoping not only that their cranes are down, but that they continue reaching farther and farther out to load and unload containers from these massive ships.