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Ferry Case Studies 71 additional waiting area for customs, making its passenger waiting space larger than passenger waiting areas in other WSF terminals. Hawaii Superferry Project Quickfacts Operator Service # of # of Annual Annual Fleet Category Routes Vessels Passengers Vehicles Age (years) Hawaii Highway 1 1 Not Not n/a Superferry Ferry operating operating Essential History Inter-island ferry service in Hawaii was not a new idea when the Hawaii Superferry was con- ceived in 2001. A study prepared in 1973, before introduction of the three SeaFlite hydrofoils in 1975, listed 22 studies completed between 1956 and 1970 that addressed the economics of and demand for an inter-island ferry (Department of Planning and Economic Development, State of Hawaii, 1973). The SeaFlite hydrofoils operated from 1975 to 1978, but eventually they were sold due to their unreliability and uncomfortable service during rough weather (Cataluna, December 23, 2005). The 1973 study identified secondary effects associated with inter-island service, including parking and roadway congestion in the vicinity of terminals, impacts to the inter-island cargo market, and social impacts from increased travel and tourism. The study concluded that a com- prehensive approach to ferry planning was needed, as were contingencies to address issues result- ing from changes to interstate travel, impacts to recreational facilities, and redistribution of pop- ulation and economic activity (Department of Planning and Economic Development, State of Hawaii, 1973). An issue that arose during SeaFlite operations, but was not cited in the 1973 study, was concern that the ferries could harm whales. No inter-island ferry service was operating in 2001 when the Hawaii Superferry concept was developed. High-speed ferry service from an Oahu hub with planned connections to the islands of Maui, Kauai, and the Big Island of Hawaii (the Big Island) was seen as a competitive alterna- tive to flying that would also allow vehicular movement between the islands. Organizational Structure Hawaii Superferry, Inc., registered as a corporation with the Hawaii Department of Com- merce and Consumer Affairs in September 2002. Discussion with U.S. DOT's Maritime Admin- istration (MARAD) regarding loan guarantees for vessel financing also started in 2002. Publicity describing the proposed service first appeared in mid 2003. The business model for operations required capture of 7 percent of the inter-island market (1,500 passengers daily) in order to be profitable, with a target of 10 percent of the inter-island market (Natarajan, June 13, 2003). Operational Structure Hawaii Superferry, Inc., registered as a private Hawaiian corporation in 2002. In May 2009, Hawaii Superferry, Inc., declared bankruptcy. Its main assets, the two vessels, were taken into receivership by MARAD.

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72 Guidelines for Ferry Transportation Services Figure 5-14. Hawaii Superferry routes. System/Service Routes Hawaii Superferry, Inc., planned service from an Oahu hub to the islands of Maui, Kauai, and the Big Island. Actual service included one trip to Kauai and a total of 11 months of operations to Maui (see Figure 5-14). A second vessel intended for service to the Big Island was launched in September 2008. However, delivery of the second vessel, targeted for March 2009, was postponed in 2008 due to the uncertain business climate (Pacific Business News, October 28, 2008). Service ended in March 2009, before the second vessel was delivered. The Hawaii Superferry system was designed to compete with, and provide an alternative to, the airline systems as a means of public transport among the Hawaiian Islands. The ferry system was also meant to provide a means for vehicular traffic among the islands and an alternative method for moving high-value freight. In addition, according to the draft environmental impact statement developed for the project by the Hawaii DOT (Department of Transportation, State of Hawaii, 2008), the system was expected to be beneficial to public health and safety by provid- ing superior marine transportation to help with disaster planning and emergencies. Facility and Vessel Maintenance The first ferry, the Alakai, was designed without an onboard vehicle loading ramp, a decision that triggered the need for loading barges for the Oahu, Maui, and Big Island harbors and a ramp on Kauai. It is unclear why the Alakai was built without a vehicle loading ramp, given that a stern load- ing ramp was included in the design of the second vessel, the Huakai, which was intended for ser-

