Cooperation agreements in Liner Shipping

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Co-operation agreements in Liner Shipping

• Pierre Cariou
• Lecturer
• University of Nantes
• IUP BFE - Shipping-Trading Institute

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L.S. and Co-operation agreements

• 1.1. General overview

1.2. Pricing agreements in L.S.
1.3. Technical agreements in L.S.
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1.1. General overview

• Mid-19een century steam boat ability to offer
  a scheduled (called liner) service

• Two maritime transportation markets
• Tramping unscheduled services (cab or car
  rental)
• L.S scheduled services (bus or train)

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L.S. characteristics
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Goals to achieve
Shippers want
1) Secure frequency and reliability to their
purposes Stability in space/service quality
2) Stability in prices
Ship-owners want
3) Long run profitability
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Cost considerations
Total Cost (Short run) Fixed Costs
Variables Costs
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Short Run marginal cost pricing
Short Run Price variability (q gt qmax)
Need for excess capacity Space/Quality (1) and
Price stability (2)
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Long Run marginal cost pricing
Long Run Financial losses
Price must be set above the MC to cover fixed
cost
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Destructive competition
Long Run Ship-owners profitability
Short run Min. quality of services Price
variability
IF PERFECT COMPETITION Price Competition
LRMC Solution Allow co-operation between
ship-owners
In ocean commerce, there is no happy medium
between war and peace (Alexander Report, US,
1914)
Maritime conferences finds their origins in the
development of colonial English trade they are
an undesirable but unavoidable consequence of
Liner shipping (Royal Commission on Shipping
Rings, UK, 19O9)
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1.2. Pricing agreements
1875 1st Maritime conference UK -
Britain/Calcutta 1980 350 conferences
Share of Conferences in main maritime East/West
Trade
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Maritime conferences
A group of two or more vessel-operating
carriers which provides international liner
services for the carriage of cargo on particular
route or routes within specified geographical
limits and which have an agreement of which they
operate under uniform or common freight rates and
any other agreed conditions with respect to the
provision of liner services - Unctad
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Main contractual terms of agreement

• Membership Close (UK) versus Open conferences
  (US)
• Common pricing
• Outside competition (possibility to change from
• official tariffs)
• Deferred Rate (with regular shippers) and Dual
  Rate
• System (with exclusive shippers)
• Revenue pools for high value commodities

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Pricing principle - One good
Cost
AVDd
D1
D2
-?
P
?
AVCLR
MCLR
Q
0
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Pricing limits - 2 goods
Price
Airline competition
P2
Internal competition Within Cartel With Outsiders
P1
Tramping competition
Q
0
Charge what the traffic can bear - Evans (1982)
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Pricing system - Maritime freight
1. Conventional break bulk (bag, box) Payment
unit according to the stowing factor
Volume/Weight and kind of commodity
2. Containerised Commodity Box Rate (CBR)
Price is according to the size (20/40/45
feet)/kind of container (dry, liquid, reefer)/
kind of commodity Freight of All Kind (FAK)
Price is according to the size (20/40/45
feet)/kind of container (dry, liquid, reefer)
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Pricing system - Extra cost/rebates
Currency Adjustment Factor (CAF)
Bunker Adjustment Factor (BAF)
Extra length (gt 12 m.) and extra weight (gt 5
tons)
Special equipment (own container or not)
Port cost
Rebates (differed or fidelity)
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Pricing system - Loading/unloading charges
Liner terms or Port Liner Terms Charges (PLTC)

• Conventional
• 3 possibilities for loading and unloading
  (entrance, quay, on board)

• Container
• 9 possibilities for loading and unloading
• Full Container Load/Less than Container Load (4
  combinations)

