Author: Dr. Theo Notteboom and Dr. Athanasios Pallis
The optimal ship size is an ongoing concern in the shipping and port industry and associated with (dis)economies of scale with the deployment of larger vessels.
1. Feasibility of Mega Container Ships
The economic efficiency of ship size is being researched since the early 1970s. The seminal work of Jansson and Schneerson published in 1982 pointed out that the optimal ship size represents a trade-off between the positive returns earned at sea (i.e. economies of size during the line-haul operation) and the negative returns accruing while in port (i.e. diseconomies of size during the handling operations in ports). In the late 1990s, numerous scholars demonstrated that port and terminal-related factors indeed significantly impact the feasibility of deploying bigger vessels.
A survey among container shipping lines conducted by Scottish economist Alfred Baird in 1999 showed that 78% of the respondents expected that containership sizes would not go beyond the 12,000 TEU threshold. When asked about the main operational barriers to the deployment of larger container ships, the shipping lines did not point to technical limitations or market obstacles. Still, they identified port and terminal related factors as the main impediments to further scale increases. Low terminal productivity, port congestion, limited nautical accessibility, berth length, turning circles are the most significant. In the late 1990s – early 2000s, academic studies seemed to agree that the 8,000 TEU ship was the optimal ship size on the Europe-Far East trade. Economies of size diminished very rapidly beyond the 5,000 TEU scale.
More recent research shows that economies of scale at sea do not stop at the 6,000, 8,000, or 10,000 TEU threshold as suggested. Economies of scale at sea seem not to have been fully exhausted, while ports, terminals, and entire transport systems have been expanded and upgraded to significantly reduce possible diseconomies of scale in ports. The adaptive capacity of the port and terminal industry in terms of investments and productivity/efficiency gains typically did not result in penalization of larger vessels through port and terminal pricing. Advances in port productivity have resulted in disproportionately lower growth of port turnaround time as a function of vessel size. In other words, the potential diseconomies of scale linked to larger vessels have been fully or partially absorbed by port authorities, terminal operators, and other actors in the chain, thereby enabling/facilitating shipping companies to pursue consecutive rounds of scale increases in vessel size.
Still, further benefits of lower slot costs lessen while ships get larger, and savings might not be (fully) realized. The necessary efforts to prepare ports and terminals for ships of ever-increasing size are growing disproportionally. Supply chain risks related to bigger containerships could rise. Thus, it seems to become increasingly difficult to bring any further beneﬁts for the shipping lines, the ports/terminals, and the shippers when pursuing further scale increases in ship size (for example, Europe-Far East trade).
The outcome of any analysis on (dis)economies of scale and optimal vessel scale seems to be context- and time-dependent. For example, the economic viability of deploying ships of more than 10,000 TEU was considered weak in the late 1990s. However, weak market conditions in the post-2009 era, combined with a strong adaptive capacity of ports and terminals to accommodate bigger vessels, have helped shipping lines to order larger vessels, so as to improve firm and environmental performance.
A recent academic paper by Jiawei Ge and others presented an economic analysis of different mega-ship sizes (units of 18,000; 20,000 and 25,000 TEU). The focus was on comparing unit (slot) costs and more comprehensive cost-benefit measures such as the net present value (NPV). The study evaluated whether there are economic, operational, and environmental justifications for shipping companies to push the ULCS size from 18,000-20,000 TEU to 25,000 TEU considering the current and expected market conditions on the Europe-Far East trade and the current and expected environmental context for ship operations. The study came to the following conclusions:
- A further scale increase to a 25,000 TEU ULCS still generates economies of scale. Even under weak market conditions, the 25,000 TEU option gives a slightly better NPV result than the other two ship options, while the annual unit cost advantage for the largest ship size is more pronounced. Strong market conditions lead to positive NPVs for all three size options, but the 25,000 TEU ULCS clearly shows the best results.
- Changes in freight rates and load factors have the highest impact on the NPV results. Very low freight rates, even below the poor freight rates of 2016, are not beneficial to the economic viability of 25,000 TEU ships compared to the other two ship types. Higher rates give a strong incentive to shipping lines to order the largest ULCS possible.
