Chassis’ Math Problem

As 2013 gets under way, one of the biggest lasting impacts of the recession — the change in the U.S. chassis model — remains far from being resolved. Although ocean carriers have been tenacious in unshackling themselves from an unprofitable and inefficient asset while starting to bring the U.S. in line with practices in other regions, the question of who will bear the cost of providing chassis in the future remains up in the air. 

Despite announced withdrawals from chassis in many markets, it can’t be said that carriers are out of the chassis game entirely — far from it. It’s one thing to say you’re no longer providing chassis in Norfolk, Va.; it’s something else entirely to tell a major customer they’re now on their own, to “go talk to a trucker, because we’re no longer in the chassis business.”

Although that may be a goal for many carriers, the competitive forces that kept them providing chassis at a loss for years (and indeed what makes them continue to cut freight rates to maintain market share) remain a presence.

“Most of the carriers have moved the chassis off their balance sheets, but they may still have the contractual obligation to provide a chassis,” said Kevin Higgins, chief operating officer of Chassis Finder, an online tool for truckers that facilitates short-term leases of chassis.

But the miracle of the chassis transition is truly that: Despite the intense competitive pressures that make any collective action among carriers a rarity, few at this point believe carriers’ eventual exit from chassis isn’t inevitable. “Carrier momentum to withdraw from the chassis business picked up in 2012 and will continue through 2013,” S.Y. Kim, Hanjin Shipping’s managing director for North America, wrote in the JOC Annual Review and Outlook published this month.

The transition is well under way, and is a topic that will be discussed at the 2013 TPM Conference in Long Beach on March 3-6. Prior to the recession, carriers owned or leased under long-term contract the vast majority of the roughly 700,000 ocean container chassis in use in the U.S. market. After declining to renew leases and selling off chassis they owned outright, carriers today control perhaps 250,000 to 300,000 units, about half of the number they controlled earlier.

That’s led some to opine that the transition from the carrier-controlled chassis model is at its halfway point. “Carriers and leasing companies are allowing long-term leases to expire,” Higgins said. “Additionally, ocean carriers and leasing companies are mutually negotiating the early termination of long-term leases.”

The change has put the three major chassis lessors — Flexi Van, Trac Leasing and Direct Chassis Link (the former Maersk chassis business) — in virtually an entirely different business, where instead of leasing to 30 to 40 carriers that maintained the units during the term of the lease, they now are leasing to thousands of truckers and must get directly involved with maintenance and repair. The changes also have sowed confusion throughout the market because carrier chassis policies differ widely among carriers and regions.

But key to the transition will be the outcome. Many believe that, although the costs will shift to truckers and likely to the end-customers, the result will be a more efficient system because utilization of the assets will increase. Unlike ocean carriers, which would let large beneficial cargo owners hold chassis for days at a time while containers sat unloaded outside of distribution centers, truckers won’t have the resource to absorb the cost. 

“We believe that as the actual chassis cost becomes more transparent, warehouse and deconsolidation operations will be impacted dramatically. The industry habitually uses containers on chassis for storage,” Higgins said. “This practice will become unsustainable and force more efficient coordination between stakeholders.”

But how the pricing plays out is critical. It’s difficult to envision frequently undercapitalized drayage truckers absorbing much of the cost of chassis before being forced to somehow pass the costs along to the customer. The estimated cost of chassis ownership is about $6 a day, though some say it’s higher, which already is making customers resistant to pay the $11 to $15 daily rate truckers want to charge them.

“When judging their daily chassis rental rate, chassis users should consider that the chassis owner is paying about $6 or more a day 365 days a year regardless of if they have someone using the chassis or not. The revenue model needs to incorporate the fact that the chassis are not used 100 percent of the time,” said Bill Rooney, senior vice president for the trans-Pacific trade at global freight forwarder Kuehne + Nagel.

But if the trucker can’t isolate the cost of the chassis through, say, a surcharge, the result, he said, is that “it’s likely that the chassis is going to disappear into the dray rate.”

That could make this transition play out for a long time.  

Peter Tirschwell is senior vice president of strategy at UBM Global Trade. Contact him at ptirschwell@joc.com and follow him at twitter.com/PeterTirschwell.

 

 

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