Author: Dr. Theo Notteboom
Maritime services vary with the commodities carried. In liner shipping, individual maritime services are combined to form extensive shipping networks in which seaports play a pivotal role as high connectivity hubs.
1. An Asset-Based Industry
The container shipping industry consists of shipping companies transporting containerized goods overseas via regular liner services as their core activity. Container liner services are focused explicitly on transporting a limited range of standardized load units, mainly the twenty-foot dry cargo container or TEU of 20 feet long and the 40-foot dry cargo container or FEU (40′ long). High-cube containers are similar in structure to standard containers but one foot taller. In contrast to standard containers with a maximum height of 8’6″, high-cube containers are 9’6″ tall. For the most part, high-cube containers are 40 feet long but are sometimes made as 45-foot containers. Occasionally, slightly diverging container units are also loaded on container vessels such as tank, open-top, and flat rack containers. The diversity in unit loads in the container shipping industry is low due to uniformity when stacking containers below and on the deck of specialized container vessels (cellular containerships where each cell is designed to store a container).
A liner service is a fleet of ships, with common ownership or management, which provide a fixed service, at regular intervals, between designated ports, and offer transport to any goods in the hinterland served by those ports and ready for transit by their sailing dates (Stopford, 1997).
Container shipping is a highly capital-intensive industry where some assets are owned, others are leased, and where there exists a wide variability in cost bases. While it only contributes to about 16% of the volumes carried by maritime shipping, it accounts for more than half of the value carried. Asset management is a key component of the operational and commercial success of container shipping lines since they are primarily asset-based. Common asset management decisions for shipping lines include equipment management to reduce downtime and operating costs, increase the useful service life and the residual value of vessels, increase equipment safety, reduce potential liabilities, and reduce costs through better capacity management.
Container shipping lines are particularly challenged in developing an effective asset management program for the fleet they own or operate:
- Vessel lifecycle management includes the procurement, acquisition, deployment, and disposal of container vessels.
- Fleet capacity management is complex given the inflexible nature of vessel capacity in the short run due to fixed timetables, the seasonality effects in the shipping business, and cargo imbalances on trade routes.
Shipping lines seek gains in market share with capacity usually added as additional loops (in large segments) to existing services, which incur high fixed costs. For example, 10 to 11 ships are needed to operate one regular liner service on the Europe-Far East trade. Each of the post-Panamax container vessels has a typical newbuilding price ranging from USD 100 to 150 million depending on the unit capacity of the ship and the market situation in the shipbuilding industry at the time of the vessel order. On average, container shipping lines charter about half of the vessels from third-party ship owners. Ship chartering is a particularly common practice for mid-size containerships in the range of 1,000 to 3,000 TEU.
Container shipping lines also face large investments in their container fleets. For example, a container carrier operating regular service on the Asia-Europe trade with ten vessels of 18,000 TEU needs a container fleet of at least 360,000 TEU to support the service. Container shipping lines and other transport operators typically own 55% to 60% of the total global container equipment assets, while the remainder is leased from specialized companies.
Despite sustained growth brought by containerization, container carriers tend to underperform financially compared to other logistics sectors. This weaker performance is linked to the combination of capital-intensive operations and high risks associated with revenues. The large investments in assets and the fixed nature of the liner service schedules, even if cargo volumes are too low to fill the vessel, lie at the core of the risk profile in the container liner shipping industry. High commercial and operational risks are associated with deploying a fixed fleet capacity within a fixed schedule between a set of ports of call at both ends of a trade route. Unused capacity cannot be stored and represents missed revenue opportunities. Once large and expensive liner services are set up, the pressure is to fill the ships with cargo. When there is an oversupply of vessels in the market, the high fixed costs and product perishability give shipping lines an incentive to fill vessels at a marginal cost, often leading to downward freight rates in the market and direct operational losses on the trades considered. Since the financial crisis of 2008-09, the shipping industry has undertaken strategies aiming at increasing operating margins, mainly through alliances and capacity management.
2. Freight Rates and Surcharges
The revenue base of container shipping lines consists of freight rates collected from the shippers or their representatives for the maritime transport of containerized cargo. It is mostly complemented by a set of surcharges. All-in ocean freight rates have fluctuated significantly since 2009, as exemplified by the Shanghai Containerized Freight Index and other similar indices such as the World Container Index (WCI) or the China Containerized Freight Index (CCFI). Also, contract container freight rates are influenced by the balance of power between shippers and shipping lines in rate negotiations. Customers generating large cargo volumes tend to have better leverage.
Freight rates can vary greatly depending on the economic characteristics (e.g. cargo availability, imbalances, the competitive situation among shipping lines) and technological characteristics (e.g. maximum allowable vessel size) of the trade route concerned. The existence of large cargo imbalances on a number of trade routes has a significant impact on pricing. Trade imbalances also affect shippers in their ability to access equipment. In order to guarantee space, shippers may double book their container loads, leading to missed bookings for shipping lines. Container liner companies can react by imposing surcharges in the form of a ‘no show’ fee.
