Liner Business Lecture Notes

IT 211: Liner Business Dr. Arunee Tanvisuth BBA, Thammasat Business School Semester 2/2022 , Fe b 23’ 23 (#6) Agenda for Today  Liner Shipping  Bill of Lading and its Functions  Freight Rate Mechanism  Pricing Liner Service  Cooperative Strategy in Liner Business 3 Characteristi...

IT 211: Liner Business Dr. Arunee Tanvisuth BBA, Thammasat Business School Semester 2/2022 , Fe b 23’ 23 (#6) Agenda for Today  Liner Shipping  Bill of Lading and its Functions  Freight Rate Mechanism  Pricing Liner Service  Cooperative Strategy in Liner Business 3 Characteristics of Liner Shipping  Scheduled services between predetermined ranges of ports on a regular basis  Lines will be operated by several vessels at given frequencies whether there is cargo or not  Common/ Public C arrier  General/ Packed C argo (high - value cargo) 4 Origins of the Liner Service  Improving steamship technology in the 1870s ◦ Regular scheduled services  Developments in the commercial systems ◦ Steamship agents ◦ Banking services  The opening of the Suez Canal in 1869  The freight market boom in 1872 - 3 The “Cargo Liner” Era  Multi - deck vessels or “cargo liners” (with their own cargo - handling gear)  Carry a mixture of manufactures, semi - manufactures, minor bulks, and passengers  Trade routes b/w North America, the European countries and their colonies in Asia, Africa, and South America ◦ Outward trade of manufactures and home trade of minor bulks → u nbalanced trade ◦ Flexible vessels that can carry all sorts of cargo ◦ Cargo liners and tween - deckers used by tramp were similar in size, design, and speed → to achieve better risk management for both markets The “Cargo Liner” Era (2)  By the 1960s, the cost, complexity, and poor delivery performance of the cargo liner system ◦ Capital cost, labor cost ◦ Turnaround time  Cargo liners technologically obsolete  The Container System (1966 – present) 10 Liner Shipping (2)  Large numbers of small shipments b/w large numbers of shippers (consignor) and receivers (consignee) in many ports  Shipper pays freight in accordance with tariffs based on volume or weight of the cargo → revenue ton  Standard contract of carriage → Bill of Lading (B/L) Liner Shipping (3)  Use special type of vessel  Costly organization of head offices and agencies in different ports of call ◦ use various agents and representatives to approach cargo owners and freight forwarders to secure business  Basic models of service ◦ End - to - end service (conventional or “two - way” traffic) ◦ Round the world service (“one - way” traffic) ◦ Network (with feeder ) service 13 Criteria for Designing Service Network  Shipping lines have to make a trade - off between the requirements of their customers and operational cost considerations ◦ Shippers demand direct services b/w their preferred ports of loading and discharging ◦ Shipping lines need to optimize ship utilization and benefit the most from scale economies in vessel size → The main objective is to optimize their shipping networks by rationalizing coverage of ports, shipping routes, and transit time The Liner Shipping Routes  The East - West Trades (the largest volume of trade) ◦ Transpacific ◦ Transatlantic ◦ Europe – Asia (and Far East) ◦ Europe - Middle East ◦ North America - Middle East ◦ Far East - Middle East The Liner Shipping Routes (2)  The North - South Trades ◦ Trades b/w the industrial centers of Europe, North America and the Far East and the developing countries of Latin America, Africa, Far East and Australasia  Intra - Regional Trades ◦ The short - sea services are playing an important part → from hub/ base ports (Hong Kong, Singapore, and Rotterdam) to out ports Current Major Liner Routes  Transpacific  Transatlantic  Asia - Europe 22 23 24 25 26 Liner Bill of Lading (B/L, BOL)  A document issued by a carrier to a shipper, acknowledging that specified goods have been received on board as cargo for conveyance to a named place for delivery to the consignee who is usually identified  The term derives from the noun “bill” (a schedule of costs for services supplied or to be supplied) and from the verb “to lade” (which means to load a cargo onto a ship) 34 Three Main Functions of B/L  A receipt for goods , signed by the master (or other duly authorized person) on behalf of the carrier  A documentary evidence of the contract of carriage b/w the shipper and the carrier  A document of title to the goods described therein Document of Title  A document that enables the holder (the person who possesses it) to deal with the goods described in it as if he was the owner  “Title” is the right to ownership  The goods can therefore be