Costs and Prices in the Liner Shipping industry

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Costs and Pricesin the Liner Shipping industry
Massimiliano Cozzani 7 Aprile 2005
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We can see todays topics connected to
BUDGET SCHEMES
SCHEDULE With comments on cargo allocations
CONTAINER COSTS With particular emphasis on MR
(Maintenance Repair) Details on container
leasing market and its rules
VESSEL COSTS Details on features of a contract
with a Terminal Operator

• VOYAGE REVENUES
• Well detail its main items such as
• Ocean freight and commercial policies
• Demurrages
• Terminal Handling charges

ADMINISTRATIVE COSTS Starting point to discuss
organizational issues (organigrams)
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In the terms of our initial division, we could
name this section as PURE SOFTWARE
We want to show how a Shipping Line can elaborate
for internal purposes cost and revenue
elements. This can be done showing a typical
provisional budget, prepared in two ways, both
having an economic/financial meaning.
Our aim, anyhow, is to continue elaborating our
picture of Liner Shipping Industry and its
management.
This industry has been long regarded as a poor
one in terms of management accounting the most
common rumour was that even big groups were
dealing with their business thinking to move
cargo around, and opening the cost drawer at
the end of the year, check where they were. In
fact, the number of bankruptcies in the industry,
the very low (by other industries standards)
R.O.I., return on investment, the almost unknown
management techniques, could only prove that the
industry was typical thin one, driven by events,
more than controlling them. In the recent years
the picture has slightly changed, if only due to
the consolidation process which has cut some
inefficient companies from the market, and left
operationalo only those with straight accounts
and procedures. From another point of view the
length of recent negative cycles makes survival
possible to the fittest only. The fittest not
necessarily the biggest.
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REVENUES
BUDGET SCHEME A
Freight
Terminal Charges (Thc)
Demurrages
Slot Hire
Total Voyage Revenues
A
COSTS
Commissions
Brokerage
Rebates
Goods-related port costs
On-carriages
Total Voyage Costs
B
C
1st contribution margin
A - B
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1st contribution margin
C
Land logistics
Load/Discharge empties
Hired containers cost
Owned ctrs equivalent
Total Container costs
D
2nd contribution margin
E
C - D
Ships hire costs
Bunker costs
Ship-related port costs
Damages
Insurances
F
Total Ship Costs
Gross operational margin
E
C - D
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Gross operational margin
E
Contributions
F
Gross Margin net of contributions
General expenses
Net Margin
G
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Total Gross Freight
BUDGET SCHEME B
1
Teus
/teu

Thc
(Carriage /Feeder)
(Rebates)
(Commissions)
(Brokerage)
Net Freight
2
Stevedoring
Shiftings
(Total Stevedoring)
3
Dry Logistics
Reefer Logistics
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(Total Logistics)
F I O
A
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F I O
A
Vessel/cell cost
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(Total Ship cost)
Dry Containers
Reefer Containers
(Total Container costs)
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GROSS PROFIT
B
Demurrages
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Gross Margin
C

• Charter Hire Days
• Off Hire
• Fuel Oil
• Diesel Oil
• Port Costs
• Voyage Sundries
• Claims

