After turbulence, Port of Virginia improves bottom line and efficiency
After six years of operating losses and turbulence in its executive office and boardroom, things are starting to look up at the Port of Virginia. The East Coast’s third-busiest port moved a record 2.3 million containers in 2013 and operating losses have dropped.
But state and port officials admit that financial sustainability is still far off and will require long-term, deliberate solutions to bolster one of the state’s most important economic assets. “We can’t do quick fixes,” says Virginia Secretary of Transportation Aubrey Layne. “When we put a fix in place, we want to make sure it’s the right thing to do for the long term — not just knee-jerk reflexes.”
Solving the troubled port’s finances was John R. Reinhart’s top priority when he took over as CEO and executive director at the Virginia Port Authority last February. Six months on the job, and Reinhart is well on the way to achieving that objective. The former CEO of Maersk Line Ltd. quickly tackled the challenge of reining in the port’s operating losses, which totaled $137 million over the last six fiscal years, according to Gov. Terry McAuliffe’s administration. In his first “State of the Port” address shortly after taking over the helm, Reinhart pulled no punches, noting, “We’ve got to stop the bleeding.”
So far, it looks like the wound has been partly stitched. To keep the port on pace with the surge of cargo coming through its Hampton Roads marine terminals, Reinhart accelerated plans to overhaul terminal systems to move cargo faster, created a task force to address issues raised by motor carriers and renegotiated incentives with rail carriers — all while the VPA endured an overhaul of its board of commissioners and integrated functions with those of its operating arm, Virginia International Terminals.
Reinhart is getting high marks from state officials and board members, who are applauding his efforts to improve port operations. In January, the month before he came on board, the port was operating at a “burn rate,” or operating loss, of $71,437 per day. That had been reduced to a loss of $7,205 per day in the port’s fiscal fourth quarter. The operating loss for the fiscal year that ended June 30 was $17.1 million — $6 million less than had been predicted in January. The port’s fourth-quarter loss was the smallest in the last seven years.And while the bottom line improved, the port had handled a record-setting 2.3 million-plus containers during the year.
“Right off the bat, John was able to bring leadership and coordinated effort to the port,” says Layne, noting that under Reinhart, the port was able to halt its $2 million monthly operating losses. “He was able to make the hard decisions and arrest that precipitous decline and get hold of finances through leadership and operating fixes.”
One fix renegotiated incentives offered to rail carriers, a move Layne wholeheartedly supports. “Railroads are very important to the port,” he notes. “I don’t blame them if the port and previous management gave incentives, but it’s pretty obvious we were losing money on every train car that they loaded.”
Rail incentives bore a particularly large hole in the port’s budget since handling the freight led to overtime labor and lease costs. The incentives were put in place to bolster rail traffic, which ultimately led to more overtime pay for workers handling the additional cargo.
Reinhart renegotiated some of the leases and allowed others to lapse, Layne adds. “We’ll work on incentives that make economic sense, not just drive throughput. If we’re running the port efficiently, people will want to bring goods here.”
To further improve port performance, in April McAuliffe removed five of the 11 appointed members of the VPA’s board of commissioners before their terms expired. The overhaul came less than three years after former Gov. Bob McDonnell replaced 10 members of the board when the port recorded its third consecutive year of operating losses. McAuliffe brought back one of those members, Northern Virginia attorney and former state Transportation Secretary John Milliken, who reclaimed his chairman’s gavel.
“I’m delighted to have the opportunity to come back and take a role down here again,” says Milliken, who had served as board chairman for a decade before McDonnell removed him.
“Do I feel excited and challenged? Absolutely, but there’s no pressure.”
Other new McAuliffe appointees include former state Del. Alan Diamonstein and TowneBank CEO Robert Aston, a member of the VIT board that was dissolved when it merged with VPA. The new board hit the ground running, approving a breakeven budget for the 2015 fiscal year and supporting Reinhart’s efforts to shore up the port’s operations. “John Reinhart has been spectacular. He’s brought a burst of energy and a sense of urgency,” Milliken says. “I give the prior board full credit for selecting him. Our job is to push [Reinhart] on the operating side because we’ve committed to the governor to run a port that’s self-sustaining.”
The previous board, according to Layne, had become encumbered by a lack of direction and ineffective port leadership, which ultimately impacted its performance. “The board had taken its eye off its real charge for being a good policy board for arguably the commonwealth’s most significant economic asset.” The new board, he adds, is focused on making the port a strong economic generator for its customers, Hampton Roads and the state. “We’ve got a long ways to go but at least we’re headed in the right direction.”
The goal now is to achieve financial stability while determining the best way to handle the record volume of containers moving through the port. “The purpose of the port is job creation and economic development,” Milliken says, adding that the biggest short-term barrier is reaching optimal operating capacity of 85 to 90 percent. “We don’t want to be a drain on anybody.”
High cargo volumes passing through the East Coast’s deepest channel have stretched capacity, choking terminal operations. (see chart) “We’ve just come off our heaviest volume year in history,” Milliken notes. “In some ways, that’s a curse as well as a blessing. We weren’t organizationally set up to handle it effectively, and we lost money.”
With volumes expected to continue to grow, the VPA is focused on enlarging facilities, including APM Terminals Virginia. Four years ago, the port authority agreed to lease the Portsmouth terminal from APM North America for 20 years at an approximate annual cost of $50 million, but that agreement could be renegotiated when APM sells the facility to a partnership between infrastructure investor Alinda Capital Partners and British pension fund Universities Superannuation Scheme Ltd.