Base freight rates or Freight All Kinds (FAK) rates are applicable in most trades. These freight rates are lump sum rates for a container on a specific origin-destination pair, irrespective of its contents and irrespective of the quantity of cargo stuffed into the box by the shipper. On top of these base freight rates, liner companies charge separately for additional items through various surcharges. Still, some (larger) customers receive all-in prices. The most common surcharges include:
- Fuel surcharges (Bunker Adjustment Factor or BAF, but other terms are also used).
- Surcharges related to the exchange rate risk (Currency Adjustment Factor or CAF).
- Terminal handling charges (THC).
- Port congestion surcharges.
- Piracy surcharge.
- Surcharge for dangerous cargo.
- Various container equipment-related surcharges, such as demurrage charges, detention charges, equipment handover charges, equipment imbalance surcharges, special equipment for open-top containers, and heavy lifts.
Most carriers have developed a broad array of possible mandatory and optional charges and surcharges. In order to improve transparency and facilitate the ease of doing business, shipping lines have made efforts to simplify surcharge systems, as exemplified by the steps taken by Maersk Line in 2013. Despite these efforts, the list of possible surcharges remains rather long.
Fuel surcharges aim to pass (part of) the fuel costs on to the customer through variable charges.
Initially, fuel surcharges or BAFs were a percentage of the base freight rate levied only when the bunker price per ton was above a certain threshold value. In October 2008, after the lifting by the European Commission of the Block Exemption on anti-cartel rules for liner conferences, each shipping line had to set its fuel surcharges based on its own formula. Fuel surcharges tend to fluctuate greatly depending on bunker prices and the pricing strategy of the shipping line. In the second half of 2018, container shipping lines started to adjust fuel surcharges on a trade-by-trade basis ahead of the IMO deadline for introducing low-sulfur fuel rules. As of 2020, a global sulfur cap of 0.5% was imposed on ship fuel.
Currency Adjustment Factor (CAF, also known as the Currency Adjustment Charge or the Currency Surcharge) is usually a percentage of the basic freight rate applied to take into consideration the volatility of currencies between the point of loading and unloading.
When the USD started to become more volatile in the 1960s and 1970s, liner conferences came up with tariff surcharges to ensure that they would continue to enjoy a more or less stable income in the currency of their own country. A similar situation applied after 2005 when the Bank of China decided to allow the renminbi the fluctuation in relation to other currencies, particularly the USD. CAF and BAF have been contested by some shippers on the ground that the costs covered by these surcharges belong to the commercial risk of the entrepreneurial shipping line and should thus be included in the freight rate.
Terminal Handling Charges (THC) are a tariff charged by the shipping line to the shipper and which (should) cover (part or all of) the terminal handling costs, which the shipping line pays to the terminal operator.
THC vary per shipping line and per country and are a negotiable item for large customers. The party who pays the THC at the port of loading and/or the port of discharge depends on the Incoterms used. The Incoterms 2020 have been developed by the International Chamber of Commerce and are the world’s essential terms of trade for the sale of goods. They include EXW (Ex Works), FCA (Free Carrier), CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To), DAP (Delivered at Place), DPU (Delivered at Place Unloaded), DDP (Delivered Duty Paid), FAS (Free Alongside Ship), FOB (Free On Board), CFR (Cost and Freight) and CIF (Cost Insurance and Freight). These terms all have exact meanings for the sale of goods worldwide.
THC for exports are usually collected by shipping lines while releasing the Bill of Lading after completing export customs clearance procedures. Shipping lines usually collect the import THC at the time of issuing the delivery order to the consignee to take delivery of goods. THC may recover a major share of actual costs in some ports of call. In other ports, the applicable THC are higher than the actual container handling rates charged by the terminal operators, and thus a revenue-making instrument for the carriers. Shippers might argue that THC are arbitrarily fixed and used as a revenue-making instrument, particularly when base freight rates are low. Carriers typically argue that THC are aimed at cost recovery and are not a profit center.
3. Scale Enlargement in Vessel Size
The growing demand for maritime container transport has been met via vessel upscaling. The mid-1970s brought the first ships of over 2,000 TEU capacity. The Panamax vessel of 4,000 to 5,000 TEU (maximum dimensions for transit through the old Panama Canal locks) was introduced in the early 1990s. In 1988, APL was the first shipping line to deploy a post-Panamax vessel. In 1996, Maersk Line introduced the ‘Regina Maersk’ with a nominal vessel capacity of about 7,400 TEU. Consecutive rounds of scale increase led to the introduction of the ‘Emma Maersk’ in 2006, a containership that can hold more than 15,000 TEU and measured 397 m in length overall, with a beam of 56 m, and a commercial draft of 15.5 m. Since 2010, vessel capacity has been pushed beyond the 20,000 TEU mark. The introduction of ever-larger container vessels has resulted in an overall upscaling across the main east-west trade routes, with large vessels cascading to north-south routes.
