1. ORGANIZATION AND ECONOMICS OF SHIPPING COMPANY
Marina Zanne

2. Introduction Development:
ship owner = ship operator = trader = captain
ship owner = ship operator = trader
ship owner is not necessarily a ship operator
Ship operator = shipping company = a company that provides maritime transport of goods or passengers = the most important component in seaborne trade provision

3. Introduction
The company is formed to fulfill the needs that are recognized in our living environment.
Shipping company faces a challenging environment  market cycles
Key variables that shipowner/shipoperators must monitor:
the revenue received from chartering/operating the ship,
the costs of running the ship,
the method of financing the business.

4. Shipping company
Shipping company is an open, dynamic, complex, partially autonomous, goals driven social system that tries to combine the limited resources in a best possible way in order to achieve the most rational production and in this way to use the given possibilities to the max.
Production is measured for example in transported tons of cargo per ship‘s deadweight capacity.

5. Main elements in managing ships
Drewry; Ship management (2006), p. 2

6. Shipping company
A bigger organization will normally consist of the head office, the ships, offices abroad and a network of business connections such as shipbrokers, agents, stevedores, etc. These companies are usually independent companies with whom the big company has fixed contracts.

7. Functional organization
Unstable crews, lack of communication (or too slow communication), poor overall efficiency

8. Matrix type organization
Decentralisation of management  higher motivation and initiative aboard the ships  free and interactive relations, fleet leader on shore-side
Better control of expenses

9. Shipping company
Smaller companies usually outsource majority of “common” activities (that are present in big companies), such as crewing, accounting, technical issues or even fleet development. Liner shipping companies are much more demanding than the tramp shipping companies.

10. Ship’s costs Fixed costs capital costs loan repayment depreciation
operating costs
crew costs
stores
repair & maintenance
insurance
administration
Fixed costs

11. Ship’s costs voyage costs (variable costs) fuel costs
port / canal charges
service charges (tugging, pilotage,cargo handling etc)

12. Capital costs: Cost of loan
Capital costs (depend on how the ship is financed):
Financed by a loan:
size of loan
source of loan
interest rate
terms of loan

13. Capital costs: Cost of loan (Example)
Question: What is cheaper for a company buying a ship?
Cash price = $. Terms of loan: a)
down payment: 1/3 of cash price
interest rate: 8% (per year)
paying period: 6 years, repayments once per year, fixed instalment b)
down payment $
paying period: 5 years, repayments twice per year, fixed instalment

14. Capital costs: Cost of loan (Formulas)
where
r – interest rate (for adeqaute period of time)
n – number of instalments

15. Capital costs: Cost of loan (Example)
a) r = 8%, n = 6 CRF = 0, Instalment = ,59$ Final price = ,52$ Interests = ,52$

16. Capital costs: Cost of loan (Example)
Repayment scheme:
No.
Principal
Instalment
Interests
Partial principal
,00 1
,41
,59
,00
,59 2
,90
,07
,51 3
,90
,59
,99 4
,07
,75
,83 5
,73
,25
,34 6
0,00
,86
,52
,52

17. Capital costs: Cost of loan (Example)
b) r = 4%, n = 10 CRF = 0, Instalment = ,16$ Final price = ,63 $ Interests = ,63 $

18. Capital costs: Cost of loan (Example)
No.
Principal
Instalment
Interests
Partial principal
,00 1
,84
,16
,00
,16 2
,63
,95
,21 3
,61
,15
,02 4
,11
,66
,50 5
,51
,56
,60 6
,93
,58
,58 7
,60
,84
,33 8
,99
,54
,62 9
,50
,68
,48 10
0,00
,66
,63
,63

19. Capital costs: Cost of loan (Example)
Answer: Second option is cheaper.

20. Capital costs: Depreciation
Depreciation refers to two very different but related concepts:
decline in value of assets, and
allocation of the cost of tangible assets to periods in which the assets are used.
Depreciation costs depend on:
cost of the asset,
expected salvage value of the asset,
estimated useful life of the asset, and
a method of apportioning the cost over such life.

