Mr. DREWRY. Is that a requirement of law? I mean, are the trust territories considered to be part of our domestic trade?

Mr. WESTER. No, the trust territories are considered foreign and are treated as foreign.

Mr. DREWRY. So, technically you would be eligible to receive operating subsidy for that portion of your service?

Mr. WESTER. As I understand the act, that is correct, yes.

Mr. DREWRY. Your replacement, what are you planning to replace the four ships with? Will it be four ships or will it be three, and what

Mr. WESTER. Our plans would necessarily, of course, depend on the cargo volume, but at the present time initially, at least, we would contemplate building three vessels comparable to the Mariners in size and speed, and with those three vessels and their increased speed we estimate that we could maintain a sailing frequency of approximately every 13 days as opposed to our present schedule of 12 days. In other words, no significant change.

We could maintain the same service with these faster vessels.

Mr. DREWRY. And this is, I presume, on the basis of continuing the same type of service to Guam primarily, with services to the trust territories, too?

Mr. WESTER. That is correct.

Mr. DREWRY. And you will seek operating subsidy as well as construction subsidy?

Mr. WESTER. Yes, we would. In fact, it would be required to have both in order to service the trade with the new ships.

Mr. DREWRY. Well, on your present trade route, when you leave the present regulatory provisions of the domestic laws, what regulation would then be in force?

Mr. WESTER. In the event 7028 is passed it would mean that a conference system would undoubtedly be set up with whatever foreignflag operators sought to enter the trade along with those other American-flag operators that are in the trade.

Of course, it does have the effect of withdrawing the rate structure from the complete control of the Federal Maritime Commission which it now has to specify whether the rates are reasonable or not.

Mr. DREWRY. Now, a good portion of your liftings to Guam are military, are they not?

Mr. WESTER. Yes; they are.

On a weight basis, as I indicated, annually there was 60,000 tons of commercial and 37,000 tons of military.

Mr. DREWRY. Are your rates on the military cargoes governed by conference?

Mr. WESTER. The rates on the military cargo are a result of negotiations with the Military Sea Transportation Service, and just to illustrate the savings to the Government under these contract arrangements they have, the average freight rate, say to Guam, military wise, is about $26 a ton, as opposed to about $45 a ton on commercial. It must be borne in mind, however, that the military rates are FIO, and you would have to add something to the $26 rate for the stevedoring costs at both ends.

I do not have all the data as to what it costs the military, but I know they have some very good stevedoring contracts and we had occasion within the last couple of years in negotiating with MSTS wherein a military manifest was individually rated at the commercial rates, and it showed that the military was enjoying a savings of some 30 to 50 percent.

Mr. DREWRY. Does that mean that the military are in a sense responsible for the high rates to the Guamanians?

Mr. WESTER. No, I would not say that, because the same military rate structure prevails to Guam as it does to all the Far East areas. They group the Far East as one area, with the exception of Saigon and Bangkok that have slightly higher rates.

Mr. DREWRY. What is the remaining life expectancy of these vessels that you are operating there now?

Mr. WESTER. Well, that is a difficult thing to answer. However, these ships were built in 1943, and they are now 21 years old. We recently received authority from the Federal Maritime Administration to build a Mariner vessel for our trade route 29, and although we have the authority we understand informally that due to budgetary requirements that the earliest we could expect to be able to contract for this additional vessel would be about the first of January of 1966, which would mean that we would not be able to take delivery until probably 1967 or 1968, and it would appear that the same budgetary requirements would probably be involved in our request here to build three new vessels for the Guam trade and it is conceivable that we might not get these vessels into operation until around 1970, by which time our present vessels will be about 30 years old, and that is getting pretty well along for that type vessel.

Mr. DREWRY. What problems would you have in trying to serve Guam and the trust territories from your regular trade route 29 trade route?

Mr. WESTER. Of course, there is a substantial deviation involved. Guam is sitting right smack out in the middle of the Pacific, and it does not geographically lend itself to any normal trade route, to any of the other areas with the possible exception of Manila. If you were proceeding directly to Manila from San Francisco or the west coast, the deviation via Guam would be not too substantial. However, none of our vessels proceed directly to Manila. A great deal of the tonnage moving into the Philippines has been lost by the U.S.-flag vessels due to various acts of the Philippine Government which have set aside much of their cargo for their own vessels. So, as a result on our trade route we find it necessary to service other areas like Japan and Hong Kong prior to Manila.

