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Liner Shipping Profitability: Determination and Opportunity for Improvement Theodore Prince International Association of Maritime Economists Panama City, Republic of Panama Liner Shipping Today Numerous economic problems Microeconomic Large [reported] losses Larger [unreported] losses?

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liner shipping profitability determination and opportunity for improvement

Liner Shipping Profitability:Determination andOpportunity for Improvement

Theodore Prince

International Association of Maritime Economists

Panama City, Republic of Panama

liner shipping today
Liner Shipping Today
  • Numerous economic problems
    • Microeconomic
      • Large [reported] losses
      • Larger [unreported] losses?
      • Overcapacity from rush to investment
    • Macroeconomic
      • Deflation
      • Debt overhang
      • Possible trade war

Airline and telecommunication

industries serve as example

importance of liner shipping
Importance of Liner Shipping
  • Significance to public policy
    • Structural support of economy
    • Supports global trade
    • Provides foreign exchange
    • Represents significant investment
    • Major employer

Potential liner shipping company failure poses potentially great public policy risk

the accounting challenge
The Accounting Challenge
  • Is accounting adequate?
    • Systems are antiquated
      • Arcane accounting methods
      • Legacy financial systems
    • Regulatory change affects methodology
      • From rate-of-return utility
      • To deregulated freedom
    • Complex transactions
      • Multinational scope
      • Extensive vertical integration

Accounting issues invite public policy

consideration and

further research

know not raise your costs

Loaded Containers Shorthaul

Vessel

Loaded Containers Longhaul

Loaded Containers Commercial Zone

Loaded Containers Storedoor

Terminal

Empty Containers Shorthaul

Empty Containers Longhaul

Empty Containers Intra-terminal

Equipment

Empty Containers Leasing On-Hire

Empty Containers Leasing Off-Hire

Inland Transportation

Empty Chassis Shorthaul

Empty Chassis Longhaul

Empty Chassis Intra-terminal

Agency

Empty Chassis Leasing On-Hire

Empty Chassis Leasing Off-Hire

Know (Not Raise) Your Costs

Trucking

More cost accounting codes is not the solution

really know your costs

Shipment #1

Shipment #2

Shipment #3

Shipment #4

Shipment #5

Shipment #6

Shipment #7

Shipment #8

Shipment #9

Vessel

Terminal

Equipment

Inland Transportation

Agency

Really Know Your Costs

Costs need to be accumulated

across all costs – by individual move

death by average cost
Death by Average Cost

Average cost continues to increase

Volume drops as moves

below average cost are

lost to competitors

Average cost pricing is guarantee for disaster

death by average cost8
Death by Average Cost
  • Network economics not understood
    • Scale:
      • Higher volume
      • Lower unit costs
    • Scope
      • Serve everywhere
    • Density
      • Often confused
      • Applicable to relevant network arcs

Economies can be

diminishing – or they

can become diseconomies

(e.g., Post-Panamax vessels)

understand routing options
Understand Routing Options

Lowest

Vessel

No

Feeder

Lowest

Inland

Lowest

Overall

Lowest overall cost may not be selected because

it is not a stated – or understood -- objective

understand cost allocation

Cost Basis

Allocation Subjectivity

Commercial feeder

Variable

None

Space charter or alliance

Variable/Joint

Low

Linehaul used as feeder

Joint/Fixed

Medium

Linehaul

Fixed

High

Understand Cost Allocation

True nature of costs may be misunderstood – or misstated

understand equipment cost

Load #1

Load #2

Load #3

Ocean Freight

$3,500

$2,500

$3,000

Days to Devan

40

20

60

Per Diem

$0

$0

$2,000

Revenue

$3,500

$2,500

$5,000

Revenue/Day*

$44

$42

$50

Understand Equipment Cost

Highest

Revenue

Fastest

Devan

Highest

Yield

* Plus 40 Days Origin and Ocean

Highest overall yield may not be recognized because

it is not a stated – or understood -- objective

price service specifically
Price Service Specifically

Bad

Business

Breakeven

Business

Good

Business

Pricing needs to tie to individual routing

the lure of logistics
The Lure of Logistics
  • “Value-add” not a guaranteed success
    • Same challenges as liner business
      • Competitive pricing
      • High IT requirements
      • Qualified salesforce
      • Multicultural issues
      • Global competitors already established
    • Issues
      • Distraction from core business
      • Squanders scarce capital
      • Bad accounting – bad decisions

