Liner Shipping Economics

Liner Shipping Economics
Liner Shipping Economics

J.O. Jansson
Swedish Road and Traffic Research Institute
Linkoping
and
D. Shneerson
Department of Economics
University of Haifa
London New York

CHAPMAN AND HALL
First published in 1987 by
Chapman and Hall Ltd
11 New Fetter Lane, London EC4P4EE
Published in the USA by
Chapman and Hall
29 West 35th Street, New York NYlO001
© 1987 J.O. Jansson and D. Shneerson
Softcover reprint of the hardcover 1st edition 1987
All rights reserved. No part of this book may

be reprinted, or reproduced or utilized in any
form or by any electronic, mechanical or other
means, now known or hereafter invented,
including photocopying and recording, or in
any iriformation storage and retrieval system,
without permission in writing from the
publisher.
British Library Cataloguing in Publication Data
Jansson, Jan Owen

Liner shipping economics.
I. Shipping 2. Ocean liners
I. Title II. Shneerson, Dan
387.5'1 HE593
ISBN-13: 978-94-010-7914-3
Library of Congress Cataloging in Publication Data
Jansson, Jan Owen.

Liner shipping economics.
Bibliography: p.
Includes index.
l. Shipping. 2. Shipping-Rates. 3. Shipping conferences.
I. Shneerson, Dan. II. Title.
HE582.J36 1987 387.5'1 86-20718
ISBN-13: 978-94-010-7914-3 e-ISBN-13: 978-94-009-3147-3

DOl: 10.1007/978-94-009-3147-3
Contents
Preface ix
PART I THE LINER SHIPPING INDUSTRY 1
1 Characteristics of demand and supply of liner shipping 3

1.1 An aggregate picture of seaborne trade and the world fleet
tonnage 3
1.2 The development of the shares of the world fleet: developed
countries, flags of convenience and developing countries 7
1.3 Liner shipping, shipping for hire and 'own shipping' 15
1.4 The relative size of the liner shipping industry 22
1.5 Recent development in general cargo shipping 22
1.6 Geographical aspects of liner shipping 30
2 Market organization: the conference system 35
2.l The scope of the conference system 35
2.2 Conference organization and main activities 35
2.3 Why conferences? 42
2.4 Concluding remarks 47
3 The level and structure of freight rates 49
3.1 The general level of freight rates 49
3.2 The structure of freight rates 66
Appendix A: The construction of the CON/SCaN index (1975-85) 84
Appendix B: The liner index of the FRG (1976-85) 88
Appendix C: The construction of an individual line freight rate index 89
4 The art of charging what the traffic can bear 94
4.1 The main form of price discrimination in liner shipping 94
4.2 The role of commodity value for shipping demand elasticity 95
4.3 The role of competition from other sources of goods supply for
shipping demand elasticity 100
4.4 Competition from 'outsiders' and other modes of transport 107
4.5 Summary and conclusions 107
PART II LINER SERVICE OPTIMIZATION 111
5 Ship size and shipping costs 113

5.1 Sizes of ships of different categories: The statistical picture 113
vi Contents
5.2 Plant-size economies in general 115

5.3 The three ship capacities 117
5.4 The model 117
5.5 Estimation of ship size elasticities of handling and hauling
capacities and factor costs 123
5.6 Economies of size at sea - diseconomies of size in port 135
5.7 Optimal ship size 138
5.8 Analysis of the effect on optimal ship size of parameter changes
in the model 139
5.9 The optimal size of a palletized reefer ship: A case study 147
5.10 Towards a model of ship size growth 149
6 Multi-port calling versus trans-shipment 157
6.1 The general problem: Feeder-transport cost minimization in a
given service range 157
6.2 The specific problem: The potential of sea-feeder transport 157
6.3 The very large container carriers and feeder services 171
7 Shippers' costs of sailings infrequency and transit time 173
7.1 Storage costs 173
7.2 Costs of sailings infrequency and transit time for goods which are
not stored by importers 183
7.3 Loss of value of perishable goods 183
7.4 How important are shippers' costs? 184
Appendix: Optimal ship size when both shipping company
costs and the shippers' costs are accounted for 188
8 Port costs and charges and the problem of shipping and
port sub-optimizations 193
8.1 'Public' general cargo transport systems versus 'private' bulk
cargo transport systems 193
8.2 Bottlenecks in ports 194
8.3 Port charges as a means of coordinating shipping and port
operations 200
9 A cost minimization model of a liner trade 205
9.1 A liner trade model - purpose, scope and assumption 205
9.2 Total producer and user costs 207
9.3 Optimal ship size, multi-port diversion, and frequency of sailings 211
9.4 The minimum total cost per ton 213
PART III ECONOMIC EVALUATION OF THE

CONFERENCE SYSTEM 217
10 The charging floor reconsidered 219
10.1 Economies of scale? 219
Contents vii
10.2 Common cost and factor indivisibility 223

Appendix: Model of profit-maximizing freight rate making 225
11 The freight rate structure is out of line with the
marginal cost structure 238
11.1 Principles of marginal cost-based tariffs 238
11.2 Cross-subsidization between commodities 239
11.3 Excessive averaging of freight rates: Some suggestions for
reforming the tariff construction 242
11.4 Further aspects of a cost-based freight rate structure 247
Appendix: Freight rates and shipping marginal costs
of Israeli imports and exports 254
12 Potential cartel profits become social costs 264
12.1 Empirical evidence of low load factors in liner shipping 264
12.2 Model of supply and demand equilibrium in a liner trade 265
12.3 Some evidence of a negative relationship between the load factor
and the profit potential 273
12.4 Excessive service competition 275
13 Conclusion: price competition in liner shipping
should be encouraged 276
13.1 The two types of ill effects 276
13.2 Allocative inefficiency effects 277
13.3 'Slack' effects 280
13.4 Encourage price competition and service coordination 281
13.5 Recent attempts of reforming liner conference practices 285
13.6 Problems of regulating international liner shipping 286
13.7 Hopes for the future 287
References 289
Author index 293
Subject index 295
Preface
The importance of international liner shipping needs little emphasizing. A

large majority of international trade moves by sea, and the liner shipping share
in total freight revenue exceeds one-half. Notwithstanding, people in general
know surprisingly little about the basic facts of the liner shipping industry,
and, in particular, about the economics ofliner shipping. Perhaps because it is
an international industry, where shipping lines flying many different flags
participate, it has tended to fall in between national accounts of domestic
industries. Even transport economists have, generally speaking, treated liner
shipping rather 'stepmotherly'; besides the work of Bennathan and Walters
(1969), a relatively small group of specialized maritime economists, including
A. Stromme-Svendsen, T. Thorburn, S. Sturmey, R. Goss, and B.M. Deakin,
have in the post-war period made important contributions to the subject, but
so far no coherent and reasonably comprehensive treatise of liner shipping
economics has appeared. The first purpose of the present volume is therefore
obvious: to provide just that.
The book is divided in three parts: Part I The liner shipping industry; Part II
Liner service optimization; Part III Economic evaluation of the conference
system. Needless to say, all three parts concur to fulfill the first purpose of
providing a complete book of liner shipping economics. In Part II a more or
less separate, second, purpose has been to develop analytical tools for liner
service optimization.
Thereby we use different approaches. First we develop general models of, for
example, ship-size optimization, the choice between multi-port calling and
trans-shipment, etc. so far as it is fruitful to generalize. Then the general
principles derived are illustrated by case studies or practical examples, which
hopefully serve the double purpose of (i) conveying to the reader something of
the reality of seaborne freight transport, as well as (ii) demonstrating the
usefulness of sound theoretical underpinning of empirical studies of liner
shipping operations.
A third purpose is to make substantial contribution to the long controversy
over the omnipresent price cartels in liner shipping known as liner conferences.
This is a very complex and difficult issue, especially in the present period of
thorough structural change in liner shipping both technologically and
organizationally, which could be sufficient for a whole book - the most recent
example is Sletmo and Williams (1981). The present discussion of this long-
standing issue is a natural continuation of the general economic analysis of the
liner shipping industry in Parts I and II. The main stumbling block is, and has
always been, misleading conceptions of the pricing-relevant marginal cost of
scheduled transport services. A good century of administered liner freight rates
x Preface
has left costing principles in liner shipping lagging. We suggest various

improvements in this field, but realize that the only certain way of exposing
costing deficiencies is by freer pricing. Encouragement of price competition
does not necessarily mean that all liner conferences have to be dissolved, but
rather a change of object ofthe conferences from price fixing to coordination of
sailings (schedules), ports of call and feeder services.
Writing this book, we have accumulated debts to many people, not the least to
our families. Going back to where it started, our interest in the subject was
awakened by working with Professors Thorburn, Walters, and Bannathan;
later, contacts with friendly people from the shipping and port industries have
been an invaluable factor of production. Informants are too many to mention
individually, however, Nachum Gonzarsky of Zim Lines read chapters 1 and
2 and made valuable comments, for which we are grateful, and Yosi Sela of Zim
assisted in the construction of the liner freight-rate indices. Shlomit Ergon-
Karlin devoted a lot of her time to the empirical work of chapters 1,5 and 9
and helped in the organization of the whole manuscript, which we gratefully
acknowledge.
Many thanks to the EI-Yam Chair for Shipping and Ports which has
generously financed the project in the final stages.
Haifa. October 1985 Jan Owen Jansson
Dan Shneerson
PART THE LINER SHIPPING INDUSTRY
ONE
In this part we describe the liner shipping industry from different

points of view. In chapter 1 we take up some important character-
istics of demand and supply of liner shipping including the types of
cargo, ships, and trade routes involved. In chapter 2 the very
specific market organization is described.
Practically all international liner shipping is organized as route-
specific price cartels known as liner conferences. The conference
system has existed for more than a century, and naturally has been
subject to much discussion, but comparatively little regulatory
action. We give a short historical background (see also Deakin,
1973), and outline recent tendencies in national as well as
international shipping policy.
In chapters 3 and 4 the intriguing matter of freight rate making
in liner shipping is dealt with. In chapter 3 the existing level and
structure of freight rates are surveyed, and a hypothesis of rate-
making behaviour - charging what the traffic can bear over and
above the direct handling costs - is tested statistically. Chapter 4
develops some ideas of improving the state of the art of freight rate
making by combining derived-demand theory with the relevant
facts of liner shipping markets.
1 Characteristics of demand and supply of liner
shipping
The pattern of seaborne trade and shipping is determined by a multitude of

factors, economic, geographic and political. In this chapter we have selected
some factors of general importance as well as some factors of specific
importance for the purpose of this book. The chapter starts by an aggregate
picture, in which the liner shipping sector will gradually be identified from
different points of view.
A short historical background is given and the current tendencies of the
development of liner shipping are pointed out. The statistical data presented
are compiled from the standard sources of currently published shipping
statistics, if no other source is given. *
1.1 AN AGGREGATE PICTURE OF SEABORNE TRADE

AND THE WORLD FLEET TONNAGE
Nations trade in order to increase their wealth. The role of international
transport is to bridge the spatial separation of trading countries. Shipping is by
far the most important mode of transport of international trade. In terms of
weight something like 90% of all international trade moves by sea, and so far as
long-distance trade is concerned virtually all is seaborne. Due to the fact that
the average transport distance is much longer in international than in intra-
national trade, the total transport work in ton-miles performed by shipping
dominates over the transport work made by all other modes of freight
transport. According to one estimate (Swedish Shipping Gazette) the total
ton-miles by sea are more than twice the total ton-miles by road, railway, and
air, put together.
In a historic perspective the most striking feature of the development of
international trade and shipping is the enormous upsurge in seaborne trade
that has occurred in the post-war period. Today the total international trade
in tons is about seven times greater than in 1950. This corresponds to a rate of
growth per annum of 8%. In the first half of this century - during which two
world wars and the great depression have occurred - the average rate of
growth of international trade was only about 1% per annum. In the last
*The standard sources of shipping and seaborne trade statistics are: Lloyd's Register of Shipping;
Fearnley and Eger's Chartering Co. Ltd; H. P. Drewry (Shipping Consultants) Ltd.
4 The liner shipping industry
decades of the nineteenth century the growth rate was more impressive-
about 4% per annum.
The unit of measurement of the volume of production or supply in shipping
is all important. The number of tons (measured in weight) of cargo carried or of
capacity offered is not satisfactory, and for two reasons: (i) tons should be
weighted by the distance travelled; the number of ton-miles is therefore a
superior measure, and (ii) in practically all liner trades volume rather than
weight determines the constraint to the carrying capacity; therefore, the
number of cubic ton-miles (measured in cubic meters) is a superior measure to
the number of weight ton-miles. An example of the importance of distance is
the fact that between the end of the 1940s and the middle of the 1970s the
annual rate of growth in total ton-miles (in weight) by sea was as high as 12%
compared with 8% in tons. The average transport distance has been rising. The
rapid economic growth of Japan, the expansion of oil exports from the Persian
Gulf to the distant markets of USA and Europe, and the opening of new
sources of minerals in Africa, Australia and Brazil, are the main explanation of
this observation. An example of the importance of measuring in cubic meters is
the liner trade between USA and the Far East. During the years 1980-82 west-
bound weight tonnage (exports from USA) was 26% higher than eastbound
tonnage (see Table 1.4). When measured in volume, the imbalance is reversed.
Capacity utilization on the eastbound leg was greater than 90% during that
period compared to a utilization of less than 60% on the westbound leg, when
the two are measured by the volume of cargo. *
As mentioned, between the end of the 1940s and the middle of the 1970s the
annual rate of growth in total seaborne trade measured in ton-miles was a
good 12%. The world fleet (aggregated for all types of ships) developed in line
with this tremendous rate of growth. Shipping and shipbuilding have been two
of the most pronounced growth industries in the post-war period up to 1974.
The development of shipping output measured in (weight) ton-miles and
shipping capacity in gross revenue ton (GRT). which is a volumetric unit of
measurement, is depicted in Fig. 1.1.
The last decade (middle 1970s to middle 1980s) has been characterized by
ups and downs in trade during the first half of the decade, and a sharp fall in
trade during its second half. It may seem as a puzzle, but during a period of
decline in world trade, the world fleet has shown a rise. Between 1977 and 1982,
seaborne trade has dropped from 17.5 to 13.2 million ton-miles - a fall of 25%.
During the same period, the world fleet has grown from 394 to 425 million
GRT - an increase of 8%. The rise in productivity in ports, and the rise in the
share of container ships in this total, means that the effective carrying capacity
of the fleet has increased even faster. The inevitable outcome for most shipping
activities was a fall in the utilization of the world fleet, and a drop in freight
·Information disclosed by shipping lines operating on this route.

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rates. The recession that started at the beginning of the 1980s, has plunged still
deeper and is likely to stick until the end of the decade.
What explains the lack of response of supply to the fall in demand and the
continuous increase in shipping capacity in spite ofthe drop in total ton-miles?
We suggest two explanations, one technological and the other institutional.
The last ten years were a period of rapid technological development which was
triggered by the rise in fuel costs.
The most important technological innovation has been the development of
fuel-saving engines. New diesel engines equipped with computers that
coordinate the diesel-fuel characteristics with the timing of ignition, save up to
20 tons of fuel out of 66 tons of daily fuel consumption of a middle-size
container ship - approximately 30% savings. In 1984 there were about 300
orders for Sulzer's RTA newly developed engine and 250 for the MAN-
B& WL-M C engine.
The fuel-saving operation is not limited to the efficient engine. It has
been widely recognized, for instance, that the ship's propeller, in its present
form, is quite an obsolete concept. Much progress has been made in
experiments with new ideas, like that of Bremer Vulkan, which decreases fuel
consumptionly 10%. The new propeller arrangement consists of a conven-
tional four-blade propeller fitted with a second nine-blade reaction propeller.
This second propeller, mounted behind the conventional one and not being
connected to the engine, turns independently. The inner part of the reaction
propeller is curved; it acts as a turbine, the nine blades being driven by the
outflow of the four-blade unit. This produces a moment of rotation, which is
converted into thrust, which can be used to attain higher speed or to reduce the
actual power required from the main engine, thereby reducing fuel
consumption.
Hull design and hull cleaning also have had an effect on fuel saving. In 1984
Japanese yards were building twenty bulk carriers for Sanko with a bulbous
open stern that reduces friction and improves flow to the propeller and thereby
reduces power requirements up to 4%. The inventors of the bulbous open stern
maintain that it can be applied to any type of ship. Sandblasting and
selfpolishing coatings have also proved to be efficient fuel-saving techniques.
There have been other innovations, for example, the 'Racal-Decca-
Navigator' which incorporates in one system practically all the existing
navigational instruments, and the Swedish fuel-economizer (Sal-Fe), which
keeps watch on the vessel's long-term performance, including fuel quality.
Ships in this era of rapid technological changes have a much shorter life than
before. At the beginning ofthe century, ships 50 or 60 years old were still sailing
the seas. The Liberty ships were still in operation 30 years after the Second
World War. Today, a 15-year-old container ship is considered obsolete. The
life-span of a container ship is taken today to be 12 years.
Some institutional factors acted to increase the tendency for more ship
building. First, governments protecting employment interests continued to
Characteristics of demand and supply 7
subsidize shipyards. Second, international intervention - in the form of the

UNCT AD formula for sharing trade (see chapter 2), have triggered a
development of national fleets by the developing countries. The high level of
new shipbuilding orders in 1981 and 1982 will prolong the excess capacity, and
may present shipping during the rest of the 1980s with the least favourable
business environment the industry has known since the Second Warld War.
1.2 THE DEVELOPMENT OF THE SHARES OF THE

WORLD FLEET: DEVELOPED COUNTRIES, FLAGS OF
CONVENIENCE AND DEVELOPING COUNTRIES
This description of the development of the world fleet concentrates on the
changes in its composition by flag in the last twenty years. With the help of
Table 1.1 and Fig. 1.2 we see that the fleet of the traditional maritime countries
has nearly doubled during the period, while both the flags of convenience*
category and the fleet of developing countries has shown a sevenfold increase.
These different rates of growth mean that the shares of these groups of
countries have changed substantially during the period. Most notable is the
decline in the share of developed countries which has gone down by
approximately 30%. Flags of convenience have increased their share from 11 %
to 28% between 1963 and 1977, but show a slight decline since then. The fleet of
developing countries has increased its share from 7% to 18% at an accelerating
rate. The Eastern bloc has maintained a fairly constant share throughout the
period of approximately 8%.
The development of two traditional maritime nations - the UK and
Sweden - and that of the USA is shown in Table 1.2 and Fig. 1.3. In 1983 the
size of the British fleet was less than that in 1963, and its share has declined
from 15% to 5.5%. The share of the USA has dropped from 19.1 % in 1960 to
4.6% - a decline of almost four times. Similarly, the size of the fleet under the
Swedish flag has declined during the period, and its share has gone down from
3% to 1%.
Of the developed countries the share of the USA-flag carriage of seaborne
foreign trade to/from the USA has been strikingly low - below 5% - since
1975. Table 1.3 summarizes the development of this trade since 1950. Of a total
of 676 million tons handled in 1982, non-liner dry-bulk shipments accounted
for half this tonnage, tanker cargo represented 42%, and liner cargo
constituted the remaining 8%. Thus, the 55.5 million tons of liner cargo were
but a small fraction of the total trade, but they represented half of the
* A flag of convenience is characterized by the following features: (i) The country of registry allows
ownership and control of vessels by non-citizens. (ii) Taxes on the income from the ships are not
levied locally or are low. (iii) Manning of ships by non-nationals is freely permitted. (iv) There is
little control and few regulations by the government over the shipping. Countries affording 'flags
of convenience', or 'open registry flags', are Liberia, Panama, Cyprus and Somalia. Of these only
Liberia and Panama have a substantial open-registry fleet.
Table 1.1 Development of the world fleet by groups of countries 1963-83
Flags of convenience Western countries Developing countries Eastern bloc World total
Year 000 GRT Share 000 GRT Share 000 GRT Share 000 GRT Share 000 GRT Share
(%) (%) (%) (%) (%)
1963 16295.3 11.2 111288.1 76.3 10 506.4 7.2 7773.8 5.3 145836.6 100
1964 19763.3 12.9 112450.0 73.5 11000.9 7.2 9785.4 6.4 152999.6 100
1965 160391.5 100
1966 26143.0 15.3 119140.8 69.6 12903.9 7.5 12942.1 7.6 171129.8 100
1967 28387.5 15.6 125396.0 68.9 13 988.1 7.9 14328.1 7.7 182099.6 100
1968 32182.6 16.6 131028.8 67.5 14488.9 7.5 16452.1 8.5 194152.4 100
1969 36251.4 17.1 140746.3 66.5 16013.3 7.6 18649.9 8.8 211660.9 100
1970 41119.4 18.1 148673.1 65.4 17722.5 7.8 19974.9 8.8 227489.9 100
1971 47683.0 19.3 159111.6 64.4 18710.3 7.6 21697.7 8.8 247202.6 100
1972 56174.0 20.9 169529.8 63.2 19779.6 7.4 22856.8 8.5 268340.2 100
1973 66299.0 22.9 178571.1 61.6 21329.6 7.4 23727.0 8.2 289926.7 100
1974 74706.0 24.0 187728.3 60.3 23776.6 7.6 25111.7 8.1 311322.6 100
1975 88655.3 25.9 196030.1 57.3 30282.6 8.9 27194.4 8.0 342162.4 100
1976 99786.0 26.8 209430.8 56.3 33340.0 9.0 29443.1 7.9 371999.9 100
1977 109517.0 27.8 212947.1 54.1 40163.1 10.2 31051.2 7.9 393678.4 100
1978 111520.0 27.5 217121.6 53.5 44963.3 11.1 32397.2 8.0 406002.0 100
1979 114605.0 27.8 214337.8 51.9 50458.8 12.2 33619.8 8.1 413 021.4 100
1980 114776.0 27.3 216404.3 51.5 54329.0 12.9 34401.3 8.2 419910.7 100
1981 111855.0 26.6 214744.0 51.0 62007.5 14.7 32228.3 7.7 420834.8 100
1982 113288.0 26.7 210342.7 49.5 65983.8 15.5 35127.2 8.3 424741.7 100
1983 113412.3 26.8 198090.0 46.9 75935.2 18.0 35152.8 8.3 422590.3 100
450
World I"ol"al
400
350
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1963 1965 1970 1975 19801982 1983
Figure 1.2(a) Development of the world fleet (000 GRT), by groups of countries.
BO
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1963 1965 1970 1975 19BO 19B2 19B3
Figure 1.2(b) The development of the shares of world fleet tonnage by groups of
countries, 1963-83 (in GRT).
$281 billion value of 1982 foreign trade. Of the liner trade in 1982, 26% was
carried by USA-flag ships. Most of this cargo - approximately 80% - was
carried on five principal liner trade routes. The cargo movement on these
routes is summarized in Table 1.4.
The development of the privately owned USA-flag liner fleet since 1960
(Fig. 1.3 and Table 1.5) shows an absolute decline in the size of the fleet, and a
change in composition and ship size. In 1960 most of the 617 ships of
6.5 million dwt consisted of conventional, general-cargo vessels. In 1982, of a
total number of260 ships of 4.6 million dwt, 67% consisted of unit-load vessels.
Shipping is an international business. The market for shipping is in one
sense the whole world, and factors of production can be bought at most places.
Space can easily he bridged. Head offices can be located anywhere in the world,
and vessels can be bought and sold everywhere. Competition in shipping -
and particularly in non-liner trades - is a continuous effort to offer the service
Table 1.2 Development oj the fleets oj Sweden, the UK

and the USA (000 GRT)
Year Sweden UK USA
1963 4176.3 21565.2 23132.8

1964 4308.0 21490.0 22430.2
1965 4290.1 21530.3 21527.3
1966 4399.6 21541.7 20797.4
1967 4634.6 21716.1 20332.6
1968 4865.4 21921.0 19668.4
1969 5029.4 23843.8 19550.4
1970 4920.7 25824.8 18463.2
1971 4978.3 27334.9 16265.7
1972 5632.3 28624.9 15024.1
1973 5669.3 30159.5 14912.4
1974 6226.7 31566.3 14429.1
1975 7486.2 33157.4 14586.6
1976 7971.2 32923.3 14908.4
1977 7429.4 31646.4 15299.7
1978 6508.3 30896.6 16187.6
1979 4636.7 27951.3 17542.2
1980 4234.0 27135.2 18464.3
1981 4033.9 25419.4 18908.3
1982 3787.6 22505.3 19111.1
1983 3432.7 19121.5 19358.5
at the least-cost combination of factors. The growth of flags of convenience