Mr. DREWRY. Then, presumably rates would have to be increased still higher if you were to attempt in any way to provide the service with your subsidized vessels?

Mr. WESTER. If you were to take into account the deviation involved as an item of cost it undoubtedly would.

Mr. DREWRY. That is all, Mr. Chairman.

The CHAIRMAN. This is an entirely new subsidization of an existing trade route; is it?

Mr. WESTER. That is correct, sir.
The CHAIRMAN. In its entirety?

Mr. WESTER. That is correct.

The CHAIRMAN. Mr. Tollefson?

Mr. TOLLEFSON. As I understand you to say, Mr. Wester, your operations to the other islands or areas are subsidized?

Mr. WESTER. Not in the mid-Pacific.

Mr. TOLLEFSON. Not in the mid-Pacific?

Mr. WESTER. No, sir.

Mr. TOLLEFSON. Are those other areas served by foreign-flag vessels? Mr. WESTER. They can be.

Mr. TOLLEFSON. From the United States?

Mr. WESTER. No, sir. I do not know of any from the United States. Actually the volume of tonnage moving into these other areas such as Kwajalein and Wake Island represents less than 15 percent of the total tonnage in this particular trade route area.

Mr. TOLLEFSON. Well now, if the foreign flags began servicing Guam, which they apparently would do, are beginning to do, you would be wiped out eventually of much of your Guam trade, then what would happen to the rest of your service to the other islands?

Mr. WESTER. Well, we would hope that under a construction and operating differential subsidy that we would be able to compete with the foreign-flag vessels to Guam and adjacent areas in the same manner that we are successfully competing with them to other areas such as Japan, Philippines, and Hong Kong and so on.

Mr. TOLLEFSON. I do not think I worded my question properly. Suppose we do not enact this bill, foreign-flag vessels will take more and more of the trade to Guam; will they not?

Mr. WESTER. From the Far East points, that is correct. At the present time they are excluded from trading with the United States, but they are bringing in increasingly greater tonnages from Japan, Australia, Hong Kong, and as a matter of fact I have with me one of the Guam papers dated January 19 which has a rather startling ad depicting Toyota automobiles that were brought in from Japan, judging from these pictures these automobiles are one and two deep stretching for better than a block. So right now they are bringing in substantial tonnages from Japan.

Mr. ASHLEY. How much do the cars cost?

Mr. WESTER. I do not have that.

and

Mr. ASHLEY. I think that might possibly bear on why the line is a block long and so deep.

Mr. WESTER. True, they are not as expensive.

Mr. ASHLEY. If they are a thousand or so, we do not produce anything in that price range.

Mr. WESTER. That is correct.

Mr. TOLLEFSON. What I am trying to get at, maybe your concern has been expressed at some other point. But what if we do not enact this bill at all, what is going to happen to your trade at Guam? What is going to happen to you?

Mr. WESTER. As best we can see now, we would continue to operate as long as our ships held out, but obviously somewhere down the road these vessels are going to start to fall apart and then we would be faced with the alternative of either dropping out of the trade completely or seeking to get newer vessels, new vessels to service the trade.

Mr. TOLLEFSON. Well, could you afford to get new vessels to service that trade without construction differential subsidies?

Mr. WESTER. We could not.

Mr. TOLLEFSON. But the day is going to come

Mr. HAGEN. Will you yield at that point?

Mr. TOLLEFSON. Yes.

Mr. HAGEN. American President Lines are also appearing here; do: they also seek this subsidy?

Mr. WESTER. Yes, they do.

Mr. HAGEN. Would they drop out also if it were not granted? Are they in the same position as you are, essentially?

Mr. WESTER. Essentially, except that their vessels are already built and already operating under an operating differential subsidy. They have been and are being built with construction differential subsidy already, so far as I can determine it would not be necessary for them to build new vessels at this juncture to service the trade.

Mr. HAGEN. But the day would eventually come for them, too, when they would have to replace those vessels, too?