bought and sold while they are in transit at sea 36 Items in B/L  Name of Shipper (cargo owner)  Name of Consignee (or “to order”)  Name of Notify Party (usually the buyer/ their agent)  Ship’s name  Port of Loading  Port of Discharge  When and where freight to be paid (freight paid, payable at destination/ freight collect)  Full description of cargo ◦ Marks, numbers, weight, cubic volume  The place and date of issue of the B/L  Signed “for the carrier” “Straight” bill of lading  A B/L made out to a named consignee without the words “to/ or order” appearing is known as a straight B/L  It cannot be endorsed to a third party  As straight B/L is not negotiable, it has been argued that it is not a B/L, however, it is still a document of title  The S ea Waybill ◦ Alternative document to a B/L ◦ It fulfils only the first two functions… receipt for cargo and evidence of contract ◦ It is NOT a document of title ◦ The waybill must be made out for delivery of the cargo to a named consignee ◦ Commonly used in trade that does not involve documentary credit Monopoly  From Greek “ monos ” means alone or single + “ polein ” means to sell  Only one producer/seller for a product that has no viable substitute products… the single business is the industry  Entry into a market is restricted due to high costs or other impediments, which may be economic, social or political ◦ a government can create a monopoly over an industry that it wants to control, such as electricity, water, tobacco ◦ oftentimes, one entity has the exclusive rights to a natural resource. .. in Saudi Arabia the government has sole control over the oil industry ◦ a monopoly may also form when a company has a copyright or patent that prevents others from entering the market. .. Pfizer had a patent on Viagra  Seller has the power to control market price 40 Perfect Competition  Many buyers and many sellers  The market supplies homogeneous or standardized products that are perfect substitutes for each other… consumers perceive the products to be identical  Consumers have perfect information about the prices all sellers in the market charge – so if some firms decide to charge a price higher than the ruling market price, there will be a large substitution effect away from this firm  All firms are assumed to have equal access to resources and improvements in production technologies achieved by one firm can spill -over to all the other suppliers in the market  There are assumed to be no barriers to entry & exit of firms in long run  Prices are determined by supply and demand ◦ Producers are “price taker”  Firms aim to maximize profit ◦ Sell where MC = MR 41 Oligopoly  From Greek “ oligo ” means few + “ -opoly ” as in monopoly and duopoly  There are only a few firms that make up an industry  This select group of firms has control over the price and, like a monopoly, an oligopoly has high barriers to entry  The products that the oligopolistic firms produce are often nearly identical and, therefore, the companies, which are competing for market share, are interdependent as a result of market forces ◦ each oligopolist is aware of the actions of the others, the decisions of one firm influence, and are influenced by, the decisions of other firms  Oligopolistic market is at the highest risk for collusion 42 Examples of Oligopoly  United Kingdom ◦ grocery market (74.4%, Tesco, Sainsbry’s , Asda , Morrisons ) ◦ beer brewing industry (67%, Scottish & Newcastle, Molson Coors, Inbev ) ◦ detergent market (Unilever, P&G)  Worldwide ◦ accountancy market is controlled by PriceWaterCoopers , KPMG, Deloitte Touche Tohmatsu, and Ernst & Young (the Big Four) ◦ food industry (Kraft Foods, PepsiCo, Nestle) ◦ commercial aircraft (Boeing, Airbus) 43 Monopolistic Competition  Many producers and many consumers in a given market, and no business has total control over the market price  Consumers perceive that there are product differentiation among the competitors' products  Few barrier to entry and exit  Producers have a degree of control over price ◦ firms can behave like monopoly in the short - run, including using market power to generate profit ◦ in the long - run, other firms enter the market and the benefits of differentiation decrease with competition… the market becomes more like perfect competition where firms cannot gain economic profit Freight Rates  The supply of sea transport is influenced by freight rates  It motivates decision - makers to adjust capacity in the short term ◦ change operational speed ◦ move to and from layup  It contribute to the investment decisions in the long term ◦ scrapping and ordering of ships 45 Freight Rate Mechanism… Tramp  Shipowners