In researching a column last week on why long-term ocean carrier contracts remain so rare in the U.S. trades, I put some questions to Bob Sappio, Senior Vice President, Pan American Trade (covering the trans-Pacific, trans-Atlantic, and Latin America trades) at APL. Below are the questions, and his responses:
Q: How many multi-year contracts does APL have in place and what percent of APL’s contracts are multi-year?
APL has about 5 percent of our contracts as multi-year contracts.
Q: Are these figures that have been flat or increasing?
Year on year it is about flat.
Q: What is the average duration of the multi-year contracts you have in place?
The average duration is 24 months.
Q: Do they generally contain fixed or fluctuating rates and to the extent of the latter, how are the rates over time determined, i.e. tied to a third-party index such as Drewry, CTS or SCFI?
Rates are not fixed. We have various formulas that allow rates to move up or down in a narrow band - some are customer driven formulas, some use a single third-party index or combination of indices,' some use other macro-economic indicators.
Q: Does APL wish to have a greater number of its contracts be long term, i.e. is this something you are promoting with customers?
APL feels that for a certain segment of the market, longer-term contracts that provide both service and rate predictability is an intelligent approach. We have promoted the notion of longer-term agreements, with improved predictability for both carrier and shipper, for some time now. We have made progress is many areas, and have been frustrated in others. Our customers want service certainty and predictable rates - we can facilitate this in more thoughtful and intelligent contracts - rather than "rate and volume agreements" that have heretofore characterized much of the service contract process.
Q: If so, what are the obstacles you face in achieving this -- what are the typical objections shippers express? How is the environment surrounding multi-year contracts changing?
Anytime you plow some new ground and make change you can expect resistance or some apprehension. Some of the obstacles include: The starting point of the rate in a multi-year agreement, willingness of customers to pay for service specificity and service commitments, how do we "index" the rate and allow it to move - albeit in a narrow band, and which index or combination on indices is best to use. Lastly, are both parties willing to "stay the course" of the multi-year agreement even if the market moves well beyond what was envisioned - either up or down. In order for this approach to take hold - all have to live up to commitments.
At the end of the day, service contracting represents a significant process improvement opportunity. Ten-plus years into OSRA (the 1998 Ocean Shipping Reform Act), we have made a material improvement, a revolutionary change really, in the number of individual service contracts in the trade. However, we have not yet made a broad enough change in the level of sophistication of the service contracts, that continues to be evolutionary...that's a shame. It should be a priority for both carrier and shipper and more predictable contracts would allow both parties to talk more about service improvement, supply chain cost reductions (not just price), improvements in carrier network efficiencies, perhaps even gain sharing.