Vessel/cell cost
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Some basic clarifications on main items
The FIO (Free in Out) is an important indicator
for Linesdecisions, as it gives us
the rentability of the company (but, more
importantly, of any traffic) before ship costs
and containers, which, in themselves are a given
data. through a specific software, we can arrange
the FIO to be calculated at a much lower and
detailed level, building a Fio x port-pair, in
practice obtaining the rentability of
any combination of our traffics. This figure can
be used to discriminate among traffics to have a
guideline when building a new service to fix
targets or priorities for agencies
The NET FREIGHT is widely regarded to monitor how
the revenues are faring. It gives us the feeling
of the impact of commercial costs allowing us to
win that freight. It is also an indicator to
monitor the respect of Lines logistic
indications in our agents commercial activity.
For Instance, the month following a G.R.I.
(General rate increase) wed expect the net
freight to be higher.If it doesnt happen, this
might be the result of a particular cargo
composition (20/40), especially on those trades
where the freight for a 40 is not exactly the
double than that of a 20.
LOGISTICS include the cost for land and rail
movements of empties. As we remember, there are
constant shifts of empties from one Plus areas
to Minus ones. This includes movements from
port depots to inland platforms to
support Intermodal activities.
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SCHEDULE
The main factors on which it is built are
Service idea, or VISION. This is the first step,
and really it is where the main features of a
successful company can be traced.
Analysis of FLOWS of cargo from main intended
areas of origin to main destinations.
Consequently, decision on the number of PORTS,
expecially when more than one is present in a
determined area/country. The ideal target is to
utilize the slot more than once during the round
voyage.
Preparation of MILEAGE details pertaining to the
involved ports averages for STAY AT PORT
averages for BUNKERING stop(s)
A good schedule should always allow for some
SPARE time especially if the service is meant to
be weekly / fixed day sailing. A too-rigid
schedule has some negative consequences, for any
problem that might arise, from weather
conditions, to engine/ crane breakdowns to port
congestions.
So, the decision on the FREQUENCY
(weekly-fortnightly), is the key one, with
implication on the number of ships to be
utilized. Then, it is a matter of picking the
SIZE apt to your market share targets the SPEED
is closely linked to the latter, too.
.The schedule is the our face on the market, a
point of reference for agents, customers, port
operators, competitors (). Personally, I tend to
monitor mine, and the one of my competition,
checking the DEVIATION, between declared (on
spe- cialized press abd actual (on same press)
sailing dates.
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Having set the schedule, Lines then build CARGO
ALLOCATIONS for all areas ports therein
included. For organizational / acocunting
reasons, it is a common procedure to split the
round voyage in W/B E/B or S/B N/B legs, but
allocations are more specific being created per
p.o.l. / Agent.
Allocations are normally two-fold, distributed by
VOLUME (teu) and WEIGHT (tons). In some cases,
where this can be done, a split per CTR TYPE
(20/40) Is provided as a target, or a limitation
on heavy 20s is attached to the allotment.
In order not to penalize the last ports of
loading, the respect of allocations by previous
ones is a must, especially in tight commercial
peaks. The same ports, viceversa, have to
release space as soon as possible, when they
feel they cannot use theirs in total. It is
evident that the above can be source of daily
negotiations, in which the Line has the final
word. It is helped in this excercise by the
provision of bi-weekly (at least) FORECASTS per
volume / weight / destination, the accuracy of
which, of Course, increases as long as we
approach to the loading date.
With reference to the previous breakdowns, it is
evident that Lines are in a position to modify
the allocations during time, having as a
discriminant the relative FIO per port-pair. When
the occupation factor is high, it is worthwhile
entering the minor details of each single traffic
Maximisation of cargo mix per ctr / weight /
revenue / origin increases in its dimensions as
the size of vessels grows, and it leads to the
creation of YIELD MANAGEMENT tools Which try to
work out the best scenario / configuration given
input conditions.
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Container Maintenance and Repair (MR)
A key function in container management
containers need caring, and break down quite
frequently. This is a typical function
centralized at Head Office level, with direct
contacts with Depots performing the job. The
action process is
authorization
Pictures requested
Surveyors called
Inspection
Estimate
Ctr IN
refusal
The basic rule is to repair the unit WHERE THE
CARGO IS. In fact, it is useless to have It
repaired, say, in Genova, when the empty has to
then shipped to Egypt for loading. It is not only
a matter of tariff the risk is to bear the cost
of a double repair.

• Outsourcing this function happens,but it can be
  considered a proper measure for small
• SLs only. In this event, the contract can be
  fixed as
• an insurance for all types of damages. In this
  case we pay a premium x ctr / day, and
• the SL is not receiving any damage invoice
• - Fleet management fee.There is a fixed fee x
  ctr, but the Line is billed for the damages.