(FOC) and its halt, the growth of fleets of cheap crew of developing countries,
and the constant shifts of flags from one country to another are all a reflection
of this principle.
The initial rise in the fleet of FOC is explained by lower crew costs and the
flexible financial arrangements it afforded. Its eventual halt is explained by
the rise in crew wages of FOC that was brought about by the International
Transport Workers' Federation (ITF) regulations, and at the same time by the
world-wide accessibility to cheap crews, especially in South East Asia. As a
result, the economic attractiveness of FOC has declined. However, political
advantages remain, for example in the shipment of Arabic oil, and cargo
transported to/from countries such as Taiwan and South Africa. FOC still
constitute a source of competition to the development of the national fleets of
developing countries, and are therefore under the pressure of these countries,
having as their voice the UNCT AD secretariat, to take steps which would
reduce this competition.
The decline of the fleet of the traditional maritime nations is mainly a result
15
14
13
\
12 \
\
11 \
\
10 \
GI
\
0'1 9 \
0
..... \
c:
cu \
...ucu 8 \
0- 7 \
\
6 \
,....
,"-
\
5
,,- -USA'
--"
-._.-._
4
3 ...... _ ....... _.
2 ........
"
''-'-'_Sweden
1963 1965 1970 1975 19801982 1983

Figure 1.3 The development of the shares in the world fleet of UK, Sweden and USA,
1963-83 (in GRT).
of their high crew costs. Table 1.6 compares the costs of a representative
European crew, FOC crew (ITF crew), and a developing country crew
(Korean/Taiwanese). The cost of a European crew is nearly twice the cost of
the Korean/Taiwanese crew.
Certainly in the more competitive segments of the industry, a difference in
annual crew costs of approximately $500000 makes it practically impossible
for a European ship to compete. In addition to the already mentioned UK and
Swedish fleets, the fleets of France and Holland - two old maritime
countries - have shrunk to a negligible size. Faced with this growing
competition, the Europeans may have to follow the American example of
deliberately restricting the size of their fleet to a certain fraction of their
seaborne trade, protecting it by various forms of subsidies. Or indeed to follow
the extreme example of Canada which took the deliberate decision to do away
with its national fleet, due to its high crew costs.
In the past, a ship's crew was to a large extent national-specific. Today, and
most likely in the future, the crew will be hired in a world-wide market. At the
Table 1.3 US oceanborne[oreign trade tonnage/commercial cargo carried (millions)
1950 1956 1960 1965 1970 1975 1980 1981 1982"
Total tons 117.6 260.1 277.9 371.3 473.2 615.6 772.2 760.0 675.9
US-flag tons 49.9 53.9 31.0 27.7 25.2 31.4 28.2 34.2 31.2
US percentage
of total 42.5 20.7 11.1 7.5 5.3 5.1 3.7 4.5 4.6
Liner
Total tons 35.2 46.4 50.7 49.2 50.4 44.3 59.3 60.0 55.5
US-flag tons 16.0 18.0 14.5 11.2 11.8 13.6 16.2 16.5 14.4
US percentage 45.6 38.7 28.6 22.8 23.5 30.7 27.3 27.6 26.0
Dry-bulk
Total tons 31.3 116.0 109.0 171.6 240.7 275.3 356.7 365.6 335.7
US-flag tons 6.5 15.8 8.4 8.2 5.4 3.8 4.1 4.5 3.6
US percentage 20.9 13.6 7.7 4.8 2.2 1.4 1.2 1.2 4.6
Tanker
Total tons 51.1 97.7 118.2 150.5 182.1 296.0 356.3 334.4 284.7
US-flag tons 27.4 20.1 8.1 8.2 8.0 14.0 7.9 13.2 13.2
US percentage 53.6 20.6 6.9 5.5 4.4 4.7 2.2 3.9 4.6
(Contd.)
Table 1.3 (Contd.)
Value ($ billions)
1950 1956 1960 1965 1970 1975 1980 1981 1982"
Total value NA 20.6 24.7 32.4 49.7 127.5 294.3 315.4 281.2
US-flag value NA 7.0 6.5 6.9 10.3 22.4 42.3 47.0 43.5
US percentage
of total NA 33.8 26.4 21.4 20.7 17.5 14.4 14.9 15.5
Liner
Total value NA 15.3 18.5 22.3 33.5 64.0 136.9 148.0 140.8
US-flag value NA 6.1 5.9 6.2 9.7 20.0 39.2 41.7 39.1
US percentage NA 39.6 32.1 27.8 28.8 31.2 28.7 28.1 27.7
Dry-bulk
Total value NA 3.3 3.6 6.6 12.2 36.6 74.1 81.0 72.0
US-flag value NA 0.5 0.3 0.4 0.4 1.0 1.3 1.9 1.3
US percentage NA 15.0 9.0 6.3 3.3 2.8 1.8 2.3 1.8
Tanker
Total value NA 2.0 2.6 3.5 4.0 26.9 83.3 86.4 68.3
US-flag value NA 0.4 0.3 0.3 0.2 1.4 1.8 3.4 3.3
US percentage NA 20.4 10.4 8.2 5.6 5.1 2.1 3.9 4.6
Source: Admiral Harold E. Shear (1983), International symposium on liner shipping III. Bremen, November 1-3. 1983
• Preliminary
NA: Not available
Table 1.4 Principal US ocean liner trades 1980-82 (thousands of long tons)
Total Import Export

Trade Year tonnage tonnage tonnage
US/Far East 1980 17866 7413 10453

1981 18555 8482 10073
1982 18679 8474 10205
US/UK Continental Europe 1980 14065 6227 7838
Scandinavia and Baltic Sea 1981 13495 7018 6477
1982 11 518 5275 6243
US Red Sea and Gulf
of Aden to Indonesia 1980 5757 1488 4269
1981 5985 1731 4254
1982 5673 1450 4223
US Mediterranean 1980 5636 2052 3584
1981 6879 3230 3649
1982 5004 2430 2574
US Caribbean 1980 4834 937 3897
1981 4232 952 3280
1982 3481 640 2841
Grand total 1980 48158 18117 30041
1981 49146 21413 27733
1982 44355 18269 26086
Source: Admiral Harold E. Shear (1983) International symposium on liner shipping III, Bremen,
November 1-3
same time there is a growing concern that the potential market where shipping
services are sold will be restricted as a result of increasing national and
international intervention.
1.3 LINER SHIPPING, SHIPPING FOR HIRE

AND 'OWN SHIPPING'
A disaggregation of the shipping industry is appropriately made from the
demand-side. Apart from the geographical division of the total demand for
sea transport, which will be taken up at the end of this chapter, differences in
the inherent characteristics of goods in seaborne trade, differences in the
packages of goods, and differences in the preferred size of shipments, are all
important causes of the existing differentiation of the supply of shipping
Table 1.5 Privately owned US-flag liner fleet 1960-83 (tonnage in thousands)
Conventional Combo
general cargo Unit load pass/cargo Total
Number DWT Number DWT Number DWT Number DWT
1960 562 6041 16 91 39 392 617 6524

1965 555 6321 32 366 27 274 614 6962
1970 374 4659 102 1420 19 170 495 6249
1975 159 2157 146 2802 6 50 311 5009
1980 110 1474 153 3130 7 57 270 4661
1981 110 1474 142 2963 7 58 259 4495
1982 107 1433 140 2938 8 65 255 4436
1983" 107 1435 145 3084 8 65 260 4584
Source: Admiral Harold E. Shear (1983) International symposium on liner shipping III, Bremen,
November /-3
"As of I July 1983 forty-five conventional general cargo vessels, eighteen multipurpose vessels and
three 'combo' vessels (combination of passenger-cargo vessels) were inactive due to lack of cargo
or other reasons.
Table 1.6 A comparison of the costs of different crews

(annual dol/ars, end of 1983)
No. of Korean/
Type of ship crew European ITF Taiwanese
Panamax 26 1050000 700000 580000

Container ship
(30000dwt) 25 950000 655000 516000
Conventional
general cargo 24 920000 630000 550000
Source: Various accounts of shipping companies and published ITF tariff.
services. From an economic point of view the last-mentioned aspect is the most
useful point of departure.
Due to the relatively large carrying capacity of a ship a basic division of the
total market for sea transport is between, (a) markets for sea transport of less-
than-full shiploads, and (b) markets for sea transport offull shiploads. Shippers
of less-than-full shiploads are primarily served by shipping lines maintaining
regular services between specified ports according to schedules advertised well
in advance - in short, by liner shipping.
Final
m a nufac~ured Carl"ons Small Break-bulk
goods, frui~, shipmenl"s cargo ships
vege~ables and
at shorl"er or I •I Liner ('convenhonal
longer liners> )
frozen meal" Boxes shipping
intervals
Break-bulk
cargoship
Cral"es with one or
Intermedial"e Medium-size more refrigera~ed
goods shipmenl"s holds
Unpacked big
articles (e.g Specialized
cars) Shipping 'unit load'
for hire carriers
Bags
Full shiploads _I
Processed once or tWice
mal"erial a year All-purpose
Drums
~ramp ships
Shipping under
Bales, rolls
your own
e~c.
Full shiploads H sl"eam ('own Specialized
Raw material many hmes shipping ') dry-bulk
a year
carriers and
oil I"ankers
Type of goods Type of package Size and annual Type of shipping Type of ship
number of shipmen~ service
DEMAND SUPPLY
Figure 1.4 Shipping demand and supply aspects.

Shippers of full shiploads rely on the ship charter market. They can either
enter a long-term charter agreement which may have a duration of6 months to
20 years and more, or they may enter a single-voyage charter agreement, and
make use of the spot charter market. Full shiploads make possible 'shipping for
hire' transactions - either short or long term.
The development of telecommunication has greatly facilitated the con-
tinuous matching of shipping capacity and potential shiploads, which is a
prerequisite for the working of a voyage charter market. However, the Baltic
Exchange in London, the most important auction market for tramp-ship
charters, originated in the 18th century.
We think it is instructive to speak about 'own shipping' (an abbreviation of
our own making) as the third main type of shipping services (see Fig. 1.4).
Historically 'own shipping' has the oldest origin at least so far as deep-sea
shipping is concerned. As the term suggests, merchant shipping used to be
conducted by big merchants and trading firms like the East India Company,
which had more or less monopolized each particular trade. They owned the
ships which carried their goods, and there was not much room for special
shipping companies. As international trade grew, however, new demands for
shipping arose.
The general technological progress made possible specialization in ship-
ping. The two catalysts for the emergence of liner shipping and voyage charter
shipping, were respectively the introduction of steamships during the second
half of the nineteenth century which made possible regular shipping services
according to schedule, and the development of telecommunication. With these
developments 'own shipping' tonnage was offered for the general use by the big
trading companies, and shipping lines were thus formed. Today 'own shipping'
is confined to specialized shipping activity, especially in the -bulk-shipping
market. About one-half of the world tanker fleet is owned or long-time
chartered by the oil companies. In the dry-bulk market about 30% of the
tonnage is owned by industrial companies.
1.3.1 Shipping activities and ship types

We distinguish three main types of shipping activities: 'liner services', 'shipping
for hire', and 'own shipping'. In the past all three activities were served by ships
of an 'all-purpose' type. Shipping-for-hire services had mostly been carried out
by the so-called 'tramps'. The traditional tramp used to be an all-purpose ship.
The idea behind such a ship was to maximize the chances of getting a cargo in
any port of the world. The tramp would go to a port wherever and whenever
sufficient cargo was available to fill the ship. The ships employed in liner
shipping were, like the tramps, exclusively all-purpose ships. The important
difference was that liners were designed to carry miscellaneous packaged
cargo. That meant in the first place that the liners were equipped with two or
more decks. They were also usually faster than the tramps, which is a reflection
of the higher average value of time of packaged cargo.
The similarity of the ship types meant that they were all, at least potentially,
in competition with each other. Although the main space in the lower holds of
a typical all-purpose tramp was intended for loose cargo or big lots of robust
packaged cargo, it could also stow small packaged cargo on the single shelter
deck. This also meant that conversions of tramps into liners and liners into
tramps were not too involved. It was not unusual that an original liner ended
its days as a tramp. Or, that a shipping line would occasionally charter a
suitable tramp ship for one or more sailings.
The potential savings of specialization and tailor-made ships, have em-
braced all types of shipping activities. The traditional all-purpose tramp has
practically disappeared from the seas. Shipping-for-hire services are nowadays
carried out by specialized bulk carriers designed to take one or two types of
cargo (e.g. ore and oil, carried by Ore-Bulk-Oil (OBO) ships). Similarly own
shipping is nowadays performed by specialized ships. The main point of owning
ships for a large goods producer/exporter is that a high degree of cost-reducing
specialization of the ships' design can be ventured. The tendency to
specialization has also influenced the design of liners. The disadvantages of
handling very heterogeneous articles have been mitigated by introducing
standard 'unit loads'. Special ships go with each particular type of unit load.
Containers and container ships are the dominant and most well-known
examples of this development. In 1985 approximately 60% of the liner cargo
was carried by the general category of container ships, while the remaining
40% by the non-container category, called 'conventional liners'.
An outcome of the tendency to specialization is that competition between
the different types of shipping activities has greatly declined. In particular, the
traditional competition between the liner and the all-purpose tramp belongs
to the past.
In the future, some competition between the liners and tramp will remain,
and will take two forms. First, there are bulk ships that are designed to take
both bulk and general cargo or containers. These are few in number and do not
constitute a severe threat to the liner trade. One example is the Belgian ABC
line, which has been operating six specially designed vessels which can carry
both bulk and containers on the Australia-Europe and USA trade routes. The
other form of competition is simply that with the general increase in the
volume of international trade, the borderline between general cargo and bulk
will gradually shift. Some commodities that were potential liner cargo
(such as sugar and rice) will become minor bulk, moving in quantities that are
sufficient to fill a ship.
Yet, the main source of competition in the liner shipping industry is the
liners themselves - either by the independents operating outside the confer-
ences, or by member lines operating within the conferences.
A summary of the main ship types and their association with the type of
shipping activity is given below:
Tankers
~
-----======-
Bulk shipping Gas carriers
Dry bulk
OBOs
__________ Full container

~Part container
_________ Unit load vessels ~ Roro
·
L mer sh"Ippmg ---------- Palletized
~ Conventionailine"
_ _ _ _ Tankers
Own shipping Gas carriers
- - - - Dry bulk
Note: The shipping terms of the different types are discussed in the subsequent sections of the
book. The term 'unit load' is chosen by us as the most appropriate to describe all the ship types
of the given four sub-categories, although a common term used for them all in the industry is
container ships 'unit load' is normally associated with the specific form of ships for palletized
cargo.
1.3.2 The wide definition of general cargo

The crucial aspect of liner cargo is that the shipments are each rather small.
Shipment smallness is in the first place associated with these two kinds of
commodities.
'Odd' commodities - in the sense that the annual quantity traded is very
small - will necessarily move in small lots.
2 High-value commodities will, even if the annual quantity traded is
substantial, normally move in small lots because the storage costs will
otherwise be too high.
Both these characteristics - 'oddity' and high-value - are possessed by
highly processed goods. Many other commodities than highly processed
goods are, however, carried by liners.
Another way of distinguishing liner cargo from bulk cargo is by the presence
or absence of packages. It is true that 'packaged cargo' is rather close to an
exhaustive definition of liner cargo. Exceptions certainly exist. On one hand,

articles like cars or logs are often carried by liners in an unpacked shape. On
the other hand, large shipments of bagged cargo, for example, can go by bulk
shipping.
The real snag of this criterion of distinction is that 'packaged or loose' is not
an inherent characteristic of commodities. It is not a characteristic which leads
to smallness of shipments, but the causal relationship is the opposite. No
matter whether the shipper wants it or not, the goods of a small shipment have
normally to be packed in order to 'mix' with other shipments of packaged
cargo. This has to be done for stowage reasons, but, of course, also for their
own protection, or to avoid causing damage to other goods.
The so-called 'major bulk commodities' - oil, iron ore, coal, bauxite,
phosphate rock, grain, and perhaps a few others - are nowadays traded in
such large quantities that they come in shiploads in practically all trades.
Under this condition transport in loose form will, besides the savings of
package costs, make possible the most economic methods of port handling,
and the most economic modes of shipping. It is not that these bulk
commodities are inherently unsuitable for packaging. For instance, oil in
drums used to be a common liner cargo, as recently as in the 1920s.
The conclusion is that liner cargo cannot be defined operationally as a
goods category which is predestined to liner shipping. It is useful to divide
the total seaborne trade into 'the major bulk commodities', on one hand, and
the rest, which can be called general cargo', on the other. Liner shipping has
practically nothing to do with the former category. The latter category, is
however, by no means reserved for liner shipping. Specialized bulk carriers, that
either operate in the spot market, or in the time-charter market, make inroads
into liner shipping.
The most important sub-class of general cargo for liner services in terms of
freight revenue is final consumer and producer goods - manufactures, textiles,
food products etc., tools and machinery. Lawrence (1972, p. 137) estimates
that these shipments account for only 10-15% of the general cargo weight, but
constitute more than half of all general cargo by value.
Second in importance is what can be loosely described as intermediate
goods. Chemicals, steel products and various assembly parts belong to this
category. The growth of multinational firms, and the international division of
production processes has given a stimulus to trade in intermediate goods.
The third general cargo category is primary products and such processed
goods as boards, wood pulp and paper, cement, copper and other metals, scrap
iron, etc. These commodities are shared with tramps and specialized bulk
carriers. The share of liner shipping in this trade is quite sensitive to relative
freight rates.
Finally, the wide definition of general cargo nowadays includes the most
important category of unitized cargo - containers, trailers, pallets, etc.
1.4 THE RELATIVE SIZE OF THE LINER SHIPPING INDUSTRY

It is remarkable that there exists no published records of the total turnover,
value added, or some other measure of the size in economic terms of the liner
shipping industry. The main reason for this is probably that liner shipping
companies, unless forced to do so, do not bother to report this kind of data.
However, estimates of total liner shipping turnover have from time to time
been produced on an ad hoc basis. There seems to be a reasonable consensus
about the relative importance of liner shipping: total resource costs of liner
shipping are about the same as the resource costs of all other branches of
shipping put together. For example, in the Rochdale report it was estimated
that 'the gross revenue ofthe liner trades amounts to perhaps about one half of
the total revenue of the shipping industry' (HMSO, 1970).
In terms of cargo tons, ton-miles, or fleet tonnage the relative size of the
liner shipping sector appears much smaller. But neither can this be shown with
accurate figures, due to lack of data. * Total ton-miles of general cargo (which
is perhaps twice that of liner cargo) and total tonnage of ships for general
cargo, can be given and related to the totals of all shipping. From the
previously mentioned sources of shipping and seaborne trade statistics, we
have extracted these round figures:
Total ton-miles of One-fifth of total ton-miles of
general cargo: all seaborne trade
Total dwt of ships for One-fifth of total dwt of world
general cargo: fleet
Total GRT of ships for One-quarter of total GRT of world
general cargo: fleet
Total freight revenue of Two-thirds of total freight revenue
general cargo:
1.5 RECENT DEVELOPMENT IN GENERAL CARGO SHIPPING

The fact that barely 10% of total seaborne ton-miles is produced by liners
while about 50% of total freight revenue is earned in the liner shipping sector
means that the average liner freight rate per ton-mile is almost ten times the
average freight rate per ton-mile of all other shipping. Why is this so? This
question will be fully answered in Part II, where a thorough shipping
engineering economy analysis is made. A full answer requires a model which
takes into account all important interrelationships between ship design
variables and shipping costs.
Part of the answer is, however, very straightforward, and can be given
* An attempt to account for the liner trade between sixty pairs of countries was made by the
American consulting company WAF A jointly with Mennelitics. They publish a 5-year forecast of
the main commodities moving on these trades, which is updated every 6 months.
already at this stage. The stevedoring charges for handling heterogeneous
packaged cargo are in general at least ten times higher than the stevedoring
charges for handling homogeneous bulk cargo. In view of the fact that total
stevedoring charges make up a good half of the total freight cost of break-bulk
cargo in, for example, the North Atlantic trades and the North Pacific trades, *
the relatively high direct handling (loading and unloading) costs can be said to
provide half the explanation of the wide difference between liner freight rates
and other shipping freight rates.
For break-bulk cargo it is generally true that the 'journey' from quay to hold
and back of a shipment is more expensive than the journey across an ocean. If,
in addition, the cost of ship's lay time is included, as it should be, the cost of the
loading and unloading, will typically constitute two-thirds or even more of the
total freight cost. In view of this rather lopsided cost structure it is not
surprising that something radical had to be done about the break-bulk
handling costs. The general answer to the soaring costs of stevedoring was
unitization of cargo.
1.5.1 Unitization of break-bulk cargo

Break-bulk cargo handling is very labour-intensive. To minimize the lay time a
big conventional liner can employ as many as ten gangs of stevedoring labour
at a time, which can mean that some one hundred men are engaged in cargo
handling simultaneously. (The gang size varies fairly widely from port to port.)
The productivity per man-hour is very variable depending on a number of
factors: the handling equipment, the type of article being handled, etc. In the
port of Stockholm the round figure of 1 ton per man-hour was used as a
standard in the 1950s and 1960s. Much higher figures were not reported
anywhere in the ports of the world during the late 1960s and the beginning of
the 1970s. Table 1.7 indicates that the productivity per gang-hour was
typically less than 25 tons, and was on average in a range which corresponds to
a figure somewhat above 1 ton per man-hour.
Unitization made an increase in break-bulk handling productivity possible.
In 1985 the average productivity in ports of developed countries varied
between 200 and 300 tons per gang shift. Given a size of a gang of ten
stevedores and 8-hour shifts, 250 tons per gang-shift implies a productivity of
3 tons per man-hour: a three-fold increase over handling productivity in the
1960s.
The level of wages of longshoremen in American ports was such that the
stevedoring charges for loading or unloading break-bulk cargo were in the
range of $10- 20 per ton at the beginning of the 1970s. The stevedoring charges
*In liner trad~sDetween deVeloping countries the proportion of total stevedoring charges in the
total freight costs is much less - typically in the range of 20-30% - due to the much lower dock-
labour wage rate. If chronically congested ports are included in the service, the proportion of
stevedoring charges is still less because the lay time cost of ships becomes very dominating.
Table 1.7 Break-bulk loading and unloading capacity
Port Tons per gang-hour
Antwerp and Rotterdam 18-25

