Liner Shipping Profitability: Determination and Opportunity for Improvement

1. Liner Shipping Profitability:Determination andOpportunity for Improvement Theodore Prince International Association of Maritime Economists Panama City, Republic of Panama

2. 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

4. 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

5. 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

6. 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

7. 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

8. 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)

9. 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

10. 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

11. 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

12. Price Service Specifically Bad Business Breakeven Business Good Business Pricing needs to tie to individual routing

13. 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?

14. 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?

15. 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?

16. 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

17. 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

18. 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

19. Track COverview Theodore Prince International Association of Maritime Economists Panama City, Republic of Panama

20. A Recent Ad 1996: ERP 1998: CRM 2000: SCM 2002: S.O.S. Chasing technology initiatives has not delivered satisfactory results Source: PTC advertisement

21. 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

22. The Alchemy of Logistics • Today’s “reality” • Customers will • Always pay less • To receive more • Transportation deflation is real

23. 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

24. Transportation Improvement Innovation has decreased transit time and improved reliability

25. The US Experience International trade and US intermodal have grown together

26. But the Future is Daunting Volume through San Pedro ports Is expected to triple in 20 years Source: ACTA

27. 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

28. The San Pedro Dilemma 79% 19% 123% Larger vessels have had disproportionate effect

29. 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?

30. 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