Large vessels come with operational challenges related to port calls, terminal operations, and hinterland transport. Port and terminal-related factors are the main impediments to scale increases, such as terminal productivity, port congestion, nautical accessibility, berth length, and turning circles. In the past decades, ports, terminals, and entire transport systems have been expanded and upgraded to accommodate increased ship size. Even large upstream seaports such as Antwerp and Hamburg adapted to the new imperatives brought by mega container vessels by expanding their terminal facilities. The revealed adaptive capacity of the port and terminal industry in terms of investments and productivity gains typically did not result in the penalization of larger vessels through port and terminal pricing. Simultaneously, advances in port productivity have resulted in disproportionately lower growth of port turnaround time as a function of vessel size. In other words, port authorities, terminal operators, and other actors in the chain have fully or partially absorbed the potential diseconomies of scale linked to larger vessels, thereby enabling shipping companies to pursue consecutive rounds of scale increases in vessel size.
In recent years, attention has been paid to emission reductions and energy savings associated with ship size. Scale increases in vessel size combined with advances in ship technology and slow steaming can decrease the annual CO2 emissions of the world containership fleet. Container shipping is increasingly confronted with stronger environmental considerations and stricter regulatory frameworks on ship emissions and energy efficiencies. These include MARPOL Annex VI (Regulations for the Prevention of Air Pollution from Ships) and MRV (Monitoring, Reporting, and Verification), the Emission Control Areas (ECAs) with a sulfur cap of 0.1%, the global sulfur cap of 0.5% (applicable since 1st January 2020), and the Energy Efficiency Design Index (EEDI), mandatory for new ships since 2013. Hence, emission control and energy efficiency have become the main concerns in newbuilding decision-making. Container carrier CMA CGM was the first to order ULCSs with engines using LNG, which began operations in 2020.
The focus of container carriers on larger vessels does not necessarily lead to a more stable market environment. Consecutive rounds of scale enlargements in vessel size have reduced container trade slot costs, but carriers have not always reaped the full benefits of economies of scale at sea. The volatility of business cycles has more than once resulted in unstable cargo demand for shipping lines. Adding post-Panamax capacity can give a short-term competitive edge to the early mover, putting pressure on competing lines to upgrade their container fleet to avoid a unit cost disadvantage. A boomerang effect can result in overcapacity, impacting the margins of the industry, including the carrier who started the vessel scaling-up round. Vessel lay-ups, order cancellations, slow steaming, and service suspensions are the primary tools used by shipping lines in an attempt to absorb overcapacity when it occurs.
4. Horizontal Integration: Operational Agreements and M&A
Shipping lines view cooperation as one of the most effective ways of coping with a trade environment characterized by intense pricing pressure. Trade agreements such as liner conferences were prevalent until the European Commission outlawed this type of cooperation in October 2008. At present, the horizontal integration dynamics in the container shipping industry are based on mergers and acquisitions (M&A) and operational cooperation in many forms ranging from slot-chartering and vessel-sharing agreements to strategic alliances.
A slot chartering agreement (SCA) is a contract between partners who buy and sell a defined allocation (space, weight) on a vessel in general on a ‘used’ or ‘unused’ basis at an agreed price and for a minimum defined time period. In some cases, shipping lines engage in a slot exchange agreement.
A vessel sharing agreement (VSA) involves a limited number of shipping companies agreeing to operate a liner service along a specified route using a specified number of vessels. The partners do not necessarily each have an equal number of vessels. The capacity that each partner gets may vary from port to port and could depend on the number of vessels operated by the different partners.
A vessel sharing agreement for one regular liner service is slightly different from that of an alliance. A vessel sharing agreement is usually dedicated to a particular trade route with terms and conditions specific to that route. In contrast, an alliance is more global and could include many different trade routes, usually under the same terms.
In general terms, an alliance is an operating agreement between two or more carriers about joint fleet capacity management on a number of trade routes (typically the major East-West trade routes). The alliance members retain their commercial independence.
The first alliances among shipping lines date back to the mid-1990s, which coincided with the introduction of the first vessels above 6,000 TEU on the Europe-Far East trade route. In 1997, about 70% of the services on the main East-West trades were supplied by the four main strategic alliances. In 2022, three alliances were operational in the market: 2M, Ocean Alliance, and THE Alliance. This represented an evolution from just seven years earlier when four alliances were still active: 2M, Ocean Three, CKYHE, and G6. Alliance partnerships evolved due to mergers and acquisitions. Alliances can also be affected by the exit of carriers. For example, Malaysian carrier MISC left the Grand Alliance in the late 2000s, and Hanjin became the first large carrier to go bankrupt due to weak market conditions. The January 2023 announcement that the 2M alliance (MSC and Maersk) will be discontinued after January 2025 shows that alliance formation is heavily affected by changing strategic, operational, and market conditions.
