One of the most significant changes in the 54-year history of maritime containerization is unfolding rapidly at U.S. ocean container terminals, and everyone from trucking companies to shippers is scrambling to adjust.
One by one and with little fanfare, ocean carriers at U.S. ports are pulling out of the business of providing chassis to carry containers away from terminals.
For the container lines, it’s the natural result of the financial and operational overhaul many launched during the trade downturn, an exercise that has pushed many carriers to focus on core operations and shed secondary services and operations that added costs without the offsetting revenue.
For shippers and other cargo interests, the carriers’ moves are part of a broader restructuring of shipping essentials. From the availability of containers to the equipment needed to haul the boxes, the nuts and bolts of the business are changing.
In quick order in recent weeks, Cosco, CMA CGM, NYK Line, Orient Overseas Container Line, Atlantic Container Line and Evergreen Marine announced they are exiting the chassis business. The withdrawal is starting in smaller ports and inland locations such as Boston, Philadelphia and Pittsburgh, and will eventually extend throughout the U.S.
In a sense, the carriers were following the lead of Maersk Line, which last year announced it would no longer provide chassis for free in New York-New Jersey. Maersk established a new entity, Direct ChassisLink, to provide chassis on a neutral basis, at an initial cost of $11 a day, to any trucker needing one.
That’s routine business in many countries, but a fundamental change in practice in the United States. And, with the lineup of carriers leaving the chassis business growing, others are sure to follow. “I don’t think there is a carrier out there that is not contemplating getting out of the chassis business,” said Phil Connors, executive vice president of Flexi-Van Leasing, a Kenilworth, N.J.-based chassis lessor.
Trucking companies are especially concerned about the development because eventually they will have to provide chassis at all U.S. ports, either by owning the equipment outright or leasing the chassis on a per-diem basis from third-party providers such as Flex-Van or TRAC Intermodal, which until last month was known as Seacastle.
Except for a handful of relatively large, well-capitalized harbor trucking companies, most truckers can’t afford the huge costs of buying, maintaining, repairing and storing the hundreds of chassis they will need to service their customers.
A typical chassis spends long periods at a customer’s warehouse while the container is being unloaded, is in transit to another customer or is sitting in the customer’s yard until it is moved to the warehouse. The math is simple: A motor carrier with 100 trucks will need 300 to 400 chassis so equipment is always available to serve its customers.
There are only a few dozen large container lines in the world, but there are thousands of harbor trucking companies in the U.S., and the vast majority do not have the capital needed to buy, maintain and store chassis. That’s why, some service providers say, the long-ignored economics of this necessary piece of equipment are coming to the forefront.
“The trucker is never going to pay for the chassis. He has to pass the cost on” to the beneficial cargo owner, said Bob Curry, president of California Cartage, a Long Beach, Calif.-based drayage operator and third-party logistics provider.
So far, at least, the economics and operations of Maersk’s Direct ChassisLink are working out just fine, according to Andy Chinigo, vice president of business development at DCLI.
In Elizabeth, N.J., some 20 percent of DCLI’s chassis leased by truckers use the equipment to pull containers owned by lines other than Maersk. “Why are they using my chassis when they can get it for free from the other lines?” Chinigo asked.
The answer in most cases is that the trucker can use DCLI’s neutral chassis to call at any terminal to pick up a container belonging to any ocean carrier without having to wait 30 minutes or longer for the terminal to match the right container with the chassis.
With the model successful in the Northeast, DCLI is extending it to ports and inland destinations in other parts of the country, just as other shipping lines are rushing to shed the chassis.
Carriers got into the business of providing chassis in the U.S. more than 50 years ago when they were trying to gain a foothold. Like all startup companies, container lines used every hook they could to gain customers, including providing chassis and delivering containers to multiple inland points.
For years, they absorbed most of this cost as part of their service, but the recession and the added cost of meeting new federal “roadability” regulations pushed them to pare their businesses to the core — port-to-port ocean carriage.
“When you are building a business, you have to do things differently from when a business becomes mature,” said Frank Harder of transportation consulting firm the Tioga Group. “You can find a parallel with the rail industry, because railroads are always debating about focusing on their core business and getting other people to invest in everything else.”
Cargo interests, especially large retailers, are concerned because the days of using ocean carrier-owned chassis for free are ending.
Today, when a trucker picks up a container and chassis at a marine terminal and drays the unit to a retailer’s warehouse, the ocean carrier often allows the retailer to keep the chassis for 10 to 20 days, sometimes for as long as a month, without paying detention charges. The chassis, in effect, provides free storage for the retailer.
DCLI doesn’t operate that way, and other chassis providers are certain to follow its model. DCLI charges the customer $11 a day from the time the chassis leaves its control until the equipment is returned, Chinigo said.
Almost on cue, TRAC Intermodal last week introduced a new service called TRAC Connect that rents chassis to port truckers at $11 a day on a short- to medium-term basis.
Although the transition from ocean carrier-owned chassis to trucker or third-party-owned chassis will be difficult for many participants in the supply chain, shipping lines will see it as a major improvement in their efficiency — and to their bottom lines.