Eventually, just another commodity business –

with a high price of entry?

maximize profit not revenue

Load/Load

Load/Empty

Import Revenue

$3000

$3000

Export Revenue

$600

$0

Additional expense

$800

$0

Total Contribution

$2800

$3000

Roundtrip days

180

60

Annual roundtrips

2

6

Annual contribution

$5,600

$18,000

Maximize Profit Not Revenue

Highest

Revenue

Highest

Profit

How valuable is that customer – really?

vertical integration
Vertical Integration

Yesterday

Today

Assets

Customer wanted assurance of steamship line providing own vessels, containers and terminals

Customer wants assurance of time-definite delivery. Alliances obviate need for using own asset.

Terminal Subsidiaries

Profit centers that could attract business from unaffiliated lines

Cost centers competing against companies that offer core competency

Has the business case for owning terminals changed?

vertical integration issues

Issue

Implications

Capital

May be consuming large (but unrecognized) amounts of capital

Balance sheet

May require significant off balance sheet guarantees that can no longer be hidden

Taxes

May be paying too much locally or violating transfer cost rules

Management focus

May distract from core business – or hide fact that there are cheaper alternatives

Transaction costs

May require extensive transaction costs to justify “arms-length” existence

True profit center

May not be one because internal negotiations affected by political influence

Vertical Integration Issues
organizational structure
Organizational Structure

Operations

Commercial

Time to review the

traditional thinking?

Before

Steamship Agency

Today

Own Organization

Possible?

Steamship Agency

Own Organization

Low cost

support

Focus on

customer

the accounting challenge18
The Accounting Challenge
  • The research agenda
    • Accounting theory
    • Role of information technology
    • Business process reengineering
    • Government regulation
    • Impact of financial markets
    • Asset-based network-operating realities

Research needs are great and urgency is high

track c overview

Track COverview

Theodore Prince

International Association of Maritime Economists

Panama City, Republic of Panama

a recent ad
A Recent Ad

1996: ERP

1998: CRM

2000: SCM

2002: S.O.S.

Chasing technology initiatives has

not delivered satisfactory results

Source: PTC advertisement

the lure of logistics21
The Lure of Logistics
  • Outgrowth of financial reengineering
    • The transition
      • Traffic Manager: minimize carrier expense
      • Logistics Manager: maximize profit
    • The impact
      • Income statement improvement
      • Balance sheet reduction
    • “Soft” skill sets
the alchemy of logistics
The Alchemy of Logistics
  • Today’s “reality”
    • Customers will
      • Always pay less
      • To receive more
    • Transportation deflation is real
the limits of logistics
The Limits of Logistics
  • Ultimately freight must move
    • Carriers that are
      • Asset-based
      • Network-operating
    • Networks
      • Arcs (liner, rail, truck)
      • Nodes (ports and terminals)
    • Our focus
      • How the nodes function and interface with the arcs
transportation improvement
Transportation Improvement

Innovation has decreased transit

time and improved reliability

the us experience
The US Experience

International trade and US

intermodal have grown together

but the future is daunting
But the Future is Daunting

Volume through San Pedro ports

Is expected to triple in 20 years

Source: ACTA

change is constant
Supply Chain 1992

Bought in Shenzen

Truck to Hong Kong for consolidation

Ocean transport Hong Kong to Long Beach

Marine to rail transfer

Intact ISO intermodal to New York

Sold in New York

Supply Chain 2002

Bought in Shenzen

Shenzen factory pack

Ocean transport Yantian to Long Beach

Trucked to LA distribution center

Deconsolidation and reconsolidation

Domestic intermodal to New York

Sold in New York

Change is Constant
the san pedro dilemma
The San Pedro Dilemma

79%

19%

123%

Larger vessels have had disproportionate effect

asset life dilemma
Asset Life Dilemma

Alameda Corridor was $2.4 billion project to handle

longhaul (>1500 miles) intermodal, but it may need to

address shorthaul (<200 miles) market.

Can physical life > economic life?

challenges are many
Supply

Network design and implementation

Infrastructure investment and maintenance

Intermodal connectivity

Productivity improvement

Financial viability

Environmental mandates

Demand

Supply chain innovation

Customer requirements

Impact of globalization

Increasing trade growth

Frequency of change

Financial viability

Environmental mandates

Challenges are Many

Track C has many interesting topics to discuss