First Ruling Not Good For Jones Act Operators

Implications: A surprisingly quick, but predictable ruling by a Federal judge has created significant uncertainties for many Jones Act operators. 

Analysis: The Federal judge hearing the SCA's suit against the USCG has ordered the agency to revoke the Jones Act privileges of the Seacor Holdings (NYSE:CKH) vessel Seabulk Trader.  The vessel was converted to a double-hulled tanker in a Chinese shipyard.  A similar lawsuit against a Matson Navigation (Nasdaq:ALEX) conversion has yet to be ruled on.

The language contained in the Jones Act would appear to allow very little room for operators to repair the vessels outside of the US.  Despite the plain reading of the law, interpretations by the USCG have led to rampant abuse by Jones Act companies.  While Seacor and Matson are facing the immediate consequences, other operators are at risk.

Should the SCA choose to target normal dry dock activities under the same premise, numerous other companies would face similar consequences.  As the Jones Act fleet has aged, it has become increasingly common to perform repairs overseas entailing significant repairs and alterations to vessels.  When viewed in part  or in whole, these activities fall in line with the Judges interpretation of Jones Act restrictions.

An appeal is certain, though a legal victory is unlikely in this case.  The problem is the plain language of the law and an overreliance on the administrative interpretation by the USCG.  However, it is equally unlikely that a mass expulsion of Jones Act vessels will result.  Congress retains the power to restore trading privileges, which would be the most likely outcome if wholesale expulsions threaten.

The longer-term impact is that planned conversions by US Shipping Partners (NYSE:USS) and others have just hit a fatal snag.  Should the SCA expand their focus, the limitation to dry dock vessels domestically will severely hit some operators, such as Horizon Lines (NYSE:HRZ).