The main incentives for alliance formation relate to achieving a critical mass in the scale of operation, exploring new markets, enhancing global reach, improving fleet deployment, and spreading risks associated with investments in large container vessels. Strategic alliances provide their members with easy access to more loops or services with relatively low-cost implications and allow them to share terminals to cooperate in many areas at sea and ashore, thereby achieving cost savings. Alliances also come with some impediments for members, particularly at the level of a loss of operational and strategic independence and regulatory headaches.
The shipping business has been subject to several waves of mergers and acquisitions (M&A). The number of acquisitions rose from three cases in 1993 to 13 in 1998 before peaking at 18 in 2006. The main M&A events included the merger between P&O Container Line and Nedlloyd in 1997, the merger between CMA and CGM in 1999, and the take-over by Maersk of Sea-Land in 1999 and P&O Nedlloyd in 2005. The economic crisis of late 2008 had an impact on the market structure. There was no major M&A activity in liner shipping between October 2008 and early 2014, but a new wave of acquisitions and mergers appeared inevitable in the medium term. The most recent wave in carrier consolidation started in the mid-2010s.
Shipping lines opt for mergers and acquisitions to obtain a larger size, secure growth, and benefit from scale advantages. Other motives relate to gaining instant access to markets and distribution networks, obtaining access to new technologies, or diversifying the asset base. Acquisitions typically feature some pitfalls associated with the internationalization of the maritime industry: cultural differences, overestimated synergies, and high expenses concerning the integration of departments. Still, acquisitions make sense in liner shipping as the maritime industry is mature because entry barriers are relatively high due to the investment required and the development of the customer base. For example, through a series of major acquisitions (Sea-Land, P&O Nedlloyd, Safmarine, Hamburg-Sud, etc.), Maersk increased its market share substantially and made strategic adjustments to secure its competitive advantage on key trade routes. In contrast to Maersk Line, MSC reached the number one position in the world ranking of container lines based on organic or internal growth.
The liner shipping industry has witnessed a concentration trend in slot capacity control, mainly due to M&A activity. The top 20 carriers controlled 89.7% of the world’s container vessel capacity in April 2019. This figure amounted to about 83% in late 2009, 56% in 1990, and only 26% in 1980. The consolidation trend has raised concerns about an overly concentrated market and the potential oligopolistic behavior of the large carriers and their alliances. Therefore, M&A activity and alliance formation in liner shipping are under scrutiny by competition authorities worldwide. Alliances and carrier consolidation have their full impact on inter-port competition, given the large container volumes and associated bargaining power.
5. Vertical Integration: Extending the Scope of Operations
In response to low margins in shipping and customer demand for door-to-door and one-stop shopping logistics services, shipping lines may extend the reach of their activities to other parts of the supply chain. Over the recent decades, the largest container lines have shown a keen interest in developing dedicated terminal capacity to control costs and operational performance, improve profitability, and as a measure to cope with poor vessel schedule integrity. For example, Maersk Line’s parent company, AP Moller-Maersk, operates many container terminals through its subsidiary APM Terminals. CMA CGM, MSC, Evergreen, and Cosco are among the shipping lines fully or partly controlling terminal capacity worldwide. Independent global terminal operators such as Hutchison Ports, PSA, and DP World are increasingly hedging risks by setting up dedicated terminal joint ventures in cooperation with shipping lines and strategic alliances. The above developments have given rise to growing complexity in terminal ownership structures and partnership arrangements.
The scope of extension of several shipping lines goes beyond terminal operations to include inland transport and logistics. Many shipping lines are developing door-to-door services based on the principle of carrier haulage to get a stronger grip on the routing of inland container flows. Some shipping lines enhance network integration through structural or ad hoc coordination with independent inland transport operators and logistics service providers. They do not own inland transport equipment. Instead, they use the services of reliable, independent inland carriers on a (long-term) contract base. Other shipping lines combine a strategy of selective investment in key supporting activities (e.g. agency services or distribution centers) with sub-contracting of less critical services. With a few exceptions (e.g. CEVA Logistics as part of CMA CGM, Medlog as part of MSC, and Damco now fully integrated with Maersk Line), the management of pure logistics services is done by subsidiaries that share the same mother company as the shipping line but operate independently of liner shipping operations. Another group of shipping lines is increasingly active in managing hinterland flows. The focus is now on the efficient synchronization of inland distribution capacities with port capacities.
COVID-19 has accelerated the logistics integration strategies of some major container carriers. High freight rates have resulted in record profitability in container shipping and deep pockets of carriers. Helped by historically high operating margins, a number of carriers, such as Maersk Line, CMA CGM, or MSC, embarked on a take-over spree in the air freight business, e-commerce, and last-mile logistics, digital platforms, and forwarding activities. Examples include the take-over by Maersk of Senator International (air freight forwarding) and e-commerce firms HUUB (fashion industry), B2C Europe Holding, Visible SCM (US), and Pilot Freight Services; or the take-over by CMA-CGM of Ingram Micro’s Commerce & Lifecycle Services (CLS) in November 2021 to boost its e-commerce expertise and the preliminary agreement to acquire a 51% stake in the Colis Privé Group (e-commerce services & last-mile logistics, February 2022).
