Liner Shipping Profitability: Determination and Opportunity for Improvement

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Liner Shipping ProfitabilityDetermination
andOpportunity for Improvement

• Theodore Prince
• International Association of Maritime Economists
• Panama City, Republic of Panama

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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
3
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
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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
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Know (Not Raise) Your Costs
Trucking
More cost accounting codes is not the solution
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Really Know Your Costs
Costs need to be accumulated across all costs
by individual move
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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
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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)
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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
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Understand Cost Allocation
True nature of costs may be misunderstood or
misstated
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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
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Price Service Specifically
Bad Business
Breakeven Business
Good Business
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
Highest Revenue
Highest Profit
How valuable is that customer really?
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Vertical Integration
Today
Yesterday
Customer wants assurance of time-definite
delivery. Alliances obviate need for using own
asset.
Customer wanted assurance of steamship line
providing own vessels, containers and terminals
Assets
Cost centers competing against companies that
offer core competency
Profit centers that could attract business from
unaffiliated lines
Terminal Subsidiaries
Has the business case for owning terminals
changed?
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Vertical Integration Issues
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Organizational Structure
Commercial
Operations
Time to review the traditional thinking?
Steamship Agency
Before
Own Organization
Today
Own Organization
Steamship Agency
Possible?
Low cost support
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 COverview

• Theodore Prince
• International Association of Maritime Economists
• Panama City, Republic of Panama

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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

• Todays 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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Transportation Improvement
Innovation has decreased transit time and
improved reliability
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The US Experience
International trade and US intermodal have grown
together
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But the Future is Daunting
Volume through San Pedro ports Is expected to
triple in 20 years
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
1988 2002
Average vessel size (TEUs) 2800 5000
Intact Intermodal 60 40
Intermodal TEUs per Vessel 1680 2000
Local Cargo 40 30
Local Cargo (TEUs) 1120 1500
Local Intermodal Cargo 0 20
Local Intermodal Cargo (TEUs) 0 1000
TEUs Needing Local Trucking 1120 2500
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123
Larger vessels have had disproportionate effect
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Asset Life Dilemma
Alameda Corridor was 2.4 billion project to
handle longhaul (gt1500 miles) intermodal, but it
may need to address shorthaul (lt200 miles)
market. Can physical life gt 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