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Co-operation agreements in Liner Shipping

Co-operation agreements in Liner Shipping. Pierre Cariou Lecturer University of Nantes IUP BFE - “Shipping-Trading Institute”. L.S. and Co-operation agreements. 1.1. General overview. 1.2. Pricing agreements in L.S. 1.3. Technical agreements in L.S. 1.1. General overview.

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Co-operation agreements in Liner Shipping

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  1. Co-operation agreements in Liner Shipping Pierre Cariou Lecturer University of Nantes IUP BFE - “Shipping-Trading Institute” Genoa - 2003

  2. L.S. and Co-operation agreements 1.1. General overview 1.2. Pricing agreements in L.S. 1.3. Technical agreements in L.S. Genoa - 2003

  3. 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) Genoa - 2003

  4. L.S. characteristics Genoa - 2003

  5. 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 Genoa - 2003

  6. Voyage FC (Fuel consumption, wages, port dues…) FC (capital costs, equipment…) Port and THC (Terminal Handling Costs) Administrative costs Cost considerations Total Cost (Short run) = Fixed Costs + Variables Costs Genoa - 2003

  7. Cost MCSR D2 D1 Q 0 qmax Short Run marginal cost pricing Short Run Price variability (q > qmax) Need for excess capacity: Space/Quality (1) and Price stability (2) Genoa - 2003

  8. Cost D1 - AVCLR MCLR Q 0 Long Run marginal cost pricing Long Run Financial losses Price must be set above the MC to cover fixed cost Genoa - 2003

  9. Destructive competition Long Run Ship-owners profitability Short run Min. quality of services Price variability IF PERFECT COMPETITION: Price Competition = LRMC Solution: Allow co-operation between ship-owners “In ocean commerce, there is no happy medium between war and peace” (Alexander Report, US, 1914) “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) Genoa - 2003

  10. 1.2. Pricing agreements 1875 : 1st Maritime conference UK - Britain/Calcutta 1980 : 350 conferences Share of Conferences in main maritime East/West Trade Genoa - 2003

  11. Maritime conferences “ 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 Genoa - 2003

  12. Main contractual terms of agreement • 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 Genoa - 2003

  13. Pricing principle - One good Cost AVDd D1 D2 - P + AVCLR MCLR Q 0 Genoa - 2003

  14. Pricing limits - 2 goods Price Airline competition P2 Internal competition Within Cartel With Outsiders P1 Tramping competition Q 0 “Charge what the traffic can bear” - Evans (1982) Genoa - 2003

  15. Pricing system - Maritime freight 1. Conventional break bulk (bag, box…) Payment unit according to the stowing factor : Volume/Weight and 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…) Genoa - 2003

  16. 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) Genoa - 2003

  17. 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) Genoa - 2003

  18. 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 FF 1.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) Genoa - 2003

  19. Pricing example - conventional goods Stowing factor - Payment unit M=Volume = 3x(1.5x1.5x1) = 6.75 m3 W=Weight = 3x 480 = 1.44 tons Unit for payment : M=6.75 m3 WITASS Conference Pricing (abstract, p.6) ALL SECTIONS (WESTBOUND & EASTBOUND) - EUROPE Commodities LCL (DM) Alimentary goods 180 W/M Min. 3x Genoa - 2003

  20. Pricing example - conventional goods Local currency FF Maritime freight (p.6) 195x6,75=1 316 DM 4 342 FF Min. 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 € Genoa - 2003

  21. 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 FF 1.DM : 3.35 FF UK prices : VENCOL SECTION - Westbound - FCL Felixtowe - La Guaira - Maracaibo Genoa - 2003

  22. Pricing example - containerised goods Local currency FF Maritime freight (p.5) 2x5 800 = 11 600 DM 38 860 FF BAF (p.3) 2x200 = 400 DM 1 340 FF 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 € Genoa - 2003

  23. Pricing controversy “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) “The liner market… presents a case, while not perfectly contestable is nevertheless reasonably close to it” (Davies, 1989) Genoa - 2003

  24. Conclusions Collective pricing is a consequence of High Fixed Cost in Liner Shipping • 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) Genoa - 2003

  25. 1.3. Technical agreements Technical agreements (without pricing considerations) to share fixed and operational costs A consequence of containerisation (Mc LEAN - 1956) 1st container vessel: Almenia (60 teu) 1st consortium agreement: Atlantic Container Line (1966) Genoa - 2003

  26. A) Consortium Main advantages of containerisation: • Simplified vessels and better utilisation of space • increase loading/unloading performances (reduced • transit time) • reduced damage to cargo (insurance premium) Genoa - 2003

  27. Growth in World container trade (Millions TEU) Genoa - 2003

  28. Increase capacity through unit system Increase in port productivity (quay productivity + indirect system) Over-capacity Profitability decrease Price variability Decrease and Prices harmonisation (1 to 4 in 1970 1 to 1.8 in 1985) Consortium justification • Increase in ship costs • Increase in container cost and container unbalanced Genoa - 2003

  29. 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) Genoa - 2003

  30. B) Strategic alliances (1994-…) Initial motivations for maritime conferences: stabilisation of price, cover fixed coston a maritime route Initial motivations for consortiums Investment in containerships, share fixed cost on a maritime route • Initial motivations for Strategic alliances • New requirements from shippers: • World-wide services • Unique co-ordinator Genoa - 2003

  31. A world-wide base Genoa - 2003

  32. Pre-nineties networks Carrier 1 Carrier 2 Post-nineties Unique co-ordinator (commercial issues) Genoa - 2003

  33. 1 & 2 invest Carrier 1 Carrier 2 Solution 1. Internal growth Limits: Over-capacity Genoa - 2003

  34. Growth of main carriers capacity (1995/2000) - 000’ teu Genoa - 2003

  35. Merger & Acquisition Carrier 2 M or A with carrier1 Solution 2. External growth Limits: Cost for acquisition: Profitability results Genoa - 2003

  36. Strategic alliances (slot agreements) Carrier 1 Carrier 2 Solution 3. Co-operation (joint-services) Genoa - 2003

  37. Alliances and mergers (1995/1999) Genoa - 2003

  38. 13 Ship-owners-517 vessels on East/West Trade in 1997 (000’ teu) Genoa - 2003

  39. Genoa - 2003

  40. Strategic Alliances advantages Quality improvements (+) Economies of scale (+) Concentration (-) Horizontal Are + > - ? Port Congestion (+/-) Higher market power (+) Vertical Genoa - 2003

  41. Number of containerships by size in 1990, 1995, 1999 Representative cost of containerships by size in 1997 Genoa - 2003

  42. Economies of scale for containerships Economies of density ($/teu/day) Time at sea/ Economies of scale at sea Time at port/ Diseconomies of scale at sea Economies of scale ($/teu/service) Genoa - 2003

  43. Estimation of economies of density on containerships ($/day) Genoa - 2003

  44. Economies of scale ($/day/teu on Europe/Far East trade) Genoa - 2003

  45. 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 imply • co-operations and competition between operators • (Port operators/Ship-owners, Forwarder/Ship-owners…) Genoa - 2003

  46. For more information E-mail adress: pierre.cariou@sc-eco.univ-nantes.fr Personal web site: www.sc-eco.univ-nantes.fr/~pcariou Genoa - 2003

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