However, not all carriers are walking the path of logistics integration. For example, there is currently no indication from ONE, Evergreen, or Hapag-Lloyd of a large investment ramp-up in logistics companies. This can be partly explained by the presence of a logistics company in the shareholding of these carriers (e.g., the Kühne family as one of the main shareholders of Hapag-Lloyd while also being active in global 3PL company Kühne & Nagel) or by the fact that these carriers belong to larger conglomerates somewhat already active in the logistics sector (e.g. the Japanese NYK group as an active shareholder of carrier ONE while also having its own logistics division Yusen Logistics).
The level of consolidation in liner shipping combined with very high freight rates in the period late 2020 to 2022 gave new entrants, such as large e-commerce players and logistics service providers, incentives to consider a direct involvement in container shipping. In other words, while some carriers were vertically integrating in view of offering global logistics solutions, other market players (might) enter the container shipping business, although on a small and rather fragmented scale for now. For example, faced with the challenge of keeping stores stocked amid a global supply chain crisis, e-commerce giants such as Amazon, as well as large retailers like Walmart and Costco, went so far as to charter their own container ships, typically calling at smaller container ports.
Shipping lines face important challenges to improve inland logistics further. Competition with the merchant haulage option remains fierce since they have a broader and more established market base on which to offer their services. The logistics requirements of customers (e.g. late bookings, peaks in equipment demand) typically lead to peak activity levels and high inland logistics costs. Given the mounting challenges in inland logistics, shipping lines that succeed in achieving better management of inland logistics can secure an important cost advantage compared to rivals.
Many shipping lines are also heavily focusing on digital transformation. Through investments and initiatives in digital infrastructure and services, shipping lines are aiming for the creation of value-adding activities in the following areas:
- The optimization of operations by using data for the real-time network leads to bunker fuel cost savings. Other forms of operational optimization include automated vessel stowage planning, the planning of container repairs, the repositioning of empty containers, and the predictive maintenance of vessels, containers, and other shipping assets.
- The development of advanced commercial decision-making instruments by using data to target customers and optimize the cargo mix within restrictions (e.g. dangerous goods), generate transparency in the supply chains of the customers and develop intelligent pricing engines.
- The development of new services that can generate new revenue streams. Examples include consultancy and advisory services related to logistics chains, the aggregation, and selling of trade data, or the commercialization of weather data collected by vessels navigating the open seas.
Technology is thus playing a particular role in the vertical integration process namely in terms of IT (control of the process) and intermodal integration (control of the flows). Shipping lines are setting up cooperation schemes to support digital transformation. For example, Maersk, MSC, Hapag-Lloyd, and ONE launched a digital container platform in 2019. This Digital Container Shipping Association (DCSA), whose members are currently responsible for 70% of global container trade, has been established to set standards for the digitalization of container shipping to overcome the lack of a common foundation for technical interfaces and data. The neutral and non-profit association is open to all ocean carriers who wish to join. DSCA interacts with other associations and organizations such as the United Nations (i.e. Rules for Electronic Data Interchange for Administration, Commerce and Transport or UN/EDIFACT), the International Organization for Standardization (ISO), the Blockchain in Transport Alliance (BITA), and OpenShipping.org, which offers an open-source standard for global shipping. In late 2020, DSCA published its new data and process standards for the creation and use of electronic bills of lading (eBL). This is the first step in a multi-year eDocumentation initiative to deliver standards to enable the digitalization of end-to-end container shipping documentation.
6. Container Services and Networks
A. Container service network patterns
When designing their networks, shipping lines implicitly have to make a trade-off between the requirements of the customers and operational cost considerations. Higher demand for service segmentation adds to the growing complexity of the networks. Shippers demand direct services between their preferred ports of loading and discharge. The demand side thus exerts strong pressure on the service schedules, port rotations, and feeder connections. However, shipping lines have to design their liner services and networks to optimize ship utilization and benefit from scale economies in vessel size. Their objective is to optimize their shipping networks by rationalizing the coverage of ports, shipping routes, and transit time according to direct routes and strategic passages.
Shipping lines may direct flows along paths optimal for the system, with the lowest cost for the entire network being achieved by indirect routing via hubs and the amalgamation of flows. However, the more efficient the network from the carrier’s point of view, the less convenient that network could be for the shippers’ needs. Bundling is one of the key drivers of container service network dynamics and can occur at two levels:
- Bundling within an individual liner service.
- Bundling by combining two or more liner services.
