Ocean carriers, struggling to make a profit in the face of overcapacity and declining freight rates, are taking dramatic and sometimes unexpected actions to slash costs. In this environment of frenzied cost-cutting, the proprietary container terminal operated for a single shipping line is becoming an endangered species.
Nowhere is this trend more evident than at the Port of Oakland, where in recent years terminal-operating affiliates of major shipping lines including Maersk Line, NYK Line, APL and Hanjin Shipping have terminated their leases with the port. The carriers’ vessels now call at the SSA Marine or Ports America facilities, Oakland’s public terminals.
The consolidation of container line operations at public, or general-user terminals, has been occurring elsewhere, but Paul Bingham, economics practice leader at planning and research firm Wilbur Smith Associates, said he’s “surprised at the pace it has happened in Oakland.”
The rapid chain of events doesn’t surprise Ed DeNike, chief operating officer at SSA, which in July took over the operations of Eagle Marine (APL) and Total Terminal Inc. (Hanjin). “It is difficult to survive in Oakland,” he said.
Frank Capo, TTI’s senior vice president and chief commercial officer, confirmed that the terminal operator simply couldn’t earn a profit in Oakland.
The same is true for APM Terminals, which, like Maersk, is owned by A.P. Moller-Maersk. APM saw a trend where trans-Pacific shipping lines began concentrating their calls in Los Angeles-Long Beach to the south and Seattle-Tacoma to the north, and decided it was time to cease its operations in Oakland, said Tom Boyd, an APM spokesman.
Carriers today seek economies of scale through the formation of vessel-sharing arrangements, such as the recently announced P3 consortium of Maersk, Mediterranean Shipping Co. and CMA CGM. In this era of consolidation on the ocean side of the business, the proprietary terminal model championed more than 30 years ago by Sea-Land Service no longer applies in many ports, Bingham said.
Sea-Land offered premier service to its customers by controlling the ocean and marine terminal operations. Competitive pressures today prevent carriers from charging premium rates for premier service, so the concept of the proprietary marine terminal “clearly has become less important around the world,” Bingham said.
These issues came to a head in Oakland, where the port faced the expiration of four terminal leases in 2016-17. Consolidation, however, also allowed Oakland to instantaneously create facilities better suited for the large vessels with capacities of 8,000 to 13,000 20-foot containers now common in Pacific Southwest services. SSA combined three smaller facilities to create an efficient, rectangular terminal, basically by tearing down the fences that separated them.
Consolidating old, small, inefficient, low-volume terminal operations into SSA’s 350-acre facility and Ports America’s 220 terminal results in significant advantages for Oakland, said Jean Banker, deputy executive port director. The mega-terminals achieve more efficient use of their assets, including equipment, land, gates and labor. They can better handle the big ships, they are environmentally friendly, and they will achieve much higher container throughput-per-acre productivity, she said.
The efficiencies also benefit vessel operators, whose ships spend less time in port and more time on the ocean, where they’re earning money. The terminal’s per-unit cost of vessel, yard and gate operations can be shared with the shipping lines, and the carriers are freed from the large capital costs involved in owning and operating a marine terminal.
Consolidation also involves risk, however. Oakland renegotiated its leases to make the consolidation happen, and in the short term it will earn less revenue. The more efficient operations, however, should result in faster growth and eventually higher revenue. “It’s short-term revenue loss and long-term revenue growth,” Banker said.
DeNike said the higher container volumes SSA now will handle in Oakland will allow the company to invest in the productivity-enhancing measures it already has implemented in Long Beach, such as computer-controlled quay cranes and a centralized gate operation. SSA also will get much greater use of its vessel and yard cranes and yard tractors, with less downtime for the costly equipment, he said.
Oakland’s diminishing ability to support proprietary terminal operations results from several factors, including geography, intermodal rail and cargo volumes. By national standards, Oakland is a large port, handling about 2 million TEUs a year. With Los Angeles-Long Beach’s annual volume of 14 million TEUs to the south, and Seattle-Tacoma’s 4 million TEUs to the north, however, Oakland couldn’t generate the volumes needed to support seven proprietary terminals.
Because it’s more of an export port than an import port, Oakland doesn’t attract inbound calls from Asia carrying high-value imports, and the railroads don’t concentrate their intermodal assets there. Railroads crave density, and the western railroads have invested heavily in Southern California to accommodate daily intermodal service to destinations across the country.
“Oakland’s intermodal options are not on the same scale as Tacoma or Los Angeles,” Boyd said.
Terminal operators in Oakland say the railroads price their intermodal services for Southern California, resulting in rates that are $100 to $200 less per container than in Oakland. Like other U.S. West Coast ports, Oakland also must compete with Prince Rupert, British Columbia, where Canadian National Railway’s intermodal rates to Chicago are reportedly $300 to $400 per container lower than what the U.S. railroads charge to Chicago.
Given these factors, terminal operators say the railroads invest much more in infrastructure in Southern California, to the detriment of Northern California.
The railroads don’t like this comparison. “We have consistently invested in Northern California, including a major tunnel renovation project through the Sierras to open the route for double-stack intermodal trains,” Union Pacific spokesman Aaron Hunt said. UP’s Donner Pass investments have resulted in a double-stack service that is up to 75 miles shorter and three hours faster than its Feather River Canyon route, depending on the destination, Hunt said.
BNSF Railway noted that over the last decade it has invested nearly $2 billion on the TransCon Corridor connecting Oakland, Los Angeles and Long Beach to major markets nationwide.
The big plus for Oakland as the port consolidates its terminal operations will be higher container throughput per acre. Most U.S. ports achieve much less use of their costly waterfront land than do terminals in Europe and Asia. Container throughput per acre in Southern California averages 4,500 to 4,800 TEUs, according to Larry Nye, vice president of port planning at engineering and consulting firm Moffatt & Nichol. Productivity drops to 3,500 in Seattle, 3,400 in Oakland and 3,100 in Tacoma. The numbers are based on gross terminal acreage, including non-container storage areas. A more desirable, and achievable, productivity level would be 6,000 to 7,000 TEUs per acre, Nye said.
Ports that have large public terminals rather than smaller proprietary terminals operate more densely and achieve higher throughput productivity. Savannah, for example, last year had 7,350 TEUs per acre in its 400-acre container marshalling yard, port spokesman Robert Morris said. This net productivity number doesn’t include non-storage acreage at the Garden City terminal.
Proprietary terminal operators at other U.S. ports such as Seattle, Tacoma, Los Angeles, Long Beach and New York-New Jersey are undoubtedly taking a hard look at their yard productivity numbers, and especially their financial numbers, to see if it makes sense in all cases to maintain single-carrier operations.
While not advocating a shift to public facilities, Tay Yoshitani, executive port director in Seattle, said consolidation can lead to greater efficiencies in throughput per acre. Most West Coast ports have excess capacity, he noted.
Nye said the Pacific Coast ports in the U.S. and Canada handled 23 million TEUs last year. Their capacity under current operating conditions is 35 million TEUs, and if they operated more densely on the European model, they could handle 52 million TEUs, he said.
Consolidation may be forced on some ports as ships get larger. A single weekly service with 13,000-TEU vessels generates 1 million TEUs a year of import, export and empty containers, Nye said. Because carriers must operate the ships at 80 to 85 percent capacity to be profitable, they will force denser operations at marine terminals, he said.