Transcript Meeting Agenda

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?
• Overcapacity from rush to investment
– Macroeconomic
• Deflation
• Debt overhang
• Possible trade war
Airline and telecommunication
industries serve as example
1
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
2
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
3
Know (Not Raise) Your Costs
Loaded Containers Shorthaul
Loaded Containers Longhaul
Vessel
Loaded Containers Commercial Zone
Loaded Containers Storedoor
Terminal
Trucking
Empty Containers Shorthaul
Empty Containers Longhaul
Equipment
Empty Containers Intra-terminal
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
More cost accounting codes is not the solution
4
Really Know Your Costs
Shipment #9
Shipment #8
Shipment #7
Shipment #6
Shipment #5
Shipment #4
Shipment #3
Shipment #2
Terminal
Shipment #1
Vessel
Equipment
Inland Transportation
Agency
Costs need to be accumulated
across all costs – by individual move
5
45
40
35
30
25
20
15
10
5
0
60
Average cost continues to increase
50
40
Volume drops as moves
below average cost are
lost to competitors
30
20
Volume
Cost
Death by Average Cost
10
0
1
2
3
4
Pricing Steps
Average cost pricing is guarantee for disaster
6
Death by Average Cost
• Network economics not understood
– Scale:
• Higher volume
• Lower unit costs
– Scope
• Serve everywhere
– Density
Economies can be
diminishing – or they
can become diseconomies
(e.g., Post-Panamax vessels)
• Often confused
• Applicable to relevant network arcs
7
Understand Routing Options
Lowest
Vessel
No
Feeder
Lowest
Inland
Lowest
Overall
Transportation Costs
$2,400
$2,000
$1,600
Inland
Feeder
Vessel
$1,200
$800
$400
$0
1
2
3
4
Routing Options
Lowest overall cost may not be selected because
it is not a stated – or understood -- objective
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Understand Cost Allocation
Cost Basis
Allocation
Subjectivity
Variable
None
Space charter or alliance
Variable/Joint
Low
Linehaul used as feeder
Joint/Fixed
Medium
Fixed
High
Commercial feeder
Linehaul
True nature of costs may be misunderstood – or misstated
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Understand Equipment Cost
Load #1
Ocean Freight
Highest
Revenue
Load #2
$3,500
Fastest
Devan
Load #3
$2,500
$3,000
20
60
Days to Devan
40
Per Diem
$0
$0
$2,000
Revenue
$3,500
$2,500
$5,000
$44
$42
Revenue/Day*
Highest
Yield
$50
* Plus 40 Days Origin and Ocean
Highest overall yield may not be recognized because
it is not a stated – or understood -- objective
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Price Service Specifically
Bad
Business
$4,000
Breakeven
Business
Good
Business
$3,500
$3,000
$2,500
$2,000
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16
18
20
21
Transit Days
Cost
Revenue
Pricing needs to tie to individual routing
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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?
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Maximize Profit Not Revenue
Load/Load
Load/Empty
$3000
$3000
$600
$0
Additional expense
$800
$0
Total Contribution
$2800
$3000
180
60
2
6
$5,600
$18,000
Import Revenue
Export Revenue
Highest
Revenue
Roundtrip days
Annual roundtrips
Annual contribution
Highest
Profit
How valuable is that customer – really?
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Vertical Integration
Yesterday
Today
Assets
Customer wanted
assurance of steamship
line providing own
vessels, containers and
terminals
Customer wants
assurance of timedefinite 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?
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Vertical Integration Issues
Issue
Capital
Balance sheet
Implications
May be consuming large (but unrecognized)
amounts of capital
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
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Organizational Structure
Time to review the
traditional thinking?
Operations
Commercial
Before
Steamship Agency
Today
Own Organization
Possible?
Steamship
Agency
Low cost
support
Own
Organization
Focus on
customer
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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
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Track C
Overview
Theodore Prince
International Association of Maritime Economists
Panama City, Republic of Panama
A Recent Ad
1996: ERP
1998: CRM
2000: SCM
2002: S.O.S.
Chasing technology initiatives has
not delivered satisfactory results
Source: PTC advertisement
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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
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The Alchemy of Logistics
• Today’s “reality”
– Customers will
• Always pay less
• To receive more
– Transportation
deflation is real
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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
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Transit Hong Kong to New York
Transportation Improvement
60
Innovation has decreased transit
time and improved reliability
50
40
30
20
10
0
1968
1973
1978
1983
1988
Water
Land
1993
1998
2003
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The US Experience
200%
1989 = 100%
180%
International trade and US
intermodal have grown together
160%
140%
120%
100%
9 90 91 92 93 94 95 96 97 98 99 00 01
8
19 19 19 19 19 19 19 19 19 19 19 20 20
International TEUs
Rail Intermodal
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But the Future is Daunting
San Pedro TEUs
30
25
Volume through San Pedro ports
Is expected to triple in 20 years
20
Forecast
Actual
15
10
5
0
2000
2005
2010
2015
2020
Source: ACTA
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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
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The San Pedro Dilemma
Local Cargo
Local Cargo (TEUs)
Local Intermodal Cargo
Local Intermodal Cargo (TEUs)
1988
2002
2800 79% 5000
60%
40%
1680 19% 2000
40%
30%
1120
1500
0%
20%
0
1000
TEUs Needing Local Trucking
1120 123% 2500
Average vessel size (TEUs)
Intact Intermodal
Intermodal TEUs per Vessel
Larger vessels have had disproportionate effect
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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?
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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
Track C has many interesting topics to discuss
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