Bremen and Hamburg 14-22
Gothenburg 12-20
New York 12-18
Chicago 12-20
Long Beach and San Francisco 10-15
Karachi 6-22
Valparaiso 10-18
La Valletta 12-15
Sources: A Battelle report pertaining to 1970 and the UNCTAD report

Berth Throughput (United Nations, New York, 1973) pertaining to
1971 and 1972.
of West Europe ports were also very high, although not as high as their
American counterparts. The European level of break-bulk handling costs
was about half the American level.
The container made its first appearance in the 1950s, and in the latter half of
the 1960s the breakthrough occurred. One used to speak about the container
revolution. This is an adequate expression, which, however, should not
obscure the fact that a development had been under way for some time, and
can be described as a transition stage between manual break-bulk cargo
handling and the container system.
One important innovation which anticipated containerization was the
putting together of small-size packages to large units by pre-slinging and
palletization for better utilization of crane capacity. This required equipment
for lifting and carrying those units which no longer could be handled manually
in ship holds and on the quay apron. The forklift truck was the most important
answer to this demand.
The increase in package unit size was not without its problems. Given the
conventional gear for cargo handling, the bigger units increased the risk of
damage and the danger of the work. Furthermore, at least in the past, as cargo
had to be lying in the open for rather long periods without protection,
unpredictability of rain became an awkward problem (in the temperate zones).
The container was the logical continuation of the trend towards bigger
units; it was an answer to several demands. From the handling-of-cargo point
of view, by standardization of container dimensions* expensive tailor-made
·Until recently standard container dimensions were 20 x 8 x 8 feet, and 40 x 8 x 8
feet for a large one. Today a standard container has more height and is of dimensions of 20 x 8
x 8.5 feet, and 40 x 8 x 8.5 or 40 x 8 x 9.5 feet respectively. Some shipping lines are using non-
standardized containers. Sea-Land still has boxes of dimensions 35 x 8 x 8 feet in use, but these
are gradually being removed from operation, and American President Line (APL) are currently
using 45 x 8 x 9.5 feet containers, which are not officially approved by the International
Container Organization (lCO).
container cranes of very-high capacity could achieve sufficiently high degree of

capacity utilization to be profitable. The weight per crane was raised to meet
the container weight. Cranes of capacity between 30 and 45 tons were designed
(container cranes of capacity of less than 30 tons are not in use, and today all
new designs lift no less than 35 tons). Thanks to this and by eliminating the
need for stowing the cargo in the ship's hold, the continuous work of the crane
was not impeded by that notorious bottleneck.
At a container berth, where, as is usual, two container cranes are used
simultaneously, fifty to sixty containers an hour can be loaded and/or
unloaded, and, which is most significant, the operation does not require more
than about ten men, induding the crane-operators. The productivity per man-
hour in this case is approximately 70 tons. Thanks to the containerization the
potential man-hour productivity has risen (conservatively calculated) fifty
times!
The new generation of container ships - the very large container carrier
(VLCC) - of 3000 to 4400 TEUs (twenty foot equivalent units) may require
more than the standard two cranes per berth, and are often supplemented by
cranes of other berths. At Port Newark for example, 900-foot container ships
are worked by four and sometimes by six container cranes. It should be
recalled that while working, container cranes must normally have a space of a
hold width between them, due to the dense container traffic on the quay.
However, bearing in mind that the lay time of ships has also been drastically
reduced by cargo unitization - in the aforementioned illustrative example the
handling performance per ship-hour is about 100 tons in the break-bulk case
and about 700 tons in the container case - this question presents itself; Why
have not all liner services already been containerized? There are three main
reasons why break-bulk cargo handling still prevails in most trades.
All cargo cannot, or is not very suitable to put in a container box.
2 The tremendous labour-saving potential is somewhat of an optical illusion.
The stowage and unstowage of break-bulk cargo in the ship's hold is
eliminated, but reappears to some extent in the stuffing and stripping of
containers, which are second packages, so to speak.
3 The containers themselves, the container cranes, and the container ships are
relatively expensive equipment.
Ofthe three the unsuitability of cargo is the most important one. In addition to
the fact that some cargo is not fit to be stowed in a container, there are types of
cargo that cannot be mixed within a container (raisins and coffee is an
example).
Where the containerization has been carried out, a reduction in freight
rates has not occurred; the cost of the capital which has been substituted
for labour is very substantial. The hope is that the containerization will halt
the trend of soaring freight rates, and not that it will really turn this trend
downwards.
For containerization to be really labour-saving it is required that the
containers are stuffed already at the premises of the shippers, and are not
stripped until the containers have reached their final destinations. In these
circumstances the containerization does not only save labour for loading and
unloading of ships, but also eliminates the need for expensive break-bulk cargo
handling at the landside of the ports, and at inland re-Ioading depots.
In developing countries the potential for door-to-door container transports
has so far not seemed very great, depending among other things on the
underdeveloped inland transport infrastructure; the stevedoring costs have
not yet reached the critical level, where a switch from labour-intensive break-
bulk cargo handling to the very capital-intensive container system is justified
unless significant inland transport and handling cost savings can be achieved
in addition.
A reservation to this observation is that the development of container trade
does not depend only on the cost savings achieved at one end of the route. In
the trade between developing and developed countries, a developing country
may start container services to meet demands set by the developed country,
although this development would not be justified by the cost savings of the
developing country. Dar es Salaam in Tanzania and Mombasa in Kenya are
examples of ports with container-service developments which aim at integrat-
ing the trade of these countries with that of the developed nations. The most
captive non-containerized trade will consequently be trade between the
developing countries.
Container lift-on/lift-off is the most common handling technique. Con-
tainers can also be rolled on and off, if the ship is equipped with stern-, bow- or
side-ports. In that case the bogies have to be left attached to the containers in
order to achieve really speedy handling, which means that the space utilization
of the ship's hold cannot be as high as when the containers are stacked on each
other. Two great advantages of the roll-on/roll-offtechnique are, on the other
hand, (i) that the expensive container cranes are not required, and (ii) that great
flexibility as to the combination of different units - containers, trailers, trucks,
cars etc. - is obtained. The roll-on/roll-off technique is a development of
traditional ferry services. It is predominant on short sea routes, but in the last
few years roll-on/roll-off ships have spread into deep-sea trades, particularly
into trades including large shipment of motor cars.
On the dense routes of the international trade, fully cellular container ships
can be employed. On thin routes, the volume of cargo and the lack of port
facilities may encourage the use of mix-ships. Where ports do not have lift-
onjIift-off container cranes, roll-on/roll-off (RoRo) ships are often being used.
There are two methods of handling cargo in a RoRo ship, both requiring little
port investment. According to one, any cargo - containerized or otherwise -
is put on a chassis, which is connected to a tractor, which carries the load out
ofthe ship and the port. Alternatively, the cargo may be put on a 'slave chassis'
which is much lower and will be used only in the port area. By the other
method - the 'Stow-Ro' technique -large forklifts take the containers up and
down the ramp and stow them in/out of the holds ofthe RoRo ship. Such ships
are currently in widespread use in the thin trades, and are also used in some
dense routes, e.g. the North Atlantic route.
A third unit-load system is represented by the barge-carrying vessels, which
have appeared recently. As distinguished from the traditional tug towing
a number or barges, the barges (lighters) are carried aboard the mother ship.
The so-called lighter aboard (LASH) ships, to which a great deal of
attention has been paid, can carry some seventy barges each of 850 tons
holding capacity. LASH ships were built during the 1970s. There are few-
about thirty - ships of this kind operating in the mid-1980s.
There is a newer version of the LASH, which is called SEABEE, where the
barges are designed according to modular dimensions of containers. LASH
ships can also carry containers but are not specifically designed to do so, with
the result that some idle space will remain. SEABEEs and LASHs have been
operating in a number of different trades and particularly on routes between
developing and developed countries. Prudential line and Lykes Brothers line,
for example, operate these types of ships in the East African trade. SEABEEs
and LASHs are big and expensive vessels. The penetration of container ships
to many trades including those of developing countries, has lowered their
attractiveness. In the mid-1980s there is no new construction of LASH and
SEABEE ships.
1.5.2 Composition of the fleet of general cargo ships,

and current tendencies
A decade ago, a very topical question in the shipping world was, how quick,
and how far the penetration of containerization will be in liner shipping? Will
something be left for conventional liners, or will this ship type be as completely
replaced by unit-load carriers in the next decade, as horses were by tractors
two or three decades ago? Two developments are relevant to consider: the
development of the total general cargo sector, and the development of the
modal split in this sector.
The most expansive part of seaborne trade in the post-war period has been
the sector represented by the major bulk commodities - especially oil, coal, iron
ore and grain. (So far as the oil trade is concerned the expansion came to an
abrupt halt in 1975.) The general-cargo sector has been growing steadily but
not at quite the same pace. In the 1970s the annual rate of growth has been a
good 5%.
The total tonnage of ships for general cargo has been growing much slower
in the 1970s than the general-cargo trade in ton-miles. The average rate of
growth of this tonnage was only 2%. The explanation for the disparity of the
trade and tonnage growth rates is two-fold.
The productivity in terms of ton-miles performed per ton of deadweight has

been increasing.
2 Specialized bulk carriers have made inroads into the general cargo trade.
The source of the productivity increase is easily pinpointed. During the
1970s the share of unit-load carriers of the total fleet of ships for general cargo
has been steadily growing. Under otherwise equal conditions the carrying
capacity in ton-miles of a container ship, or a RoRo ship is about three times
greater than the carrying capacity of a conventional liner of the same tonnage.
(This is probably a conservative estimate. Koike (1983), ofNYK lines, argued
that 'the transport efficiency of container ships is believed to be at a level six (6)
times that of conventional vessels'.) This is explained by higher speed at sea,
and, above all, considerably shorter turn-around times in port of unit-load
carriers.
It should, however, be remembered that the price of a container ship
(including the containers) per dwt is not far from three times that of a
conventional liner. The fact that the total deadweight of ships for general cargo
has been slow-growing does not mean that investments in new ships have been
slow.
Table 1.8 below gives the composition of the general cargo fleet and the
average annual rate of growth of its constituent ship types between 1970 and
1982. By the end of the period all unit-load ships measured in GRTconstituted
approximately one-quarter of the total GRT of conventional liners. Bearing in
mind that the productivity per GRT of unit-load ship is approximately three
times greater, the liner fleet composition in terms of carrying capacity is
approximately 40% unit-load ships and 60% conventional liners. Quite
another matter is how the total liner cargo is divided between conventional
liners and unit load carriers. The old ships do not disappear automatically as
they lose business. However, Koike (1983) estimated that out of a total liner
cargo trade of 1369.3 billion ton-miles, 561.3 billion ton-miles was container
trade, approximately 41 % of the world liner cargo.
Lawrence (1972; p. 141) estimated that the proportion ofliner cargo carried
by container ship would rise from 12% in 1970 to 35-40% by 1975 and 50-60%
by 1980. This estimate seems belatedly to have come true, if the carryings of all
unit-load ships are taken into account.
By the middle of 1980s it appears that the question raised a decade ago has
been answered. Containerization has become the dominant form of liner
shipping. By 1985 unpublished accounts of shipping lines estimate the
container share in the total trade - full and part load - to be around 60%. In
conjunction with the tendency to integrate land and sea transport, it can be
predicted that all containerizable cargo will eventually 'go containers', with
the trade between developing countries being the last to join. As to ship-
building the rate of growth of container ship and RoRo ship investments is
Table 1.8 The fleet composition for general cargo and average rates of growth of constituent ship types
,Fleet composition (000 GRT)
Ship types
Conventional Full Part

Year liners % container % container % RoRo % Total %
1970 72396 96.8 1908 2.6 484 0.6 74788 100

1971 71931 95.3 2781 3.7 740 1.0 75452 100
1972 70591 92.8 4310 5.7 1131 1.5 76032 100
1973 69506 90.6 5899 7.7 1291 1.7 76696 100
1974 68674 89.9 6291 8.2 1457" 1.9 76422 100
1975 70399 89.7 6244 7.9 247 b 0.3 1623 2.1 78493 100
1976 73608 89.1 6685 8.1 420 0.5 1862 2.3 82575 100
1977 77088 88.2 7543 8.6 425 0.5 2347 2.7 87403 100
1978 79675 86.2 8674 9.4 1007 1.l 3035 3.3 92391 100
1979 81678 84.1 9996 10.3 1322 1.4 4072 4.2 97068 100
1980 82610 82.2 11274 11.2 1677 J.7 4973 4.9 100534 100
1981 80826 81.9 12292 12.5 5576 5.6 98694 100
- c
1982 80542 80.8 12942 13.0 6176 6.2 99660 100
Annual average
rate of growth +0.92% + 18.4% +53% + 24.5% +2%
"The 1974 figure for RoRo was missing, and an estimate which consists of the average of 1973 and 1975 was used.
bOriginal figures were quoted on a TEU basis and were converted to dwt, on the basis of the average relation between the number of TEUs and dwt for full
container vessels during 1975.
'Figure not available.
steadily high but the most expansive category seems to be part container ships
(see Table 1.8), which combine the carriage of containers with break-bulk
cargo and/or RoRo cargo. Containerization has now almost reached satur-
ation levels in the trades between the main industrial areas (Western Europe,
North American and Japan, Australia, South Africa).
By the end of 1982 the world full-container ship fleet consisted of739 vessels,
totalling 14.47 million GRT with a combined hauling capacity of 823500
TEUs. The full-container ship fleet can be classified according to the regions/
countries of shipowners. This is summarized in Table 1.9. As seen in
the table, only 17.9% of the world full-container capacity is owned by
developing countries, mostly located in South-east A1>ia. When the world full-
container ship fleet is classified by ownership of nations, the USA leads the top
ten, followed by Japan, the UK, FRG, Denmark, France, Hongkong, Taiwan,
Italy and the USSR.
1.6 GEOGRAPHICAL ASPECTS OF LINER SHIPPING

The liner shipping industry is a supply aggregate which, when looked at from
the demand-side, breaks down into numerous place- and time-specific sub-
markets.
The geographical aspects serve to give some glimpses of the richly faceted
picture of the demand for liner shipping. The short account that follows will
make use of mainly two sources. For conventional general-cargo ships we will
rely on the comprehensive survey of liner shipping that has been made by
Table 1.9 The geographical distribution of the world full-container ship

fleet (1982)
TEU
Number of
Fleet zones ships Number %
Europe (OECD members) 312 371709 45.1
USA, Canada 116 121765 14.8
Japan 73 89734 10.9
Other Western countries 31 43684 5.4
Asia (excluding Japan

and China) 99 120452 14.6
Other countries 44 26831 3.3
Eastern bloc 64 49294 6.0
Total 739 823469 100.0
Source: Shigeya Golo (1983). Asian Liner Shipping. in International symposium on

Liner Shipping III. Bremen. November 1-3
Lawrence (1972). For the description of container ships movements, we rely on
data collected by various shipping lines and reported in the International
Symposium on Liner Shipping III, Bremen, 1983.
1.6.1 The dominance of intercontinental trade

The geographical characteristic ofliner trade routes which we want to hold up
in the first place, is the dominance of intercontinental trade requiring trans-
ocean shipping. From the analysis of the geography of seaborne general-cargo
trades made by Lawrence (1972; chapter 6) it can be concluded that in terms of
tons something like 80% of world seaborne trade in general cargo is
intercontinental and 20% is intra-continental. In terms of ton-miles, and
shipping demand, the dominance of intercontinental trade is apparently still
more pronounced.
For container services the three main routes that link the three regions - the
Far East, North America, and Europe - had been containerized almost
completely by 1982. These three areas are dominantly the centres of
containerized cargo traffic. They generate 91% of the containerized world
trade volume. Of a total of98 million tonnes of containerized cargo in 1980,46
million, or 47%, were carried along a longitudinal belt connecting these
regions. Container cargo traffic between US/Canada and UK/Continent/the
West Mediterranean is estimated at 19 million tonnes or 19% of the world
containerized cargo. The second largest container route is the trans-Pacific
route between US/Canada and Far East/South East Asia. This trade carried
18 million tonnes, with an 18% share accordingly.
The third largest trade route is the UK/Continent/West Mediterranean to
the Far East/South East Asia, with an estimated 9 million tonnes, with a 9%
share. The combined total of the above three routes is 47% of the world total.
In the direction of north to south and vice versa, it is estimated that 40
million tonnes were carried, comprising 41 % of the total. This cargo was
distributed:
To/from US/Canada: 10 million tonnes (10%)
To/from Europe: 21 million tonnes (21%)
To/from Asia: 9 million tonnes (9%)
The trade volume in the north-south direction (between developing countries)
is still in its infancy and amounts to a little over 2 million tonnes, less than
2.5%.
1.6.2 The dense-route and thin-route sectors

Every pair of general-cargo ports of the world represents, in principle, a
specific demand for liner services. The number of such specific demands
reaches an almost astronomical figure. It is quite obvious that the number of
specific liner services cannot match this figure. Even if one takes countries
rather than ports, the number of potential trade routes - each pair of st:aboard
countries constitutes a potential trade route - the same statement holds true:
the number of direct liner shipping connections is well below the potential
number of trade pairs.
Lawrence estimates the number of trade pairs that generate sufficient
general cargo to support weekly sailings to be approximately 240. This is only
a small fraction ofthe total number of potential trade pairs. It implies that liner
services can be offered at a reasonable frequency to the majority of countries in
the world only by employing a complex itinerary, in which liners call at ports
of different countries. Only a few pairs of trading countries generate sufficient
cargo to support weekly services. The implications of trade thinness for the
design of liner services are discussed in later chapters.
The degree of concentration of the flows of general cargo is quite
remarkable. According to Lawrence's calculations 60% of the total volume of
general-cargo trade moves on the fifteen densest routes.
From a demand-side point of view the total liner shipping industry can thus
be divided into two quite distinct sectors: the dense-trade-route sector, and the
thin-trade-route sector. The former sector dominates in terms oftrade volume,
while the latter sector is completely dominating in terms of numbers of routes.
1.6.3 The directional cargo balance

Another important geographical aspect is the directional balance of general-
cargo movements. In terms of value it is well known that most countries show
a surplus in the trade with some countries and deficits in the trade with other
countries. It is unusual that the export and import value balance in each
particular relation.
In terms of trade volume the general imbalance between individual trade
pairs is far more pronounced. We have calculated the average 'index of
imbalance' of the fifteen major general-cargo trades, which, according to
Lawrence (1972), generate 60% of total general-cargo trade. The unweighted
average ratio ofthe volume of cargo on the fat leg to the volume of cargo on the
meagre leg comes to no less than 3.15: 1. Practically every major trade route is
unbalanced to a higher or lower degree. Of the trade routes which have been
subject to our cost and freight-rate investigation, accounted for in chapter 3,
only a few routes were found to be fairly balanced.
1.6.4 Variability of the demand for shipping

Shipping services are not storable. If the supply of shipping capacity exceeds
demand, the excess supply cannot be stored and sold again when demand
exceeds supply. The generally considerable variability in demand for shipping
II III IV V VI VII VIII IX X XI XII
87 86 120 112 143 113 115 86 72 76 89 101
100
IJ)
c
0
.I-
"U
C
a
IJ)
:J
0 50
.s::
r
4 5 6 7 8 9 1011 12 1 2 3 4 5 6 7 8 9 1011 12 1 2 3 4 5 6 7 8 9 1011 12 1 2 3 4 5 6 7 8 9 10 l' 12 1 2

• 1970171 ~... 1971172 .,. .. 1972173 ~ "4 1973174 ----+
Figure 1.5 Monthly distribution of general-cargo export through the ports of Haifa and Ashdod. (Source: Annual
reports of the Israeli Port Authority.
is particularly important under these conditions. Three reasons for variations

in shipping demand can be distinguished.
First, there are the unpredictable, major single contingencies, which will
change the cargo base of shipping services very radically, like political
upheavals, changes in climate, or dramatic changes in economic policy. The
Korean war and the closure of the Suez Canal are two cases in point. The latter
event caused a dramatic increase in shipping requirement. The tanker ton-
miles increased by approximately 15% as a consequence of the re-routing of
tankers around the Cape of Good Hope.
Second, there are a large number of recurrent, but more or less random
minor occurrences, like strikes and other work stoppages, weather changes,
variations in production and tastes etc, that affect shipping demand.
Third, there are predictable cyclical fluctuations in demand for shipping.
There is a substantial amount of seasonality in the bulk trades. Agricultural
products are forthcoming during short harvest periods. Oil to Europe and
North America reaches a peak during winter because of heating requirements.
But seasonality also characterizes trades in general cargo. This is illustrated in
the following example of monthly pattern of Israeli exports of break-bulk
cargo (Fig. 1.5). The 'index of seasonality' that appears in the figure (the
monthly tonnage as a percentage of the moving average of 12 months) shows
that the volume of cargo in the peak month (May) was twice that of the lowest
off-peak month (September).
2 Market organization: the conference system
Liner shipping stands out, together with the international airline industry, in
the world economy in being almost completely cartelized in the first place as
far as pricing is concerned. Unlike the airline industry, the organization of the
freight rate making in the liner shipping industry is highly decentralized.
Practically every longer trade route of the world is covered by a separate
coalition of liner-service operators - the liner conference - which fixes the
freight rates on the route concerned. This does not necessarily imply that price
competition is wholly ruled out on all liner-trade routes. Outside competition
from independent liners and tramps, and to a lesser extent from industrial
(bulk) carriers and air freight, occurs at varying intensity. On some routes
competition can be fierce occasionally. On other routes the conference
members operate in 'splendid isolation'.
2.1 THE SCOPE OF THE CONFERENCE SYSTEM

There is no accurate figure available for the total number of conferences in
operation. In Croner's World Directory ofLiner Conferences (1976) the number
listed is 341. It can be assumed that some conferences covering local short-sea
trades are not included in this figure.
Anyway, conferences exist in most liner trades and in practically all
intercontinental trades. The broad lines of the geographical distribution of
conferences is summarized in Table 2.1. It can be noted that in the normal case
a conference covers the trade in one direction only.
Membership in the conferences can vary from two to sixty-five shipping
lines flying many different flags. As seen from the table the average number of
members of a conference is about eleven.
The itinerary of services covered by conferences varies greatly, depending
mainly on the volume oftrade generated in different trading areas, but also on
political considerations. Thus, China and Indonesia are covered by confer-
ences serving only these countries. And conference lines calling at Israeli ports
will not call at any of the neighbouring ports of Arab countries. In other cases
of ' thin trades' it is usual that more than one country is included in the range of
a particular conference at one or both ends.
2.2 CONFERENCE ORGANIZATION AND MAIN ACTIVITIES

Liner conferences differ considerably in their organization and the scope of
their activities. The conference system is not controlled by a central body like
Table 2.1 Number of coriferences and conferences membership
To
Other develop- Developing

From Europe USA Japan ed countries countries Total
Europe No. of conferences 31 23 1 17 41 113