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Ferry Case Studies 73 vice to the Big Island and despite the fact that similar ferries, including the Spirit of Ontario, which visited Hawaii in March 2004, had onboard vehicle loading ramps (Leidemann, March 6, 2004). The Hawaii DOT's original position, as expressed by a spokesman in 2003 and outlined in a May 21, 2004, letter to Hawaii Superferry, Inc., was that the Hawaii DOT was not responsible for providing loading ramps and operational equipment for a private ferry service (Department of Transportation, State of Hawaii, 2008). The Hawaii DOT was concerned that providing loading equipment, which it had not provided for any other harbor users, would set a precedent, open- ing demands for similar equipment. After initial resistance, the Hawaii DOT agreed to build temporary, barge-supported loading ramps, at a cost of $38.5 million to the state. Hawaii Superferry, Inc., told the Hawaii DOT that MARAD, as a term of the loan guarantee, had imposed a June 30, 2005, deadline to settle all envi- ronmental issues (Auditor, State of Hawaii, December 2008). There is no evidence that MARAD had in fact set such a deadline. However, in order to meet the perceived deadline, the Hawaii DOT adopted the $38.5 million system of temporary loading structures in the belief that such a temporary system would be exempt from environmental review. The Hawaii DOT preferred per- manent structures, but under state law, permanent structures automatically require environ- mental review, a process that would not meet the June 30, 2005, deadline. The Hawaii DOT's December 2005 finding that the temporary barges were exempt from environmental review would later be overturned by the Hawaii Supreme Court. The Hawaii Senate, in regular session in April 2005, rejected a bill to provide the Hawaii DOT with $40 million in funding for Superferry-specific harbor improvements. Instead, the monies were appropriated through general obligation bonds of $20 million for each of the fiscal years 2006 and 2007. The Harbor Division of the Hawaii DOT then awarded a $38.5 million contract for construc- tion of barges and ramps in China, which meant that, under the Jones Act provisions, if the barges and ramps were not needed, they could not be reused for shipping purposes in the United States. It is significant that the change in design for the second ferry to include a vehicle loading ramp rendered obsolete the $10 million (of $38.5 million) that the Hawaii DOT spent on infrastruc- ture for the Big Island's Kawaihae Harbor. If both vessels had been built with onboard vehicle loading ramps, the cost of harbor improvements at the four harbors would have been much smaller, and the issue of environmental review triggered by use of state money for a private proj- ect would not have arisen. The vessels were constructed in Mobile, Alabama, at a cost of $95 million. Both the Alakai, used on the Maui service, and the Huakai, intended for Big Island service, have the capacity to carry 866 passengers and 282 compact cars (or 28 trucks and buses plus 65 cars) at 37 knots. The Alakai-- 353 feet long by 78 foot beam (107.7 meters by 23.8 meters) with 12 foot (3.65 meter) draft--has no onboard loading ramp. The Huakai, at 369 feet long (113 meters), is 20 feet longer due to a stern quarter bi-fold vehicle loading ramp designed for a 42-metric-ton truck. (Austal, 2008) Staffing Levels Hawaii Superferry, Inc., had a staff of 308 (Segal, 2007). Founding President and CEO, John Garibaldi, was replaced by Thomas Fargo, who became president and CEO in April 2008. Financial Structure Fares A variable fare schedule with higher rates for summer season and weekend service was used. Promotional $39 one-way fares were also offered in spring 2008 in an attempt to increase rider- ship. Representative fares are provided in Table 5-24.