and shippers negotiate to establish a freight rate which reflects the balance of ships and cargoes available in the market  If there are too many ships the rate will drop, if there are too few ships the rate will increase… once the freight rate is established, shippers and shipowners adjust to it and eventually this brings supply and demand into balance  The supply function, demand function, equilibrium price 46 S upply Function of a Single Ship (VLCC) Supply Function for a Fleet of 10 VLCCs Oil Transport Demand Function Supply/ Demand Equilibrium Special Characteristics of Liner  Transporting many small parcels requires a larger and more complex administrative overhead  The obligation to sail to a timetable makes capacity inflexible ➔ Whereas tramp owners respond quickly to supply/ demand imbalances by moving their least efficient ships into layup ➔ Liner companies must stick with their schedules ➔ Capacity management is key to liner business 51 The Liner Pricing Problem  Marginal Cost Prices  Fixed Prices  Price Discrimination 52 Marginal Cost Prices  Pricing at Marginal Cost (in free market without conferences) Ex. When demand is low (recession) Marginal cost (MC) is $400 per teu Pricing at MC, volume = 3,400 teu At 3,400 teu , AC = $1,250 per teu Total loss = $850X3,400 = $2.89 million Ex. When demand is high (boom) Price at $2,250, volume = 4,000 teu At 4,000 teu , AC = $1,150 per teu Total Profit = $1,100X 4,000 = $4.4 million 53 Fixed Prices  Liner companies agree to “fix” price Ex. When demand is low (recession) Pricing at $1,250 per teu , volume = 3,250 teu At 3,250 teu , AC = $1,350 per teu Total Loss = $100X3,250 = $0.325 million Ex. When demand is high (boom) Pricing at $1,250, volume = 4,250 teu At 4,000 teu , AC = $1,150 per teu Total Profit = $100X 4,000 = $0.4 million 54 Pricing Liner Services  Pricing policy is based on two principles ◦ Price stability… liner companies have fixed overheads so why not fix prices? ◦ Price discrimination  commodity price discrimination  customer price discrimination (special discounts)  Liner offers different prices for each commodity ◦ Low value cargoes are offered cheap rate to fill empty capacity ◦ Higher value cargoes are charged a premium ◦ Same practice in airline business… first and business class VS economy class → c harge what the traffic can bear and cross subsidization 55 Pricing Liner Services (2)  Price discrimination can also be applied to customers ◦ Special rates for large volume shippers through service agreements  More difficult to implement as containerization has standardized the physical cargo Pricing Liner Services (3)  Liner tariff rates are assessed on either cargo weight, measurement or value ◦ goods measuring less than 40 cu.ft . per ton are charged on a cargo weight basis, and above that measure by the measurement tariff scale  Different charges are also applied to LCL (less - than - container - load) and FCL (full - container - load) Rates for FCL  Commodity Box Rate (CBR) ◦ A lump sum payable for the carriage of a container stuffed with a particular commodity ◦ The rate is based on the average utilization of the box, e.g., 13 tons in a twenty - foot container  Freight - all - kinds (FAK) ◦ Rates are non - discriminatory by treating all commodities the same way ◦ They are basically average cost rates; the shipowner distributes his projected total costs over the anticipated number of containers to be moved 58 Typical Items in Liner’s Invoice  Basic freight rates ◦ Full liner term or hook to hook ◦ CBR or FAK  Sea freight additional ◦ Bunker/ fuel adjustment factor (BAF, FAF) ◦ Currency adjustment factor (CAF) ◦ Port congestion surcharges  Terminal handling charge (THC) ◦ CFS charges/ stuffing/ unstuffing charges 59 Items in Liner’s Invoice (2)  Service additional ◦ For additional services e.g. storage of goods, custom clearance, trans - shipment  Cargo additional ◦ For cargoes that are difficult or expensive to transport (heavy lift, open top container, etc.)  Others ◦ Bill of lading fee ◦ Delivery order fee 60 61 Please find the new applicable CMA CGM Freight All Kinds (FAK) rates(*) as follows as from April 1st, 2019 (date of loading in the origin ports) until further notice. 