Working out the details

An inexorable flow of cost pressures and recognition that dockworkers unions are a fact of life, sometimes unwelcome, are the business parameters that US ports have to work within. The most delicate topic in the maritime industry today – more sensitive than bunker fuel surcharges and slow steaming – labour is seen as a quietly simmering pot that will boil over if handled badly.

Six-year contract agreements on the east and west coasts are set to be the pattern for many years to come. Most analysts see this arrangement as counter-productive because it makes for an unwieldy and clumsy system unable to adapt to rapidly changing market forces and economics.

Explains an executive of a maritime coalition: "The union structure is such that a certain number of workers are called up a day to work on a specific operation for a specific shift. But, because of sudden logistics changes, they might not be needed there the whole time, but they are contracted to work for the full shift – and meanwhile there could be a shortage at another operation. But the agreement can only be changed every six years."   

West Coast ILWU dockworkers get a 16% increase for the six years to 2014, while the East Coast ILA contract ends in 2012 (with wrangling to start in the third quarter of this year), giving a 4%-8% increase (depending on the port) from now until then.

Much of the simmering among the shipping lines and terminal operators is caused by the trade union wage levels, averaging $100,000 a year plus medical and pension benefits. The rest of the heat comes from the difficulty of introducing new technology and methods.

Unlike other sectors of the economy, where wages have levelled off because business is stagnating, the guaranteed rises in port wages are taking up a greater share of costs while slicing into profits.

Mark Montgomery, chief executive of Ports America Chesapeake, the largest operator in the country, says labour accounts for 40% of variable costs and as much as 65% of total costs. "But, collective bargaining allows us to know what the costs will be and we can build those into our projections." He says that the two sides on both coasts have been responsible in negotiations and "we each know our respective challenges".

The instinctive reaction to union involvement in port operations is that they obstruct technology, but Mr Montgomery says this is not necessarily true. "Our labour relations are such that the unions have been good and have allowed long-term concessions."

Consultant and economist Paul Bingham, of Wilbur Smith Associates, says: "The ports will likely never be satisfied with the pace of adoption of new technology and equipment due to the need to negotiate work rules with the longshore unions. There is an appreciation within the leadership of the unions however, that new technology and equipment can improve the competitive position of the ports with respect to performance, which influences the trade volume those ports attract and thus the amount of work available for their members.

"The challenge for union leaders," says Mr Bingham,"in negotiating work rule changes to accommodate new technology and equipment is to retain as much job-related control as possible to maximise member jobs and income. So I would not characterise the unions as stalling as much as taking a strong negotiating stance with respect to what they get in return for working with new technology and equipment.

"Labour costs are significantly influenced by dockworker union cooperation," he says, "but there are operational decisions by carriers and terminal operators, such as what days and times they plan for vessel calls and working shifts, that also contribute to port labour costs incurred. Carriers and terminal operators can’t optimise vessel schedules purely to minimise port labour costs as they must take other considerations into account such as schedule integrity and customer demands."

On the future pattern of labour costs, Mr Bingham says: "Right now, under current longshore labour contracts, the labour costs are not rising as a proportion of total variable costs. This is because the work rules governing port labour and the pay rates are fixed by the current contracts, whereas some other variable cost components (e.g. energy costs, especially related to diesel fuel consumption) have increased significantly recently.

"I would expect moderate increases (e.g. as built into the current 6-year ILWU coast-wise contract on the West Coast through 2014) generally in line with what other strong unions have achieved. This is against a back-drop of recovering trade volumes, providing more hours of employment to dockworkers on both coasts."

At Portland, Oregon on the West Coast, new Terminal 6 operator, ICTSI of the Philippines, specifically set out to get the ILWU on its side and discussed the operation with local union leaders. "Although there is no detailed agreement, we have pledged to work together and get the best results possible," says Elvis Ganda, chief executive of the Oregon subsidiary.

Jeff Smith, president of the Portland Local, concurs. "We both know it's in our interests to work together. As long as they realise that we have to 'work safe' – that nobody's safety is jeopardised – we are going to do our part to make it happen. But we must wait and see and they must also do their part."

The main measuring stick in the US is teu moves per hour, with the union and ICTSI broadly agreeing on 30 per crane. ICTSI took out a 25-year lease in February, paying $8m up front and $4.5m annually. Volumes rose from 7,000 teu in the last two weeks of February to 17,000 teu in March and 20,000 in April. Says Mr Ganda: "We have ranged from 24 to more than 30 lifts an hour and are pleased with how it's going – but it's early days still."

Joseph Curto, president of the New York Shipping Association, says: "Labour as a percentage of revenue should range from 35%-45% but each facility is different. Remember that in many other ports the ILA (East Coast) labour hiring and attendant costs are only related to stevedoring. In many other locations, state workers or other non-ILA workers are doing the terminal, gate, and rail work. There are not similar arrangements on the West Coast. That is why it is so difficult to make an “apples to apples” comparison.

"In 2012, the last year of the current contract, the labour rates are scheduled to increase due to a leveling of the tiered wage system. We just cannot predict with any accuracy what the costs will be beyond the expiration of the current agreement."

On the contentious issue of dockworker union cooperation, Mr Curto says: "I think that there is an acknowledgement by the union (International Longshoremen’s Association) that things need to change, but things like reducing gang size or other manning can only be done at the bargaining table. These will be subjects of discussion for negotiations. The current East Coast agreements are in place until September 30, 2012. Negotiations on a new agreement may start as early as the fall of 2011.

"The current labour agreement has good language in it for the implementation of technology. I don’t know of any open cases where-in an employer has not been able to implement new technology because of union objections."

Roger Giesinger, head of the Hampton Roads Shipping Association, says union cooperation on technology and cost control is mostly positive "but while some union officials care about helping, there are certainly others that don't".

Comparisons with Europe over port efficiency and operations are misleading, warns a consultant, speaking privately. "Supply chains are completely different – the US has very little short-sea commerce; Europe stays with 40 foot boxes while the US transfers to 53 footers. In the New York area, in the early days of containerisation, shippers set up warehouses and distribution centres outside the area of trade union control. So, their location is different to that in other parts of the East Coast."