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74 Guidelines for Ferry Transportation Services Table 5-24. Hawaii Superferry passenger fares. September to June July to August One-way One-way One-way One-way Passenger Car/SUV Passenger Car/SUV Oahu to Maui $42.00 (TTh) $55.00 (TTh) $52.00 (TTh) $59.00 (TTh) $52.00 (FM) $65.00 (FM) $62.00 (FM) $69.00 (FM) Funding Sources Major funding sources for Hawaii Superferry, Inc., included a federally guaranteed loan of $140 million from ABN-AMRO Bank and $71 million in equity financing from J. F. Lehman & Co. (Associated Press, October 29, 2005). Norwest Equity Partners also provided private equity, so that, combined with the equity from J. F. Lehman, $237 million in debt and equity financing was available to Hawaii Superferry, Inc. (Reilly, December 2, 2005). Numerous Hawaii companies invested smaller amounts, including $1 million from Maui Land and Pineapple Company, Inc., and $0.5 million from Grove Farm Kauai (Segal, 2004). A list of Hawaii Superferry's 30 largest creditors and equity security holders appeared in the May 30, 2009, bankruptcy filing. For the ferry service to break even, each vessel had to operate at 50-percent capacity (i.e., on average, carry 433 passengers and 142 cars). However, the service usually operated at well below 50-percent capacity. Ridership in spring 2008 was approximately 25 percent of capacity. Promo- tional fares were offered in the spring and fall of 2008. In July 2008, even though ridership had increased 40 percent over June's ridership to average 390 passengers and 99 vehicles per day, it was still below the break-even point (Pacific Business News, August 4, 2004). The service report- edly carried a total of 250,000 passengers during its 11 months of operation. Planning Issues Environmental and Regulatory Issues The allocation of federal funds for private, project-specific activities such as vessel construc- tion and allocation of state funds for private, project-specific activities such as harbor improve- ments typically would trigger environmental review of the project. The Hawaii DOT's opinion that use of federal and state funds for the Superferry service, a private project, did not require environmental review opened the door to legal challenges. In January 2005, Hawaii Superferry, Inc., signed a loan guarantee from MARAD for $139.7 mil- lion to support securing funds for Austal USA to construct two vessels. Condition X of the MARAD agreement contained preconditions requiring confirmation from Hawaii Superferry, Inc., that no environmental assessment (EA) of harbor improvements would be required before the agreement could be finalized 1 year later (Auditor, State of Hawaii, April 2008). MARAD was concerned that environmental issues could jeopardize port access. MARAD, as a federal agency, could have requested to be the federal lead for an environmen- tal review under the National Environmental Policy Act (NEPA). However, Condition X of the loan guarantee indicated that MARAD was prepared, in effect, to delegate its federal review authority to the state and accept that state environmental findings on harbor improvements alone were sufficient for the project. However, the state was taking the position that state fund- ing for harbor improvements was exempt from environmental review. Given MARAD's delega- tion of its federal review authority to the state, the state's position implied that MARAD accepted that review of the impacts of federal funding for the vessels, outside of harbor improvements, was unnecessary.

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Ferry Case Studies 75 A Sierra Club editorial in the Honolulu Advertiser in March 2005 summarized the issues fac- ing the Hawaii Superferry (Keith, 2005): An Environmental Impact Statement (EIS) is required based on at least four criteria: Use of federal funds ($140 million MARAD loan guarantee). Use of state funds ($38.5 million for project specific harbor improvements). Use of state lands. Use of shoreline area. Impacts to Kahului Harbor in Maui and traffic impacts near the harbor. Transport of invasive species between islands by vehicles. These issues were the basis of a lawsuit filed in Maui in March 2005 by three private groups asserting that an EIS was required. The suit was rejected in August by the Maui Circuit Court, as was a second suit filed in September 2005. However, a third suit, focusing specifically on potential impacts to Kahului Harbor in Maui, filed by the three groups in Maui District Court in January 2006, was found to have merit. This case was heard by the Hawaii Supreme Court, which ruled in August 2007 that the state DOT was incorrect in not requiring an environmen- tal impact assessment for Kahului Harbor improvements, as the DOT did not consider second- ary impacts. The response of Hawaii Superferry, Inc., was to begin ferry operations from Oahu to Kauai and Maui with the Alakai a few days earlier than planned, before the courts could act, and offer a special $5 fare (approximately one-tenth of the planned $52 one-way passenger, $59 one-way vehicle fares). This tactic was not received well in Kauai, where protesters physically delayed the first ferry trip to Kauai and turned back the second trip the next day. Based on a decision by the United States Coast Guard that it would be unable to ensure passenger safety, service to Kauai did not resume. There were no equivalent protests in Maui. In response to the August 23, 2007, Hawaii Supreme