Highly-respected industry analyst, Andrew Penfold, considers service and contractual issues that promote long-term sustainable relations between shipping lines and container terminal operators.
Securing container lines in a terminal is always a function of off ering competitive pricing and service levels. Having reviewed various business strategies to build revenue in the November edition of Port Strategy, the focus now turns to productivity initiatives designed to sustain customer loyalty and market share.
SERVICE DELIVERY & LINER VIEW
There are clear financial advantages stemming from competing on service offered and this is an approach that can also build robust revenues for the terminal operator. Of course, a distinction is required between the perspectives of the liner/shipper and the terminal operator.
From a purely shipping line viewpoint there is always an understandable bias in favour of prioritising vessel operations. Depending on the market orientation of the line and the percentage of carrier haulage employed, the landside part of the terminal service is also a critical component.
In the case of 100 per cent merchant haulage, the shipping line only pays for the terminal handling (and not for inland transport). The costs involved may be substantial and, therefore, a terminal operator that structurally performs above average may have a sustainable advantage contributing to the stability of the revenue streams.
This principle is illustrated in Table 1, where hypothetical operator, Terminal B realises significantly higher berth productivity compared to its competitor, Terminal A. In this example, the annual vessel cost saving of higher productivity is significant. Moreover, on each voyage a time saving of some seven hours is achieved. If similar savings could be realised in one or two other ports on the service, then the potential for an additional revenue generating port call becomes available. This can really make a positive difference.
Competing on speed can add to the financial results of the terminal operator’s customers, although this is only a real advantage if speedy handling is both reliable and predictable. Otherwise the shipping line will have to build significant flexibility into its schedules, thus negating these advantages. Uncertainties will also impact on overland transporters, leading to potential for increased costs further along the chain, so the shipper (merchant) perspective needs to be considered.
From the cargo owner/forwarder point of view, the seven-hour gain registered in the previous example is likely to be worth much less than to the shipping line. The invoice to the merchant does not change as a result. However, if an onward connection is missed, the costs involved (and damage done) may be significant. This is especially true in cases of high value goods or freight where time-to-market is extremely important or in goods required to supply production or assembly processes.
In such instances, the costs involved may be a multiple of the transportation costs. Then, the reliability of the total chain is far more important than the vessel handling speed. Securing robust revenues are thus most likely to be achieved if a terminal operator offers a steady, predictable vessel performance, short connection times to the next mode of transport and reliable, frequent hinterland connections.
Pricing techniques have already been discussed in the Part 1 article featured in the November edition of Port Strategy. However, it always requires some additional effort to be deployed to actually change container routings and sustain a favourable redirection. Some practical examples of seemingly irrational container flows are highlighted:
- Container flows may not be optimally routed due to lack of detailed awareness of comparative and modified tariffs.
- Localised internal company pricing policies sometimes prevent cross-border routings that will be both faster and less costly.
- Containers do not always follow the most cost-efficient routings – here the terminal operator has an opportunity to highlight differences, especially if it can offer complementary inland distribution services.
- Lack of transparency or awareness of available hinterland connections may lead to sub-optimal routeings.
- Inertia on the part of transport operators often prevents searching out and booking better intermodal transportation solutions – especially where longstanding ‘informal’ payments are a factor.
- The handling and redeployment of high volumes of empty containers between ports and depots often complicates the overall calculation.
All of these situations point to the need for the terminal operator to take an active role in understanding the intricacies of the customer’s business. Only by doing this, can cost advantages be quantified and highlighted. It is very difficult to resist such arguments, if clearly explained.
The people that undertake the actual bookings must be informed of the changes in relative pricing, the shipping line databases providing suggested routings may need to be updated, organisational bottlenecks may have to be removed, intermodal departments may need to be instructed or other communication efforts may be required to put the incentives to work. This goes well beyond typical shipping line-based marketing for terminal operators.
The current economic uncertainties provide a real incentive for achieving cost savings and elimination of ‘bottlenecks’. Choosing the right influencers and decisionmakers is crucial in this process, aiming at decision making unit members that have a basic willingness to evaluate improvement alternatives.
With regard to tariff and contractual arrangements, there are a couple of things that can be considered to assist in building revenue robustness, namely:
- If the importance of each customer is similar, then spreading out of contractual periods clearly offers a degree of security. Of course, as the liner business concentrates this approach becomes increasingly difficult, with two or three very large customers requiring other longer term commitments.
- The spread of the tariffs themselves should not be too wide. There should be a clear relationship between rates, volumes and service levels. In practice, this is rarely the case and variations around the optimum relation are frequent. This is not too much of an issue if it were not for the fact that shipping lines are subject to mergers and acquisitions and they (shipping lines) do switch between alliances. In this situation, the new combination may have two sets of tariffs. This effectively allows the shipping line to “cherry pick” and it results in tariff erosion for the terminal operator or port.
Timing of contract duration and contract robustness in the event of customer ownership change are, therefore, critical to preserve the interests of the terminal operator.
Maintaining and promoting robust revenue streams is the central task of the successful terminal operating company. Given the trend towards liner equity involvement in terminals it has increasingly become the case that container terminals are regarded as a cost centre for the shipping line.
This provides a real opportunity for the savvy terminal operator. By understanding the key drivers of terminal choice on the part of the shipping line – and offering high standard and additional services – the operator has the potential to offer a far higher service level than a ‘dedicated’ facility.
The terminal business is driven by a true understanding of the links between costs and service levels. In times of economic downturns and uncertainties, these measures will constitute a first line of defence when hard times prevail.