Total membership 237 147 23 183 629 1219
USA No. of conferences 10 3 1 28 43

Total membership 73 9 16 7 317 422
Japan No. of conferences 3 2 4 31 40

Total membership 37 8 37 365 447
Other developed No. of conferences 3 2 2 6 13 26

countries Total membership 29 16 6 34 124 209
Developing No. of conferences 21 29 20 49 119

countries Total membership 413 271 183 617 1484
68 59 4 48 162 341
Total
789 451 45 449 2052 3781
Source: Croner's Directory, 1976

Developed and developing were classified according to UN Foreign Trade Statistics
Market organization: the conference system 37
IA TA in the air-line industry. Nor is it under any public service obligations

similar to these that bind inland 'common carriers' in most countries.
The degree of collusion between conference members varies greatly. A
conference may simply comprise
informal gathering or intermittent, irregular meeting at which rates,
sailings or other matters of mutual interest are arranged. These may be
nothing but an informal understanding that the traffic official of one line
will consult those of another whenever any rate changes are con-
templated. In most cases however conferences are a formal organization
with permanent officers, committees, regular or special meetings, rules
and penalties. (Johnson and Huebner, 1960)
Short-sea conferences such as those covering routes between the UK and
various European countries fall into the category of 'loose' or 'inactive'
conferences. According to the Rochdale report: 'On the short sea routes of
Western Europe, the conference arrangements have generally broken down in
recent years' (HMSO, 1970). Conferences covering deep-sea trades mostly
belong to the other category.
The main activities of an individual conference concern internal affairs of
freight rates, supply regulation, and market division. In addition the
conference system as a whole maintains a kind of order in the liner shipping
industry by dividing the total market into a great number of sub-markets.
Conferences define their respective ranges, thereby preventing exaggerated
return-load hunting in neighbouring trading areas.
2.2.1 Conference freight rates

The great majority of the freight carried by conference members have rates
fixed collectively by the conference, and which are published in rate books
(tariffs). The tariff describes the articles included and specifies all the rules and
regulations concerning the applicable freight rates. There are also some
commodities that move at so called 'open rates'. These are commodities that
face particularly strong competition from tramp shipping. The opening of
rates is mainly a policy instrument to meet external competition. It is also a
means of mitigating the effects of internal competition. Whenever the
conflicting interests of some conference members cannot be bridged, a possible
solution is to declare rates open. A request by a shipper for a rate reduction
may be rejected by some conference members, while approved by others. A
compromise is sometimes to declare the commodity in question as open-rate
cargo. Another example is when some conferences members are suspected of
granting secret rebates on freight rates of certain commodities. The other
members may then demand a legalizing of internal competition by declaring
these rates open (Fact Finding Investigation, 1961; pp. 154-5).
Changes in freight rates can only be made with the consensus of the
conference. The shippers' interests are taken into account in as much as freight
rates in the tariff cannot be changed without an advance notice. In the
recommendation of the Committee of European National Shipowners'
Association (CENSA) made in Brussels in October 1965, in connection with
the discussion of a code of conduct in dealings between shipping conferences
and shippers, it was stated that: 'As a general recommendation, where freight
rate increases are contemplated, the current month plus the next two following
should be given as the period of notice. Such a period of notice is, it is
understood, already given by most conferences' (UNCT AD, 1970). In
practice it is usual that more than 3 months elapse from the date of
contemplating across-the-board rate increases, as the internal conference
procedure of changing rates is quite complicated (discussed in Fact Finding
Investigation, 1961; pp. 49-60 and 66-8). Changes in conference freight rates
are said to be typically made in intervals of 6-12 months. The new US
Shipping Act, 1984 specifies that 'rates, charges, classifications, rules, or
regulations of controlled carriers, may not, without special permission of the
commission, become effective sooner than the 30th day after the date of filing
with the commission' (Section 9.c of the Act). Freight rates of different
conferences are believed, now as before, to tend to move together. McLachlan
(1963) constructed correlation indices for changes in freight rates of confer-
ences operating on different routes. How much of this consensus regarding the
conferences' listing of freight rates is borne out by our own investigation is
discussed in section 3.1.
2.2.2 Do conferences monopolize the trade?

Where no competition from non-conference liners exist, nor competition from
tramps or air freight, conferences may enjoy a high degree of monopoly power
over the route concerned (there may still be competition from other sources of
supply of the commodity). This is a situation that may prevail in some of the
thin-trade routes in the world. On the dense main trading routes, one or more
of these prerequisites are likely to be violated.
First, competition from the tramps. Traditionally when the bulk market was
bad, tramp bulk operators would enter the liner trade, but when the market
changed to the better they would make a comeback to the tramp market.
During the last few years a different pattern has emerged where a number of
bulk operators have established themselves in the liner market, with a declared
intention to stay. They normally run fairly regular services, and are capable of
combining the carriage of bulk in one direction and containers in the other.
Such bulk/container combinations exist, for example, in the trade between
USA/Australia, and a bulk/car carriage combination in the trade between
Europe and Japan. A Neo Bulk Shipping Study (prepared for the US
Department of Commerce by Harbridge House Inc., April 1972) estimated
that 35-50% of import liner traffic into the USA and 50-60% of exports
moving on liners, could have been transported as neo-bulk during the period
from 1967 to 1970. To take another example of the Australia-to-Europe trade,
the most important commodities - by their order of value: wool, fresh fruit,
food, metals - may also be carried by tramps or specialized ships.
Competition from air-transport also exists, and is particularly felt in the
carriage of high-value cargo. In Israel the share of airborne cargo of the total
Israeli trade measured in value was 16% in 1979, while its share measured in
weight was 1%.
The most important source of competition for the liner shipping industry
can be described by the phrase: 'we look for the enemy, and the enemy is us', i.e.
competition between different shipping lines (of the same conference, of non-
conference, or of the same nation) offering liner services. Trans Freight Line
(TFL) in the North Atlantic is a good example. Starting operation in the North
Atlantic in 1976 among four other independent lines, the company had grown
up to control almost 20% of the market by 1982. In fact, the company has
grown so much as a 'tolerated outsider' that it has become intolerant towards
competition by others and joined certain conferences to protect their
interests. * Evergreen is another striking example. The company, mostly
operating on routes confined to South East Asia, has grown as an independent
line to a size bigger than conference members in some trades. In its turn,
similar to the pattern followed by TFL, Evergreen operating as a 'tolerated
outsider' in the Far Eastern Freight Conference, has been faced with a growing
competition by the state-run line Yangming. The latter, acting as a complete
outsider, offered a European service from March 1983 with four 1846-TEU
container ships in an attempt to force its way into the closed market. It
appeared that Evergreen - the outsider - could no longer avoid Yangming's
growing operations and was seeking agreement with the intruder.
More generally, the three major liner routes connecting the three regions -
the Far East, North America, and Europe - have increasingly been facing
competition by outsiders in recent years. The weight of outsider ships in terms
of TEU capacity at the end of 1982 exceeded one-third of the total on all the
three key routes. On the USA/Europe and Mediterranean route, the combined
TEU capacity of non-conference ships represented about 39% of the total.
When both full- and part-container ships are taken into account, the share of
non-conference was approximately 23% of the TEU capacity on transpacific
routes in 1978, and it had gone up to 34.4% at the end of 1982. On transatlantic
routes, the weight of non-conference ships, which was slightly above 20% in
1978, rose to 39% by the end of 1981. On Europe-related routes, there were
practically no non-conference ships in 1978, while in 1978 non-conference
ships on the Far East/Europe route represented 31 % of the total capacity
offered (based on Koike, 1983).
• A speech delivered by John R. Arwood, President TFL, at the International Symposium on Liner
Shipping, Bremen, Nov. 1983.
2.2.3 Means of self-regulation by conferences

Conferences have employed various measures to protect themselves against
the various sources of competition that threaten their existence. The threat to
the conference stability comes both from within and from outside the
conference; the measures of self-regulation adopted by conferences aim at
safeguarding the conference system from both.
(a) Loyalty rebates to secure a stable total demand

Having defined its range in relation to other conferences, the share of a
particular conference is then not completely secured. Outsiders can occasion-
ally, or more permanently, challenge the conference lines by underbidding the
freight rates fixed by the conference. Naturally it is of interest to the conference
as a whole that, when given, the freight rates shippers' demand for liner services
are as stable as possible. To secure 'their' cargo, liner conferences have long
since found means of securing patronage of shippers. The most important one
is the loyalty rebates. According to this system a rebate of the order of 10-15%
is granted on a continuous basis to shippers who have signed exc1usive-
patronage contracts. Still more efficient (and more controversial) is the
'deferred rebates' system, which means that shippers get the rebate, for
example, on a year's freight retroactively but only provided that they have not
used a non-member line or tramp at any occasion.
In the USA the system of deferred rebate has not been allowed, as it violates
the anti-trust law. The Shipping Act, 1984 endorsed this prohibition. Loyalty
rebates have been allowed and are still permitted by the new law. According to
the new act, the conditions specifying the loyalty rebate must be published in
the tariff book, and must not violate the anti-trust law. Loyalty rebates which
discriminate between shippers, whether they have or have not patronised the
line in question, are not allowed. (A method employed by shipping lines
operating in the USA trade to discriminate among shippers is to grant
quantities discount; some shippers - with larger quantities of cargo - will get
lower rates than others.) An important contributory cause is mini-bridge
routings that have been inaugurated by almost all carriers in the USA trade,
and for practical reasons these shipments are not subject to the loyalty-
contract systems. Traffic routings via Canadian ports have further weakened
the loyalty-contract system. The conference inability to implement loyalty-
contract systems in the face of strong competition from non-conference and
their own members offering mini-bridge services, was a contributory cause to
the weakening of the conference system and its replacement in some cases by a
more loose organization of independent rate-setting groups.
(b) Membership restrictions

The total supply of shipping capacity is controlled by the conference in the first
place by restricting the membership. Conferences that restrict entry are called
'closed conferences', and they cover most trade routes of the world except the
important USA trade. Restriction on entry is not in accordance with US anti-
trust laws, and is not allowed in trades to and from the USA. In these trades
'open conferences' exist. Any shipping line can enter the applicable conference
without the consent of existing members, provided only that the newcomer is
prepared to obey all other conference rules.
(c) Market-sharing arrangements

Conference membership restrictions can only be partially effective in regulat-
ing the total supply of shipping capacity. It is difficult to check internal
competition among existing conference members for a larger market share,
unless further restrictions are imposed on the conference members.
All members are supposed to adhere to the fixed freight rates; the main idea
of the conference system is to rule out price competition. An individual line
may, however, be tempted to lower the rates because the demand facing an
individual line is more elastic than the demand facing the whole conference. An
individual line will increase its profit by a freight-rate reduction if the other
lines stay put. This he could do by offering secret rebates, by reclassification of
commodities, or by cheating in the measurement of the cargo. The incentive
of an individual member in a cartel to break the cartel rules by 'cheating'
in the pricing has been recognized as a main source of a built-in instability
of cartels. It appears, however, that liner conferences have managed to
protect themselves against this by elaborate systems of control of freight
rates actually charged, and by imposing heavy penalties on conference
rule-breakers.
Particularly in the USA trade, where conferences are open, self-policing
devices have evolved. In these conferences a mandate to police conference
members is given to a neutral body, which is eitherformed by the conference or
else the conference buys these policing services from an outside concern,
normally called 'policing body'. In the closed conference control over members
is normally carried out by self-policing, but even here there are examples of
buying 'policing body' services, as is the case with the European-Far East
closed conference, which, in 1985, granted 9.5% deferred rebate (after 6 months
ofloyal use of its services) to shippers. Cheating can be assumed to be practised
sometimes in some trades, but not to an extent that really undermines the
stability of the conferences.
The main form of competition, then, among member lines is quality, or
'service' competition. Some conferences have sought to avoid 'excessive'
service competition by internal agreements to share the market to a higher or
lower degree.
In cases where market-pooling arrangements are made two main forms can
be distinguished, (i) quantity-pooling agreements, and (ii) revenue-pooling
agreements. Output-sharing agreements allocate the total output of the
conference among member lines according to some agreed formula. This is
implemented in several alternative ways, e.g. allocation of 'cargo quotas', or

allocation of 'sailings quotas' and 'ports quotas'.
Cargo quotas can be applied to the total trade of the conference, to specific
commodities that are particularly attractive to members, or to the cargo
loaded and/or unloaded in a particular port. An example of a comprehensive
cargo-sharing agreement is that which applies in the Far Eastern Freight
Conference (Deakin, 1973; p.65). According to this arrangement, which has
been operative since 1946, the conference sets up a berthing committee which
is responsible for estimating the amount of cargo expected at the next period,
and on the basis of these estimates the committee allocates the cargo among
the lines. Due to the administrative complications cargo quotas are in many
cases confined to specific commodities like rubber in the export trade of the
Far East.
Sailings quotas are applied more generally by conferences. These specify the
maximum number of sailings allowed for each line on the route. Quite often
this is combined with entry restrictions to particular ports; each member can
make only a limited number of sailings to a specific port, or to a specific group
of ports.
Quantity pooling is sometimes supplemented by a revenue-pooling ar-
rangement. The revenue pool to be allocated can vary from 100% of the total
freight revenue to a portion of the total revenue of about 40%. In early pooling
agreements the quotas were determined according to a measure ofthe capacity
of the ships employed by each line. A more common criterion seems now to be
the quantity of cargo that has been carried by each line over a period of several
years prior to the agreements (Deakin, 1973; p.67).
An important question is whether adjustments can be made in the initial
shares agreed by the conference. A failure to carry the allocated quota of cargo,
or to make the minimum number of sailings required by an agreement will
result in a downward adjustment of the failing conference member's future
market share. Upward adjustments are also made, but they seem to be more
difficult for an expansive line to get through.
2.3 WHY CONFERENCES?

After the previous description of the various aspects of the conference system,
this question springs to one's mind of itself: Why is practically the whole liner
shipping industry thoroughly cartelized? It would not be very remarkable if
liner conferences were existing in one or two liner trades; the remarkable thing
is that all the hundreds of separate liner trades between all continents
including all sorts of nations and geographical regions are with very few
exceptions covered by conferences.
The only comparable example from another industry of the world economy
is the international airline industry. A noteworthy difference is, however, that
IAT A is basically an inter-governmental organization of more or less
nationalized companies, whereas the liner conferences are private cartels.

An attempt to an explanation of the prevalence ofthe conference system can
start by the somewhat truistic observation that most people would like to lead
a quiet life in a profitable business. Competition is seldom something that
business men seek for its own sake, and already Adam Smith has noted that
wherever business men of the same trade gather the possibility of fixing prices
is an easily raised topic for conversation. Price cartels are by no means an
unnatural form of industrial organization as far as the industrialists them-
selves are concerned. .
The remarkable aspect ofliner conferences is that they are allowed and even
approved of by governments in all countries, and have been so since the origin
of the conference system at the end of the ninteenth century.
The first conference was formed in 1875 in the UK-Calcutta trade.* Since
then conferences have spread first in the main trades at that time - between the
UK (and continental Europe) and India, South East Asia, China, and
Australia - and have later proliferated in all trades of the world. The rapid
replacement of the sailing ships by steamships, which took place at the end of
the nineteenth century, increased the carrying capacity of the world fleet quite
rapidly. The steamships were both faster and bigger than the ships they
replaced. The increase in supply was not matched on the demand side, and
severe excess capacity of shipping services was created. A drastic and long-
lived decline in freight rates was inevitable. The incentive on the part of liner
shipowners to get organized was particularly strong. The creation of the first
conferences can be attributed to this severe slump.
Shipowners have since those days always been able to make a convincing
case for the necessity and desirability of price cartels in liner shipping. The
main point of the argumentation has been that in the absence of conferences
freight rates would frequently be bid down to the direct handling cost 'floor'.
This would be disadvantageous also for shippers, because frequent bank-
ruptcies of shipping companies would mean that regular shipping services
could not be maintained; every government consider it to be a national interest
that 'vital trade connections' are not jeopardized. Several public inquiries into
the conference system have by and large concurred in the shipowners' case for
the liner conferences.
2.3.1 Public inquiries into the conference system and international

shipping policy
Laws with a bearing on liner conferences have deep roots in the leading
shipping nations. The Royal Commission on Shipping Rings was initiated in
Britain in 1906 and reported in 1909. The commission's majority verdict on
*The most comprehensive discussion of the historical evolution of conferences is found in Deakin
(1973).
conferences was favourable. Conferences were acknowledged as a necessary

form of organization for providing regular services at stable rates. It was
pointed out, however, that the conference system may lead to excessive rates
and oversupply; the commission recommended, as a result, that shippers
should form trade associations for negotiations with conferences.
This attitude remains in present 'merchant shipping' laws in spite of post-war
legislative efforts to prevent restrictive practices including the formation of
price cartels in other industries. A notable attempt to take a new look at the
shipping price cartels in the advent ofthe c~ntainer age was made in the report
of the British committee of inquiry into shipping from 1970 (HMSO, 1970),
known as the Rochdale report (after the chairman of the committee, Lord
Rochdale). The committee summarized its recommendations so far as liner
conferences are concerned in this way.
Members of conferences covering trade to and from the UK should
collectively accept a published code of conference practice, which should
contain provisions relating to the admission of new members, the
publication of tariffs, the provision of information about revenues and
costs to representatives of the Government and of shippers, and
consultation with the Government and shippers (HMSO, 1970).
The existing form of organization qf the liner shipping industry - price
cartels - was accepted.
In the USA the Alexander Committee was formed in 1912 and reported in
1914. It examined the-conference system in the light of the anti-trust laws. The
conclusions of the committee were similar to those of the Royal Commission.
Conferences were recognized as essential; free price competition cannot work
in the liner shipping industry. As a result, liner conferences were exempt from
anti-trust laws by the Shipping Act, 1916. A salient feature of USA shipping
legislation is that conferences should be 'open', i.e. allow free entry.
Legal controversies have been a much more frequent problem in the US
trades than anywhere else, since anti-trust laws are, generally speaking,
comparatively vigorously enforced in industry as well as inland and air
transportation in the United States. The new Shipping Act, 1984 was therefore
welcomed by many commentators. Now the seemingly endless problems
would disappear thanks to the very explicit 'anti-trust immunity' bestowed on
liner shipping in USA trades.
Much less attention has so far been paid to quite another, potentially
fundamental provision of the new act, which may well erode the price cartels in
the future. In Section 5(b} (8)* it is stated that 'Each conference agreement must
provide that any member of the conference may take independent action on
any rate .. .'. In other words, although the law does not prohibit agreements
*For further details, see the Act itself(Public Law 98-237, 98th Congress). For an interpretation of
the Act see Friedman and Devierno, 1984.
between conference members on freight rates, as it neither does regarding

pooling of traffic or revenue, and coordination of sailings, it makes
abundantly clear that it is unlawful to deny individual members the right to
charge their own rates. Our interpretation of the new law is that freight rate
tariffs produced by liner conferences should be regarded as a sort of list of
'recommended prices', which are issued by many different trade associations,
which only serve as guidelines for individual members, and from which every
member is free to deviate without fear of retaliation in any form.
Public investigations of liner conferences on a smaller scale, have been
initiated by governments of other shipping nations. In general, their conclu-
sions are similar to those of the British inquiries. While the need for
conferences is acknowledged, several recommendations are usually made to
restrict conference abuse. As a result, during the last 20 years, some
legislation to that effect has followed in Japan, Australia, New Zealand and
Canada in the form of explicit exceptions from fair trade or restrictive practice
Acts. Similarly, work has been going on for some time in the EEC with a view
to reconciling shipping policy with Articles 85 and 86 of the Treaty of Rome.
Private shippers' associations started to react on the conference system in
the early 1950s. Various points were raised concerning the conference system
in the Commission on Sea Transport of the International Chamber of
Commerce. The pros and cons of the conference system were listed in an ICC
brochure, which recommended that shippers should join in associations acting
as counterparts to the conference, but it also gave blessing to the basic cartel
system.
During the last two decades, in parallel with the formation of national
policies towards conferences, international policy towards liner conferences
have become a central issue. The instrument for initiating international policy
towards conferences was the United Nations Conference on Trade and
Development (UNCTAD). Shortly after its creation in 1964, UNCTAD
established a committee on shipping, and a shipping and ports division that
have been engaged in research into shipping. The growing criticism in the
committee by the developing countries of the liner conferences serving their
trades, made the European maritime nations group together in the Consulta-
tive Shipping Group (CSG). Two consequences of the CSG's activities were the
formation of more shippers' councils in Europe, and the creation of the
committee of European National Shipowners Association (CENSA).
UNCT AD being the voice of developing countries has initiated several
studies on the establishment and expansion of merchant fleets of developing
countries. The climax of these activities and the most influential outcome of
UNCT AD's initiatives has been the 'UN Code of Conduct of Liner Confer-
ences'. It was presented for discussion by the Group of 77' (countries in Africa,
Asia and South America) at the UNCT AD conference in Santiago, and was
adopted by a majority vote at the UN Diplomatic Conference in Geneva in
1974. The code convention came into effect on 6 December 1984. During these
10 years intensive negotiations have taken place with the view of reaching a
compromise between the main shipping nations and the interests of the
majority members ofUNCTAD, the 'Group of 77'. The endorsed code in 1974
stipulated that the convention could not enter into force without the support
of at least some OECD governments. This seemed assured at the Diplomatic
Conference in Geneva, but subsequent events proved otherwise. The OECD
countries decided that a common position on the code was required. In 1979,
an agreement - Regulation EEC 954/79, commonly known as the 'Brussels
Package - was produced, which sets the terms by which the OECD countries
would sign the code convention. After the 'Brussels Package' was accepted by
the OECD countries, the code convention was finally put into force in
December 1984.
Of the many aspects covered by the code, the most important and most
controversial one has been cargo-sharing formula of 40-40-20. According to
this formula the division of liner cargo moving between each pair of countries
by the conference lines should be: 40% carried by liners of each of the two
trading countries, and 20% carried by third parties, so called cross-traders.
These notorious magic numbers, according to the code convention are not
inflexible, but are merely put as suggestions.
The market-sharing formula (MSF) should be viewed as an outcome of the
conflict between shipping policy of nations which possess large merchant
navies, and nations which do not, but have aspiration to become self-
supporting or near so in shipping. The MSF is a manifestation of this
aspiration, and the conference system is chosen as the most suitable form of
market organization to achieve this goal. The MSF is one step away from
freedom to compete towards more protectionism of international shipping.
But does it constitute in practice a real threat to the fleets of existing nations
(i.e., developed nations) and to the freedom of competition, or is it merely a
paper tiger?
The most important limitation to the wide applicability of the MSF is the
'Brussels Package'. The Package provides that EEC and (on the basis of
reciprocity) OECD conference trades, are not subject to the MSF and the
status quo is retained. This means that the majority of the liner trade between
the developed countries is excluded from the code. Other considerations that
limit the scope of the code are, (i) cargo carried by non-conference lines is
excluded from the code, (ii) cargo transported under bilateral trade agreements
is excluded, and (iii) military equipment for national defence purposes is
excluded. Finally a large number of countries, and most important the USA,
have refrained from signing the code convention. According to an estimate of
Ross-Bell (1984),just the 'Brussels Package' limits the scope ofthe MSF to 7%
of the world liner trade.
Even if this exact figure is not accepted, it is impossible to envisage how the
code convention is capable of introducing a 'new order' into liner shipping.
When all the qualifications that we mentioned are considered, the MSF will
apply only to a small segment of the liner shipping industry.
There may be no direct threat of the code to the status quo of the
international liner shipping industry, but there is an indirect one. The code is a
deliberate effort to encourage more protectionism and bilateral agreements. It
has awakened the aspiration of the developing countries to use their foreign
trade as a base for developing their fleet - whether this is liner cargo or bulk, or
whether it is carried by conference or non-conference lines. New bilateral
agreements, such as that between the USA and Brazil who share equally the
trade between them, have emerged. Korea, Japan and the Philippines have
declared their intention to build their own fleet that will carry 40% of their
foreign trade. The MSF concept has been extended to include bulk services.
Some developing countries aim at carrying up to 70% of their bulk cargo in
their own ships.
This development is a move towards more protectionism and nationalism of
the international liner shipping industry. The aspirations of the 'have nots' are
very understandable, when it is borne in mind that, (i) shipping is not just
another industry; shipping is the mode by which almost all the goods essential
for the support of nations are traded, and (ii) the liner shipping industry,
mostly owned by the developed countries, has been characterized by absence
of sufficient competition and secrecy of operations. Yet, it is impossible to see
how in this case adding a wrong (to a wrong) will make things right. The
criterion ofthe MSF concept is not one that is in accordance with the efficiency
of the international division of labour. Of the two recent initiatives to set the
terms by which conferences operate, the US Shipping Act, 1984 - which is a
move towards a more liberal and competitive environment ofliner shipping -
will hopefully set the example to follow by other nations pursuing a
protective-nationalist policy - whether these are developing or developed
countries.
2.4 CONCLUDING REMARKS

