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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

1.3. Technical agreements in L.S.

1.2. Pricing 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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Tramping Liner ShippingTransportation demand

Number of shippers Few ManyQuantity Big SmallDensity High (weight) Low (volume)Unit Value Low HighRegularity Low High

Transportation supplyContract Vessel (C/P) Goods (Bill of Lading)Vessels Liquid and bulk vessels General CargoFrequency Low High

ImplicationsGoods Liquid and main bulk

commoditiesMinor bulk and general cargo

Services Supply/demand regulation Prior to demandFreight elasticity Low LowMarkets Poor/Rich countries Rich/Rich countries

Share in maritime transport (2000)Tons (est.) 70% 30%Value (est.) 20% 80%

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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Total Cost (Short run)

=

Fixed

Costs

+

Variables

Costs

Voyage FC (Fuel consumption, wages, port dues…)

FC (capital costs, equipment…)

Cost considerations

Port and THC (Terminal Handling Costs)

Administrative costs

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Short Run marginal cost pricing

Short RunPrice variability

(q > qmax)

Q

Cost

qmax0

MCSR

D1

D2

Need for excess capacity:Space/Quality (1)

and Price stability (2)

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Long RunFinancial losses

Q

Cost

0

D1

AVCLR

MCLR

-

Long Run marginal cost pricing

Price must beset above theMC to cover

fixed cost

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Long RunShip-owners profitability

IF PERFECT COMPETITION: Price Competition = LRMCSolution: Allow co-operation between ship-owners

Short runMin. quality of services

Price variability

“In ocean commerce, there is no happy medium between war and peace” (Alexander Report, US, 1914)

Destructive competition

“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

Date Forms Price Technical1875 Maritime conferences X1966 Consortiums X1992 Stability agreement XX1994 Strategic Alliances XX

1875 : 1st Maritime conference UK - Britain/Calcutta1980 : 350 conferences

1978 1997Transpacific 77% 53%Europe/Asie 90% 68%Transatlantic (TACA - 1997) 60% 58%

Share of Conferences in main maritime East/West Trade

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“ 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

Maritime conferences

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• 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

Main contractual terms of agreement

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Q

Cost

0

D1 D2

AVCLR

MCLR

P-

+

Pricing principle - One good

AVDd

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Pricing limits - 2 goods

Price

P1

P2

Q0

Airline competition

Tramping competition

Internal competitionWithin Cartel With Outsiders

“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/Weightand 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 (> 12 m.) and extra weight (> 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 FF1.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, P&O Neddloyd - Netherland)

Area - From/to any Northern European Range to South America Atlantic

Section CARICA (p. 1)

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WITASS Conference Pricing (abstract, p.6)

ALL SECTIONS (WESTBOUND & EASTBOUND) - EUROPE

Commodities LCL (DM)

Alimentary goods 180 W/MMin. 3x

Stowing factor - Payment unit

M=Volume = 3x(1.5x1.5x1) = 6.75 m3W=Weight = 3x 480 = 1.44 tons

Unit for payment : M=6.75 m3

Pricing example - conventional goods

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Pricing example - conventional goods

Local currency FF

Maritime freight (p.6) 195x6,75=1 316 DM 4 342 FFMin. freight (p.2) 3x300 DM = 900 DM

BAF (p. 3) - 5 DM pft 5x1.44=7.2 DM 23.75 FF

Port costs (p. 3) 715x1.44=1 023 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 FF1.DM : 3.35 FF

UK prices : VENCOL SECTION - Westbound - FCL

Felixtowe - La Guaira - Maracaibo

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Local currency FF

Maritime freight (p.5) 2x5 800 = 11 600 DM 38 860 FF

BAF (p.3) 2x200 = 400 DM 1 340 FF

Pricing example - containerised goods

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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“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)

Pricing controversy

“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 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)

Collective pricing is a consequence of High Fixed Costin Liner Shipping

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1.3. Technical agreements

Date Forms Price Technical1875 Maritime conferences X1966 Consortiums X1992 Stability agreement XX1994 Strategic Alliances XX

Technical agreements (without pricing considerations) toshare 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:

• reduced damage to cargo (insurance premium)

• increase loading/unloading performances (reduced transit time)

• Simplified vessels and better utilisation of space

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Growth in World container trade (Millions TEU)

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• Increase in ship costs

• Increase in container cost and container unbalanced

Increase capacity through unit system

Increase in port productivity(quay productivity + indirect system)

Over-capacity

Decrease and Prices harmonisation

(1 to 4 in 19701 to 1.8 in 1985)

Profitability decreasePrice variability

Consortium justification

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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 Strategic alliances

New requirements from shippers:• World-wide services• Unique co-ordinator

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

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Le HavreAntwerp

Singapour

Hong Kong

Yokohama

New York

Norfolk

Los Angeles

Oakland

Europe/Far East

Transatlantic

Transpacific

Panama

A world-wide base

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Unique co-ordinator (commercial issues)

Carrier 1 Carrier 2

Pre-nineties networks

Post-nineties

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Solution 1. Internal growth

Carrier 1 Carrier 2

1 & 2 invest

Limits: Over-capacity

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Growth of main carriers capacity (1995/2000) - 000’ teu