The objective of bundling within an individual liner service is to collect container cargo by calling at various ports along the route instead of focusing on an end-to-end service. Such a line bundling service is conceived as a set of x roundtrips of y vessels, each with a similar calling pattern in terms of the order of port calls and time intervals (i.e. frequency) between two consecutive port calls. By overlaying these x roundtrips, shipping lines can offer the desired calling frequency in each of the ports of call of the loop. Line bundling operations can be symmetrical (i.e. same ports of call for both sailing directions) or asymmetrical (i.e. different ports of call on the way back). Most liner services are line bundling itineraries connecting two and five ports of call scheduled in each of the main markets. The trade between Europe and the Far East provides a good example. Most mainline operators and alliances running services from the Far East to North Europe stick to line bundling itineraries with direct calls scheduled in each of the main markets.
Notwithstanding diversity in calling patterns on the observed routes, carriers select up to five regional ports of call per loop. Shipping lines have significantly increased average vessel sizes deployed on routes. In October 2019, the average container vessel on the Asia – North Europe trade had a capacity of 16,100 TEU compared to 11,711 TEU in 2015, 9,444 TEU in 2012, 6,164 TEU in 2006, and 4,250 TEU in 2002. These scale increases in vessel size have put downward pressure on the average number of European port calls per loop on the Far East-North Europe trade: 4.9 ports of call in 1989, 3.84 in 1998, 3.77 in October 2000, 3.68 in February 2006, 3.35 in December 2009 and 3.48 in April 2012. However, in recent years, the number of port calls has slightly increased, mainly driven by the carriers’ focus on increasing vessel utilization. As a result, the average number of European port calls per loop on the Far East-North Europe trade reached 4.52 in July 2015, 4.59 in April 2017, and 4.11 in June 2019. Two extreme forms of line bundling are round-the-world services and pendulum services.
The second possibility is bundling container cargo by combining two or more liner services. The three main cargo bundling options include a hub-and-spoke network (hub/feeder), interlining/intersection, and relay. The establishment of global networks has given rise to hub port development at the crossing points of trade lanes. Intermediate hubs have emerged since the mid-1990s within many global port systems: Freeport (Bahamas), Salalah (Oman), Tanjung Pelepas (Malaysia), Gioia Tauro, Algeciras, Taranto, Cagliari, Damietta, Tanger Med, and Malta in the Mediterranean, to name but a few. Hubs have a range of common characteristics in terms of nautical accessibility, proximity to main shipping lanes, and ownership, in whole or in part, by carriers or multinational terminal operators. Transshipments are growing as a share of maritime containerized traffic, from around 11% in 1980, 19% in 1990, 26% in 2000 to about 29% in 2010, and 28% in 2012.
Most intermediate hubs are located along the global beltway or equatorial round-the-world route (i.e. the Caribbean, Southeast and East Asia, the Middle East, and the Mediterranean). These nodes multiply shipping options and improve connectivity within the network through their pivotal role in regional hub-and-spoke networks and cargo relay and interlining operations between the carriers’ east-west services and other inter and intra-regional services. Container ports in Northern Europe, North America, and mainland China mainly act as gateways to the respective hinterlands and do not account for significant transshipment volumes.
Two developments undermine the position of pure transshipment/interlining hubs. First, the insertion of hubs often represents a temporary phase in connecting a region to global shipping networks. Hub-and-spoke networks allow considerable economies of scale of equipment. Still, the cost-efficiency of larger ships might not be sufficient to offset the extra feeder costs and container lift charges involved. Once traffic volumes for the gateway ports are sufficient, hubs are bypassed and become redundant. Second, transshipment cargo can easily be moved to new hub terminals that emerge along the long-distance shipping lanes, implying a volatile market condition for transshipment hubs. Seaports that can combine a transshipment function with gateway cargo having a less vulnerable and, thus, more sustainable position in shipping networks.
In channeling gateway and transshipment flows through their shipping networks, container carriers aim to control key terminals in the network. Decisions on the desired port hierarchy are guided by strategic, commercial, and operational considerations. Shipping lines rarely opt for the same port hierarchy because a terminal can be a regional hub for one shipping line and a secondary feeder port for another operator.
The liner service configurations are often combined to form complex multi-layer networks. The advantages of complex bundling are higher load factors and the use of larger vessels in terms of TEU capacity, higher service frequencies, and more destinations served. Container service operators have to make a trade-off between frequency and volume on the trunk lines. Smaller vessels allow for meeting the shippers’ demand for high frequencies and lower transit times, while larger units allow operators to benefit from vessel scale economies. The main disadvantages of complex bundling networks are the need for extra container handling at intermediate terminals and longer transport times and distances. Both elements incur additional costs and could counterbalance the cost advantages linked to higher load factors or the use of larger unit capacities. Some containers in such a system undergo as many as four transhipments before reaching the final discharge port. The global container shipping grid allows shipping lines to cope with the changes in trade flows as it combines a large number of potential routes in a network.
Existing liner shipping networks feature substantial diversity in the types of liner services and great complexity in the way end-to-end services, line bundling services, and transshipment (including relay and interlining) operations are connected to form extensive shipping networks. Maersk Line, MSC, Cosco, and CMA-CGM operate truly global liner service networks, with a strong presence on secondary routes. This is particularly the case for Maersk Line, which has created a balanced global coverage of liner services. The networks of CMA-CGM and MSC differ from the general scheme of traffic circulation through a network of specific hubs (many of these hubs are not among the world’s biggest container ports) and a more selective serving of secondary markets such as Africa (strong presence by MSC), the Caribbean and the East Mediterranean.