The original question whether liner conferences are beneficial or harmful for
seaborne trade has latterly receded into the background, while the issue of
protectionism in liner shipping has come to the front.
This is unfortunate in our view. The two issues are interrelated. The rigid
protectionism which is emerging in the shipping industry is a bad thing, and so
is, as we will argue in part III, the conference system in its traditional form. And
the latter fosters the former tendency. In order to prevent a complete
politicizing of international liner shipping, liner companies should of their
own accord offer an alternative to the traditional price cartel organization of
the industry rather than fight for the preservation of the 'free enterprise
conference system' to quote a typically contradictory party cry by a leading
shipping man.
A rather paradoxical fact is that comparatively low profits are made in liner
shipping in spite of the cartelization of each trade. The low profitability in liner
shipping is, in our view, not a sign of a favourably low level offreight rates but of
low efficiency. In part III, in which the welfare aspects of the conference system
are discussed, we show that the most probable explanation for the low
profitability is that the potential monopoly profits are eliminated by costs of
efforts on the part of individual lines to secure the potential high profits.
The opinion that the conferences system is a prerequisite for an orderly
forwarding of general cargo trade must not remain unchallenged. We mean
that the liner conferences create the need for themselves. The fixing of freight
rates out ofline with the marginal costs (see part III) results in tensions which
are mistakenly regarded as the justification for the price cartels, and which the
conference members try to mitigate by further regulations and restrictions on
competition.
At the same time we acknowledge that efficiency of operations require
coordination of the scheduled services. How to combine efficient coordination
of services and maintain price competition is the subject matter of part III. The
US Shipping Act, 1984 is an important step towards a definition of such a role
of liner services.
3 The level and structure of freight rates
3.1 THE GENERAL LEVEL OF FREIGHT RATES
3.1.1 Previous studies of the development of the general level

of liner freight rates
The following is a description of the development of the general level of
conference freight rates, which would agree with the general consensus.
Freight rates are fixed by the conference and are published in their tariff
books. The general level of these rates is usually held unchanged for a period of
6 months, whence the conference would announce 'across-the-board' change
in the level of rates, i.e. the general level of rates will rise by an equal
proportional increase of the rates of all commodities. If we were to plot the
general level of freight rates against time, a rising-step function shape is
expected to emerge - rates are fixed at a certain level for a period of time, and
then rise to a new level, with very few occasions of a fall in the level of rates.
Conference freight rates are by and large 'sticky' downwards, which is
attributed to the quasi-monopoly power that they possess.
There have been several attempts to substantiate this common belief. The
first to mention is the single-handed attempt by McLachlan (1958) who
constructed a liner freight rate index for the UK trade for the period 1946-57.
McLachlan who based his index on the published conference rates and 'across
the board' changes in these rates, did in fact confirm the common belief that
liner rates are both stable and are almost always rising. As seen in Fig. 3.1,
which compares McLachlan's UK exports index to the tramp freight rate
index, liner rates show remarkable stability over the period (especially the
period 1946-50), and except for slight declines of approximately 2-3% on
several occasions have been consistently rising.
A major attempt to study the development of the level ofliner freight rates
was made by Deakin (1973). Deakin studied the development of rates of
individual commodities as well as the development of the general level of rates
of the whole conference in some trades serving the UK - those with Australia
and South East Asia, for the period 1948-70. His rate indices are based on the
conference published rates, and except for one case (the trade UK-Australia)
they are all unweighted rate indices; that is, they record the average movement
of gross revenue per ton of the commodity or the conference concerned. In
Figs 3.2 and 3.3 we show two of Deakin's indices for the trades UK-
India/Pakistan, and UK-Australia. The weighted index ofthe UK-Australia
conference registers the weighted average movement of rates of individual
- - Export liner freight index

225
- - -- Tramp freight index
200
~
J '\ A
>(
175
, \"J ,"
~ 150 J ,
,
I "
c I
125 I
75
50L-~~~---.---.--~--.---.---.--,.--,__-.---.~
Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan
1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958
Figure 3.1 McLachlan's liner freight rate and tramp rate index (1948 = 100).
300
275
250
GJ 225
C
u 200
III
01
0
175
)(
GJ
'0 150
.:
125
100
I I I i I I i I I I i I I i I I I iii I I I i
1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970
Figure 3.2 Index of un weighted average of conference freight rates outwards and
homewards between the United Kingdom and India/Pakistan, the Far East, Australia.
1948-1970.
Source: Deakin & Seward, p. 106.
commodities carried on this trade, using freight revenue received in 1967 as

weights.
Both indices lend support to the common consensus -liner freight rates
show both stability and they are sticky downwards. Deakin also concludes
The level and structure of freight rates 51
- - Conference liner ra~es. unweigh~ed

300 - - - - Conference liner ra~es, weigh~ed
250
QJ 200
r---~===:j-~
~ r-----r-r-
-----~
01
.3 150
r------f- oJ" - ...
r--_ ....... -.r- _J
100
i l l I I I I r I I I I
End 19-'.8 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970
Figure 3.3 United Kingdom - Australia Homewards. Index of conference liner freight
rates weighted and unweighted, 1948-1970 (freight rate changes for individual
commodities have been weighted by the freight revenue yielded by each commodity in a
base year (1967).
Source: Deakin & Seward, p. 110.
'that movements in basic freight rates over the whole period (1948-70) are very
similar in all three conferences' (Deakin, p. 104).
McLachlan's and Deakin's indices have not been updated and published on
a continuous basis. Nor have they been adopted for official use by the UK
government. Two liner freight indices that aim at more comprehensiveness
and at being updated and published continuously are the German (Bremen)
Index, and the more recent Canadian Export Index.
The Bremen Index, established in 1954, covers cargo loaded and discharged
by liners in seaports of the Federal Republic of Germany. The routes covered
are worldwide and there is no restriction as to flag of ship or nationality of
ownership. It is of Laspeyeres type. Freight rates are weighted by the earnings at
a base period, which was first taken to be luly-December 1954, then revised
and changed to December, 1959, and finally today 1965 is used as a base year.
The index is based on published official tariffs of (originally) 325 freight rates
from 29 outbound and 27 inbound routes. Separate indices are calculated for
general cargo and bulk cargo moved by liners. These are then combined to
yield an aggregate index, giving bulk a weight of 15% and general cargo 85%.
The German index is published monthly. Figure 3.4 shows the development of
the Bremen index in the last decade (1976-85), using 1965 as a base year.
The index which reports the yearly average values has been consistently
rising throughout the period with a minor fall in 1983 of less than 1%. There is
a remarkably steep rise in the index in 1984 while the years 1981-83 are
marked by rate stability (see also Appendix B).
370 Bremen index
~ 350
'0
c
QJ
Ol
vc> 300
C
>-
L:
c
~
250
Figure 3.4 The development of the Bremen liner index (1965 = 100).
The recent liner freight index initiated by the Canadian Transport

Commission (CTC), is a welcomed effort to record comprehensively the
movement ofliner rates in the export trade of Canada (Bryan and Cape (1982),
and Wei et al. (1983)). The index, started in 1977, covers the export trade of
Canada carried by 17 conferences. The freight rates recorded are the
conference published rates. 121 individual commodities were included which
were selected according to the cut-off criterion of'exceeding $3 million in value
and 500 metric tons in quantity' (Wei et al., 1983, p. 15). The data is used
to construct an overall conference freight rate index, an index by rate type,
an index by the nature of conference, an index for an individual conference,
and an index for an individual commodity. Like previous indices it is of a
Laspeyeres type. Individual freight rates are weighed by freight revenue at the
base period, which was chosen to be the first quarter of 1980. (The initial
attempt to construct a 'Chain Laspeyeres Index' as suggested by Bryan (1982)
was eventually replaced by the 'fixed basket Laspeyeres Index' for reasons
listed in Wie et al. (1983)). In Fig. 3.5 we give the aggregate conference rate
index for Canadian export for the period 1978-81.
There has been no other published liner freight rate index. It may be
mentioned in passing that the Shipping Division of the United Nations
Conference for Trade and Development (UNCT AD) has contemplated at one
stage the construction of such an index with special reference to trade of
developing countries,* but gave up the idea when confronted with the
*A study exploring the feasibility and merits of various liner freight rates indices was
commissioned by UNCTAD to M. G. Kendall who published his report in January 1968
(Kendall, 1968).
130 _ Basera~es
0--0 Base ra~es and BAF's and CAF's

.....o 120
0"-
~ 110
1/1
8
.~ 100
GJ
"0L. 90
.....
~
'ii 80
L.
U.
70
I i I I I
I II III IV II III IV II III IV II III IV
1-1978---+1--1979---+-1--1980--+-1-1981---i
Figure 3.5 Aggregate quarterly liner conference rate indices for Canadian exports.
Source: Wei et al. 1983, p. 23.
complexity of the task, and its costs. The heterogeneity of cargo and routes
has discouraged any attempt to construct a regional and a worldwide liner
freight rate index.
In summary all four indices confirmed the assumed general pattern of liner
conferences freight rates. The general level of rates is kept constant for a period
of time, whence it is increased by a certain proportion. Rates show little
fluctuations and are sticky downwards. With the exception of a drop of 1% in
one year in the Bremen index, all indices show a continuous rise. This pattern
also gave support to the belief 'that conference pricing is, to a large extent,
dependent upon cost components in liner shipping and that given less volatile
times, rates would not necessarily be adjusted in response to short-term
changes in liner transport demand.' (Wei et al. 1983, p. 5).
The main deficiency of these indices is that the published conference rates
form the freight indices. If individual lines within the conference compete by
varying their freight rates in response to changing market conditions, this will
not be reflected at all in the index. This deficiency was realized by both Deakin
and Bryan and Cape, who due to lack of data were unable to measure its
importance. It will be the focus of our subsequent analysis in this chapter.
This will be done by comparing the conference and an individual line freight
index. We will construct our own index of freight rates, and address the
following issues: are conference freight rates stable and in particular are they
sticky downwards? Does an individual firm within the conference behave in
conformity with the 'front' presented by the conference as a whole? Will the
freight rate index of an individual line overlap with that of the conference as a
whole?
Do rates of individual commodities move in parallel, so that 'across-the-

board' changes in rates accord well with the actual rate changes that have
taken place, or do actual freight rates of individual commodities move in a
different manner?
To answer these questions we construct a liner shipping freight-rate index.
This is done for two shipping trade routes: the route FRG (Hamburg/Bremen
Ports) to Israel, controlled by the conference CONISCON, and the route west
coast of Italy/Sicily and Adriatic ports to North Atlantic ports range,
controlled by the conference WINAC. For the first route two indices of the
general level of rates over the route, for the period 1975-85, are constructed.
One for the whole conference, and a second one for a particular shipping line
operating within the conference. For the second trade route, commodity
indices are constructed of the three main commodities moving on this trade,
for the period 1979-85.
3.1.2 Liner freight rates indices on the FRG to Israel trade route
The trade route selected - FRG to Israel which covers a distance of 3650
miles - constitutes a part of the larger trade zone of north-west Europe to the
Mediterranean. The latter is served by more than twenty lines offering more
than 25000 containers per month in various combinations of sea and land.
Out of these twenty companies only nine call at Israeli ports, offering 10000
containers per month via more than twenty-five different ships. Five out of
these nine companies have colluded by forming closed conferences, while the
remaining four act as independents (Matthews, 1984).
The part of this trade that is studied here -(FRG to Israel) is served by five
shipping lines offering approximately 6700 containers per month. Three of
these are organized in a closed conference called CONISCON. They include
Zim (Israel), ONOL (FRG), and KNSM (the Netherlands). Together they offer
45% of the total capacity offered on the route, Zim having 63% of the capacity
offered by the conference. Of the cargo moved over this route 80% is liner
cargo, which mostly consists of finished and semi-finished manufactured
goods.
Conferences can best be described as 'price cartels'. The member shipping
lines coordinate the freight rates they charge and publish a uniform tariff for all
the services provided by them. In other respects, conferences may vary in
their degree of control of member lines. They sometimes form a loose
organization for the sole purpose of coordinating rates (especially on short sea
hauls), and at the other extreme they may exercise tight control over members
to the extent of sharing revenue according to some agreed formula. Another
important distinction is between 'closed' and 'open' conferences. Closed
conferences do not admit free entry to the conference, while open conferences
allow free entry. All conferences serving the USA trade are open conferences
by the anti-trust law.
The CONISCON is an example of a conference with tight control over

members. It is a closed conference consisting of just three shipping lines (of
different nations) operating on the basis of a 'revenue pool', i.e. of sharing
revenue. At the same time the conference faces strong competition from the
three independent firms (or 'outsiders') that offer more than 50% of the total
shipping capacity on the route. The intriguing question is whether the
conference can sustain or even raise freight rates when faced with competition
from the 'independents'. Can the conference avoid lowering its published
freight rates when faced by a situation of excess capacity and strong
competition? To answer this question we construct a conference freight-rate
index, which is based on the published rates of the conference.
(a) The conference freight rate index

The unit of account for the construction of the index is a standard container of
a dimension of 20 x 20 x 8 feet, also called a Twenty-Foot Equivalent Unit
(TEU). The freight-rate index is calculated per TEU of a representative
commodity mix. CONISCON publishes twenty-nine classes of rates in its
tariff, called 'official scale of rates'. Out of this list we have chosen twelve classes
of rates, which cover 80% of the total trade. A representative TEU, then,
consists of a mix of these twelve commodity groups, being weighted by the
revenue share of each class. The conference rates that we use are the 'basic
rates' that are quoted to all shippers, under the category 'non-contractors', and
prior to any rebates an individual line is allowed to get by mutual agreement.
To this basic charge we have added surcharges when applicable (such as the
Yom-Kippur war surcharge applicable since 1973), and fuel surcharges.
A freight-rate index compares the average (weighted) of a set of freight-rate
relatives; that is, a set of rates in period t is being compared to a corresponding
set of rates at some other period. The weights that are assigned to the freight
rates are their respective quantities or revenue. They can be fixed at a reference
period in the past, in which case the index is of a Laspeyeres type, or they can
be fixed at a reference period of the current year in which case the resulting
index is a Paasche index. Weights can also change continuously, in which case
the index is a 'chain index' - of a Laspeyeres type if last year's weights are used,
or of a Paasche type if current weights are used. (For a general discussion on
indices see Allen, 1975)
The index we construct is of Laspeyeres type with fixed weights of the base
period, which is 1975. The weights used are the revenue share of each
commodity group in 1975:
ptWO
p --- (3.1 )
L - pOW o
where pt is a vector offreight rates Pj (i = 1, ... , 12) at time t

WO is a vector of revenue shares Wj (i = 1, ... , 12) at base year
PL is a Laspieres price index using a TEU as a unit of measurement
The list of freight rates by the twelve commodity classification groups and
the corresponding weights of revenue shares (in Deutschmarks (DM)) and for
the whole period 1975-85 appear in Appendix A. The source for the freight-
rate data is the conference secretariat. The revenue shares were calculated from
national account statistics issued by the Israeli Central Bureau of Statistics
(1975-84).
The CON IS CON freight-rate index is plotted in Fig. 3.6 and is compared
with the Bremen liner index for the corresponding period 1975-85. During
the period 1975-80 the CONISCON index has been consistently rising and
the conference announced twice yearly increases in freight rates. The first 3
years of this period were lucrative, demand for recently introduced container
services was high, and there was enough cargo for all member lines. During
this period the conference was operating on the basis of a'cargo-pool', but with
a very loose control over its member-lines, so that individual lines made efforts
to take advantage of the boom and increase their share at the expense of other
members. The years 1978 and 1979 were years of strong competition within the
370
Bremen index
350
300
250
200
150
CONISCON index
100
90-
~975 1 1976 i 1977 i 1978 i 1979 i 1980 I 1981 i 1982 i 1983 I 1984 i 1985 I
Figure 3.6 A comparison of the CONISCON freight rate index with the Bremen liner
index, 1975-85.
conference (more on this in section (b)), where each line wanted a bigger bite in
the market. This eventually led members to agree to switch from a 'cargo-pool'
to a 'revenue pool' agreement by which revenue is shared among members
according to an agreed formula and accounts are settled by the conference
periodically. The conference also took a decision to tighten the control over
members. All this turmoil, while expected to be reflected in individual lines' rate
indices (section (b)), are not reflected at all in the conference freight-rate index!
During the years 1978-80 the conference index was rising. The internal
competition did not induce the conference to lower freight rates. Rather, the
conference has presented a unified front to the outsiders, pushing freight rates
further up. The local boom in Israel and the general recovery of world
economy in the years 1982-83 were expected to cause a further rise in the
general level of rates. But against this increase in demand, competition by
outsiders intensified, and tipped the balance. In 1982 a newly established
Israeli company ISCONT joined the other two outsiders - the German CIS
and the British BORCHARD. The conference responded by slightly lowering
the level of rates. The drastic measures taken by the Israeli Government to
curtail imports in 1983 in combination with the new capacity offering finally
stirred a 'cut-throat' competition between the conference and the outsiders. In
1983 the index dropped from 144 to 90 and stayed at that level during the first
half of 1984. The next scenario is quite inevitable: all shipping lines serving the
route have colluded and agreed on a coordinated policy, which included a
reallocation of cargo between the conference and the outsiders and an
agreement to raise rates. 'Order' was restored. In the second half of 1984 the
freight-rate index began to rise and by 1985 it had reached the same level that
prevailed 10 years ago.
The comparison with the Bremen index shows that the similarities lasted as
long as the CONISCON index was rising between 1975 and 1980. Thereafter
the two indices diverge in their directions. In particular in 1984 the Bremen
index shows a steep rise while the CONISCON index is at rock bottom.
The CONISCON general level of rates is not sticky downwards. Confer-
ences, like any other industrial firm, respond to outside competition by
lowering rates. The specificity of the liner trade was again demonstrated, and
the futility of constructing a worldwide liner index is an inevitable outcome.
In contrast to the worldwide competitive tramp market, liner services are
specific in time and space, and different route characteristics will lead to
entirely different movement of the general level of freight rates.
(b) A freight rate index of an individual firm within the coriference

A true freight-rate index is one that records the actual freight rates that were
made by shippers to the shipping lines. Are these charges identical to the rates
published by the conference? Do member shipping lines adhere bluntly to the
rate policy set by the conference, or will they, when faced with competition, like
that frog who fell into ajar full of milky freight rates, start kicking freight rates
downwards to save themselves? To answer this question we construct a
freight-rate index of an individual line, which is a member of the CONISCON
conference, for the same period of time of 1975-85. Lack of data made it
impossible to follow our previous procedure for constructing the index. Partly,
as discussions with shipping companies revealed, this is attributed to the large
number of actual freight rates charged to different shippers and different
commodities. The methodology used then was to base the index on data of the
actual revenue per container and work our way backwards to arrive at a rate
index. This was done by correcting the changes in revenue per TEU by the
changes in the volume and the composition of cargo. The data and a detailed
description of the methodology appear in Appendix C.
The individual line freight-rate index (ILFI) calculated on a quarterly basis
is plotted in Fig. 3.7, together with the conference freight-rate index
(CFI). It appears that the actual level of liner freight rates does
fluctuate in a manner that resembles the competitive bulk market. Very
little of the promise of rate stability is delivered by the development of the
ILFI. In comparison with the unified front of the CFI, the ILFI bears little
resemblance. The two move up side by side during the boom years
1976-77, but then the 'cut-throat' competition within the conference
(a term usually reserved by the shipping industry to competition by the
outsiders), while not affecting the CFI, caused a sharp fall in the ILFI. The
resulting revenue-pool agreement in 1979 helped the ILFI
increase slightly in 1980. But this was also a period of slowing down of the
German economy and a decline in exports due to a decline in the DM
exchange rate ($1 = 1.73DM was the exchange rate in the middle of 1980),
- - CONISCON index
- - - I LFI index
150
....
>(100+-.....
QI
o
~
50
1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985
Figure 3.7 A comparison of an individual line freight index with the conference freight
index, 1975-85.
and as a result the ILFI stays at a low level. The economic recovery in
Germany by the end of 1981, together with the 'election economics' of the
Israeli Government that stimulated imports through its subsidization, pushed
the ILFI up again from the end of 1981 to the beginning of 1983. In 1982 the
independent line ISCONT entered the market, and by exploiting the low level
of chartering container ships in Europe and employing inexpensive South-
Asian crews, the line started a rate war. In response the conference issued an
'emergency tariff' which was distributed among member lines, announced
selective reductions in rate and different percentages, according to competitive
conditions. The member lines within the conference had little fat left, but were
forced to be stripped to their bones.
Rates by the second half of 1983 began to slide. By 1984, the ILFI reached a
level that was less than half its peak level in 1977, and approximately one-third
of the CFI peak in 1981. An agreement between the conference and the
outsiders to share the trade and agree on a higher level of rates was signed in
July 1984 (in spite of the Shippers' Association objection), and brought back
'stability', i.e. the ILFI increased, but still to a level lower than the one
prevailing 10 years ago.
In summary, the actual freight rates paid by shippers are not stable. They
fluctuate up and down according to rules of supply and demand, and
according to the degree of competition - within and outside the conference. A
freight-rate index based on officially published conference-rates does not truly
account for the movement of the actual freight rates. The conference index
shows much greater rate stability, and is different in both direction and
magnitude to the movement of the actual freight rates paid by shippers.
3.1.3 Freight rates indices of individual commodities - the west coast

of Italy/Sicilian and Adriatic Ports - North Atlantic Range
Conference (WINAC)
Do freight rates of individual commodities move in parallel, so that changes in
their level are well summarized by 'across-the-board' changes? Evidence from
the CONISCON conference showed that this is not the case. The rates of the
twelve groups changed at the same rate when the CFI was rising, during the
years 1976-82, but when falling, different commodities dropped at different
percentages. In Table 3.1 we have calculated these rates of change (the annual
difference divided by the last year level). Rate changes are not 'across the
board' during the period 1983 to 1984 when they were falling. For example in
the first half of 1985 the category of 'Alloyed metals' fell by 44.9%, while the
category of 'Others' by 5.6% only.
The second example we investigate is the West Coast of Italy/Sicilian and
Adriatic Ports - North Atlantic Range Conference (WINAC), which has its
loading ports in Genoa, Lagorn, Napoli, Palermo, Trieste and Bari, and its
North Atlantic Ports are New York, Boston, Baltimore, Philadelphia and
Table 3.l Freight rates changes of the CON/SCaN Cmiferences (rates of annual changes. in percentages)
1976 1977 1978 1979 1980 1981 1982 1983 1984 1985
/ II / II /
Food Across-the-board changes in freight rates -19 -20.0 0 -0.7 17.0