- Very low load factors make the 18,000 and 20,000 TEU units more competitive from an NPV perspective, while the balance tilts to the 25,000 TEU unit when higher load factors are achieved.
- The NPV results are also very sensitive to vessel speed. When super slow steaming is applied, the NPV values of the three ship sizes remain very similar. However, the 25,000 TEU vessel can present more favorable NPV results than the other two ship sizes when a sailing speed above 17 knots would be adopted, which remains unlikely in the current market context.
- A fall in shipbuilding prices and bunker prices makes the 25,000 TEU ship slightly better off compared to the other two ship types.
2. Economies of Scale in Cruise Shipping
Cruise shipping has also been a shipping market characterized by the increase of cruise vessel size. Following the exploitation of economies of scale, the capacity of each of the 50 biggest cruise ships in operation exceeds 3,000 passengers, with the biggest of them having a capacity of 6.687 passengers and 228,081 Gross Tons (GT). Contrary to the case of cargo shipping, there is not a universal classification of cruise ships based on their size, and each cruise line classifies its cruise ships according to its preference and strategy.
Recent research of the capital, operating, and voyage costs associated with the construction and operations of the cruise fleet suggests that further upscaling of cruise vessels’ size should not be unquestionable. This is because a further increase in cruise ship size is not necessarily associated with diminishing costs per passenger (guest).
Capital costs are the costs of building the cruise ship plus any related interest. Operating costs are the expenses related to the daily operation of the vessel, including crew costs, maintenance and repairs, insurance, and administration costs. Voyage costs are the costs for commercial use of the vessel. Includes fuel costs, provisions, port costs, canal dues, agency expenses, and others. In their study Chaos et al calculated these three types of costs for 246 cruise vessels, grouped into five different ship sizes, namely small (under 20,000 GT); mid-sized (20,000–60,000 GT); big (60.000-120.000 GT); super (120.000-200.000) and mega (over 120,000 GT) ships, (over 120,000 GT) ships.
Capital costs are the highest cost component (28%-38%) for a cruise vessel. The second highest cost component is manning (16%-26%), due to a large number of auxiliary personnel required. Insurance costs represent 10–11% of the total costs. This percentage is higher than the respective 5% that is observed in other types of seagoing vessels. Yet, it is justified by the substantially higher construction costs of the newly built cruise vessels. In contrast to other types of passenger ships or cargo vessels, operating costs (between 41 and 50%) are higher than voyage costs (between 21 and 22%).
Based on these results, a model detailing the unit costs per passenger and per year (€/pax·year) for different size cruise vessels, under the assumptions of full occupancy and a low operating time of 60 days (which is the case of approximately 60% of such vessels) estimates a decline in the average voyage, operating, and capital costs, in mid-sized and big cruises compared to small cruises at over 30%. From this size upwards (i.e. in the case of super or mega-size cruise vessels), the average costs remain stable. The explanation lies in the significant weight of capital costs in relation to the other costs.
When the cruise vessels are utilized for longer periods, operating time increases to 120 days per annum, the voyage costs are altered, and economies of scale are realized since average total costs decrease as the size of the ship increases. However, the presence of scale economies is limited to a certain size (60,000-120,000 GT). From this size upwards, average total costs (per passenger) were found to increase. It is important to highlight that larger cruise ships are more sensitive to passenger occupancy than smaller ones due to their high capital and operating costs. Although the number of passengers increases significantly with ship size, the capital cost of the biggest vessels (construction and financing cost) is such that the average capital cost per passenger increases instead of decreasing.
- Chapter 1.3 – Ports and Container Shipping
- Chapter 1.5 – Ports and Cruise Shipping
- Chapter 2.2 – Port Hinterlands, Regionalization and Corridors
- Chaos, S.R., Pallis, A.A., Marchán, S.S., Roca, D.P. and Conejo, A.S.A., 2020, Economies of scale in cruise shipping. Maritime Economics & Logistics, https://doi.org/10.1057/s41278-020-00158-3.
- Ge, J., Zhu, M., Sha, M., Notteboom, T., Shi, W., Wang, X., 2020, Towards 25,000 TEU vessels? A comparative economic analysis of ultra-large containership sizes under different market and operational conditions, Maritime Economics and Logistics, https://doi.org/10.1057/s41278-019-00136-4.