1995 2000 1995-2000Maersk/Sea Land 186 620 +233%Evergreen 182 317 +74%P&O Neddlod 98,9 280 +183%Hanjin/DSR 92,3 240 +160%MSC 89 224 +152%NOL/APL 63,5 207 +226%Cosco 169,6 198 +17%NYK 137 166 +21%MOL 118,2 136 +15%CMA/CGM 46 122 +165%K Line 75,5 112 +48%Hyundai 59,2 102 +72%Hapag Lloyd 71,7 102 +42%OOCL 55,8 101 +81%Yang Ming 60 93 +55%

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Solution 2. External growth

Carrier 2 M or A with carrier 1

Merger & Acquisition

Limits: Cost for acquisition: Profitability results

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Solution 3. Co-operation (joint-services)

Strategic alliances (slot agreements)

Carrier 1 Carrier 2

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Alliances and mergers (1995/1999)

19991995GLOBAL ALLIANCEOOCL (Hong Kong)MOL (Japon)APL (USA)Nedlloyd (Pays-Bas)

GRAND ALLIANCEP&O (UK)Hapag-Lloyd (Allemagne)NYK (Japon)NOL (Singapour)

MAERSK/SEA-LANDMaersk (Danemark)SeaLand (USA)

TRICONDSR-Senator (Allemagne)Cho Yang (Corée du Sud)

NEW WORLD ALLIANCEAPL/NOL (USA/Singapour)MOL (Japon)Hyundai (Corée du Sud) Hyundai

MISC

UASC

Cosco

K Line

Yang Ming

Hanjin

GRAND ALLIANCEP&O/Nedlloyd (UK/Pays-Bas)Hapag-Lloyd (Allemagne)NYK (Japon)MISC (Malaisie)

MAERSK/SEA-LANDMaersk (Danemark)SeaLand (USA)

TRICONHanjin/DSR-Senator (Corée/All.)Cho Yang (Corée du Sud)UASC (Koweit)

Sino-Japonese AllianceCosco (Chine)K Line (Japon)Yang Ming (Taiwan)

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Ship-owners 000'teu1 Maersk/Sea Land 6202 Evergreen 3173 P&O Nedlloyd 2804 Hanjin/DSR 2405 MSC 2246 APL/NOL 2077 Cosco 1988 NYK 1669 CP Ships 141

10 MOL 13611 Zim 13212 CMA/CGM 12213 K Line 11214 Hyundai 10215 Hapag Lloyd 10216 OOCL 10117 Yang Ming 9318 China S. G. 8619 UASC 7420 Wan Hai 70

Alliances 000'evpGlobal Alliance 445Grand Alliance 548Maersk / Sea Land 620Tricon (+ Cho Yang) 314Sino-Japonese All. 403Others 1193

13 Ship-owners-517 vessels on East/West Trade in 1997 (000’ teu)

Global Alliance MOL (Japon) / APL (USA) / OOCL (Hong Kong)Grand Alliance NOL (Singapour) / NYK (Japon) / H-L (Allemagne) / P&O (UK)Maersk / Sea Land Maersk (Danemark) / Sea-Land (USA)Tricon DSR-Senator (All.) / Hanjin (Jap.) / ChoYang (Corée) / UASC (Koweit)Sino-Japonese All. (1998) Cosco (Chine) / K Line (Japon) / Yang Ming (Taiwan)

Europe/Far East Transpacific TransatlanticGlobal Alliance 13% 12% 10%Grand Alliance 23% 18% -

Maersk / Sea Land 12% 15% 24%Tricon 15% 11% 9%

Sino-Japonese All. 12% 0% -Autres 25% 44% 57%

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Europe/Extrême Orient Transpacifique Transatlantique

Global Alliance Grand Alliance Maersk / Sea Land Tricon Sino-Japonese All. Autres

Source : Cariou et Alphaliner (2000)

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Strategic Alliances advantages

Horizontal Quality improvements (+)

Economies of scale (+)

Concentration (-)

VerticalPort Congestion (+/-)

Higher market power (+)

Are + > - ?

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Number of containerships by size in 1990, 1995, 1999

Representative cost of containerships by size in 1997

1990 1995 1999 90-95 95-993250 - 4249 63 151 217 + 88 + 664250 et + 5 43 138 + 38 + 95

Panamax of 3 500 teu Post Panamax of 7 000 teuCapital costsCrewI & MTotal Fixed cost

18 8861 7146 000

26 600

31 4771 714

10 00043 191

Total fuel costs 11 850 19 350Total cost per day 38 450 62 541Average cost/teu/day 10,98 8,93

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Economies of scale for containerships

C ap ita l cos ts (C TK E ) F u e l cos t (C C ) In su ran ce /M a in ta in an ce (I& M )

V esse l s ize (teu )

Economies of density ($/teu/day)

Time at sea/ Economies of scale at seaTime at port/ Diseconomies of scale at sea

Economies of scale ($/teu/service)

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Estimation of economies of density on containerships ($/day)

0

5

10

15

20

1000 1500 2000 2500 3000 3500 4000 4500 5000 5500 6000 6500 7000 7500 8000

$/jo

ur

CTKE/EVP CC/EVP

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Economies of scale ($/day/teu on Europe/Far East trade)

200

250

300

350

400

450

500

550

1000 2000 3000 4000 5000 6000 7000 8000

T aille d es n avires en evp

Coû

t en

$ pa

r evp

M odèle C u llinane e t K hanna

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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 implyco-operations and competition between operators (Port operators/Ship-owners, Forwarder/Ship-owners…)

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For more information

E-mail adress: pierre.cariou@sc-eco.univ-nantes.fr

Personal web site: www.sc-eco.univ-nantes.fr/~pcariou