Chemicals -8.0 -22.0 0 -12.0 17.0
Pharmaceutical and cosmetics -18.0 -30.0 0 3.7 16.3
Plastic and rubber -19.0 -20.6 0 4.9 17.2
Textile and leather - 23.3 -28.7 0 4.9 16.3
Paper and wood -10.0 -30.4 0 4.1 18.0
Building materials -37.0 -15.8 0 -1.8 17.3
Alloyed metals -44.9 -35.6 0 5.6 17.8
Machinery and tools 13.2 - 35.3 0 5.6 17.8
Motor cars -25.6 -16.6 0 16.l 17.8
Consumer goods - 23.9 -23.3 0 1.1 17.2
Others -5.6 -26.0 0 3.7 17.8
Norfolk (the Secretariat office is in Genoa). The member lines of the

conference are: Atlanttrafik Express Service Trader Navigation Co. Ltd, CIA.
Trasatlantica - Spanish Line, Constellation Lines SA, Costa Line (Costa
Armatori SPA), Egyptian Navigation Co., Farrell Lines Inc., 'Italia' Societa
Per Azioni Di Navigazione, Jugolinija (Jugoslavenska Linijska Plovidba),
Nedlloyd Lines, Sea-Land Service Inc., Zim Israel Navigation Company
Limited. CFI were constructed for the three main commodities moving on this
trade - macaroni, shoes and furniture - by their order of volume moved. The
freight rates used are the official rates of the conference (not all published for
the public). The quantities moved of each commodity were collected from all
shipping lines within the conference. The development of freight rates (for
January of each year) for the period 1979-85 and the quantities of cargo (for
the period 1981-83) are shown in Tables 3.2 and 3.3.
The commodity freight rates were expressed in an index form using 1979 as a
base year. Then a single index, which is a weighted average of the three indices,
Table 3.2 Freight rates oj macaroni. shoes and Jurniture

moving by the WINAC ConJerence (1979-85)
Commodity
Macaroni Shoes Furniture

Year (W) (W/M) (W/M)
1979 15.6 45.75 44

1980 12.5 48 44
1981 11.5 38 43
1982 10.45 45 48.5
1983 11.5 43.5 35.5
1984 to.5 47.25 31
1985 14.5 46 43
Table 3.3 Annual quantitites oj macaroni. shoes and Jurniture moved by WINAC
member lines (1981-83. tons)
Commodity
Year Macaroni Shoes Furniture Total
1981 17115 (44%) 15368 (40%) 6155 (16%) 38638 (100%)

1982 21052 (51%) 13643 (33%) 6507 (16%) 41202 (100%)
1983 21789 (45%) 13 783 (28%) 13465 (27%) 49037 (100%)
Total 59956 (47%) 42794 (33%) 26127 (20%) 128877 (100%)

Table 3.4 Commodity indices and a weighted average index of the WINAC
Conference (1979-85)
WINAC indices
Weighted
Year Macaroni Shoes Furniture averaged index
1979 100 100 100 100

1980 80.13 104.92 100 97.71
1981 73.72 83.06 97.73 85.0
1982 65.99 98.36 110.23 94.34
1983 73.72 95.08 80.68 86.01
1984 67.31 103.28 70.45 85.58
1985 92.95 100.55 97.73 97.97
was constructed. The weights used were the quantities moved by the
conference during the whole period of 1981-83 (macaroni 47%, shoes 33%,
furniture 20%). These indices are summarized in Table 3.4, and Fig. 3.8.
The WINAC indices do fluctuate quite widely. For example, the index for
furniture fell by nearly 40% during 1983 and 1984 and rose again by nearly
40% during 1985. The weighted-average index also shows fluctuation during
0- - -0 Macaroni
0-·_·0 Shoes
0 - - - 0 Furniture
110 •........• Weighted average
index
100
\
\
90 \
>< \
CLJ
"0
\
C \
\
80 ~ , ....
,
"0-. ,
70 , "
"'0' "
60
;:;..c
I I I I I I
1979 1980 1981 1982 1983 1984-
Figure 3.8 Commodity indices and a weighted average index of WINAC Conference,
1979-85.
the period, though over a narrower margin. Individual indices do not move in
parallel. For example, the macaroni index fell by 35% between 1979 and 1982,
while the furniture index increased by 10% during the same period.
Table 3.5 and Fig. 3.9 compares the three indices ofWINAC (the weighted
average index) CONISCON and Bremen. It is evident that the three indices do
not move in parallel. In fact, there is just one year - 1985 - where the three
have the same direction of change, i.e. show an increase. The WINAC and
CONISCON are similar in the sense that they both fluctuate during the period
(though in a different manner), but end at the same level of rates as at the
beginning of the period. The Bremen index does not fluctuate during the
period and is 52% higher by 1985 compared with 1979. One possible
explanation is that the Bremen index which consists of a much greater level of
aggregation (approximately 1000 tariff items of a large number of worldwide
trade routes) is an average of different relations which tend to compensate each
other and present an unreal picture of rates development, at least as far as its
contribution to our understanding of the industrial organization of the
shipping conference market is concerned.
Table 3.5 A comparison of the WINAC, CONISCON and

Bremen freight rate indices
WINAC CaNIS CON" Bremen b
126.4
1979 100 263.6
132.6
142.0
1980 97.71 281.3
145.0
148.7
1981 85.0 311.2
145.1
146.3
1982 94.34 316.9
148.7
124.4
1983 86.01 314.2
90.6
90.6
1984 85.58 370.7
96.2
1985C 97.97 120.2 400.7
aBase year for the CONISCON index is 1975.

bBase year for the Bremen index is 1965. The index is an arithmetic
average of the monthly indices.
cThe WINAC and CONISCON indices account for the first 6 months of
1985. The Bremen index is an average of the first 5 months of 1985.
400 ..... Bremen index
.....
/ ..... "
350 /
/
/
",
._---.----e"
.-- --
300
.; ;I'
",
~ 250
u
c
200
150
-----
CONISCON index
100
--_------.J:==~~~- WINAC index
75
~L-----'------r-----'-----~------.------r-----.~
1979 1980 1981 1982 1983 1984 1985 I )0
Figure 3.9 A comparison of the WINAC, CONISCON, and Bremen freight-rate

indices, 1979-85.
Table 3.6 A comparison of the I LF I to the spot shipment of grain index
Index
Freight rate per

ton of grain,
US-Rotterdam Spot grain index, 1LFl,
Year ($) U S- Rotterdam Germany-I srael
1975 5.43 100 100

1976 5.95 109.6 104.1
1977 5.06 93.2 115.3
1978 7.01 129.1 100.1
1979 13.70 252.3 67.8
1980 17.73 326.5 74.15
1981 13.55 249.5 79.4
1982 8.46 155.8 100.3
1983 8.23 151.5 85.1
Sources: The Grain Freight index: lhe Public L"dyer; COllltllodil\' Week.
ILFI: Arithmetic Average of the quarterly ILFI index. .
3.1.4 A comparison of a liner and a dry-bulk freight rate index

How do liner freight rates fluctuate in comparison with the rate fluctuations in
the competitive bulk market? We now compare the ILFI to the spot freight-
rate index of grain shipment from the USA to Rotterdam during the period
1975-83. The annual averages of the ILFI (which smooths the quarterly
fluctuations that occur within the year) and the spot grain index (SGI) are
shown in Table 3.6 and Fig. 3.10.
Freight rates in the bulk market fluctuate much more widely. This common
knowledge still holds true. In the competitive bulk market change in freight
rate is the main instrument that clears the market. In the liner shipping market
greater reliance is made on adjustments in capacity offered to correct for
changes in supply and demand that have taken place.
The two indices do not follow the same pattern. In particular the years 1979
and 1980 were boom years for bulk shipping while for liner shipping, in the
case investigated, these were years of depressed market conditions.
A Summary
Some of the dust covering behaviour of conferences has been cleared. The
answers to the questions posed at the beginning of this section are:
350
0---0 Spot grain index
••- -•• 1LFI index
300
250
x
III
'C
C
200
150
." 0 ___
100 ",. ...... - 0
.--_0""'"
50
-r: 1 1 1 i i i I'"
1975 1976 1977 1978 1979 1980 1981 1982 1983
Figure 3.10 A comparison of the ILFI to the spot shipment of grain index, 1975-83.
Conferences rates are not stable and are not sticky downwards. In
comparison to the spot bulk market, however, they exhibit much greater
stability.
2 Rates of individual member lines fluctuate more than the official conference
rates. They respond more strongly to competition within and outside the
conference. An outcome of this is that an index based on the official
conference rates is not a true index of the actual changes that have taken
place.
3 Rates of individual commodities over the same route do not move in
parallel. This is particularly so when a situation of falling rates prevails.
'Across-the-board' changes in rates do not account for the actual changes in
freight rates.
4 The general level of rates over different routes does not move in parallel or
even at the same direction. Unlike a world competitive bulk market, where
rates tend to equalize over widely separated geographical zones, liner freight
rates are specific in time and space. Rates behave, to a very great extent,
according to the specific conditions prevailing on a particular route.
5 The indices by McLachlan, Deakin, the Bremen index, and the Canadian
export index - are indices that have been widely relied upon by the shipping
industry (Although the Canadian index has only recently been in use). Our
analysis showed that the published rates by the conference are a poor guide
to the actual development of rates. They can rather be interpreted as a
'ceiling', or 'maximum recommended prices'. The actual freight rates
charged by individual lines would normally be lower than these re-
commended rates due to competition within and outside the conference.
Liner freight rate indices in the future should be based on the actual rates
charged by individual lines.
These results are obtained on the basis of a study of two trade routes; they
cannot be taken as generally true. More freight-rate indices, of different routes
on the globe, would be required which could be routinely published. It would
only require the cooperation of shipping lines to file any changes in rates of an
agreed basket of commodities, to the office responsible. Against the privileges
society has granted conferences, a systematic, continuous account of freight-
rate changes that will bind liner firms by law would be a not too imposing
demand of companies engaged in the liner business.
3.2 THE STRUCTURE OF FREIGHT RATES
3.2.1 The complexity of freight rate tariffs

The most conspicuous feature of the tariff has been its size: practically every
one of hundreds or more different articles are separately identified so that each
can, in principle, carry an individual freight rate. When, as is common,
a separate rate is quoted for each specific commodity, one speaks about
'commodity rates'. A single tariff may include several thousands of commodity
rates. In some tariffs freight rates are divided into ten to twenty classes, and the
commodities are assigned to the different classes. These quotations also apply
to containerized cargo. For a less-than-full container load, commodity rates as
published for conventional cargo normally apply. For a full container load, a
simplified tariff which may include twenty or thirty commodity classes is
normally used.
While there is a wide freight-rate differentiation between commodities, there
ORIGjREV. PAGE
5lh Rev. 23-D
CANCELS PAGE
4th Rev. 23·0
EFFECTIVE DATE
Oclober31.1985
CORRECTION NO. I 2223
E:\cepl as otherwise provided herein, ratesare slated in US SUBJECT TO NOTE I HEREUNDER
Dollars and apply per Ion of 1,000 Kgs-. (W) or I CMDTY
cubic meter (M) whichever produces the greater revenue. TO GULF PORTS TO SOUTH ATLANTIC CODE
OR
RATE PER RATE PER ITEM
RATE CONTAINER CONTAINER NUMBER
COMMODITY DESCRIPTION AND PACKING BASIS RATE RATE
CHEMICALS, VIZ.: (Conlinucd)

Mud Drilling Additives W 163.00
In nexibags (For value not to
exceed S200.00perton)
To Gulf Ports Only:
In 20-ft. H/H containers PC 1365.00
Elf. July I, 1985 PC 1540.00
Organic Solvent. Liquid Aqueous W 167.00
In 20-ft. H/H containers PC 2150.00
In 4O-ft. H/H containers PC 2855.00
Oxidizing Agent,lnorganic W 167.00
Peroxide. Hydrogen (ON DECK ONLY) W 503.00
(C) ·lhruDecember 1.1985
Phosphate,ln bags W 144.00
Phthalic Anhydride. In bags
In 4O-fl:. H/H containers PC 1850.00
Potassium Biflouride W 191.00
(C) ·'hruDec.I,1985
Potassium Boroflouride W 245.00
(C) -lhru Dec. I. 1985
Potassium Carbonate PC 1855.00
Potassium Chlorate. in barrels W 180.00
(C) -lhruDec.I,1985
Potassium Fluoride W 245.00
Potassium Titanium Fluoride 245.00
(C) -lhru Dec. I, 1985
NOTE: For explanations of abbreviations and reference marks. see page 2 (A)
Note: Where no ralesare shown under "TO SOUTH ATLANTIC" the GULF Rates will apply
Figure 3.11 Page of rate book.

is very little differentiation between ports. The tariff often contains a

classification of the ports included in the conference range into 'base ports' to
which 'base rates' apply and 'outports' to which surcharges apply.
The conferences (excluding USA) normally issue two different tariffs - for
non-contractors and contractors. The tariff issued for non-contractors applies
equally to all shippers, but is different to the agreed tariff for contractors, i.e. for
shippers who enter a long-term agreement with the conference. In the latter
case different shippers will be quoted different tariffs. In Fig. 3.11 a page in a
typical tariff is reproduced as a concrete illustration.
By all recent experience, it is the volume (measurement capacity) which is
the capacity constraint that is binding in liner shipping. However, the freight-
rate tariffs issued by liner conferences do not adhere to this fact. The base for
quoting freight rates of individual commodities is not standardized. Rates of
individual commodities are expressed in mainly three different ways.
1 Per weigh t ton (W).
2 Per measurement ton (M).
3 Per weight ton or measurement ton, whichever gives the higher revenue
(WjM).
(A fourth type is ad valorem rates-all or part of the freight rate is paid in
proportion to the value of the goods.)
The units of measurment of the different bases can, in addition, vary. A
weight ton is usually defined as either a metric ton (1000 kg) or a 'long ton'
(1016 kg). A measurement ton used to be commonly defined as 40 cubic feet (in
some trades 50 cubic feet), or else, as is usually the case today, as 1 cubic meter,
i.e., 35.5 cubic feet. A commodity that is being charged on a weight basis will
pay according to its weight irrespective of the volume it occupies. A
commodity that pays per volume will do so irrespective of its weight.
Even in the present container age, freight rates are sometimes quoted per
weight ton, although it is well known that so far as general cargo is concerned
a container is full when its total volume is occupied, and the holding capacity
of a container ship is exhausted by container number rather than cargo weight.
Tradition is probably the main explanation for this practice, but also the
fact that for less-than-full container loads, the weight of a shipment is often
easier to determine than its volume. In this connection something could be
mentioned about the traditional way of cargo measurements.
Digression 1: The 'pivot unit' system of cargo summation

It is true that thinking in terms of cargo volume has gained wide currency in
the liner shipping industry in the wake of containerization for most other
purposes than freight rating. The traditional practice of cargo measurement
used to be based on a double-unit system - weight or volume, and almost from
the beginning of shipping 'pivot unit' systems of freight charging are known.
Especially when the ratio of a ship's volume capacity to dead-weight capacity

is in the range of the average stowage factor of the commodities moving on the
route concerned, it is usual to charge heavy (dense) cargo on the basis of
weight, and light cargo on the basis of volume. In between cargo can be
difficult to assign to one or the other category, and may move as weight or
volume cargo, whichever gives the higher revenue. (The option W / M is
motivated by the fact that, depending for example on the packing, a certain
commodity may from time to time be presented in slightly varying shapes. To
protect against loss of space in the hold as a result of awkward packing, the
possibility of charging a commodity, which normally goes under a weight rate,
on the basis of volume can be left open.)
The traditional level of the pivot - 40 cubic feet/2240 lbs - used to be quite
relevant as it coincides with the stowage factor for coal, which was once the
predominant outward cargo from Great Britain. A so-called 'freight-ton' used
to be a weight ton for cargo with a stowage factor up to 40 cubic feet/2240 lbs,
and 40 cubic feet for cargo with higher stowage factors. Nowadays this stowage
factor rarely carries any particular significance. The average stowage factor of
liner cargo from industrial countries is more typically to be found in the 70-80
cubic feet per weight-ton range. Not withstanding the old freight-ton thinking
may remain and is often used to calculate costs and freight rates per weight ton
for high-density commodities, and per cubic meter or foot for low-density
cargo. A suspicion that such irrational rate-making behaviour exists can be
nursed on account of the remaining widespread practice of measuring total
cargo quantities in freight tons. (We have earlier made a preliminary test of this
suspicion, however, we found no evidence that the freight ton thinking
manifests itself also in the rate-making. Our test has been confined to a
restricted material. The refutation of this suspicion cannot be claimed to be
conclusive.)
Digression 2: Reasonsfor the current discrepancy between the volume/weight-

capacity ratio of liners and the average stowage factor of liner
cargo
One may ask why ship designs have not been adjusted to the current average
stowage factor of general cargo. It could be argued that the equilibrium state
on the fat leg should be that the dead-weight capacity and the cargo volume
holding capacity are both binding constraints. In the past this used to be the
case in many trades. A number of commodities which nowadays are carried in
bulk, and which have comparatively low stowage factors like ore, coal and oil,
were once liner cargoes. The loss of these bulk commodities has resulted in an
increase in the average stowage factor of the remaining liner cargo. This effect
has been strengthened by the development of packaging of manufactured
goods. Consumer goods packaging especially has in recent times been heavily
influenced by 'point-of-sale appeal', which has led to a considerable increase in
the stowage factors. An illustrative somewhat extreme example of this trend is

that one packet oftive safety-razor blades in a dispenser attached to a card and
protected by a plastic 'bubble' now takes up as much space as twenty packets
of ten blades used to do some years ago. The volume-capacityjdead-weight-
capacity ratio of older cargo liners which have been built with the old average-
stowage factor of liner cargo in mind are getting increasingly out of line with
the current average-stowage factor.
Can anything be done about this in the design of new ships? One aspect of
container ships is noteworthy in this context. Conventional liners which are
full but not down can increase the shiploads by taking deck cargo. It has to be
well secured, robust cargo otherwise the risk of loss and damage (from rain
and sea) to the cargo is great. The 'deck-cargo principle' has been further
exploited with the introduction of the container. The stacks of containers in
the open holds of cellular container ships can reach well above the
hypothetical deck level without risk of damage to the content of the top
containers. The main question ofthe holding-capacity design, however, is why
the redundant dead-weight capacity is not stripped off new ships?
Given the volume capacity, the dead-weight capacity can be reduced by
increasing the ratio of the beam to the draught of the ship. This capacity
reduction will, however, reduce total shipping costs only very slightly, and in a
rather limited range of values of the volume-capacityjdead-weight-capacity
ratio. The hull cost is primarily determined by the enclosed space (rather than
the dead-weight), and the seaworthiness of a big but shallow-drawing ship is
rather poor. It seems simply not possible to adjust ship design to keep abreast
with the secular trend of general cargo becoming less and less dense. It can
sometimes even be a problem for ship operations. As a matter offact, premium
should be put on high-density cargo in pronounced measurement trades,
because such cargo serves the same purpose as ballast; when bottom loaded it
adds stability to the ship.
3.2.2 The pricing principle

A question which has been asked by many observers ofliner conference tariffs
is: Can the seemingly complex structure of freight rates be explained by some
sort of general principle? (Sturmey, 1967; Abrahamsson, 1968; Heaver, 1973;
Gardner, 1978; Evans, 1982; Gilman, 1983.)
The single most important pricing principle that has dominated the
transportation industries is the principle of 'charging what the tariff can bear',
the 'value-of-service' principle, or in economists' jargon 'price discrimination'.
Foster (1975) goes so far as stating that 'price discrimination is rare outside
transport but has been common within'. Although a distinction is sometimes
made between the three terms, we use them as having the same meaning: prices
of different services are not equal to the corresponding marginal costs, but
each price exceeds the marginal cost by a mark-up that depends on the
elasticity of demand (see Locklin, 1954; p. 60). Railway freight-rate making is
perhaps the most well-known example of the long-established practice of
charging what each traffic can bear. In recent times air-freight transport
provides an object lesson of far-reaching freight-rate discrimination. Many
thousands of different commodities carry separate rates in the IA T A-
sanctioned commodity tariffs.
It is to be expected that in the thoroughly cartelized liner shipping industry
price discrimination is a particularly prominent feature. Judging from the
general attitudes of people in the industry it seems that the principle of
charging what the traffic can bear is practiced also in liner shipping at least to
the same extent as in railway- and air-freight transport. The shipping-
conference tariffs are thought to be originally modelled on railway tariffs.
3.2.3 Empirical studies of the structure of freight rates

In break-bulk cargo trades it has always been the policy of conferences in
dealings with shippers and regulatory authorities to point out how great a
number of factors there are that participate in shaping the level an,' structure
offreight rates, and which makes it very difficult to compare individual freight
rates. For example, the following rather exhaustive list of twenty-seven factors
was suggested by the US delegates in the Inter-American Maritime Confer-
ence in 1941.
1 Character of cargo.
2 Volume of cargo.
3 Availability of cargo.
4 Susceptibility to damage.
5 Susceptibility to pilferage.
6 Value of goods.
7 Packing.
8 Package.
9 Stowage.
10 Heavy lifts.
11 Extra length.
12 Goods from other sources of supply.
13 Goods via competitive gateways.
14 Competition from other carriers.
15 Direct cost of operation.
16 Distance.
17 Cost of handling.
18 Lighterage.
19 Special deliveries or devices.
20 Fixed charges.
21 Insurance.
22 Port facilities.
23 Port regulations.
24 Port charges and dues.
25 Canal tolls.
26 Port location.
27 Possibility of securing return cargo.
Source: Inter-American Maritime Conference, Report of
Delegates of the United States (Washington,
Government Printing Office, 1941).
The complexity of freight-rate tariffs, and the allegedly numerous factors of
influence on freight rates did not encourage early empirical investigations of
freight-rate determination by economists. However, a number of empirical
studies of break-bulk freight rates have been made through the years along
roughly the same lines (Chinitz, 1956; UNCT AD, 1969; ECLA, 1970; Heaver,
1972, 1973; Deakin, 1973; Bryan, 1974; Shneerson, 1976).
The most comprehensive investigation of freight rates was undertaken by
the Economic Commission for Latin America (ECLA, 1970). The object of the
study was to determine the factors that underlie the level and structure of
freight rates, and to estimate their effect on Latin America's foreign trade. The
methodology used was to apply a multiple regression analysis on cross-
section data: ninety-three freight tariffs were used for the year 1966. Possible
determinants of the structure of rates that were included in the regression
analysis were:
The value of the commodity per ton; it is a widely held view that the more
valuable an article is, the higher the freight rate it can bear.
2 Loading and discharging costs.
3 Risks of damage and deterioration of merchandise on the voyage.
4 The proportion of total cargo carried represented by each commodity on
any given route.
5 The stowage factor for each commodity.
The form of the regression equation used was both linear and log, and the two
gave similar results.
The main result of the study was that out of the five explanatory variables
tried, only the value of commodities and the stowage factor were statistically
significant. It was found that a reduced form of the model, with the value of
commodity and the stowage factor as the only explanatory variables, gave the
best explanation of the structure of freight rates on twenty-nine out of thirty-
three routes.
The stowage factor was considered as 'representing elements of the
operational costs of a vessel, and of an implicit system of distributing these
costs among the various commodities' (ECLA, 1970; p. 125). This led to the
conclusion that cost factors are the major determinants of the freight rates
(ECLA, 1970, pp. 118-19).
Subsequent studies of freight rates generally confirmed this result. A study

by Heaver (1972) of freight rates in the Trans-Pacific trade (see also Bryan,
1974), adds to previous analysis the aspect of cargo balances over the route.
Heaver explains rates of eastbound and westbound trades in terms of the
stowage factor and the unit value, and compares the results of the two
directions of trade. The regression results showed a high jP(in the range of 0.83
to 0.93 in most cases) and the coefficients of the explanatory variables were
significant. As before, it was demonstrated that 'the most significant factor
explaining differences between rates is the cubic of freight in all four samples;
that is a cost factor and not a demand factor as is asserted so often' (Heaver,
1972; p.25).
In the last 15 years we have also, in different connections, made a number of
similar statistical analyses of freight-rate data from various trade routes. We
have put them together for the present purpose, and summarized the results in
Tables 3.7-3.12.
The freight rate data were pertaining to trades to and from Thailand and
Singapore, Israel, from Western Europe to the West Indies, and between
France and Morocco. All together fourty-six trade routes were studied
(Shneerson, 1976). The freight-rate data for South-East Asia was collected in
Table 3.7 Western Europe to the West Indies and Central America
Coefficients
Number of
observations Constant log v log sf logw R2
65 -0.260" 0.290 0.657 - 0.026"

0.68
(- 0.62) (6.37) (5.93) (- 0.57)
aNot significant at the 5% level.

