Friday, August 28, 2009


Was Hawaii used by Austal to gain military contracts? An interview with Austal CEO provides more info

by Larry Geller

Here’s a snippet from an interview by the website Finance News Network’s Clive Tompkins with Austal Ltd. CEO Bob Browning (8/28/2009):

Clive Tompkins: Given the substantial hit you took to your bottom-line on the Hawaii Super Ferry contract, are you going to change the way you get paid for similar deals?

Bob Browning: Sure, yeah the Hawaii Super Ferry contract really was quite unusual. We were actually helping that company get started and put $30 million of mezzanine debt into the business which then allowed us to contract to build two large catamaran ferries for them. And strategically was important because it allowed us to build our workforce up in Mobile, Alabama which then allowed us to win the Joint High Speed Vessel program which is a very close derivative to that whole forum. So while it was unfortunate that Hawaii Super Ferry filed for Chapter 11, it was an unusual thing that we normally wouldn’t do, but it did position us for a much more lucrative contract with the Navy.

The link includes a video of the interview and a complete transcript.

For those who would interpret this as vindication of the theory that the Hawaii Superferry business was really operated at a loss just to bolster Austal’s position with the Navy, this doesn’t quite do it. “…it did position us for a much more lucrative contract with the Navy” would have held true whether HSF succeeded or failed, of course, and the fact that this helped the company with their military aspirations says nothing about the seriousness of HSF to operate its business as a long-term venture.

Without knowing whether HSF was kept on life support just to boost Austal’s prospects of landing a military contract we cannot derive much from this interview.

Let’s look at a similar case. In 1989 Motorola came to Hawaii to discuss tax breaks and other incentives that might have convinced it to relocate a Mainland plant to the Mililani industrial park. That would have been quite a coup for DBEDT. In the end, Motorola appears to have received a good enough deal from Illinois and stayed there. So can we say that the negotiations with Hawaii were staged simply to squeeze Illinois for a better offer? I had that feeling at the time, but that’s all it was, a feeling, an impression. Without access to internal Motorola conversations, it would be hard to impute intent.

And so it is with this one. The Hawaii Superferry helped Austal get military contracts, and even if it was a strategic decision to do that, this interview doesn’t say that was the sole motivation for supporting HSF with their $30 million.

That the Superferry business appears, from external estimates, to be a money loser, is a far stronger indication that there may have been motives besides profit impinging on this business. While Honolulu can choose to operate a public service such as The Boat at a loss, a private entity usually cannot do that.

This interview falls short of being a “smoking gun.”

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Yeah, you are right, it's not the "smoking gun." But, it is still funny to read the quote from Austal that they would say now to justify their financial performance which they probably would not have said publicly a few months ago. The quote is a good explanation for Austal's actions but JFL still lossed $85 to $90 million which will take a while to make back even if he were to get JHSV and LCS subcontracts, something not verified. Bottom line, HSF did not know how low and inconsistent the ridership was going to be, and they did not expect that the HSC would find a solid argument for striking down Act 2.

There won't be a smoking gun, because it has been Austal stated goal of winning DOD contracts from the outset. Austal USA was set up in 1999 with the goal of winning the LCS contract. Opening a US shipyard was Austal's only hope of tapping into the US defense market. They partnered with Benders Shipbuilding in Mobile to open Austal USA. (They have since bought out Bender's share) They have built nine commercial vessels in the past ten years, including the two HSF, building up and training their workforce even as they pursued the LCS and JHSV contracts. Much has been made of HSF leading to these contracts, however these projects were in the pipeline long before the HSF project came along, and the DOD experience with the Westpac Express in Okinawa probably would have a greater impact on any decisions within the DOD than a short term, aborted experience with a ferry in Hawaii. HSF was a well funded business that ran into the perfect storm of poor execution, fierce local opposition and debilitating legal problems, astronomical fuel prices and a tanking economy. It failed because it turned out to be unsustainable in the long term. The JFL link is curious as well, as the LCS lead contractor is GD owned BIW. If any work was to be performed outside of Austal USA it would go to BIW, not a JFL owned yard. You conspiracy theorists kill me. Sometimes some things just really are the way they look.

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