Court ruling, the Maui Circuit Court issued an injunction that stopped the Hawaii Superferry service to Maui on September 14, 2007, and ordered preparation of an EIS, which the DOT then started. A government audit of the Hawaii Act 2 legislation and environmental review process for Hawaii Superferry was performed by the Hawaii State Auditor in 2008 (Leidemann, March 6, 2004; Auditor, State of Hawaii, April 2008). Key findings of the Phase I, April 2008 report were the following: Faced with too little time and opposition from Hawaii Superferry, Inc., the state DOT aban- doned efforts to prepare an environmental review of harbor improvements needed to accom- modate the ferry service. Flawed Hawaiian EIS laws and rules allowed the Hawaii DOT to invoke its own exemption list and ignore requests for environmental review. Key findings of the Phase II, December 2008 report were the following: For Hawaii Superferry, Inc., the Hawaii DOT reversed long-standing policy of not providing pier-side equipment for harbor users. Flawed or unclear Hawaiian EIS laws and rules allowed the Hawaii DOT to pay little attention to secondary or cumulative effects. Based on a deadline imposed by Hawaii Superferry, Inc., Hawaii DOT implemented temporary harbor improvements consisting of barges and ramps that were not DOT's preferred solution. The state-funded $38.5 million of harbor improvements have been problematic, with the Maui barge and pier incurring more than $3 million in damages. Fitting the second vessel with a loading ramp eliminated the need for a $10 million barge-and- ramp system built for the Big Island harbor and a $2.5 million ramp for the Kauai harbor.

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76 Guidelines for Ferry Transportation Services If Hawaii Superferry retrofitted the Alakai with a loading ramp, the entire $38.5 million spent on harbor improvements for Hawaii Superferry would have been unnecessary. Legislation on behalf of Hawaii Superferry, Inc., compromised the state's environmental laws and put the interests of a single business before the state's environmental, fiduciary, and pub- lic safety responsibilities. A range of potentially significant environmental issues associated with operations of the Hawaii Superferry were raised by various interested parties. Some of the issues were reflected in the DOT EIS (Pacific Business News, October 28, 2008); however, that document specifically focused on the state harbor improvements rather than on the entire service. The broader range of potential issues included the following: Impacts to harbor cargo-handling capacity, particularly due to displacement of existing oper- ations by the loading barge-ramps. Incremental (cumulative) impacts by ferry operations in addition to proposed cruise ship service. Traffic impacts at the harbors during ferry loading and unloading and cumulative impacts if docking occurred during peak hours or at noon. Impacts to existing recreational activities in harbors. Collision-related impacts to protected species, including whales, dolphins, and sea turtles. Vessel acoustics that could affect whales. Transport of invasive species between islands, either on the wheels of recreational vehicles or through inter-island movement of produce. Air quality impacts from vessel emissions. Impacts to cultural traditions (sites and practices) in the harbor areas including the Pu'ukohola Heiau National Historic Park. The level of political support provided for the Superferry project was strong. In late October 2007, the Governor called a special 5-day legislative session specifically to address the Supreme Court's decision requiring an EA of the Hawaii Superferry operations. During the session, the state senate and state house passed a bill to allow "large-capacity ferry vessels" to operate between ports in Hawaii while an EA (or EIS) was being prepared. On November 5, 2007, the Governor signed the bill into law under the name of Act 2, Second Special Session. Based on the new law, on November 14, 2007, the Maui Second Circuit Court lifted the injunction, allowing ferry oper- ations to restart. On December 13, 2007, Hawaii Superferry, Inc., resumed service to Maui after approximately 1 month of delays to make repairs to the loading barge in Kahului Harbor, Maui. A tug was brought in to assist in holding the loading barge in place during rough weather. However, main- tenance issues continued to impact service--cracks were found in the aluminum rudder and hull on the Alakai. The ferry went in for maintenance in February 2008 and remained out of service for almost 2 months. Service resumed in April. Questions regarding the scale of the service reemerged after service resumed. During the first week of service, the ferry carried 150 to 300 passengers and 40 to 100 vehicles each way (Segal, 2007). Ridership in the spring was approximately 25 percent of vessel capacity, well below the break-even point. Promotional $39 one-way passenger and $55 one-way vehicle fares were offered through June 2008. In July 2008, even though ridership increased 40 percent over June's ridership to an average of 390 passengers and 99 vehicles per day, it was still below the 50-percent break-even point (Pacific Business News, August 4, 2004). In August, discounts to farmers and shippers were offered, and during September and October, promotional $49 one-way passenger fares were again offered (Pacific Business News, August 28, 2008; Pacific Business News, September 5, 2008).