Mr. WESTER. I would assume so.

Mr. HAGEN. So as far as you are concerned, 3 or 4 or 5 years, whatever the period is, when your vessels get so old they are not profitable to operate any more, you would have to have new ships and you could not build any without construction subsidy?

Mr. WESTER. That is correct.

Mr. HAGEN. And you would be out of the trade?

Mr. WESTER. That is right.

Mr. HAGEN. For that reason primarily, as far as you are concerned, you are asking for this legislation?

Mr. WESTER. That is the primary reason for it; yes, sir.

Mr. HAGEN. Now, if we pass this bill or approve this bill and it is enacted into law in its present form, then foreign-flag vessels can serve Guam from U.S. ports; can they not?

Mr. WESTER. Yes, they can.

Mr. HAGEN. I think at the last hearing there was some discussion as to that and I think the question was put to Mr. Adams why not give consideration to prohibiting foreign flags from servicing Guam from the U.S. ports? Have you people given consideration to some language that would accomplish that?

Mr. WESTER. Yes, we have. At the last hearing at which Mr. Won Pat appeared, Mr. Adams was asked to come forth with language that would do exactly what you suggest wherein subsidy could be granted on this trade without permitting foreign-flag vessels to enter the trade, and we have this substitute bill language drafted and can supply it to you now.

Mr. TOLLEFSON. Could we take a look at those suggested amendments or that suggested amendment?

The CHAIRMAN. Certainly.

Mr. TOLLEFSON. That is all I have at the moment, Mr. Chairman. The CHAIRMAN. Mr. Ashley?

Mr. ASHLEY. Do I understand that you are interested in securing legislation which will allow your company and others to avail itself of construction and operating differential subsidy and that you also. would like to have language that would prohibit foreign competition?

Mr. WESTER. No, sir; that was not our language. It was not our request. That request was made of us by representatives of this committee. Our statement is directed solely to H.R. 7028 which permits the foreign-flag competition.

In other words, we are not asking for any preferential treatment. However, certain members of the committee felt that it would further hurt our balance-of-payments situation by allowing foreign-flag vessels also to enter the trade from the United States.

Mr. ASHLEY. Is Guam serviced by any other companies other than Pacific Far East and American President Lines?

Mr. WESTER. Recently there has been a service begun by the Pacific Navigation System.

Mr. ASHLEY. I see that Pacific Far East has been averaging about 69,000 tons of commercial traffic from the United States and that in 1963 the total revenue tons, commercial, was 104,000 which would put you about 70 percent of all of the tonnage handled. Is this about right?

Mr. WESTER. That is correct.

Mr. ASHLEY. And the American President, I take it, handles substantially the remainder of it?

Mr. WESTER. Yes, sir.

Mr. ASHLEY. Does your company make money on this at the present time?

Mr. WESTER. At the present time we are making money on the trade. However, there were several years during which time we did not make money in this trade.

Mr. ASHLEY. Why was that?

Mr. WESTER. We lost in 1958, 1959, 1960, 1961, I believe

Mr. ASHLEY. Why was it that you were not making money?

Mr. WESTER. Well, because the tonnage offering for Guam at the time was not sufficient to pay the way to Guam and return, and further that the freight rates needed adjustment and adjustments were made in the freight rates after which we began to make some money in it.

I might add that since we lost money in this Guam trade for about 4 years, one in which we lost $1,400,000; we were advised by the Maritime Administration that we had best do something about getting the trade into balance or conceivably would be requested to drop out of the trade entirely. Well, we took several steps, amongst which was increasing the freight rates and curtailing some of the service that we had offered previously to permit us to come into the black.

Of course, one of the reasons why recently we have been making more money than normally would have been the case is that in November of 1962 Typhoon Karen hit Guam with very destructive force and resulted in considerable damage and there has been quite a lot of reconstruction going on which has boosted the tonnage the last year

or so.

Mr. ASHLEY. But, if your company is making money now at the present rate structure, you are going to continue to on the basis of increased tonnage which will be generated because of the population boom that you describe, so why do you need the subsidy?

Mr. WESTER. Well, the problem arises when our present ships become outmoded, then we are in a position of either building new ships or dropping out of the trade.