An executive at one shipping line, speaking on condition of anonymity, said the carrier spends $50 million a year to own and maintain its chassis fleet. “And we have one-third the number of chassis that Maersk has,” he said.
The costs and headaches associated with having a chassis fleet will only worsen as the Federal Motor Carrier Safety Administration phases in requirements for maintaining and repairing the equipment. Those rules assign most of the responsibility and liability for chassis to the provider of the equipment.
“Carriers are going to do this because it gets them away from the roadability and liability requirements,” said Greg Stefflre, a Southern California attorney and trucking company owner.
Industry experts see an even bigger force at work. Shipping lines for years have looked for a way out of what were considered value-added services but now are seen as money-losing ventures. So-called store-door pricing is paramount among these services.
Most shipping lines quote customers a store-door price to carry a container from the foreign port to the U.S. port, unload it from the vessel and truck it from the terminal to the customer’s warehouse. Store-door pricing involves negotiating the trucking rate with the drayage company and providing the carrier-owned chassis free of charge.
“What we will see is an end to store-door delivery provided by carriers,” said Peter Stone, chief commercial officer at Ports America Group, which operates marine terminals across the U.S.
Now may be the perfect time for ocean carriers as an industry to pull this off. With vessels overbooked in Asia, a shortage of containers in Asia and now a shortage of chassis in the U.S., shipping lines have leverage over shippers, said Paul Bingham, managing director of the global trade and transportation practice at IHS Global Insight.
Carriers are especially emboldened by the success of their slow-steaming program, which began as a move to reduce fuel costs but has had an almost “magical” residual effect of soaking up excess vessel capacity, Bingham said.
By demonstrating that as an industry they could avoid breaking ranks on slow-steaming, carriers can take the next step and focus more directly on port-to-port ocean service.
For shippers, the message is clear. “Anything else you want, call your freight forwarder,” Bingham said.
Terminal operators also hope the carriers succeed in exiting the chassis business and taking their equipment with them. In Los Angeles-Long Beach, for example, marine terminals devote 10 acres or more for chassis storage, and the lease rates start at about $160,000 per acre per year. Terminal operators would love to be able to devote that space to productive uses such as moving containers.
“This would be great for the terminal operator,” said Ed DeNike, chief operating officer at Seattle-based operator SSA Marine.
Maintenance and repair costs for chassis would likely fall if truckers or third parties took possession of the equipment. On the West Coast, terminals and shipping lines generally have contracts with the International Longshore and Warehouse Union or the International Association of Machinists for container maintenance and repair work. On the East and Gulf coasts, it’s the International Longshoremen’s Association.
The ILWU did not comment directly on any possible loss of work under the new model. The union released a statement, however, saying that removing chassis from the terminals would force the terminals to stack all of their containers rather than storing some of them on chassis.
“Work opportunity for the ILWU will not be impacted as the method of operation on the docks will be modified from wheeled to grounded where more ILWU-represented equipment operators will be utilized,” the union said.
On the East Coast, the ILA is more apprehensive. Its president, Harold Daggett, recently told an ILA meeting the union would not surrender its jurisdiction over maintenance and repair work. Daggett declined further comment on the issue.
Trucking company executives are concerned about what seems to be a mad dash by ocean carriers to get out of the chassis business and push the responsibility for providing chassis to their industry.
Brian Griley, president of Southern Counties Express in Southern California, said beyond news reports on the subject, truckers have received little direct information on what will happen. “How is this going to be structured? Do I have to go out and get a $1 million loan to buy chassis?” he said.
For DCLI, the process will be transparent when it extends its own program to the West Coast by the end of this year. Chinigo plans to visit Southern California and other locations 45 days before the rollout to meet with trucking associations and answer questions. He said DCLI, if invited, would even join the local associations.
DCLI said the rollout schedule was shaped by Maersk Line’s internal dispatch regions, combined with those regions’ connectivity to the regions where the service already is operating. It scheduled the Pacific Southwest region last because of the limited all-motor connections with other dispatch locations.
Nevertheless, given the magnitude of the volumes in a port like Los Angeles-Long Beach, which handles about 2 ½ times the volume of New York-New Jersey and six or seven times the volume of most other ports, there is enormous skepticism about how the transition will take place. And, with 13 marine terminals — many of them proprietary to a single carrier — logistical problems will mount.
“It will be very messy for the next few years,” Tioga Group’s Smith said. This development also could hasten the demise of smaller, poorly capitalized harbor trucking companies, he said.
Although each shipping line may take its own approach, existing local chassis pools, such as those operated by SSA Marine and vessel-sharing alliances, will take over ownership and leasing of the chassis.
Third-party equipment providers such as Flexi-Van and TRAC Intermodal also are likely to take a prominent role. Flexi-Van already leases chassis and manages chassis pools on the West Coast and is expanding its contacts with trucking companies, said John Benecke, director of the company’s western chassis pool. “We very much look forward to working with the truckers,” he said.
If the terminals operate efficiently, Smith said, each trucker should save 12 to 16 minutes for each call at a marine terminal. But that, he said, “will require very accurate information.”