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Generic damages on containers can be described as
CLEANING
VOYAGE (Impact damages)
I.R. (Improper Repairs)
W.T. (Wear and Tear
One general comment only is that in the vast
majority of cases, we see many of those costs
absorbed by the Line. In other words, we try to
minimize costs, but do not try to recover at
least part of them from the market. On the
contrary, we should try to make this a
cost-recovery item you break, you
pay, regardless of side commercial implications,
which we judge to be minimal ones. Strangely
enough, some bad habits on recovery are inversely
related to the standards of the receiving
country it is much more common to get paid, say,
in Venezuela, than in Europe.
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Container Leasing
As we discussed before, the BUY vs. HIRE option
is much a subjective one in the cntr. market the
fact is that even big groups (owners or even
direct box builders) rely heavily on the leasing
companies.
The contract is structured around some standard
items
1) Rate per container / day
2) Minimum length of contract
3) Replacement value (in case of total loss)
4) Yearly depreciation rate () from CSC plate
date
5) Build Down period (if the contract is not
renewed, period to re-deliver the unit at the
same contractual rate)
6) Post Build Down rate (higher, of course)
7) Redelivery schedule Proportioned to Lines
flows / interests
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Container Leasing (typical contracts)
MASTER LEASE In simple words, it allows us take
delivery of the unit from the leasing co.when we
want, and to re-deliver it when we want, at a
FIXED rate, no matter if it has been held for
30 days or 3 years. This great flexibility is
granted at the price of a higher rate x day.
LONG TERM We commit for x years, say five. We
can insert in the contract an Early out
option, with retroactive penalty, but in fact we
choose this contract to have a stable stock for a
certain number of years. In fact, it is most
typical on new-built units, which we intend to
maintain for some time.
FLEXI-LEASE In-between solution much proposed by
Italian leasing companies, not much diffused. We
can commit for 3 years and get a long term rate,
then we are allowed to re-deliver Before, and a
retroactive rate is applied. It gives the
opportunity to escape, should our strategy be
changed in the meantime.
PURCHASE LEASE Long term deal with a Redemption
(riscatto) Option. Lets say that we hire the
unit for Eight years, and eventually can buy the
unit for a symbolic 1 Usd.
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A very common case DIRECT INTERCHANGE It may
happen that a container of ours is loaded by
another Line (mistake at empty depot), or that
our customer asks for some reason (we cancelled a
port, and arrival date cannot be maintained) to
load our full unit with another Line. A direct
interchange can be arranged, after an agreement
among the three involved Parties (2 Lines
Leasing Co.). The Leasing could in fact can
declare that the contracts are not
compatible. There is a fee for that, but the
major drawback is that as Shipping Line we take
in a unit which did not choose / inspect at
conditions we did not want. Therefore, much more
frequently the decision is turned towards the
SUB-LEASE Among Lines, where the Leasing Co. is
not involved. This is allowed in most contracts
(i.e. the no-sub lease clause is not so common).
Logistics for empties include
- Handlings / Lift on-off / Gate in-out at
terminals
- Land or Rail transportation
- Storage costs at terminals.
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Contract with a container terminal a case
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OCEAN FREIGHT
It is important to have this concept well in
mind. Quite often, it is diluted in
freights all-inclusive, together with other
additionals. The risk is lose the grip of the
maritime Side, if not at an accounting level (you
can re-build it) at a commercial level. The ocean
freight as a REFERENCE should be always
maintained. It should always be split at manifest
level, also considering the implications this
has on commissions of all kinds.
Historically, when the Conference system was
prevailing, and door-door concepts were not that
developed, the ocean freight was highly
protected, and a rate division per COMMODITY was
in place. The filing of rates was much
bureaucratic, and the same item could have a huge
number of sub-items the target was
Diversification.
Today the tendency is to F.A.K. (freight all
kind) rates, valid for any commodity. Some
notable exceptions exist, quoted at a discount
TILES-FURNITURE-COFFEE -PAPER-LUMBER-NICKEL, but
this is more the result of the volumes moving
on those trades than a unilateral decision of
Lines. Reefer cargo, still remains at a high
premium, given the relative scarcity of the offer.
As anticipated, looking around, we find many ways
of QUOTING the ocean freight, partly influenced
by the different terms of sale, so that some
other items are added to it. Lets then look at
these typical ADDITIONALS
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Main ADDITIONALS to freight
Bunker Surcharge (Baf)
Congestion Surcharge
Currency Adjustment Factor (Caf)
War Risk Surcharge
Special Equipment Additional
Canal Surcharge
Over Dimension Add. (Dead Slots)
Overweight additional
Dangerous Cargo Addl. (IMO)
ISPS Surcharges Carrier and Terminal
Equipment Imbalance Surcharge (E.I.S.)
Service Charges (Customs/bl fees)
Feeder Additionals Ex/To base ports
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• Ocean freight is the weapon through which
  commercial activity is carried out.
• PRICE DISCRIMINATION is what Shipping Lines
  ordinarily are active in, sometimes
• in an informal way. Lets imagine two scenarios
• Conference
• Free Market

