Profit for an Intermodal carrier is many times difficult to achieve but for all companies it is life or death. It is profit that drives investment and growth. This is the main focus in an industry course recently developed in conjunction with Rutgers University.
My background as an Engineer and consultant in the industry for 50 years culminated in my becoming the CEO of Navieras de Puerto Rico (NPR) where all my years of experience came together. NPR was a true intermodal company serving the US to Puerto Rico (Jones Act) and to the east coast of South America. Over 80% of NPR’s costs were on land. Operations used rail and truck to collect and distribute cargo. Vessels had to operate on time, customers served and an operating profit was essential.
After retiring from NPR the US Merchant Marine Academy (Kings Point) selected me to be the Crowley Chair for Logistics. I was asked to develop a course the purpose of which was to teach students what made an intermodal company profitable. In addition to NPR I had worked closely my entire career with Malcom McLean the founder of containerization. At Sea-Land, McLean’s pioneering company, I was VP of Engineering and later for his United States Lines a consultant overseeing over 200 projects worldwide.
To start my course at Kings Point I relied on my engineering background and developed a simple formula to define the purpose and goal. This formula for operating profit is as follows:
Profit = Volume x Rate – Fixed costs – (Volume x Variable costs)
During the course each of the elements of the formula were expanded and studied in depth.
McLean had always stated that in the freight business you sell, price and operate in that order of importance. He was fond of saying that everything starts with a sale. But the largest challenge in a sale is making it at a proper price. Sea Land, being the pioneer carrier, had great sales and rates which were priced against break bulk carriage. Over 20 years later at United States Lines in a more mature and competitive container market McLean’s executives found problems setting rates so that even with full ships they failed to produce a profit. Sea Land was eventually profitably sold to Maersk Lines of Denmark whereas US Lines, in part due to rate pressures, went bankrupt.
Rates should be related to the costs of operations per the formula so as to result in a profit. However more often than not rates are set to competition in the market place. Too often carriers’ move cargo below cost. In many cases costs are unknown or based on estimates rather than actual. This is especially true when variable inlands are factored into ocean carriers operations. It is the carrier with the lowest costs that sets the rates. That is what is happening in the market today.
When our team took over at NPR it was operating 5 vessels serving multiple ports in the US. To produce lower operating costs a number of ports were closed and the number of active vessels reduced to 4. Thus, referring to the basic formula, by laying up fixed cost vessels and handling intermodal moves by the use of variable cost trucking and rail a profit resulted without any loss of ocean volume. The company then went from a loss in year one to a profit the following year.
In the Kings Point course along with studying operating cost the factors such as depreciation, regulatory needs, debt service and taxes were also considered. Cash flows and reinvestment needed for asset replacement or service improvements were also studied. For example, NPR competed with several carriers who had little or no debt service. I retired after NPR was sold to a strategic buyer at a premium price. The buyers resulting large debt service was the principal reason that several years later NPR went bankrupt. The carriers with low debt service are still in the trade and have made substantial re investment in ships, facilities and equipment.
It is not possible in this brief article to deal with specific cost areas as the students did at Kings Point. Students also were asked to develop presentations to the class on such subjects as Air cargo, container standards, worldwide rail and truck operations and the newly expanded Panama Canal.
Recently the writer has joined Rutgers University to duplicate the Kings Point course in a shorter form aimed at rising executives in the intermodal industry. The purpose remains the same which is to understand what factors need to be known and acted on to insure a sustained profit.
Course description: https://cait.rutgers.edu/njltap/intermodal-corporate-financial-operations