U.S. NAVY SHIP OVERHAUL MARKET First Update — Changes As Of October 1984
IMA specializes in strategic market planning. Among its more than 60 clients in 18 countries are Allis-Chalmers, Grumman Aerospace, National Intergroup, Ulstein, Mitsubishi, Todd Shipyards, Oppenheimer & Co., Royal Caribbean Cruise Lines and M.A.N.-B&W Diesel.
As one of its services IMA regularly publishes special market surveys. Each survey provides a comprehensive review of a subject with wide, current interest.
Two recent surveys have dealt with the U.S. Navy shipbuilding and ship repair markets. Great expansion in these markets over the past several years has generated much attention.
I MA's most recent report, U.S.
Navy Ship Overhaul Market is available for $480. This price includes a concise 173 page report and subscription to four quarterly updates. Please contact: James R. McCaul, president, International Maritime /4ssociates, Inc., 1800 K Street, N.W., Washington, DC 20006; Telephone: (202) 296-4615; Telex: 64325.
Navy ship maintenance and modernization is a multibillion dollar market. It provides numerous sales opportunities for equipment suppliers, service firms and shipyards.
Last July International Maritime Associates, Inc., of Washington, D.C. published a comprehensive [...] million (2 percent) of the $485 million spent on Navy ship maintenance in the region - Southern California commercial shipyards received $268 million (57 percent) out of $472 million spent by Navy in the Long Beach, San Diego areas - Norfolk area commercial yards received $575 million (48 percent) out of $1.2 billion regional depot maintenance - commercial yards in New England accounted for $125 million (24 percent) of the $519 million spent by Navy for depot level maintenance in the region • homeporting policy of Navy, while a boon to private yards located within the 50 mile "magic circle" radius of large homeports such as Norfolk (123 ships), San Diego (104 ships), and Charleston (68 ships) is "a continuing and agonizing problem to those located outside these areas" • some medium sized shipyards, through widespread use of subcontracting have retained their small business status • access to Navy piers and drydocks has allowed small ship repair businesses to become an artificially competitive force in an already overbuilt repair industry • some small ship repair businesses awarded contracts under set aside provisions act as brokers, subcontracting up to 75 percent of the work • Navy's program of strategic homeport dispersal will not likely affect ship repair prospects until FY 1988, given the site preparation, environmental approval and funding process which must still occur • employment in naval shipyards has increased during the past five years (from 68,300 in FY 1979 to 79,254 in FY 1983), while commercial ship repair yard employment has fallen The full S&I report is contained in Part 7 (pp. 143-175) of the House Appropriations Committee hearings on the FY 1985 defense budget.
Navy addressed these and other issues in Congressional testimony.
Among the recently published Navy comments: • it opposes the recommendation by private shipyards that Navy drop the 70/30 worksplit formula and in place assign certain type ships to naval yards (e.g., only nuclear powered ships) and award all other ships to the private sector - overhauls of some less complex ships are performed in naval yards to retain the capability to overhaul all types of ships if and when required - a rigid ship class allocation policy would be an overly simplistic solution which would reduce Navy's flexibility in workload assignments • a 50/50 worksplit would reduce employment by 30 percent in the naval shipyards and force closure of the Philadelphia and Long Beach naval shipyards • a 60/40 worksplit would allow Philadelphia and Long Beach to continue to operate, but manning requirements at these two yards would be substantially reduced • no reduction in workforce is scheduled for naval shipyards in FY 1985 • review of return costs of overhauls performed on DD-963, FF- 1052, DDG-2, and DDG-37 class ships in the FY 1981-83 programs indicate naval shipyards had a cost advantage over commercial yards (Navy noted there were not many ships involved) • Navy is reevaluating the small business set aside situation as it recognizes the impact of this policy on larger yards • the small business criterion of 1,000 employees is probably too large—something like 500 employees would be more appropriate • $1.56 billion, or 34.1 percent of total FY 1984 depot level program funding was channelled to the private sector - 4 percent was for carrier work - 26.7 percent was for work on submarines and nuclear cruisers - 69.3 percent was for surface ship work • 58.7 percent of ship maintenance performed by commercial shipyards in FY 1984 was accomplished in homeport areas • 54.1 percent of FY 1984 ship maintenance performed by private shipyards was awarded to yards in Norfolk and San Diego • Newport News accounted for nearly 20 percent of ship repair business assigned to the private sector • there is a bow wave in nuclear ship overhauls over the next several years Public/Private Test Competition Navy plans to conduct a competition between naval and commercial shipyards. The purpose of the competition is to have an apples-toapples comparison of cost, quality, schedule and other measures of performance.
Two similar ships will be overhauled—one in a naval yard, the other in a commercial yard.
Navy will monitor the work while in progress. An independent group will be established to review the post overhaul results.