Being that a cartel, which by definition should
control, at least, 70 (seventy) of the market
it covers to have any sense whatsoever, it FIXES
prices. As we said, the big commodity tariffs
have disappeared as are the Service Contract with
direct customers they arranged, which then were
available for utilization by Member Lines. Today
it is the single Lines arranging those for their
own account. Conference can today be defined as a
Stability Forum, where Lines can more or
less control each other and exchange information
on the market trends. They increase rates
(G.R.I. General Rate Increases) and additionals
at regular Intervals, pre-planning the increases
in their yearly budget. In practice, except in
those cases where the demand is bigger than the
offer, this System proves to be inefficient, as
the economic theory of cartels also indicates.
Surely, members of a Conference are there to
stay for some time, and this is one of the key
original reasons for conferences existence that
remain regular service offer to specific named
areas, maintained for a reasonably long period of
time.
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On the real market

• We have PRICE DISCRIMINATION in three basic
  forms
• By Product
• As we mentioned, the typical huge
  conference-style commodity tariffs have gone,
• Replaced by F.A.K. Rates still some efforts to
  differentiate are trid (see above)
• By Area
• A strong willingness exists to offer different
  rates according to the features of the
• specific market in which it is applied. The ship
  is the same, but we tend to resist to
• Equalize, say, Italian and Spanish rates
• By Customer
• In the first place identifying big, medium and
  small accounts
• Secondly, dividing freight forwarders from direct
  shippers/receivers
• Thirdly, size and scope of the company
  permitting, trying to approach customers who
• Only work through Tender Offers, giving us the
  chance to establish strict logistic links.
• By Quantity
• Cumulative discounts, deferred premiums, V.I.P.
  treatment are a way to keep clients

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DEMURRAGES
It is worthwhile reminding the phases of the
discharge of a container
Consignees premises
Vessel
Terminal

• Each movement implies different concepts as as
  far container cost accrual is
• concerned
• Full discharged unit at the terminal
• A STORAGES on terminals side
• B DEMURRAGES on Shipping Lines side
• 2) Full unit moving out of the terminal up to the
  moment when the empty unit is
• delivered back to Lines depot by Consignee
• A DETENTIONS on Shipping Lines side.
• Many Shipping Lines tend to unify their side
  summing up demurrage and detentions
• In a unique demurrage concept, covering the
  UTILIZATION time of the container.

It is a common procedure for Lines to grant a
FREE TIME for demurrages, usually in calendar or
running days, after which period a TARIFF per day
(and ctr type) is levied. In many countries, the
cashing in is in the hands of government bodies
to whom a commission is paid (in a way, revenue
almost guaranteed).
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Demurrages represent a good income for any
shipping line, and rigid policies to try and
avoid too many special deals on free time, or
discount / cancellation of the total demurrage
amount are put in place. In many a country,
customs clearance operations are slow, to say the
least, so that, theorically, a good ground for
free time extension exists. Even so, it is a good
policy to try and separate the various concepts
in a negotiation, trying maybe to work more on
ocean freight value, rather than demurrages What
we already discussed, i.e. the LONGSTANDING
procedure, is one typical sign Of the tight
control on such an item.
Briefly, then
FAC This is the customary commission paid in
some countries to whom books the cargo with a
SL. It is a of the ocean freight only (ranging
from 2.5 to 4). Only iin some particular cases
(tender offers) it can be cancelled, being the
Shipper The one appointing and negotiating with
its forwarder.

