The impact of megaships

The impact of megaships

Carriers have been ordering ships as large as 8,000 TEUs based on the logic that more capacity is needed and that larger vessels will mean lower costs per TEU. Megaships also serve as a barrier to entry to competing carriers that cannot afford the large vessels. The megaship strategy promises higher profits and less competition for carriers. However, these benefits may not be shared by other transportation providers and may actually increase the total cost of transportation for shippers.

The promised per-slot cost savings from larger vessels may not be readily passed on to shippers. Most carriers have deployed a mix of megaships and smaller vessels. That means carriers have a combination of the higher per-unit operating costs of the smaller vessels and the higher capital costs of the megaships.

To control costs, some carriers may make last-minute schedule changes and skip ports when a port call does not generate enough revenue to offset the cost of a large vessel. Carriers also tend to staff their customer service and documentation departments at a level sufficient to meet the demands of a smaller vessel. For shippers, this may mean longer waits on the phone when dealing with customer service centers, as well as delays in obtaining bills of lading.

Eventually, the situation will improve as megaships will come to dominate major routes, and the primary driver of costs will become the vessel schedule. A carrier's weekly round-robin service covering seven ports on each side of the ocean might have a round-trip voyage of 28 days - an average of 1.5 days in each port, and sailing time of 17.5 days. Four vessels would be needed.

However, if the carrier provides a hub-and-spoke schedule with only one port on each side of the ocean, and spends an average of 1.75 days in port to accommodate the loading and discharge of the larger vessel, the voyage might be reduced to 21 days and only three vessels would be needed. By reducing the need for vessels by one ship, the hub-and-spoke schedule produces an annual savings of about $20 million. And the shorter voyage would enable the carrier to increase its number of voyages by 4.35 per year, generating extra profit of about $8.5 million annually.

Using megaships exclusively, however, poses problems for a ship operator. These problems include limited draft in some ports, and increased difficulty in developing an efficient stowage plan that matches the port rotation. These limitations, plus pursuit of savings and higher profitability, will drive carriers to implement hub-and-spoke schedules that focus port-to-port service rather than door-to-door transportation.

The lower per-slot operating costs of megaships will enable carriers to raise profitability while reducing rates. Carriers also will be able to provide better and more-consistent customer service and documentation by appropriately staffing their customer support centers. Although shippers may enjoy lower ocean shipping costs, the savings will come with a price. Hub-and-spoke scheduling will increase cargo handling, producing additional costs and delays. It will also reduce accountability among service providers, especially at hand-over points.

For other participants in the supply chain, the carrier strategy of megaships and hub-and-spoke schedules will have interesting consequences. Hub ports' volumes will increase, creating a need for more storage capacity, berths and container-handling equipment. Moving the containers to their destinations will result in a stronger competition among intermodal service providers. Rail and truck intermodal capacity must be increased. Feeder vessels and barge capacity may need to be added.

Hub ports will offer an advantage in dealing with security issues. Radiation-detection equipment and X-ray machines can be concentrated at fewer ports, which will reduce costs and provide more efficient and effective inspections.

Over the long term, deployment of megaships will result in fewer carriers controlling a larger share of cargo capacity. Surviving carriers will be able to shift megaships to other routes if volumes warrant a change. This ability to respond to various markets could be interpreted as a way to manipulate supply and fix prices. Antitrust immunity will become an increasingly important topic that needs to be discussed.

The impact of megaships will change over time, creating opportunities as well as risks. Has your organization considered the impact of megaships on its operations?

Capt. Emad Samwel is president and chief executive of Ethos Management. He can be reached at (905) 884-8272, or via e-mail at esamwel@ethosmanagementconsulting.com.