By 1 March 1985 the ships selected for this pilot competition will be designated. Probably two LPD's will be chosen and competition will be on the West Coast. Presumably it will be Long Beach Naval shipyard vs. the successful commercial bidder.
In FY 1987 a similar competition will be held on the East Coast.
It will most likely involve FF-1052 class frigates.
The Senate Appropriations Committee in its report of the FY 1985 defense appropriations bill provided ground rules for this test competition.
"Overhaul competition—The Committee recommends bill language to permit the competition of two or more ship overhauls between the private and Government- owned Navy shipyards.
Traditional practice has been to establish a funding limitation on the value of overhauls to be accomplished in naval shipyards.
This procedure bears little relationship to industrial planning, nor does it provide an incentive for cost efficiency. The proposed test program would examine the prospect of balancing public and private industrial base concerns while yielding economy through competition. The Committee does not intend for the test program to be a permanent conversion of work to the private sector. Consequently, the test should not be subject to the reporting requirements of section 502 of the Fiscal Year 1981 DOD Authorization Act, as amended, or the cost comparison procedures of OMB Circular A-76. Changes in the industrial fund rate structure in the past few years permit an initial baseline for comparison of public to private shipyard costs. Congressional relief from civilian work force ceilings at industrial activities places public shipyards on comparable footing with private sector work force practices.
The recent inclusion of shipyard capital equipment replacement costs in the industrial fund rates conforms to normal business accounting procedures. With some modest adjustments, the naval shipyard cost accounting standards permit the formulation of overhaul price quotations in accordance with competitive bidding procedures.
Bill language provides that the Secretary of the Navy must certify prior to contract award, that the successful bid incorporates comparable estimates of direct and indirect costs for public and private shipyards.
The Secretary of the Navy should report to the Committee on the results of the test and provide an assessment of competition on the public and private shipyard industrial base." Victory Ship Reactivation The House Appropriation Committee added $4.2 million to the defense budget to reactivate and test two Victory ships now in reserve fleet lay-up.
"In testimony before the Committee, the Navy agreed that there is merit in bringing some victory ships out of lay-up and determining their complete status. The Committee believes that the Navy and MarAd would then be better able to tell if the Victory ships are still a viable asset, and, if so, what the mobilization costs and requirements would be. The Navy has estimated that the cost to bring out a single victory ship and restore it to operational test capability is only $2.1 million.
The Committee is therefore recommending the addition of $4.2 million for the Navy to sponsor restoration of two victory ships to operational test capability. The Committee believes that these two ships should be from two different NDRF sites, one on each coast, with the work being bid on a coastwide basis for both ships for completion in private shipyards.
Due to the technical expertise which should be required in this restoration, the Navy should use RFP rather than IFB procedures in order to insure technical qualifications as well as cost realism in the bidding process." Ready Reserve Fleet The House Appropriations Committee added $10 million to fund additional costs to operate and maintain ready reserve fleet (RRF) ships. In preparing its budget Navy anticipated that the ready reserve fleet would consist of 47 ships. The size of the fleet is now expected to be 66 ships within this year.
Navy was also directed by the House appropriations Committee to prepare a plan for dispersing 40 to 50 of the 77 RRF ships projected to be in inventory by 1988. This plan is to be submitted along with the FY 1986 budget request. Additionally, by the end of this year a minimum of six to ten RRF ships are to be relocated to major commercial ports "such as Portland, Mobile and New York City." Homeport Policy House/Senate conferees on defense appropriations directed that Navy terminate its policy of reserving 30 percent of ship overhauls to homeport yards: The conferees agree that current Navy policy with regard to homeport reservation does not recognize that ship maintenance and repair workload has, over the past several years, gradually increased the proportion being accomplished during Selected Restricted Availabilities (SRA) as opposed to during major overhauls.
While this change toward SRAs is beneficial for operational requirements, and is cost-effective, the practice of allocating 100% of SRA workload to homeport areas and also continuing to reserve a minimum of 30% of the ship overhauls for these same homeports ignores the long-term adverse impact on the mobilization capability of critical nonhomeport private shipyards. The conferees therefore agree that the Navy may reserve SRAs for homeport areas, but direct that the reservation of an arbitrary 30% of ship overhauls be terminated.
However, to minimize the disruptive impact on Navy families associated with overhauls, up to 2 overhauls may be reserved for a single homeport during any one fiscal year. Inasmuch as this is an item of congressional interest, no funds are available to deviate from this policy without submission of a prior approval reprogramming to the Committees on Appropriations.
Master Repair Certification Appropriation conferees also directed strong language at ship repairers who rely on performing work alongside Navy piers: The conferees agree that private shipyards without access to non- Navy piers and drydocks are disruptive to Navy operational requirements, contribute little to the industrial mobilization capability of the United States, and should therefore be immediately decertified from receiving further Navy ship repair, alteration, and overhaul work.