• COMMISSION This is the rewards to Lines
  agents, again calculated in of the
• ocean freight.
• In all contracts, due to the different type of
  agencys involvement, it is normally
• higher on export rather than import cargo, and
• higher on direct rather than transhipment cargo.

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• REBATE This is only one name to define the
  reward, most likely unofficial, to the
• booking party, as a way of differentiating it
  from other customers. It can be
• Immediate, payable on a vessel per vessel basis
  
• Deferred, payable after a certain fixed period
  of time (quarterly / yearly).
• The latter can also be used to build particular
  volume incentive schemes (V.I.P.), for
• which payments are different according to the
  final volume range achieved, say
• 0-200 teus x
• 201-500 teus y

The rebate system, as it appears evident, to make
some sense, implies the existence of a tariff
shared among Lines, and in fact it is most
typical of Converence environments. For an
outsider working on the free market, it is
simpler, for both its commercial and accounting
departments to have a NET tariff, without any
rebate to be deducted.
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Terminal Handling Charges (THC)
They are the corrispective charged by SLs to
cover the discharge cost of the units
and Terminal cycle (usually up to free on truck)
as charged by Terminals. The charge takes place
in those ports where the market allows for that.
In those cases, It is the SL absorbing those
costs.
The basic terminal cycle
Truck
Stack area
Quay
Vessel
Rail
1st movement
2nd movement
3rd movement
Movements are important to understand how
differently the cycle is split, in terms
of charge, between the various logistic parties
involved. Different procedures in various ports
mean different local interests towards the
port activity different (higher or lower) status
of shipping lines compared to the local shipping
community.
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In many countries, only the 1st Movement is
charged by the port to the Line, and has some
possibilities to be recovered by the Lines. In
the case of Mexico, for instance, the 1st
Maniobra is surely charged to the Line, but just
a few are in a position to levy a THC. The
remaining two Maniobras are directly handled by
the port authority and billed directly to the
receivers. The local power is so strong and
established, that the receiver pays also in case
of door-door moves, where the Line acts as final
carrier.
In others, for instance East Mediterranean ones,
trade conditions are by definition on a FREE OUT
basis (when discharging), so that the Shipping
Line is not involved in the discharge process,
i.e. it is not billed for stevedoring, and of
course cannot charge any THC.

• This implies a clear LOSS OF CONTROL
• of the land logistic process, both trucking and
  rail (it is not a coincidence that in
• Mexico almost 90 of the traffic is on a
  port/port basis, with land transportation in the
• hands of local companies, on a merchant haulage
  basis
• - of the negotiation with terminals, as they are
  dealt directly by terminal and customers.

This also implies, lets not hide it, FEWER
MARGINS for SLs, as THC represent a good revenue
for any Line wise enough in keeping this concept
as a separate one and not including it in
all-inclusive rates, subject to global
negotiations.
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Planning
Planners make part of the Marine Operations
department, in which operate with a high degree
of autonomy and delegation of responsibilities. Th
eir scope of activity relates to the proper
handling of cargo on board of ships, both from a
technical (marine safety) and commercial (volume
maximization) point of views. We can recap the
main tasks and procedures in which they are
involved
1) SCHEDULE On the basis of the Lines Long Term
Schedule (Master Schedule), which is the
official Document for allinvolved parties, and
after analysing the provisional
loading/discharge Date for each p.o.l., they
prepare the COASTAL schedule, important
operational docu- Ment, which is utilized by
Agents to establish closing dates for
commercial cargo.

• 2) BOOKINGS
• They must consolidate all loading and discharge
  data, and to this purpose they request
• Proper and timely info to pol agents in the form
  of CBR (Consolidated Booking Report),
• Which contains figures on ctr type / weight /
  origin / destination.
• In addition, they require specific formats for
• Dangerous Cargo (IMO)
• Ackward Cargo (Out of gauge)
• Reefer Cargo
• Given the particular status of this cargo on
  board of any ship.