Notwithstanding the demand-pull for global services, a large number of individual carriers remain regionally based. Asian carriers such as the Japanese carrier ONE (Ocean Network Express) and the South Korean carrier HMM mainly focus on intra-Asian trade, transpacific trade, and the Europe – Far East route. This is partly because of their huge dependence on export flows generated by the respective Asian home bases. Evergreen and Cosco Shipping are among the exceptions frequenting secondary routes such as Africa and South America. Profound differences exist in service network design among shipping lines. Some carriers have clearly opted for truly global coverage. Others are somewhat stuck in a triad-based service network, forcing them to develop a strong focus on cost bases. Alliance structures (cf. THE Alliance, Ocean Alliance, and 2M) provide members with access to more loops or services with relatively low-cost implications and allow them to share terminals.
B. The design of container liner services
Before an operator can start with regular container service design, the targeted trade route(s) need to be analyzed. The analysis should include elements related to the supply, demand, and market profile of the trade route. On the supply side, key considerations include vessel capacity deployment and utilization, vessel size distribution, the configuration of existing liner services, the existing market structure, and the port call patterns of existing operators. On the demand side, container lines focus on the characteristics of the market to be served, the geographical cargo distribution, seasonality, and cargo imbalances. The interaction between demand and supply on the trade route considered for liner services results in seasonal freight rate fluctuations and reflects its earning potential.
The ultimate goal of market analysis is not only to estimate the potential cargo demand for a new liner service but also to estimate the volatility, geographical dispersion, and seasonality of such demand. These factors will eventually affect the earning potential of the new service. Once the market potential for new services has been determined, the service planners need to decide on several inter-related core design variables that mainly concern:
- The liner service type.
- The number and order of port calls in combination with the actual port selection process.
- The vessel speed.
- The frequency.
- The vessel size and fleet mix.
- The array of liner service types and bundling options available to shipping lines (see the previous section).
Limiting the number of port calls shortens round voyage time and increases the number of round trips per year, minimizing the number of vessels required for that specific liner service. However, fewer port calls mean poorer access to cargo catchment areas. Adding port calls can generate additional revenue if the additional costs from added calls are offset by revenue growth. The actual selection of ports is a complex issue. Traffic flows through ports are a physical outcome of route and port selection by the relevant actors in the chain. Port choice has increasingly become a function of the overall network cost and performance. Human behavioral aspects might impede carriers from achieving an optimal network configuration. Incorrect or incomplete information results in bounded rationality in carriers’ network design, leading to sub-optimal decisions. Shippers sometimes impose bounded rational behavior on shipping lines where the shipper asks to call at a specific port. The selection of the ports of call by a shipping line can also be influenced by market structures and the behavior of market players. For example:
- Important shippers or logistics service providers might impose a certain port of call on a shipping line leading to bounded rationality in port choice.
- If a shipping line is part of a strategic alliance, the port choice is subject to negotiations among the alliance members. The collective choice can differ from the choice of an individual member.
- A shipping line might possess a dedicated terminal facility in a port of a multi-port gateway region and might be urged to send more ships to that facility in view of optimal terminal use.
- Carriers might stick to a specific port as they assume that the decision-making efforts and costs linked to changes in the network design will not outweigh the costs associated with the current non-optimal solution.
Next to the number of port calls, the call order is of importance. If the port of loading is the last port of call on the maritime line-bundling service and the port of discharge is the first port of call, then transit time is minimized. A port regularly acting as the last port of loading or first port of discharge in a liner service schedule, in principle, has more chance of achieving a higher deepsea call efficiency ratio (i.e. the ratio between the total TEU discharged and loaded in the port and the two-way vessel capacity) compared to rival ports which are in different segments of the loop. In practice, shipping lines’ decisions on the number and order of ports of call are influenced by many commercial and operational determinants, including the cargo generating effect of the port (i.e. the availability of export cargo), the distribution of container origins and destinations over the hinterland, the berth allocation profile of a port, the nautical access, the time constraints of the round voyages and so on.
The choice of vessel speed is mainly affected by the technical specifications of the vessel deployed (i.e. the design speed), bunker fuel prices, environmental considerations (e.g. reduction of CO2 through slow steaming), and the capacity situation in the market (i.e. slow steaming can absorb some of the vessel overcapacity in the market). Since 2008, slow steaming and super slow steaming have gradually become common in the container shipping market.
The number and order of port calls, the total two-way sailing distance, and the vessel speed are the main determinants of the total vessel roundtrip time. The theoretical roundtrip time will not always be achieved in practice due to delays along the route and in ports giving rise to schedule reliability problems. Low schedule integrity can have many causes ranging from weather conditions, delays in port access (pilotage, towage, locks, tides) to port terminal congestion, or even security considerations. To cope with the chance of delays, a shipping line can insert time buffers in the liner service, which reduces schedule unreliability but increase the vessel roundtrip time.
