Presentation on theme: "Liner Shipping Profitability: Determination and Opportunity for Improvement Theodore Prince International Association of Maritime Economists Panama City,"— Presentation transcript:
Liner Shipping Profitability: Determination and Opportunity for Improvement Theodore Prince International Association of Maritime Economists Panama City, Republic of Panama
1 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
2 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
3 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 Really Know Your Costs Vessel Terminal Equipment Inland Transportation Agency Shipment #9Shipment #5Shipment #4Shipment #3Shipment #2Shipment #1Shipment #8Shipment #7Shipment #6 Costs need to be accumulated across all costs – by individual move
6 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
7 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)
8 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
9 Understand Cost Allocation HighFixedLinehaul MediumJoint/FixedLinehaul used as feederLowVariable/JointSpace charter or allianceNoneVariableCommercial feeder Allocation Subjectivity Cost Basis True nature of costs may be misunderstood – or misstated
10 Understand Equipment Cost Revenue Revenue/Day* Per Diem Days to Devan Ocean Freight $5,000 $50 $2,000 60 $3,000 Load #3 $2,500 $42 $0 20 $2,500 Load #2 $3,500 $44 $0 40 $3,500 Load #1 Fastest Devan Highest Yield Highest Revenue * Plus 40 Days Origin and Ocean Highest overall yield may not be recognized because it is not a stated – or understood -- objective
11 Price Service Specifically Bad Business Good Business Breakeven Business Pricing needs to tie to individual routing
12 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?
13 Maximize Profit Not Revenue Additional expense Annual contribution Annual roundtrips Roundtrip days Total Contribution Export Revenue Import Revenue $0 $18,000 6 60 $3000 $0 $3000 Load/Empty $800 $5,600 2 180 $2800 $600 $3000 Load/Load Highest Revenue Highest Profit How valuable is that customer – really?
14 Vertical Integration Cost centers competing against companies that offer core competency Profit centers that could attract business from unaffiliated lines Terminal Subsidiaries 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 TodayYesterday Has the business case for owning terminals changed?
15 Vertical Integration Issues May require extensive transaction costs to justify “arms-length” existence Transaction costs May not be one because internal negotiations affected by political influence True profit center May distract from core business – or hide fact that there are cheaper alternatives Management focus May be paying too much locally or violating transfer cost rules Taxes May require significant off balance sheet guarantees that can no longer be hidden Balance sheet May be consuming large (but unrecognized) amounts of capital Capital ImplicationsIssue
16 Organizational Structure Own Organization Steamship Agency Possible? Own OrganizationToday Steamship AgencyBefore CommercialOperations Low cost support Focus on customer Time to review the traditional thinking?
17 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
Track C Overview Theodore Prince International Association of Maritime Economists Panama City, Republic of Panama
19 A Recent Ad 1996: ERP 1998: CRM 2000: SCM 2002: S.O.S. Source: PTC advertisement Chasing technology initiatives has not delivered satisfactory results
20 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
21 The Alchemy of Logistics Today’s “reality” –Customers will Always pay less To receive more –Transportation deflation is real
22 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
23 Transportation Improvement Innovation has decreased transit time and improved reliability
24 The US Experience International trade and US intermodal have grown together
25 But the Future is Daunting Source: ACTA Volume through San Pedro ports Is expected to triple in 20 years
26 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
27 The San Pedro Dilemma 19882002 Average vessel size (TEUs)28005000 Intact Intermodal60%40% Intermodal TEUs per Vessel16802000 Local Cargo40%30% Local Cargo (TEUs)11201500 Local Intermodal Cargo0%20% Local Intermodal Cargo (TEUs)01000 TEUs Needing Local Trucking11202500 79 % 19 % 123 % Larger vessels have had disproportionate effect
28 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?
29 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