21. Capital costs: Depreciation
There are plenty ofdepreciation methods, e.g.:
straight-line depreciation
declining-balance method
sum-of-years' digits method
activity depreciation

22. Straight line depreciation
Book value at beginning of year
Depreciation expense
Accumulated depreciation
Book value at end of year
Original value
Scrap value

23. Straight line depreciation (Example 1)
Using the straight line depreciation check the competitiveness of shipping company buying the ship for cash ( $) comparing to the compnay buying it with the loan ( ,63$). The ship’s displacement is tons and the scrap metal value is 150 $/t. According to accounting standards, the useful life of ship is 20 years, with 350 days of exploitation per year. If a company buys an used ship, the amortization period (utilization life) is shorter for this ship’s age.
25 years in latest publications. It used to be 16 years some decades ago.

24. Straight line depreciation (Formulas)

25. Straight line depreciation (Example 1)
Salvable value is in both cases the same:
Final price = Cash price = $
Final price = ,63$

26. Straight line depreciation (Example 2)
What is the annual and daily depreciation expense for a newly bought 15 years old ship at the price of $. The ship’s displacement is tons and the scrap metal value is 150 $/t. Prepare the depreciation plan!

27. Straight line depreciation (Example 2)
Utilization life = 5 years

28. Straight line depreciation (Example 2)
Book value at beginning of year
Depreciation expense
Accumulated depreciation
Book value at end of year

29. Operating costs crew costs stores repairs maintenance insurance
administration

30. Operating costs: Crew costs
There are several direct and indirect costs incurring when crewing of the vessel:
wage costs
travel costs
on board victualling
training
(union fees)
recruitment/selection and processing
medical examinations
social dues
communication/bank charges
crew accident insurance payment
sick pay
(standby pay)
port expenses
agency fees

31. Operating costs: Crew costs
Depend on:
size of the crew,
employment policy of the owner/operator,
ship’s flag  Flag of convenience  ITF  minimal wages for ranks on board

32. Chief officer, 2nd (1st asst) engineer
Crew costs: Wages
Bulk carriers
Master
Cheif engineer
Chief officer, 2nd (1st asst) engineer
2nd officer,
3rd (2nd asst) engineer UK
Italy
Croatia
Poland
Romania
Ukraine
India
Philipines
Drewry; Ship management (2006), p. 112

33. Chief officer, 2nd (1st asst) engineer
Crew costs: Wages
Tankers
Master
Cheif engineer
Chief officer, 2nd (1st asst) engineer
2nd officer,
3rd (2nd asst) engineer UK
Italy
Croatia
Poland
Romania
Ukraine
India
Philipines
Drewry; Ship management (2006), p. 113

34. Crew costs – depending on nationality
Indian crew (8+10)
Filipino crew(8+10)
Wages
$/month
$/month
Victualling
3.720 $/month
Miscellaneous
4.300 $/month
3.830 $/month
SKUPAJ
$/month
$/month
Tours of duty – Officers
4-6
8-10
Tours of duty – Ratings
9-10
9-12
Normal working week - Ratings
40-44 44
Guaranteed overtime per month – Ratings 85
Leave per month served - Officers
15-22
6-10 7
Drewry; Ship management (2006), p. 118

35. Crew costs – depending on ship’s age
Stopford M. (2009): Maritime economics,
p. 228

36. Operating costs: Repairs & maintenance
routine maintenance; maintenance of engine and equipment, painting jobs, renewal at the hold… while the ship is at sea
breakdowns; mecanical failures resolved in repair yards  loss of trading time!
spares; replacement parts
periodic maintenance; regular maintenance at repair yards in order to maintain sea worthiness (class) and obtain certifications (necessary for insurance) classifcation societies (dry dock every 2 year, special survey every 4 years)

37. Repairs & maintenance
 regular maintenance  less breakdowns  these costs increase with ships’s age and in average accumulate for 14% of operating costs

38. Operating costs: Insurance
vary from ship to ship
2/3 insurance of the hull and machinery  obtained from marine insurance company
1/3 thirs party insurance  obtained from P&I club
2/3 insurance of the hull and machinery  protection of owner against physical loss or damage  depend on claimed value of the vessel and previous claim records  obtained from marine insurance company
1/3 thirs party insurance  covers against third party liabilities (injury of death of crew members or passengers, damage to cargo, collision damage, pollution etc.)  obtained from P&I club

39. Operating costs: General costs / Administration
shore-based administrative and management costs
communication costs
agents in ports
flag state fee