When it comes to service frequency, carriers typically aim for a weekly service. The service frequency and the total vessel roundtrip time determine the number of vessels required for the liner service. Carriers have to secure enough vessels to guarantee the desired frequency. Given the number of vessels needed and the anticipated cargo volume for the liner service, the shipping line can then decide on the optimal vessel size and fleet mix. As vessel size economies are more significant over longer distances, the biggest vessels are typically deployed on long, cargo-intensive routes.
Decisions on all of the above key design variables will lead to a specific slot capacity offered by the new liner service. It should align with the actual demand to maximize average vessel utilization (given expected traffic imbalances, cargo dispersion patterns, and cargo seasonality and volatility).
7. The Connectivity of Container Ports in Maritime Networks
The liner service networks of shipping lines revolve around a set of strategic hubs. Each hub has high connectivity (in terms of frequency and range of ports served) to secondary ports in the network and major inland markets. A few important points need to be made in this respect:
- Container shipping lines have been very active in securing dedicated terminal capacity in the strategic locations within their liner service networks. A substantial number of container terminals worldwide feature a shipping line among their shareholders, mostly through their terminal sister companies. Examples include Terminal Link of CMA CGM (51% shareholding), Cosco Shipping Ports of the Cosco group (100%), TIL of MSC (60%), and APM Terminals of the AP Moller group (100%).
- Shipping lines do not necessarily opt for the same hubs but have similar transshipment areas (e.g. Southeast Asia, the Middle East, or the Caribbean).
- There is an upper limit to the concentration of flows in only a few hubs. For instance, Maersk Line did not opt for one European turntable, but several major hubs. The optimal number of hub ports in the network depends on various factors, including the cost trade-off between the hub-feeder option versus the direct call option. Also, shipping lines can have commercial reasons for not bundling all their cargo in one port, such as diversification and resilience strategies.
The maritime connectivity of a container port can be measured in different ways:
- UNCTAD publishes the Liner Shipping Connectivity Index (LSCI) for countries and individual ports as an aggregation of ﬁve statistics: number of liner services calling, number of liner companies providing those services, number of ships in those services, combined container capacity of those ships (in TEUs), and capacity of the largest ship calling.
- The measurement of the centrality of ports in the network. The centrality of ports in the network can be approached at the local and global levels. Degree centrality is a local level measure counting for each port the number of connections to other ports. Betweenness centrality is a global level measure summing for each port the number of its positions on the shortest possible paths within the entire network. Degree centrality is a measure of connectivity, while betweenness centrality can be regarded as a measure of accessibility. Hub ports typically have a high degree of centrality and a high betweenness centrality due to their role as inter-regional pivots in the global network.
Empirical work on the centrality of ports in the global container shipping network shows that the Asia-Pacific network is centered on the Singapore-Busan axis and Europe–Atlantic with the Le Havre-Hamburg range. Due to their lack of hub and feeder activities, large North American and Japanese ports are poorly represented despite their traffic volume. Singapore is the most central port of the global system, mainly associated with its position in the Strait of Malacca. The very high centrality of the Suez and Panama canals underlines the strong vulnerability of the global network. In East Asia and the Mediterranean, an increasing number of ports have high connectivity (for example, Port Klang, Xiamen, and Shenzhen in Asia; Marsaxlokk, Piraeus, and Tanger Med in the Mediterranean).
In the future, shipping lines will continue to mix liner services to create a network best fitting for carriers’ requirements. Increasing volumes would lead to an increasing segmentation in liner service networks and a hierarchy in hubs. Hub-and-spoke systems are just a part of the overall scene. There remains no “one size fits all” approach to the future design of liner service networks. The port hierarchy is determined by the decisions of individual container shipping lines (operating as independent carriers or in groupings), thereby guided by strategic, commercial, and operational considerations. The decisions of these lines regarding the hierarchy of the ports of call are rarely identical. Hence, a port may function as a regional hub for one liner operator and a feeder port for another.
A major threat to the future of complex liner service networks lies in decreased schedule reliability. Low schedule integrity can have many causes, ranging from weather conditions, delays in the access to ports (pilotage, towage, locks, tides), port terminal congestion, or even security considerations. Given the nature of many liner services (more than one port of call, weekly service, hub-and-spoke configurations, etc..), which are closely integrated, delays in one port cascade throughout the whole liner service and, therefore, also affect other ports of call (even those ports which initially had no delays). Moreover, vessel delays compound delays in inland freight distribution.
- Chapter 1.1 Maritime Shipping and International Trade
- Chapter 1.2 Ports and Maritime Supply Chains
- Chapter 1.4 Ports and Distribution Networks
- Chapter 2.2 Port Hinterlands, Regionalization and Corridors
- Chapter 3.1 Terminals and Terminal Operators
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