Investing

Somali Pirates Are Getting Rich: A Look At The Profit Margins

water-lilies9Errol Flynn never had it this good in “Captain Blood”

Being a Somali pirate looks like a profitable business from the outside and it is. The margins are as attractive as those in the software industry.  Microsoft still makes 60% or better margins on its core Windows, business, and server operations. With the risks that the pirates take, they ought to do as well as that.

The New York Times did a piece last year in which it estimated that the pirates would bring in $50 million in 2008. That number will be higher this year, by as much as four times.

Most information on hijacked ships is that the ransom paid to get them back is about $2 million per vessel and crew. In some cases, the pirates actually charge an additional fee for the ships which has been estimated as being as high as $5 million.

Based on 24/7 Wall St.’s evaluation of news reports, the Somali pirates are seizing near one ship per day now. This week, on a single day, they took over four vessels. Even though several large national navies including the US are policing the shipping channels to cut down piracy, the rate at which the pirates can grab prey is picked up fairly fast. The Somali pirates could take over between 80 and 120 vessels this year, and the figure is conservative. That would put their gross revenue as high as $200 million.

The pirates almost certainly pay protection to the head of the Puntland, Mohamud Muse Hirsi. Puntland is the region where most of the large “mother ships” that take the small pirate raiders out to sea, are located. For protection from international intervention on land, senior Puntland officials are probably getting a third of the take, or about $65 million.

The next largest expense is buying and keeping “mother ships” in good working order. The boats are usually trawlers which are, based on photos, about 100 feet long. One or two of these have been sunk by foreign navies, but they do not have to be replaced often. A large trawler built in the 1970s costs about $1 million. A trawler that is ten years old costs closer to $3 million. Some of the trawlers the pirates use were probably seized during their raids. Most research indicates that one out of three attempts by the pirates to hijack a ship succeeds. Covering enough ground to seize 120 vessels a year based on 400 attempts means that the pirates are probably running a dozen mother ships at any one time. The costs to “buy” and maintain those ships is about $3 million each per year, because a trawler that is seized for use and not ransomed is $3 million in revenue not taken in. Mother ship costs are at least $30 million, maybe $36 million. These are not annual costs. For each one sunk, the cost of replacement is $3 million. On a pro forma basis for operations, the cost of mother ships is $6 million.

Each mother ship works with four or five attack vessels, which are not unlike WWII PT boats, but are made of light-weight metal or composite instead of wood. Each of these has to run on two or more turbo diesels which put out 480 HP at 3,000 PRM. These are not engines which are likely to be used on any of the hijacked ships so they are probably one of the largest direct costs the pirates have. If the pirates operate 50 raiding boat it requires 100 engines. These cost as much as $15,000 each, so the cost of these is about $1.5 million. In most cases, they will not need to be replaced every year. The boat themselves are probably less than $50,000 for the 50 shells the total $2.5 million. Once again this is a one-time cost for those that are not sunk or abandoned.

Fuel for these diesels is probably very expensive but a lot of that can be taken from captured ships.

The pirates have to work with crews of mechanics, but their wages are probably modest.

Each mother ship and raider requires high- end GPS, radar and sonar. The best radars available for small ships run about $4,000. High end GSP system cost about $1,500, and sonar systems a little less than $1,000. All of the equipment runs about $400,000 for 12 trawlers and 50 raiders before installation costs. Once again, this is not an annual cost because most of the hardware can be used for several years.

The cost of what are called “extreme weather and marine” satellite phones from one of the two premier global providers, Iridium and GlobalStar, is $1,200 per unit. The cost of calls per minute is $5. Total cost for phones comes to $60,000 based on each team of pirates having two phones, and all of these probably get replaced each year due to damage. Assuming 100 minutes a month per phone and the total cost of airtime is $600,000.

Weapons are one of the largest single costs that Somali pirates have. According to a book on AK-47s from Amazon, the guns cost about $345. That is a total of $173,000 because each of 500 men is armed. The price for 9MM pistols on the black market runs about $200, for a total of $100,000. Browning 50 caliber machine guns are $14,000 each, with at least one per raider and two per mother ship for a total cost of just over $1 million. Rocket propelled grenades which are used in most raids run $3,000 and one is used in each of the 400 hijacking attempts for a total of $1.2 million. Total ammunition costs at $1 per bullet are $250,000.

Food and housing for 500 men and an average of 200 hostages has to be $10 a day, or $2.5 million a year.

Based on annual costs with pro forma calculations for things that have a life of more than a year, the expenses of operating the Somali pirate operation are $79 million. That puts the profit of the operation at over $120 million. It is worth contrasting that to the average income per capita in Somalia which is only about $600.

The pirate business is not going away. It is too profitable.

Douglas A. McIntyre