Values in parentheses represent the t statistics.
Table 3.8 France to and from Morocco
Coefficients
Number of
observations Constant log v log sf R2
France to 46 3.84 0.122 0.341 0.55

Morocco (15.44) (3.17) (3.11)
Morocco 42 3.63 0.l85 -0.195 0.23
to France (10.08) (3.72) ( - 1.70)
Values in parentheses are the t statistics.

Table 3.9 Singapore outbound trades
Coefficients
Number of
To observations Constant log v log sf 10gQ R2
Hong Kong 140 0.751a 0.387 0.619 0.05Y 0.59

(1.48) (7.39) (6.12) (1.49)
Bombay 50 - 0.482 a 9.632 0.210' 0.033 a 0.55
(- 0.42) (5.21) (0.91 ) (0.45)
Calcutta 50 0.036a (0.587 0.290a -O.Oll a 0.73
(0.04) (5.53) (1.40) (- 0.18)
Bangkok 81 2.59 0.071 a 0.785 -0.040a 0.56
(3.48) (0.92) (7.11) (- 0.82)
Japan 66 0.71Y 0.459 0.594 O.022 a 0.65
(0.87) (5.90) (2.83) (0.43)
UK 73 2.79 0.276 0.662 -0.024a 0.76
(7.41) (7.05) (6.66) (- 1.13)
US (Atlantic) 57 4.43 0.107 0.694 -0.069 0.65
(9.91) (2.22) (6.43) (-2.95)
US (Pacific) 55 4.18 0.115 0.813 -0.063 0.71
(9.68) (2.42) (7.26) (-2.75)
a Not significant at the 5% level.

Table 3.10 Singapore inbound trades
Coefficients
Number of
From observations Constant log v log sf log Q f{2
Hong Kong 72 2.413 0.220 0.396 - O.02Y 0.39

(5.02) (3.83) (2.98) (- 0.82)
Bombay 39 3.350 0.142- 0.672 -0.049- 0.52
(3.85) (1.59) (3.86) (-0.81)
Calcutta 41 4.746 -0.029- 0.586 -0.047- 0.44
(6.52) (- 0.40) (5.31) ( -0.87)
Bangkok 36 2.462 0.113- 0.454 -0.050- 0.43
(4.44) (1.82) (2.27) (- 1.56)
Japan 253 1.620 0.339 0.754 -0.004- 0.75
(5.59) (10.85) (12.34) ( - 0.22)
UK 84 2.05 0.343 0.807 -0.003- 0.82
(3.76) (6.19) (8.41 ) (- 0.09)
US (Atlantic) 56 4.153 0.184 0.426 0.017- 0.54
(7.48) (3.16) (4.06) (0.50)
US (Pacific) 57 4.283 0.116 0.819 0.010- 0.65
(8.11 ) (2.09) (6.58) (0.21 )
a Notsignificant at the 5% level.

Table 3.11 Thailand outbound and inbound trades
Outbound Inbound
Coefficients Coefficients
Number of Number of
To andfrom observations Constant log v log sf iF observations Constant log v log sf j{2
Singapore 33 2.399 0.042 8 0.451 0.29 36 2.791 0.178 0.391 0.10

(0.994) (3.228) (2.318) (2.777)
Hong Kong 44 2.579 0.185 0.227 0.26 101 2.223 0.330 0.233 8 0.27
(3.09) (1.684 (4.246) (1.23)
Calcutta 9 2.157 0.169 8 0.552 0.78 63 2.559 0.156 0.562 0.35
(1.75) (2.083) (2.914) (4.581)
Japan 35 2.589 0.167 8 0.565 0.30 129 2.856 0.238 0.255 0.34
(1.762) (2.465) (5.304) (2.574)
Bombay 8 2.422 0.127" -0.006" 0.30 55 2.524 0.197 0.361 0.61
(2.172) (- 0.029) (3.657) (3.716)
UK 21 2.639 0.170 0.372 0.74 109 3.042 0.147 0.398 0.52
(2.956) (3.586) (4.919) (5.884)
US (Pacific) 13 1.727 0.645 0.625 0.31 108 2.326 0.282 0.3468 0.25
(2.335) (1.267) (5.287) (1.85)
US (Atlantic) 9 6.05 0.182 0.845 0.97 109 2.245 0.498 -0.207" 0.33
(8.31) (7.0) (1.181) (- 0.72)
aNot significant at the 5% level.

Table 3.12 Israel outbound and inbound trades
Outbound Inbound
Coefficients Coefficients
Trade route (conference) Constant log sf log v iF Constant log sf log v IF
US (North Atlantic) Israel 0.513 0.507 0.252 0.620 1.770 0.667 0.026 0.522
(0.122)" (0.076) (0.14) (0.06)
CONEC (Continental 1.803 0.393 0.256 0.680 4.038 0.374 0.325 0.729
Near East) (0.116) (0.058) (0.065) (0.064)
UK/Israel 0.526 0.523 0.571 0.610 0.581 0.400 0.287 0.648
(0.143) (0.05) (0.087) (0.134)
South Africa/Eilat 1.080 0.335 0.223 0.702 1.468 0.419 0.105 0.730
(0.125) (0.058) (0.092) (0.087)
Tyrrenian Italy/Israel 1.100 0.396 0.095 0.651
(0.101) (0.067)
Tyrrenian - Marseilles/Israel 0.831 0.286 0.179 0.599
(0.109) (0.079)
Adriatic/Israel 1.661 0.291 0.047 0.451
(0.089) (0.094)
'Values in parentheses are the standard deviation.

1970-71 under the auspices of the United Nations (ECAFE) and supervised by
Professors E. Bennathan and A.A. Walters. The data of the Israeli trades are
from 1971 and 1972. The West Europe/West Indies route includes the ports of
Amsterdam and Rotterdam, which were analysed in the empirical study of
stevedoring charges reported in Jansson and Shneerson (1982). The freight-rate
data is from 1965, the same year as an extensive stevedoring productivity study
of the ports of Amsterdam and Rotterdam was made. This is the only case
where it has been possible to include the weight of articles in the analysis.
Within the study programme of the 'level and structure of freight rates',
UNCT AD has performed a case study of the liner trades between France
(Bayonne-Dunkirk range) and Morocco, and published the relevant freight-
rate, commodity-value and stowage-factor data (UNCT AD, 1970). They did
not carry out a multivariate regression analysis on the basis of this material;
such further use of the data was realized in the present study.
In most cases the 'gross' freight rates published in the tariffs were registered.
Only for the South-East Asia trades rates net of rebates were used. This is
unlikely to cause any bias, as a certain percentage of discount is usually given
for all commodities. We have expressed all freight rates in weight tons. When
rates were quoted per'M' or 'W/M', they were multiplied by the applicable
stowage factors.
The stowage factor of commodities is given as the ratio of cubic feet to long
ton ( = 1016 kg), including 'broken stowage' (the broken stowage is the loss of
space in the hold, due to package irregularities, etc.). Identical commodities
may have different stowage factors due to different types of packing. In the
stowage-factor manuals (Buss) more than one stowage factor is sometimes
given for a particular commodity. When possible, we have consulted the
applicable shipping companies; otherwise an average of the alternative
stowage factors was calculated. The commodity values per weight ton were
collected from foreign-trade statistics, where in most cases weight tons appear.
We generally used log-forms for the regression equations, mainly because it
seemed reasonable to expect that the commodity-value influence on freight
rates is tapering off rather strongly. In other words, we expected freight rates to
increase with increases in commodity value but far less than proportionally.
As seen the stowage factor and the commodity value are generally highly
significant explanatory variables. We expected that for the commodity value to
be really significant no serious competition from tramps and/or independent
liners can be prevalent. On the basis of the scanty information available, it can
be concluded that this is borne out by the results. On the routes where the
commodity-value coeffiicient approaches zero and is insignificant, fierce
competition from tramps and liners operating outside the respective confer-
ences is reported to prevail. The routes with low commodity value coefficients
of the waters of the Far East include the Bangkok to Singapore and Bangkok
to Hong Kong routes, which were not covered by conferences or formal rate
agreements at all. So far as the Israeli trade routes are concerned, we have been
told by representatives of Zim that the most vigorous competition rules on the
short-distance Mediterranean routes, and on the US (Atlantic Coast) route.
for the rest the commodity value coefficient varies substantially, within a
range from 0.1 to 0.6. I t is conceivable that these variations can be explained by
varying degrees of competition, but no sufficiently detailed information on
competitive conditions is available to test that. As in previous freight-rate
investigations it is apparent that the stowage factor is the most significant
explanatory variable.* Should we consequently conclude that cost after all
plays the major role in liner shipping freight-rate determination?
3.2.4 Reinterpreting the statistical evidence

Such a conclusion would really run counter to the conventional wisdom and
the prevalent view of rate-makers themselves as to what freight-rate making in
liner shipping is all about: except for the direct handling costs, all shipping
costs are viewed as 'common costs' (to all cargo in a particular trade), so the
point is to fix freight rates such that the 'contribution margin', i.e. the
contribution towards the covering of the common costs, that each commodity
gets is as large as possible.
A rule of thumb which seems to be widespread in liner shipping is that high-
value commodities can bear a larger contribution margin than low-value
commodities. So although the underlying theory of commodity value and
shipping-demand elasticity is much less straightforward than it may appear -
this is the topic of the next chapter - we still believe that more than anything
else the value of a commodity determines the contribution margin assigned to
it. How is it then that the stowage factor so consistently turns out to be an even
more significant explanatory variable in statistical analysis of freight-rate
structures?
The explanation is perhaps too close at hand to be seen: it is simply a matter
of unit of cargo measurement. In spite ofthe fact that many, and in some trades
most, of the freight rates are given per weight ton in the tariff, the contribution
margin is rightly considered per unit of volume capacity requirement of each
particular commodity. On the other hand, all regression analyses of freight
*The two most exceptional routes are the outbound route from Thailand to the Atlantic coast
of the USA, and the route from Morocco to Northern France. We have no information to shed
light on the exceptional character (the negative stowage factor coefficient) of the former route.
There is an explanation for the 'odd' stowage-factor coefficient in the latter case, which can be
interesting to mention. This route is not monopolized by a liner conference, but is an example of a
monopsony situation. The liner trade from Morocco to Northern France mainly consists of citrus
fruits, vegetables, fish and wine. Export and shipping arrangements for these products were
concentrated under one authority, the Office de Commercialisation et d'Exportation (OCE), by
nationalization in 1965. The OCE does not discuss rates with the conference but solely with the
individual shipping companies, including non-members of the conference. OCE fixes a tarilT of
rates for fruit and vegetables for the season. Shipowners are then free to accept these rates or not to
enter the trade at all. The outcome is apparently that shipping costs are completely overlooked in
the rate-making.
rates have adopted the weight ton as unit of measurement. To pinpoint exactly
where the confusion in the interpretation of the regression results can have
arisen, a formalization of the argument is useful. We make the following
definitions:
Cm = contribution margin per cubic metre (measurement ton)
C w = contribution margin per weight ton
Vm = value of commodity per cubic metre
Vw = value of commodity per weight ton
sf = stowage factor = commodity volume/commodity weight
oc = elasticity of Cm with respect to Vm
a = proportionality constant.
Transformation of volume into weight units is made in this way:
C = Cw Vw
and V =-. (3.2)
m sf m sf
Our theory of contribution margin determination is simply:
Cm=aV~. (3.3)
r
Transforming the theory into weight terms we get:
~j=a(:j (3.4)
Multiplying both sides of (3) by the stowage factor finally gives:

Cw = aV~sfl-a. (3.5)
Without having explicitly considered the stowage factor to be a determinant
ofthe contribution margin, it has nevertheless crept into the formula when the
contribution margin and commodity value are expressed per weight ton. And
given that the commodity-value-elasticity, oc is typically less than 0.5, the
stowage-factor-elasticity can be expected to appear to be greater. The sum of
these two elasticities in the expression for the contribution margin is
necessarily equal to unity. If the contribution margin was the only component
in the freight rate, we would expect the sum of the coefficients oc and f3 in the
regression analysis summary above to equal 1 on average. However, we
believe that the handling cost is also a component in the freight rate. If we
regard the handling cost per ton as a constant for the moment, the effect on the
regression results as to the values of oc and f3 would be that both fall, and thus
that oc + f3 < 1. (We have in fact found that the break-bulk handling cost per
ton depends on the stowage factor to some extent. A typical value of the
elasticity of the stevedoring charges with respect to the stowage factor is 1/4
(Jansson and Shneerson (1982)). However, this does not change anything of
the present argument.) If the handling-cost component is small relative to the
contribution margin, oc + f3 will obviously be rather close to unity, and vice
versa.
We have consequently the following, easily testable hypotheses:

1 rx+f3<I.
2 The longer the route distance, the closer to unity the rx + f3 will be.
Note especially that our theory of rate-making behaviour implies that, given
the handling-cost component in the freight rate, it is the commodity-value
coefficient rx alone that determines the stowage-factor coefficient, f3. When rx
takes a low value f3 is high, and the other way around.
So we now take a new look at our regression results in the preceding section,
and can conclude that the hypothesis that rx + f3 < 1 is reasonably well
confirmed. The sum of rx + f3 is (as expected) close to unity in a considerable
number of cases, and this sum exceeds unity only in five cases. The average
excess over unity in these cases is O.I.
The hypothesis that rx + f3 is greater the longer the transport distance will be,
has been tested by classifying all routes into three classes with respect to the
route distance.
Short-distance routes are routes up to 2000 nautical miles, middle-
distance routes are routes between 2000 and 5500 nautical miles, and long-
distance routes are routes of distances exceeding 5500 nautical miles. The
average values for each class of the sum of rx + f3 have been calculated. As
seen in Table 3.13 below, the result is in agreement with the hypothesis. It can
also be noted that the commodity-value coefficient, rx, does not follow the same
path. This possibility was anticipated; the existence of systematic differences in
the state of competition between the three classes of routes can be a
'disturbance', which may show up in the relationship between rx and the route
distance, but which will be neutralized in the relationship between rx + f3 and
the route distance.
The same information is given in the scatter diagram of Fig. 3.12, where we
have plotted f3 against rx, and indicated to which route-distance class each pair
of values belongs. Ideally we expect the observations to fall into the pattern
shown in Fig. 3.12.(a). The actual observations while generally resembling this
pattern, have many exceptions to it.
Regressing finally, the stowage-factor elasticity, f3, on the commodity-value
elasticity of freight rates, rx, and the route distance, D, yields the following
Table 3.13 Route distance and commodity value and stowage

factor coefficients
Average values of
Route distance classes
(number of routes) ex+{3 ex {3
Short distance (13) 0.525 0.165 0.360

Middle distance (18) 0.711 0.275 0.436
Long distance (14) 0.804 0.242 0.562
~ x Short distance
o Middle distance
•• • A- Long distance
•• • •
• "
0 0
0
•
0
0
)( 0
0
" "
"
•"
0
)(
•
0 0
)(
0
0
"•
X
X
"
X 0 0
0
)( X
)( 0 • A-
)(
•
X
X 0
)( X X
0(
Figure 3.12(a) Stowage-factor elasticity versus commodity-value elasticity of freight

rates - expected pattern.
(3
x Short distance
..
o·g
0 Middle distance
•
•
A- Long distance
0·8 )(
0·7
0 " 0
•
0·6
x
~
x
0
"
0
0·5 0
)( x
0·4 R
" "x x 0 0
0
0·3 )(
x "
0
0
0 " x
0
x x
0·2 0
x
0·1
I
().1 0·5 0·5 0'1 0·2 0·3 0·4 0·5 0·6 0·7 0{
0·1
0·2
Figure 3.11(b) Stowage-factor elasticity versus commodity-value elasticity of freight

rates - actual pattern.
results:
log fJ = - 3.322 - 0.037 log (I. + 0.3 log D (3.6)
( - 4.762) ( - 0.406) (3.726)
IP =0.23
where values in parentheses are the 't-statistics'. It is confirmed by equation
(3.6) that fJ is negatively related to the unit value coefficient, (I., and positively
related to distance, D, all variables measured in logs. A linear regression line
estimated between these variables confirmed the expected sign of the
coefficient, but had a slightly smaller goodness of fit. For the sake of
completeness, we give this result also:
fJ = 0.351 - 0.026(1. + 0.00003D (3.7)
(5.938) (- 0.158) (0.000008)
IP = 0.22.
3.2.5 Conclusion
The strong stowage-factor influence on freight rates, which has been found
structure of liner shipping freight rates has confirmed our hypothesis that a
freight rate is the sum of the direct handling cost plus a 'contribution margin'
which is determined according to the principle of charging what the traffic can
bear.
The strong stowage-factor influence on freight rates, which has been found
in all empirical studies, has previously been interpreted to indicate that freight
rates are largely 'cost-based'. Our present way of thinking is that the size of the
commodity-value elasticity, (I., is all important. Even a relatively low value of (I.,
say 0.20 can be an indication that far-reaching freight-rate discrimination
(charging what the traffic can bear) is practised, irrespective of the fact that the
value of the stowage-factor elasticity may well be as high as 0.50-0.75 in such a
case. One should remember that the span of commodity values in general
cargo is very wide indeed. It can range from about $50 per ton (fertilizers,
woodpulp etc.) to $5000 (cigarettes, automobiles) and more. A commodity-
value elasticity of freight rates equal to 0.20 means in such a case that freight
rates of the most high-value commodities will be three times higher than the
freight rates of low-value commodities.
Quite a different matter is why high-value commodities can bear much
higher freight rates than low-value cargo. To this matter we now turn.
APPENDIX A: THE CONSTRUCTION OF THE CONISCON INDEX

(1975-85) (DM)
Year 1974/75 1976 1977 1978

----
Date of change 1.7.74 10.1.76 1.9.76 1.2.77 1.8.77

Percentage change +5 +5 +6 +5 a a
Part of year I II I II I II
Food 2400 2520 2645 2805 2945 2945 2945

Chemicals 2500 2625 2755 2920 3065 3065 3065
Pharmaceutical
and cosmetics 2650 2780 2920 3095 3250 3250 3250
Plastics and
rubber 2350 2470 2595 2750 2885 2885 2885
Textiles and
leather 2750 2890 3035 3220 3380 3380 3380
Wood and paper 4500 4725 4960 2560 2690 2690 2690
Building
materials 2850 2990 3140 3330 3495 3495 3495
Alloyed metals 4250 4460 4685 4965 5215 5215 5215
Machinery and
tools 2300 2415 2535 2685 2820 2820 2820
Motor vehicles 2200 2310 2425 2570 2700 2700 2700
Consumer goods 2650 2780 2920 3095 3250 3250 3250
Others 2200 2310 2425 2570 2700 2700 2700
Weighted average
of basic rates
(p'WO ) 2584 2713 2848 2983 3132 3132 3132
War-risk
surcharge (%) 1.5 1.5 1.5 1.5 1.5 1.5 1.5
Fuel surcharge (%) + 15 + 15 + 15 + 15 + 15 + 15 + 15
Basic rate
plus surcharges
(p'WO) 3010 3160 3318 3475 3648 3648 3648
CONISCON index
(p'WO / pOWO) 100 105.0 110.2 115.4 121.2 121.2 121.2
The level and structure of frieght rates 85
(Contd.)
Year 1979 1980 1981 1982
Date of change 1.1.80 1.2.81

Percentage change 0 0 + 7.5 0 33.5 0 0 0
Part of year I II I II I II I II
Food 2945 2945 3165 3165 4225 4225 4225 4225

Chemicals 3065 3065 3295 3295 4400 4400 4400 4400
Pharmaceutical
and cosmetics 3250 3250 3495 3495 4665 4665 4665 4665
Plastics and
rubber 2885 2885 3100 3100 4140 4140 4140 4140
Textiles and
leather 3380 3380 3635 3635 4850 4850 4850 4850
Wood and paper 2690 2690 2890 2890 3860 3860 3860 3860
Building materials 3495 3495 3760 3760 5020 5020 5020 5020
Alloyed metals 5215 5215 5605 5605 7480 7480 7480 7480
Machinery and
tools 2820 2820 2710 2710 3620 3620 3620 3620
Motor vehicles 2700 2700 2900 2900 3870 3870 3870 3870
Consumer goods 3250 3250 3495 3495 4665 4665 4665 4665
Others 2700 2700 2900 2900 3870 3870 3870 3870
Weighted average
of basic rates
(p'W O ) 3132 3132 3262 3258 4355 4355 4355 4355
War-risk
surcharge (%) 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5
Fuel surcharge (%) +20 + 26 + 29.5 + 32.5 + 1.3 -1.2 -0.4 +1.3
Basic rate
plus surcharges
(p'W O) 3805 3993 4273 4365 4477 4368 4403 4477
CONISCON index
(p'wo/poW O ) 126.4 132.6 142.0 145.0 148.7 145.1 146.3 148.7
(Contd.)
(Contd.)
Year 1983 1984 1985
Date of change 1.1.83 26.9.83 7.8.84 1.2.85

Percentage change 0
Part of year I II I II III IV I
Food 3410 2720 2720 2700 3160