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Pricing example - conventional goods
3 boxes of cakes from Colon (Panama) / Antwerp
(Belgium) M Unit volume 1.5 x 1.5 x 1 m. W
Weight 480 kg 1. Belgian Francs 0.108 FF 1.DM
3.299 FF
West India Trans-Atlantic Steam Shipping line
conference Members (CGM - France, CSAC - Chile,
DSR - Germany, Hamburg Sud - Germany, Hapag-Lloyd
- Germany, PO Neddloyd - Netherland) Area -
From/to any Northern European Range to South
America Atlantic Section CARICA (p. 1)
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Pricing example - conventional goods
Stowing factor - Payment unit MVolume
3x(1.5x1.5x1) 6.75 m3 WWeight 3x 480 1.44
tons Unit for payment M6.75 m3
WITASS Conference Pricing (abstract, p.6) ALL
SECTIONS (WESTBOUND EASTBOUND) -
EUROPE Commodities LCL (DM) Alimentary
goods 180 W/M Min. 3x
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Pricing example - conventional goods
Local currency FF
Maritime freight (p.6) 195x6,751 316 DM 4 342
FF Min. freight (p.2) 3x300 DM 900 DM
BAF (p. 3) - 5 DM pft 5x1.447.2 DM 23.75 FF
Port costs (p. 3) 715x1.441 023 BF 111.2 FF
Total prices 4 477 FF 683
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Pricing example - containerised goods
Felixstowe (UK) to Maracaibo (Venezuela, p. 2)
Section VENCOL 2 dry containers of fertilisers
(engrais) 40 - 32 tons each (shippers
property) 1. GBP 10.06 FF 1.DM 3.35 FF
UK prices VENCOL SECTION - Westbound -
FCL Felixtowe - La Guaira - Maracaibo
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Pricing example - containerised goods
Local currency FF
Maritime freight (p.5) 2x5 800 11 600 DM 38
860 FF
BAF (p.3) 2x200 400 DM 1 340 FF
Port cost(p.3) 2x85 170 GBP 1 711 FF
Post-haulage (p.2) 2x2250 5100 DM 17 085 FF
Rebates (p. 3) -2x350 700 DM - 2 345 FF
Total prices 56 651 FF 8 715
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Pricing controversy
While it is generally accepted that conferences
charge according to what the traffic can bear,
the expression appears to mean that the lines
charge the maximum possible rate (Evans, 1982)
The most anti-competitive form of market
(Bennathan Walters, 1969)
The liner market presents a case, while not
perfectly contestable is nevertheless reasonably
close to it (Davies, 1989)
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Conclusions
Collective pricing is a consequence of High Fixed
Cost in Liner Shipping

• Collective pricing is a deal between
• less competition (profitability objectives for
  ship-owners)
• more stability in price and service quality
  (international trade)

Common pricing is on commodities 3rd degree and
not 1st degree discrimination(customers)
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1.3. Technical agreements
Technical agreements (without pricing
considerations) to share fixed and operational
costs A consequence of containerisation (Mc
LEAN - 1956) 1st container vessel Almenia (60
teu) 1st consortium agreement Atlantic
Container Line (1966)
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A) Consortium
Main advantages of containerisation

• Simplified vessels and better utilisation of
  space

• increase loading/unloading performances
  (reduced
• transit time)

• reduced damage to cargo (insurance premium)

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Growth in World container trade (Millions TEU)
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Consortium justification

• Increase in ship costs
• Increase in container cost and container
  unbalanced

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Consortium developments (1965-1980)

• Integrated consortium create a new company
  managing capital
• and operational costs and commercial issues
  (Scandutch)

• Ship Consortium managing capital and
  operational costs through
• slots agreement without commercial issues (TRIO)
• Outsiders competition (Evergreen) leads this
  second type of
• consortium to survive (more flexibility)

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B) Strategic alliances (1994-)
Initial motivations for maritime conferences
stabilisation of price, cover fixed cost on a
maritime route
Initial motivations for consortiums Investment in
containerships, share fixed cost on a maritime
route

• Initial motivations for Strategic alliances
• New requirements from shippers
• World-wide services
• Unique co-ordinator

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A world-wide base
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Unique co-ordinator (commercial issues)
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Solution 1. Internal growth
Limits Over-capacity
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Growth of main carriers capacity (1995/2000) -
000 teu
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Solution 2. External growth
Limits Cost for acquisition Profitability
results
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Solution 3. Co-operation (joint-services)
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Alliances and mergers (1995/1999)
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13 Ship-owners-517 vessels on East/West Trade in
1997 (000 teu)
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(No Transcript)
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Strategic Alliances advantages
Quality improvements () Economies of scale ()
Concentration (-)
Horizontal
Are gt - ?
Port Congestion (/-) Higher market power ()
Vertical
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Number of containerships by size in 1990, 1995,
1999
Representative cost of containerships by size in
1997
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Economies of scale for containerships
Economies of density (/teu/day)
Time at sea/ Economies of scale at sea Time at
port/ Diseconomies of scale at sea
Economies of scale (/teu/service)
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Estimation of economies of density on
containerships (/day)
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Economies of scale (/day/teu on Europe/Far East
trade)
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Conclusion

• Collective agreements is an old tradition in
  liner shipping

• Collective agreements imply regulation issues
• Efficiency versus Market Power

• Shippers requirements for door-to-door services
  imply
• co-operations and competition between operators
• (Port operators/Ship-owners, Forwarder/Ship-owners
  )

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For more information
E-mail adress pierre.cariou_at_sc-eco.univ-nantes.fr
Personal web site www.sc-eco.univ-nantes.fr/p
cariou