The deal is expected to go through this fall, and APM Terminals would be renamed Virginia International Gateway. “The VPA has the authority under its lease to double the capacity of the existing APM Terminal,” Milliken notes. “We want to do that, but it gets into the question of we’re not sure we want to do that without knowing how long we’ll control it.”
VPA officials met with the buyers before the transaction was announced and see the sale as a positive for the port. “These folks are passive investors and will look to us to help them maximize their investment,” Milliken says, adding that officials look forward to discussing the port’s long-term plans for APM with its new owners. “We made it clear to them that our long-term goal is to own or at least control the APM Terminals. They may be interested in doing a long-term deal with us.”
Layne has advocated renegotiating the port’s lease of APM Terminals and ultimately bringing the facility under the state’s control. “It would be great to control it,” he says. “If we did, we could put money in the facilities. From our perspective, why would we just lease for a few years and turn it over to a competitor?”
If an agreement can’t be reached on the Portsmouth terminal, the port’s backup plan is to fast-track the Craney Island eastward expansion, which would nearly double the port’s marine terminal capacity. “If we can’t use APM, we’ll accelerate Craney Island,” Milliken says. He adds that if the port gains long-term control of APM and expands that facility, the Craney Island expansion will be pushed back from the mid-2020s to the early 2030s.
Meanwhile, the Portsmouth Marine Terminal, which the VPA shuttered in 2011 when container operations were consolidated at APM, reopened in April as a staging facility for Chryslers bound for China and will reopen to container cargo traffic this fall. Between 75,000 and 100,000 containers are expected to pass through PMT annually, relieving the burden at Norfolk International Terminals and APM. “We’re operating at greater than optimal capacity at the other two terminals,” Milliken notes. “By shifting business to PMT, we can take some of the pressure off, and it gives us a better bottom line.”
Reinhart and the board also want to expand operational capacity at Norfolk International Terminals (NIT), which handles the largest volume of business at the port. Reinhart has become a constant presence around NIT, where he frequently performs on-site inspections and meets with workers. “He puts on boots, a hard hat and vest and walks up and down the lanes and asks very pointed questions and expects candid answers,” says Joe Harris, media relations manager for the VPA. “He talks with everybody, from the guy who’s the terminal manager down to the couriers and lashing gang.”
Those comments have helped to drive changes at the port, says Milliken. “He’s come back with ideas from talking to people at the terminals.” One conversation led to the creation of the Motor Carrier Task Force after truck drivers, who move about two-thirds of the terminal’s traffic, complained of long wait times and traffic congestion. Composed of truckers, longshoremen, shipping firm representatives and other port constituents, the task force is looking at all phases of terminal operations, from communication with the port authority to the time truckers spend at the port. “If he gets held up at the port, that hinders his ability to make four trips per day,” Milliken says. “NIT’s goal is to have a 60-minute turn time. That allows the trucker to get the level of work he needs to make a livelihood.”
To improve traffic flow, the Port of Virginia is installing automated gates and setting up an appointment system for truck arrivals and departures this fall at NIT. Improvements have also been made in nighttime lighting and in striping and numbering on the trucking lanes at the terminal. Although the port has not met its 60-minute arrival-to-departure goal, “congestion and wait times have improved,” says Milliken. “The trends are all in the right direction.”
NIT’s new terminal operating system is handling the appointments. Installed in June as part of the port’s move to a more modern technology infrastructure, Navis N4 replaced a 25-year-old system that had outlived its usefulness. The N4 software package gives the port a real-time look at the length of time truckers spend at the port, the dwell time of boxes on and off rail, and ship moves per hour.
“It’s a critical component of smoothing out day-to-day operations,” says Harris. “If we look at Tuesday appointments Monday evening, we’re able to better build labor and other needs based on the number of appointments.”
N4 lets port officials set the workload. “We’ve said to John Reinhart, ‘We’re holding you and the staff responsible for efficient operations of the terminal,’” Milliken says. “This system gives them tools they didn’t have before.” Along with the new terminal operating system, NIT added 32 new yard hustlers to support rail operations and will place new GPS systems on straddle carriers, the vehicles that move containers around the terminal. The onboard computer synchronizes moves for drivers, directing them to find specific containers and move them along the most efficient route.
Limiting the number of hourly appointments allows the port to better spread traffic flow throughout the day and take trucks off local roads during rush hours. To that end, the port authority has asked the City of Norfolk to extend the hours trucks can access Hampton Boulevard to better align with NIT times. Under a ban that went into effect in 2007, large trucks are restricted from driving on Hampton Boulevard beginning at 4 p.m., a deadline the port says limits late afternoon appointments. “We’re reaching out to the community to talk about it,” Milliken says. “With the shift to set up appointments and have a more regular flow of traffic into and out of the port, it makes a lot of sense. No trucks after 4 p.m. provides a disadvantage to other Hampton Boulevard traffic whose rush hour is at the time of our 4 o’clock deadline.”
Layne acknowledges that neighborhoods along Hampton Boulevard may be reluctant to support expanding truck hours to 7 p.m., but he adds that the VPA will be upfront with the city. “Anything that involves infrastructure, somebody is not going to be happy, but we strive to be very transparent. Even if you don’t agree, at the least, you’ll know why we’re doing it.”
The goal of the McAuliffe administration, is to make the Port of Virginia the nation’s best. “The directive from the governor is to make sure that this is the best port and to be a good fiscal steward,” says Layne. “We’re doing it correctly and getting a handle on operations and financial data.”