Philly Shipyard Foresees a Loss From NSMV Contract

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02-Nov-2023

Norwegian-owned shipbuilder Philly Shipyard says that it will likely lose money on the National Security Multi-Mission Vessel (NSMV) program, the MARAD order for five new training vessels for state maritime academies. 

The NSMV contract was structured as a privately-administered, fixed-price, multi-ship buy. The first-in-class, Empire State, has been delivered to MARAD and to operator SUNY Maritime. The second, third and fourth are in various stages of production, and the fifth will begin production by the end of the year. 

The primary challenge with completing the orders, according to Philly, is a workforce shortage. Like the U.S. Coast Guard and many other employers, Philly is still working its way out of a workforce shortage caused by the COVID-19 pandemic. In particular, the federal contractor vaccine mandate interfered with Philly’s ability to ramp up its workforce as planned. That mandate was in effect until May 2023, when the Biden administration lifted the requirement, but the workforce shortage is still affecting production at the yard. Lingering supply chain problems driven by the pandemic continue to impede operations as well.

To address the labor issue, Philly is boosting the size of its apprenticeship program for shipyard workers, and the most recent group started just this week. The yard is hoping to secure federal funding to expand apprenticeship opportunities and attract more recruits. New apprentice shipfitters have visibility into their future through at least 2027, as Philly has a four-year-long orderbook of eight vessels, and the yard’s management expects to be fully busy for “the foreseeable future.”

Though margins on follow-on vessels in the NSMV series are looking better, Philly expects that NSMV will be a loss-making contract, though its managers are pursuing options to recover some of the unforeseen costs of COVID from the customer and seek penalties and back charges from “certain underperforming subcontractors and suppliers.” Going forward, schedule delays and compression related to the labor and supply-chain issues will continue to affect the program. 

Overall, the yard lost money in the third quarter, and it has lost about $49 million over the course of the year to date, primarily from EBITDA losses. Last year’s losses were smaller during the same period, amounting to about $3.4 million. 

It has a $1.8 billion orderbook, including the last four NSMVs; a rock placement vessel for windfarms; and a series of Panamax container ships for Matson. Looking beyond 2027, Philly says that it likes the NSMV contract design and will look to sign more government orders like it. MARAD’s contract is with TOTE as project manager, and Philly serves as TOTE’s subcontractor. TOTE acts an intermediary between the yard and the federal government, buffering the yard from change orders and protecting the government from lobbying.

Philly is also rumored to be in merger talks with Korean shipbuilder Hanwha Ocean, the parent company of DSEC, a Korean ship design and component supply contractor which serves Philly and other American clients. Philly has not confirmed the discussions. 

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