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Imo Cargo This cargo, in particular, deserves lot
of attention in terms of SEGREGATION rules,
of two kinds A Allowable UN classes within a
single container B Segregation among
containers on board of ship. In the former case,
planners can reject the request for that type of
unit, unless changed. In the latter, they can
similarly stop the acquisition of Imo cargo
overall, in order to have safety rules
respected. We show hereunder two tables with
details on segregation.
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3) CONSOLIDATION They consolidate all figures and
coordinate with Line Managers best possible way
to optimize cargo mix, trying to minimize the
number of RESTOWS. Maximising implies also a
coordination with Container Management for the
loading of EMPTIES, up to the maximum allowed,
after loading of full cargo (first
priority). Maximising means of course to load
the ship down to her marks, i.e. to her
maximum permissible draught, either winter,
summer or tropical loadline as the case may be
(see graph), but in the containerized trade this
is not enough, as the cargo mix combination is a
bigger priority. Full and down is a better
jargon to explain this concept. As a matter of
fact, my experience with different planners makes
me think that this job is, true, a much technical
and software-driven one, but 50 of it belongs to
art, as one ship is never preparde the same
way, or with the same degree of efficiency, by
two different persons
4) OTHER DOCUMENTS They give authorization for
C.O.D. (Change of destination) after sailing,
underlying the number of shiftings (1 shifting
two movements) necessary for the operation. They
produce the final BREAKDOWN of vessel, a recap
with all final data, used for both operational
scopes at p.o.d. and for accounting purposes.
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5) TERMINAL OPS. They are entitled to call the
SHIFTS and GANGS on each port of call. This
naturally Implies to have a clear picture of wich
type of volumes we are going to have in that
port, Based on the forecasts we discussed.
Note TRANSHIPMENTS Extensive t/s operations can
only increase the number of variables above
described. First of all, the need arises to
de-centralize the planning functions overseas. In
our case for instance, we decided to install
aplanner in the Caribbean area, in order to cope
with local port needs with a bigger
efficiency. Tasks between two planning offices
involved on the same line are clearly defined,
ports being assigned to one or the other,
according to geographical /accounting
criteria. A typical case of coordination among
planners is when two or more vessels are
on schedule for being at a named port on the same
day. A decision has to be taken on which one is
going to work first (Berthing sequences), in this
case involving also Line Management and
Operations.

• Note BASIC STOWAGE RULES
• - Farthest destinations first
• 20 /heavy units under deck
• 2x20 not stowable over 1x40 (viceversa is
  possible)
• empties on top

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GENERAL BAY PLAN
It will become much easier looking at one of
those, but it is the main document deriving from
the planners activity. It shows a transversal
view of all BAYS (same vision for cargo loaded on
deck) with indication of all details for the
whole of its CELLS. There is a preparation phase,
starting well above the port of call, where
planners can make some loading test it has to be
noted that booking data are still much imprecise
at this stage, especially on the weight side, so
the calculation is rough. STEPS Data are
inserted in a Software, which calculates all the
main necessary technical items such as Stability,
Bending, Draft, Trim, Torsions, Stress, Stacking
and so on. The system also gives the intermediate
steps or simulations of movements as a graph.
The file is sent to the planning office of the
terminal, and loaded for their puposes. The
terminal loads its loading figures, with actual
weights, and give it back. This file is
utilized as a starting condition for the
following port.
Note It is important to remember that it is the
MASTER of the Ship to have the last word on the
acceptance of the plan as proposed by planners.
In fact, considering that software of which ships
are provided is similar to the one in the hands
of planners, counterchecks Have lost a lot of
importance. Still some data can result different,
DRAFT for instance, the thing deriving from
wrong customers weight informations.
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ORGANIGRAMS
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Organigrams Detail 1
Lines Director
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Organigrams Detail 2
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Organigrams Detail 3
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Organigrams Detail 4
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Organigrams Detail 5
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Organigrams Detail 6
Each REGION (or Regional Center) has more or less
the same functions described Above, but with
lower budgeting target. Some big Lines apply the
rule to maximise the CM2 (2nd Margin of
contribution) in Their Regions, i.e. the margin
before ship costs, the latter controlled at Head
Office Level. There we find additional Commercial
Divisions, with a Managing Director,
who Supervises a few Trade Directors, and
corrispondent Trade Managers
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The first container
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What we would not like to see again
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Another side of it
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