2. INDUSTRY ACTIVITY Business continues to be depressed at most U.S. yards. Repair of commercial ships is impacted by the strong dollar. Lack of commercial construction and repair work has focused attention on the Navy overhaul market. Competition for available work is fierce.
Braswell As a result of financial complications with its lending group, Braswell petitioned on 13 August for protection under Chapter XI of the Bankruptcy code. On 15 August the Bankruptcy Court of South Carolina granted Chapter XI protection.
The court at that time made available $4.2 million in operating funds.
The firm is in the process of developing a reorganization plan.
This plan will include phasing down operations in Hoboken and consolidating future New York area work in Bayonne. The firm is actively considering sale of the Hoboken site.
Braswell continues to market its New York/New Jersey area ship repair capabilities. Drydocking for the current Navy contract is to be accomplished in the 1052' Bayonne graving dock. Shops at the Hoboken yard continue to be used.
Todd The firm has announced it will seek an acquisition outside the marine field. It wishes to diversify— not be dependent on the ship repair and Navy construction business.
"This is a high priority objective of the company." Southwest Marine A new floating drydock has been delivered. The dock, built by Kawasaki, is designed as part of a system for lifting ships up to 10,000 tons and transferring them to two land platforms. See July report, p. 28 for schematic of yard layout.
See also, MARITIME REPORTER issue of August 15, 1984.
Pennship A newly formed investor group in Mobile, Alabama is reported to have acquired substantial interest in Paden Inc., the parent company of Pennship. The investor group is headed by Tom Weller, long active in developing industrial real estate.
The Pennship yard occupies 180 acres along the Delaware River.
In September Pennship was awarded a $21 million CPFF contract for phased maintenance of the frigate Patterson (FF-1061).
Continental Maritime of San Francisco Inc.
The firm (formerly San Francisco Welding) has ordered a new floating drydock from GHH Sterkrade. The dock will be 664' long, 142' clear width between wingwalls, and 34' 6" water clearance over keel blocks. Its displacement is 25,000 tons. The new dock will be able to lift CG-47 class cruisers and is planned to be in service 31 May 1985. The dock will be delivered on a heavy lift ship by way of Cape Horn.
In late September Continental Maritime was awarded a $18.0 million contract by the Maritime Administration to convert the President Monroe to an auxiliary crane ship (T-ACS).
Boston Shipyard Corporation The firm had received a $8.5 million contract to overhaul the frigate Connole (FF-1056). This ship overhaul was one of four FF-1052 class frigates originally to be a single package overhaul bid in 1982. Just prior to the bid submission date (10 September 1982) Navy reduced the bid package to two ships and set aside two ships for small business participation. Boston Shipbuilding and General Ship, both small businesses, were each awarded one fri- gate overhaul, ship package.
Work began Bath won the two on the Connole in mid-September. Within two weeks Navy advised Boston Shipyard it was dissatisfied with the quality and speed of work. Navy then terminated the contract. The yard initially refused to allow the ship to be moved. Management is reported to have stated Navy's actions would force the shipyard to close, throwing 500 employees out of work. It is reported that on 29 September 50 workers occupied the frigate, the yard gates were locked, and cranes were placed behind the masts to prevent the ship being moved.
On 2 October Navy moved the ship to a neutral pier. Navy is now studying options on how to complete the overhaul.
Boston Shipyard in late September was also awarded a $5.6 million fixed price contract to overhaul an auxiliary floating drydock (ARD-5).
Coastal Dry Dock In mid-August the firm was awarded a $8.0 fixed price contract to overhaul the frigate W. S. Sims (FF-1059).
Service Engineering Company In late June the firm received a $7.7 million fixed price contract to overhaul the ammunition ship Haleakala (AE-25).
Master Ordnance Repair (MOR) Contractors Three additional firms have been qualified as master ordnance repair contractors: VSE, Norshipco, and NASSCO. This brings the total number of contract holders to eleven.
(See pp. 87-88 of July IMA report for MOR details).
MSC Overhauls Exhibit 2 lists MSC ship overhauls and major repairs contracted since last June.
Navy Overhauls and Restricted Availabilities Navy overhaul and restricted availability contract awards by shipyard since 1982 are shown in Exhibit 3. A revised listing of contract awards will be included in each update to our subscribers.
3. CHANGES IN PROJECTED MARKET Exhibit 4 provides the FY 84-85 surface ship overhaul and restricted availability plan. Asterisks indicate work packages where changes have been announced since the July IMA report.
Navy plans to issue a new FY 85- 86 private sector overhaul plan in November. The next MARITIME REPORTER article and the next IMA quarterly update will report its contents.
Exhibit 5 shows the MSC nucleus fleet overhaul schedule as of September 1984. Asterisks indicate where changes have occurred since the July report. Each quarterly update to our subscribers will report changes which occur.
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