62 The new applicable COSCO’s Freight All Kind rates that will be effective from June 1st 2019 until further notice but not beyond June 31st 2019. These FAK rates will apply to all general cargoes (specific commodities excluded, such as Reefer, Dangerous Cargo etc.) Far East base Ports include: Dalian, Xingang , Qingdao, Shanghai, Ningbo, Xiamen, Yantian , Nansha , Shekou , HongKong , Kaoshung , Singapore, Busan, Port Kelang, Tanjung Pelepas 63 Cooperation in Liner Industry  Shipping Conferences ◦ Focused on coordinating and setting shipping rates and related fees ◦ Traditionally be granted protection from anti - competition legislation (due to its importance and historical evolution)  However, the situation changed from the late 1990s ◦ US Ocean Shipping Reform Act of 1998  Deregulated the industry and permitted greater freedom for shipping liners and customers to negotiate freight contracts ◦ EU ended antitrust immunity for conferences in 2008 64 The Liner Conference System  A group of two or more vessel - operating carriers which provides international liner services for the carriage of cargo on a particular route or routes which has an agreement or arrangement within the framework of which they operate under uniform or common freight rates and any other agreed conditions (United Nations)  Conference lines typically agree on rates to be charged and services to be offered. In addition, conference lines often agree to restrict shipping capacity to maintain profitability for member lines. ◦ The first conference, UK - Calcutta was formed in 1875 65 The Liner Conference System (2)  Why we need conference? ◦ To stabilize rates ◦ To control capacity ◦ To maintain adequate profit levels for the ocean carrier industry ➔ Governments ruled that t he conference system was beneficial for the shipping industry in general, but should be heavily regulated ➔ C onferences currently serving the U.S. are given anti - trust immunity to openly discuss rates, services, and sailing schedules 66 The Liner Conference System (3)  Closed Conference ◦ The most common type of conference ◦ Restrict membership in order to protect the members’ market share  Open Conference ◦ Does not restrict new members joining the group ◦ Closed conference is prohibited under the US Shipping Act 67 Cooperation in Liner Industry (2)  Strategic Alliances ◦ Grand Alliance was formed in 1998  Hapag - Lloyd, (MISC), NYK, and OOCL ◦ New World Alliance  APL, HMM, MOL ◦ CKYH Alliance  Cosco , K Line, Yangming , Hanjin 68 The Daily Maersk  Introduced in 2011 by Maersk Line  To sail b/w major ports in East Asia and Northern Europe ◦ Ningbo - Shanghai - Yantian - Tanjung P elepas - Felixstowe - Bremerhaven - Rotterdam ◦ Transit time of 36 days each way ◦ How many ships do you need for a daily service? 69 After Daily Maersk Service  G6 Alliance was formed in late 2011 and began operation in March 2012 in Asia - Europe and Mediterranean trade and expanded to Asia and N.A. east Coast in May 2013  APL, Hapag - Lloyd, HMM, MOL, NYK, OOCL  CKYH + Evergreen  MSC + CMA CGM  What about the P3 Network? 70 P3 Network  Maersk Line, Mediterranean Shipping Co and CMA CGM ◦ In June 2013, Maersk Line, MSC, and CMA CGM announced their intention to establish a long -term operational vessel sharing agreement on the East -West trades ◦ The objective was to make container liner shipping more efficient and improve service quality for shippers due to more frequent and reliable services ◦ P3 was intended to be an operational, not a commercial cooperation ◦ In October 2013, Maersk, MSC and CMA CGM signed an agreement intending to establish a network center in the form of limited liability partnership in England and Wales to take charge of the container liner operating matters for the routes of Asia -Europe, trans -Atlantic and trans -Pacific in a unified manner. 71 72 P3 Network (2)  On March 24, 2014, the US Federal Maritime Commission (FMC) decided to allow the P3 Network agreement to become effective in the U.S.  On J une 3, 2014, the European Commission informed the P3 partners that it had decided not to open an antitrust investigation into P3 and had closed its file  P3 was scheduled to start operations in the autumn of 2014 73 P3 Network (3)  On June 17, 2014, MofCOM prohibit the P3 Network ◦ A compact association (the establishment of a network center) ◦ Very high market power  Maersk (20.6%), MSC (15.2%) and CMA CGM (10.9%) → a 46.7% market share (as of Jan 1’14) ◦ Increase entry barrier  Capital -intensive industry with economies of scale ◦ Increase bargaining power against  Shippers, Port operators  How did P3 response to this decision? 74 75 76 The Ocean Alliance  Announced in April 2016  CMA CGM, China Cosco Shipping, Evergreen Line, OOCL  Creation of the Ocean Alliance orphaned 8 container lines ◦ United Arab Shipping lost its 2 partners in the Ocean Three (CMA CGM and China Shipping) ◦ G6 will lose APL (due to its CMA CGM - takeover) and OOCL to Ocean Alliance, leaving it with Hapag - Lloyd , Hyundai , MOL , NYK ◦ CKYHE will lose Cosco and Evergreen, leaving K Line , Yang Ming , and H anjin 77 80