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Ferry Case Studies 77 Meanwhile, in response to Act 2, project opponents in Maui had announced that a new legal challenge would be mounted. This challenge came in February 2008 when the three Maui groups (Sierra Club, Maui Tomorrow, and Kahului Harbor Coalition) presented a case to the Hawaii Supreme Court asserting that the special Act 2 legislation was created for a single private entity, Hawaii Superferry, Inc., and was therefore illegal. In December 2008, the Hawaii Supreme Court heard the legal challenge that the Act 2 law, which was allowing Hawaii Superferry, Inc., to oper- ate while DOT prepared an EIS, was unconstitutional. The lawsuit asserted that the legislature could only act through general laws (in order to avoid sweetheart deals for single entities) and that the state could not make an irrevocable grant of special privileges (Supreme Court of Hawaii, 2009; DePledge, 2008). The court did not indicate a schedule for a ruling. In January 2009, the draft EIS prepared by the DOT addressing direct, secondary, and cumu- lative impacts of harbor improvements was released (Department of Transportation, State of Hawaii, 2008). The report, validating the concerns of project opponents, found that the service would adversely impact cultural resources at the harbors, would result in significant impacts to road traffic in the vicinity of harbors and to natural resources, and would impact recreational activities in the harbors. On March 16, 2009, the Hawaii Supreme Court ruled that the special Act 2 legislation (passed in October 2007 to allow preparation of an EIS while ferry service continued) was unconstitu- tional, as asserted by the plaintiffs. Hawaii Superferry, Inc., stopped operations and made a final trip on March 19, 2009. With no cash flow, Hawaii Superferry, Inc., declared bankruptcy in May, and bankruptcy was granted in June 2009. As part of the bankruptcy settlement, MARAD took possession of both high-speed ferries. It is obvious from this case study that a high level of organized legal opposition to a transporta- tion project, including lawsuits during the planning process, cannot be considered a harbinger of future success. It is not unusual for suits to be filed that challenge the process or findings of a federal or state environmental assessment after it has been prepared. In such cases, if documen- tation is available showing that environmental law and processes have been followed, there is a reasonable chance of a challenge being rejected. Unfortunately, in the case of the Hawaii Super- ferry, not following required environmental review procedures opened the plan to legal chal- lenges that ultimately were upheld. Land Use Issues The system planning for the ferry service did not include public explanation of ridership demand or optimization of vessel size based on predicted demand. A decision was made not to go public with the plans until the feasibility was clear (Lynch, 2003). Continuing reticence to share planning decisions or to initiate environmental review, combined with announcements of federal funding for other harbor improvements, led to a public perception that the ferry service was a private deal developed behind closed doors to support expansion of military activity on the islands (Pacific Business News, January 13, 2004). Public concerns regarding environmental issues emerged quickly, particularly regarding traffic impacts at harbors and the potential for the large, high-speed ferries with a 12-foot draft to hit and kill whales. Hawaii Superferry's decision to use large vessels (107.7 meters long) was reportedly based on the failure of jetfoils in the mid 1970s because they were perceived to be too small to provide com- fortable service during rough weather (DePledge, 2008). Hawaii Superferry, Inc., described a strat- egy to avoid whales in October 2003 (Pendleton, 2003). Skeptics questioned both the practicality of the proposed avoidance procedures and use of unproven whale-detection technology. The concern over whale strikes dominated public dialogue; environmental benefits that the ferry might have generated did not become part of the public debate, mainly because the normal