40. Voyage costs fuel costs port charges port dues
service charges (e.g. tugs, pilotage, cargo handling)
canal charges

41. Voyage costs: Fuel costs
Depend on:
fuel price
engine power and efficiency
design and state of the hull  hydrodynamics
ship’s speed
 only cca 23% of energy consumed is applied to propelling the vessel (the rest is lost for cooling the engine, lost as exhaust emissions, lost at the propeller and hull friction)

42. Voyage costs: Fuel costs
Consumption for a Panamax bulk carrier
Speed [knots]
Main engine consumption [t/day] 16 44 55 15 36 45 14 30 37 13 24 29 12 19 23 11 18
Stopford M. (2009): Maritime economics, p. 235
IFO380
IFO180
MDO
MGO
Singapore
468.50
477.50
681.00
689.50
Rotterdam
453.50
471.50 -
706.50
Houston
460.50
473.50
738.50
Fujairah
474.50
493.00
732.50
Los Angeles
476.50
493.50
757.50

43. Voyage costs: Port charges
Fees for the use of facilities and services provided by the port
port dues service charges (pilotage, towage, cargo handling)
general use of port facilities (e.g. docking, wharfage for provision of the basic infrastructure), based on:
volume of cargo
weight of cargo
gross tonnage fo the vessel
net tonnage fo the vessel
What tonnage stays for?

44. Voyage costs: Canal charges
Suez & Panama canal
Suez; charges are calculated in terms of the Suez Canal net ton  charges vary for different types and sizes of ships
Panama; flat rate per Panama Canal net ton is used

45. Port charges: Cargo handling costs
costs of loading and discharging cargo
CMC – cargo-handling costs
L – loading charges
DIS – cargo discharge costs
CL – cargo claims
Shipowners are concerned about this costs especially in liner service operations, in tramp market these costs are usually paid by shipper.

46. Bulk carrier’s costs depending on ship’s age
Stopford M. (2009): Maritime economics, p. 222

47. Revenues
Shiponwers earn revenues in several different ways  different distribution of risk and apportionment of costs between shipowner and charterer.

48. Revenues: Voyage charter
Shipowner pays all costs (except maybe cargo handling) and is responsable for managing and running the ship, as well as of planning and execution of voyage.
Calculation involves:
determining how much cargo the vessel can carry
establishing what price of freight rate can be charged per unit transported

49. Revenues: Time charter
fixed daily or monthly payment for hiring the vessel
The owner still takes the operational risk and the charterer takes the market risk;
The charterer pays the fuel, port charges, stevadoring and other cargo related costs

50. Revenues: Bare boat charter
the owner (e.g. a bank) finances (interests, depreciation) the ship and receives a charter payment to cover the expenses (and desired profits)
charterer covers all operating costs, voyage costs and cargo related costs
charterer takes operational and market risk

51. The freight market – Dry bulk market
Costs included in the charter fee/freight rate
$/day
$/t
Stopford M. (2009): Maritime economics, p. 182

52. Stopford M. (2009): Maritime economics,
Profit / loss account
Profit / loss: revenues – costs
Stopford M. (2009): Maritime economics,
p. 248

53. Example: Optimizing the ship’s speed
Calculate the optimal ships’s speed for the following voyage: Distance: miles Bunker costs (IFO): 475 $/t Bunker costs (MDO): 740 $/t Consumption (MDO) at sea and in ports: 1,5 t/day Port days: 5 days Penalities (per day): $/day if cargo is not delivered within 26 days Fixed daily costs: $ DWT: t Freight rate: 17 $/t Port charges: $ (cargo handling costs excluded)

54. Example: Optimizing the ship’s speed
Consumption at sea is as follows: What is the profit at optimal speed?
Speed [knots]
Main engine consumption [t/day] 16 44 15 36 14 30 13 24 12 19 11

55. Costs & revenues: Summary
Stopford M. (2009): Maritime economics,
p. 220

56. Distinction between profit and cash
Profit is a concept used to measure financial return from business. The cashflow of a company represents the difference between cash payments and receipts.
Some costs are not paid in cash at the time of occurance (for example the purchase of the ship; cash transaction takes place when the ship is built, whilst the ship loses a proportion of its value by the each passing year – this is represented as depreciation in a profit / loss account).

57. Sources & further reading
Stopford M.: Maritime economics, London, Routledge (2009), Chapter 6
Bielic - Influence of shipping company organization on ship's team work effectiveness
The organisation of a shipping company, Charter parties, General average by Galvagnon/Pearson ENMM Marseille 2002