Chemicals 4050 3150 3150 2870 3370
Pharmaceutical and
cosmetics 3800 2650 2650 2750 3200
Plastics and rubber 3340 2650 2650 2750 3225
Textiles and leather 3720 2650 2650 2780 3235
Wood and paper 3450 2400 2400 2500 2950
Building materials 3150 2650 2650 2600 3050
Alloyed metals 4120 2650 2650 2800 3300
Machinery and tools 4100 2650 2650 2800 3300
Motor vehicles 2880 2400 2400 2800 3300
Consumer goods 3550 2720 2720 2750 3225
Others 3650 2700 2700 2800 3300
Weighted
average of
basic rates (p'WO) 3686 2687 2687 2766 3252
War-risk surcharge (%) 1.5 1.5 1.5 1.5 1.5
Fuel surcharge (%) +O.l +3.2 +9.8
Basic rate plus
surcharges (p'WO) 3745 2727 2727 2896 3619
CONISCON index
(p'wo/poWO) 124.4 90.6 90.6 96.2 120.2
The calculation of the revenue share of the twelve groups of commodities of a standard container
(annual imports in percentage)
Year 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 Average
for the
whole
period
Food 2.88 4.19 6.07 4.33 4.03 4.0 4.18 2.5 3.45 3.72 4
Chemicals 13.0 12.21 13.29 12.21 13.05 11.5 11.8 12.05 11 11.05 12
Pharmaceuticals and
cosmetics 1.2 1.49 1.51 0.94 0.86 1.5 1.85 1.41 1.45 3.6 1.5
Plastics and rubber 4.5 5.05 5.11 4.34 4.2 3.9 4.4 4.53 4.26 5.0 4.5
Textiles and leather 5.62 6.42 6.54 6.34 5.48 5.0 5.87 6.2 5.27 5.75 6
Wood and paper 1.32 0.92 1.89 1.7 1.78 0.98 1.61 1.81 1.95 2.1 1.5
Building materials 14.9 12.22 14.22 12.97 12.27 12.4 12.28 10.06 9.1 10.95 12
Alloyed metals 5.68 5.4 4.48 7.41 7.95 6 6.05 1.74 1.28 1.35 4.5
Machinery and tools 32.68 33.9 27.71 30.95 31.57 28.41 33.65 32.23 33.5 34.1 32
Motor vehicles 12.08 10.54 9.78 12.15 13.67 21.32 12.92 19.9 21.32 15.68 15.5
Consumer goods 4.42 5.22 4.42 5.14 4.47 4.46 4.95 5.5 5.7 4.9 5
Others 1.72 2.44 2.98 1.52 0.67 0.53 0.44 2.07 1.72 1.9 1.5
Total (percentage) 100 100 100 100 100 100 100 100 100 100 100
Total (000 $) 457.6 415.9 447.5 589.8 766.9 790.0 841.2 895.1 1040.2 944.1
Total (000 OM) 1152.2 1047.0 1038.9 1195.1 1405.3 1437.3 1900.9 2172.0 2655.9 26g3.8
Sources: Freight-rates data and surcharges: Conference Secretariat. Revenue Shares: Central Bureau of Statistics, Statistics of Foreign Trade, 1975-84.
All freight rates and revenues are measured in OM.
APPENDIX B: THE LINER INDEX OF THE FRG (1976-85, MONTHLY INDEX 1965 = 1003 )
Yearly
average
Year Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec. index
1976 205.9 205.9 211.7 211.5 212.0 211.5 211.6 212.5 216.3 217.5 217.0 217.1 212.5
1977 222.0 222.8· 224.6 227.3 226.4 226.4 227.8 228.5 229.3 230.0 230.8 230.9 227.2
1978 235.5 238.9 239.8 240.3 239.9 239.7 239.6 239.6 239.2 240.0 240.5 240.2 239.4
1979 244.8 247.0 251.3 255.3 261.5 265.7 270.7 273.2 275.0 273.4 274.1 270.7 263.6
1980 279.0 280.0 280.3 280.7 280.4 280.2 278.9 280.6 281.1 282.8 284.7 287.4 281.3
1981 304.0 307.6 310.9 313.3 313.3 311.9 311.0 311.0 311.7 312.2 314.7 312.4 311.2
1982 318.1 317.0 317.1 317.8 316.7 319.2 318.7 318.2 315.6 315.2 314.0 314.0 316.9
1983 314.2 314.2 314.7 313.7 313.7 313.5 313.5 312.8 310.8 312.3 318.4 318.7 314.2
1984 339.6 341.0 360.4 367.4 369.5 370.5 370.3 372.5 386.4 390.7 383.3 396.7 370.7
1985 401.7 412.1 409.4 387.6 392.9
Source: The German Sea Freight Indices; Liner Trade - General Cargo, Shipping Statistics Yearbook 1979,19.2, 1895, Institute of Shipping Economics,
Bremen.
APPENDIX C: THE CONSTRUCTION OF AN INDIVIDUAL LINE

FREIGHT RATE INDEX (QUARTERLY DATA FOR THE PERIOD
1976-85 IN DM AND $)
Revenue data on the Hamburg-Israel trade route (quarterly datafor the period 1976-85
in DM)
Revenue first quarter (January-March)
Quantities Average per TEU
Total Weight Weight

Year revenue TEUs (tons) Revenue (tons)
1976 468550 285 3595 1614 12.6

1977 586200 292 3533 2008 12.1
1978 321750 195 1755 1650 9.0
1979 417350 357 3945 1169 11.0
1980 405400 326 3227 1244 9.9
1981 689200 539 6040 1279 11.2
1982 661850 409 3967 1618 9.7
1983 684200 412 4162 1661 10.1
1984 458144 399 4271 1148 10.7
1985 1039600 631 7669 1648 12.1
Revenue second quarter (April-June)
Quantities Average per TEU
Total Weight Weight

Year revenue TEUs (tons) Revenue (tons)
1976 414000 294 2442 1407 8.3

1977 301250 177 1620 1702 9.1
1978 417150 310 3690 1346 11.9
1979 454700 392 4563 1160 11.6
1980 293600 270 2808 1087 10.4
1981 478950 362 4163 1323 11.5
1982 529950 334 3730 1587 11.2
1983 692400 492 4564 1407 9.3
1984 585000 595 6959 983 11.7
1985 1392450 772 9600 1803.5 12.4
Revenue third quarter (July - September)
Quantities Average per TEV
Total Weight Weight

Year revenue TEV's (tons) Revenue (tons)
1976 488800 279 2762 1752 9.9

1977 403850 224 2172 1803 9.7
1978 192150 103 1009 1865 9.8
1979 550150 438 4336 1256 9.9
1980 507900 397 4009 1279 10.1
1981 734450 471 4905 1559 10.4
1982 662450 414 4223 1600 10.2
1983 722700 580 6010 1246 10.4
1984 587000 514 6572 1142 12.8
1985 582350 314 3422 1855 10.9
Revenue fourth quarter (October - December)
Quantities Average per TEV
Total Weight Weight

Year Revenue TEVs (tons) Revenue (tons)
1976 492000 263 2656 1871 10.1

1977 455900 253 2327 1802 9.2
1978 307750 171 1905 1800 11.1
1979 503150 495 4702 1017 9.5
1980 469200 442 3978 1062 9.0
1981 861800 580 6670 1486 11.5
1982 853660 520 5715 1642 11.0
1983 527750 446 5007 1183 11.2
1984 562400 484 5151 1162 10.6
Source: All data of revenue, number of TEUs and weight were

made available by the individual shipping companies, To
protect commercial interests, revenue data were multi-
plied by a constant factor.
The construction of an individual line freight index (I LF I) (quarterly for the period 1976-85 in DM and $)
Average Corrected
Revenue Index of revenue Exchange Corrected
per TEU Index of composition per TEU rate revenue per Index Index
(DM) utilization of cargo (DM) ($=DM) TEU ($) (DM) ($)
Year Quarter (1) (2) (3) (4) (5) (6) (7) (8)
1976
I 1644 120.0 99.2 1381 2.574 536.5 82.4 81.9
II 1406.5 79.0 99.2 1795 2.557 702 107.0 107.2
III 1751.5 95.0 99.1 1860 2.531 735 111.0 112.2
IV 1870.5 97.0 99.1 1946 2.408 808 116.2 123.3
1977
2007.5 116.0 99.3 1742.5 2.395 727.5 104.0 111.0
II 1702 87.0 99.3 1970 2.360 835 117.6 127.5
III 1802.5 93.0 99.3 952 2.307 846 116.5 129.2
IV 1802 88.0 99.3 2062 2.224 927 123.1 141.5
1978
I 1650 86.0 101.1 1897.5 2.076 914 113.3 139.5
II 1345.5 114.0 101.1 1167.5 2.077 562 69.7 85.8
III 1865 94.0 101.1 1962.5 2.007 977.5 117.2 149.2
IV 1800 106.0 101.1 1679.5 1.875 895.5 100.5 136.78
1979
I 1169 105.0 101.2 1100 1.854 593.5 65.7 90.6
II 1160 111.0 101.2 1032.5 1.894 545 61.6 83.2
III 1256 95.0 101.0 1309 1.816 720.5 78.1 110.0
IV 1016.5 91.0 101.0 1106 1.766 626 66.0 95.6
1980
I 1243.5 95.0 99.7 1312.5 1.773 740 78.3 113.0
II 1087 99.0 99.7 1101 1.810 608 65.7 92.8
III 1299 97.0 99.8 1321 1.775 744 78.8 113.6
IV 1061.5 86.0 99.8 1236.5 1.911 647 73.8 98.8
(Contd.)
(Contd.)
Average Corrected
Revenue Index of revenue Exchange Corrected
per TEU Index of composition per TEU rate revenue per Index Index
(DM) utilization of cargo (DM) ($=DM) TEU ($) (DM) ($)
Year Quarter (1) (2) (3) (4) (5) (6) (7) (8)
1981
I 1278.5 107.0 99.7 1198.5 2.086 574.5 71.5 87.7
II 1323 111.0 99.7 1195 2.276 525 71.3 80.1
III 1559 99.0 99.8 1578 2.432 648.5 94.2 99.0
IV 1485.5 110.0 99.8 1353 2.245 602.5 80.8 92.0
1982
I 1618 93.0 95.7 1818 2.346 775 108.5 118.3
II 1587 107.0 95.7 1550 2.378 652 92.5 99.5
III 1600 97.0 95.7 1723.5 2.481 695 102.9 106.1
IV 1641.5 105.0 95.7 1633.5 2.501 653 97.5 99.7
1983
I 1660.5 99.0 98.1 1710 2.408 710 102.1 108.4
II 1407 89.0 98.1 1611.5 2.485 648.5 96.2 99.0
III 1246 100.0 98.8 1261 2.643 477 75.3 72.8
IV 1183 107.0 98.8 1119 2.677 418 66.8 63.8
1984
I 1148 102.0 99.4 1132 2.702 419 67.6 64.0
II 983 112.0 99.4 882.5 2.709 325.5 52.7 49.7
III 1142 122.0 100.1 935 2.912 321 55.8 49.0
IV 1161.5 101.0 100.1 1149 3.048 377 68.6 57.5
1985
I 1647.5 116.0 100.0 1224.5 3.272 375 73.1 57.2
II 1803.5 118.0 100.0 1528 3.056 500 91.2 76.3
III 1854.5 104.0 100.0 1783 2.86 623.5 106.4 95.2
IV
Explanation of construction of ILFI is as follows:
Column 1 Figure obtained by dividing total revenue by the number of TEUs.
Column 2 The index of utilization is calculated by dividing the weight per TEV at every quarter year by that of the base year, which is 1975. 1975 = 10.45 tons
per container = 100.
Column 3 The construction of the index of composition of cargo is based on the CONISCON index. The CONISCON index uses the composition of cargo (the
revenue shares) in 1975 for the construction of the index. We have constructed another index which uses the current revenue shares as weights. The
difference between these two indices is then attributed to changes in composition of cargo that have taken place every year. The index is equal to the
ratio of the CONISCON index using current revenue shares as weights divided by the CONISCON index using the 1975 revenue shares as weights,
i.e.
piW i !piWO
Index of composition of cargo = - - - -
pOw o pOw o
Column 4 The corrected revenue per TEV is obtained by dividing column (I) by column (2) and column (3).
Column 6 Revenue per TEV in OM is converted into revenue per TEV in $ by dividing column (4) by column (5)
Columns 7
and 8 The indices were constructed from columns (5) and (6) using 1975 as a base year. The values in the base period were
Revenue per container in OM in 1975 3350 = 100
Revenue per container in $ in 1975 1310 = 100
At an age of fluctuating exchange rate the choice of currency makes a difference. The official currency of the CONISCON conference is OM. But VS
$ is more often used as a unit of currency in the shipping business. We therefore constructed indices - in both US $ and OM. As seen from columns (7)
and (8) the two indices behave differently. The index in VS currency has been rising much faster during the period 1976-82, which is explained by the
rise in the price of OM relative to the dollar during this period. Since 1982 this has been reversed, with the result that the two tend first to be equal and
in 1984 and 1985 the $ index is lower than the OM index.
4 The art of charging what the traffic can bear
Freight-rate making with a view to charging what the traffic can bear is an art
rather than a science. It is more a matter of'fingerspitzgefiihl' for where the rate
ceiling is in each particular case than offormal price-elasticity estimation. The
'rate ceiling' for a commodity is the freight-rate level which, if exceeded, may
result in a complete loss of traffic in the commodity concerned. Nevertheless in
this chapter we seek to provide the theoretical underpinning of current
practice and some of the more useful rules-of-thumb.
First, we should point out that price discrimination by commodity is not
necessarily the most effective way of charging what the traffic can bear, but
probably the only possible way in a cartel of individual shipping lines.
4.1 THE MAIN FORM OF PRICE DISCRIMINATION

IN LINER SHIPPING
The idea of price discrimination is to confiscate as much as possible of the

consumers' surplus. Three forms representing successively lower degrees of
freight-rate discrimination, i.e. more and more complete consumers' surplus
confiscation, can be distinguished.
Each shipment by a shipper of a particular commodity is charged an
individual freight rate.
2 Each shipper of a particular commodity is charged an individual freight rate.
3 Each commodity is charged an individual freight rate.
Third-degree' discrimination can be carried out using published tariffs of
commodity rates. 'First-' and 'second-degree' discrimination are more difficult
to implement; that would require secret contracts with each individual
shipper, or secret agreements for each particular shipment. It would probably
give rise to too much hard feelings on the part of un favoured shippers ifit were
openly published that shippers of the same commodity are charged substanti-
ally different freight rates (and it would be disallowed by the Federal Maritime
Commission of the United States). Nowadays the railways can arrange the
pricing of a large part of their business on the basis of secret contracts. Liner
conferences practice almost exclusively third-degree freight-rate discrimin-
ation. However, so far as heterogeneous manufactured products are con-
cerned, it is, in principle, possible by defining different products very narrowly
to treat almost every individual shipper separately in spite of the fact that only
third-degree discrimination, in a literal sense, IS applied. The reason why
The art of charging what the traffic can bear 95
conferences do not go into higher-degree discrimination is primarily that they

have to publish the freight rates to maintain the price cartel. Price competition
among the conference members could not be avoided if secret contracts were
made between each individual shipping line and its shippers.
4.2 THE ROLE OF COMMODITY VALUE

FOR SHIPPING DEMAND ELASTICITY
Empirical studies of shipping-demand elasticity of individual commodities are
simply non-existent. The theoretical approaches in the literature have in
common that they are based on the fact that the demand for transport is a
derived demand (Bennathan and Walters, 1969; Sletmo 1972; Sletmo and
Williams, 1981). Transport is an input which is not demanded for its own sake,
but the demand for transport is derived from the demand for the goods that are
transported. The derived-demand approach has provided one well-known
short-cut to estimating the elasticity of demand for transport: the idea that the
value of a commodity is the decisive factor for the elasticity of demand for
transport.
In our view, too much importance has been attached to the value of
commodities. The following analysis shows that the value per ton is an
insufficient proxy for ranking rate elasticities of shipping demand of different
commodities. A number of other factors have to be taken into account as well.
We will put forward some new ideas. However, first we will briefly outline the
essence of the argument which in one form or another is the basis for
attachment of primary importance to the value per ton. The argument is well
summarized in the paradox of 'the importance of being unimportant'.
4.2.1 The importance of being unimportant

The meaning of the observation that it can be very important to be
unimportant is simply that the smaller the share of an input is in the total cost
of a particular final product, the lower the price elasticity of the demand for the
input tends to be.
The underlying model is a chain of process stages. If the production factors
in one particular stage have no good substitutes, two things determine the
factor-price elasticity of the demand for the production factors: the cost of the
process stage concerned relative to the total cost, and the price elasticity of
demand for the final product. It is easily shown that in the extreme case of no
substitution possibilities this simple rule (Marshall's Rule) holds true:
Elasticity of factor demand = Share in total cost x Elasticity of demand for
final product
Transport services fit seemingly well into this model. Transport is an
indispensible factor of production in most industries. The share of the cost of

transportation from seller to buyer in the total costs of production of different
goods is very variable. So far as manufactured goods are concerned, the
transport costs typically make up 2-4% of the total value of output, while the
transport cost content is more likely to be in the range of 20-40% of the total
value of relatively 'cheap' primary products like iron ore, coal, timber, etc. In
the former case a doubling of the freight rate may raise the total cost by only a
few per cent, while in the latter case a doubling of the freight rate can make the
total cost go up by 30% or more. Consequently, it is taken for granted that the
freight-rate elasticity of the demand for transport is much greater for low-
value primary commodities than for high-value manufactured goods.
However, the original proposition is that given a particular product, the
elasticity of demand for different factors of production thereof can be expected
to be more or less proportional to the share of each particular factor in the
total cost. A rather different proposition is that the elasticities of the demands
for factors of production which are inputs into different final products are more
or less proportional to their respective shares in the total costs ofthe different
products. Different products are obviously not equally price-elastic. By a
simple model it can be shown how the freight rate elasticity of demand for
transport is derived from the corresponding goods supply and demand.
4.2.2 Model for freight rate elasticity derivation

Consider the trade between two countries in a particular commodity. The
country which exports the commodity is called the 'X country', and the
country which imports the commodity is called the 'M country'.
The supply of the exporting country, S, is a function of the fob price, P fob ,
while the demand in the importing country, D, is a function ofthe cifprice, Pcif
S = S(P fob ) (4.1)
D = D(Pcif). (4.2)
The difference between P cif and P fob is made up of the shipping freight rate,
F, and costs of insurance etc., k, which are assumed to be constant
Pcif - P fob = F + k. (4.3)
The total differentiation of this system of three equations makes it possible
to express the differential of F like this:
dF= dD (4.4)
( ~-ds)/~
OP cif OPfob·
The trade equilibrium condition is that supply is equal to demand; this
equilibrium quantity is denoted Q, and is referred to as the trade volume

S* =D* =Q (4.5)
We define three elasticities. The elasticity ofthe trade volume with respect to
the freight rate, is denoted e, the elasticity of supply of export with respect to
the fob price is denoted by Es, and the elasticity of demand for import with
respect to the cif price is denoted ED
e= (~;)(~)
(~)(PfOb)
Es=
OP S fob
ED = (~)(PCif)
OP cif D
Substituting dQ for dD and dS in equation (4.4) and forming the inverse of
the shipping-demand, commodity-demand, and commodity-supply elastic-
ities, observing equilibrium condition (4.5), gives us the following expression
( dF )(Q) Pc if (4.6)
dQ F = (~)(PCif)F
OP cif D
Inverting equation (4.6) and making certain rearrangements, the elasticity of
shipping demand can be written in this way:
e= (~iJ[ 1 - (Pfobi:/PCifEs) J. (4.7)
cif,
This expression for the elasticity of demand for trade is a product of the
shipping cost content of the commodity price F / P and an expression which
in most cases is approximately equal to ED' In constant-cost, and nearly
constant-cost industries, the value of Es is great, and will completely dominate
the four-factor fraction to make the denominator of the right-hand expression
close to unity. If the value of ED were also roughly similar for a majority of
different commodities, equation (4.7) would be a very handy rule-of-thumb for
freight-rate elasticity estimation. In that case the inverse of the freight-rate
elasticity would be proportional to commodity unit value, and a structure of
freight rates proportional to the respective commodity values - ad valorem
charging - would be indicated. However, it is quite clear that ED is not nearly
constant. Were the commodity value and demand elasticity entirely uncorre-
lated, the ad valorem principle would still be not too bad. But suppose there is a
systematic relationship between commodity-value and demand elasticity such
that they tend to increase more or less at the same rate. That would, of course,
be devastating for the idea that high-value commodities can bear much higher
freight rates than low-value commodities. Is there such a tendency?
4.2.3 Correlation between commodity unit value

and import demand elasticity
When we consider import of goods that differ in the degree of processing, it is
clear that, as a general rule, the higher the degree of processing is, the higher the
value per ton will be. The point is that there is also a systematic relationship
between the degree of processing and the elasticity of total import demand.The
demands for raw material and intermediate goods are, like the demand for
transport services, 'derived demands', derived from the demands of the final
goods concerned. Therefore, from Marshall's Rule it can be expected that the
lower the degree of processing of a commodity is, the lower will the elasticity of
demand for import be, because the lower the degree of processing is, the lower,
on average, the share will be of the cost of the commodity in the total costs of
various final goods.
There is ample empirical evidence to support this hypothesis. As an
example, the results of two studies of import price-elasticities are given in
Table 4.1.
Table 4.1 Elasticities of demand for imports of goods of varying degrees of processing
Import price elasticities in different

countries b
Import price-elasticities of Industrial Manufactured

different goods categories' input goods goods
Crude materials -0.18 USA -1.18 -3.08

Crude food -0.21 Canada -0.38 -1.62
Manufactured food -1.40 EEC -1.77 -2.61
Semi-manufactured
goods -1.83 UK -0.75 -2.71
Finished goods -4.05 Continental
EFTA -0.81 -2.01
Japan -0.45 -2.53
'Source: Houthakker and Magee (1969) Income and price elasticities in world trade, The Review
oj Economic:s und Sculislics, May.
bComputed from Balassa and Kreinin (1967) The Review oj Economics and Statistics, May.
4.2.4 The order of magnitude of the freight rate elasticity

of shipping demand in the absence of competition
Now we can put some figures into the freight-rate elasticity formula (4.7) and
see what will be the result.
On the likely assumption that the supply of the commodity in question is
elastic, equation (4.7) can be approximated to
e;;::: (F/Pcif}E D .
The shipping cost constant of highly processed final goods is seldom greater
than a few per cent. Let us consider a range from 1 to 5%. The average value of
the import-price elasticity of finished goods is about - 4 according to
Table 4.1. The result as to the range of probable e values is consequently
- 0.04 to - 0.2. Now take primary products: in this case the shipping cost
content can vary from perhaps 10% to (at most) 50%. According to Table 4.1,
the average value for the import price-elasticity of crude materials and crude
food is about - 0.2. A range of e values from - 0.02 to - 0.1 is thus obtained
for primary products.
Contrary to common belief the range of e values coming out for shipping
demand of finished products is higher than for shipping demand of primary
products. This does not exactly prove out previous point about the serious
snag with ad valorem charging; the numerical elaborations of the e formula
have been too rough to do more than indicate that by the derived-demand
approach it cannot be held that the freight-rate elasticity of demand is
generally much higher for high-level commodities than for low-value
commodities.
A more significant observation is, however, that the e value ranges are very
low in both cases - well below unity, to hold up a crucial benchmark. No
refinement of the calculations can change this result. This makes us draw the
important conclusion that the elasticity of demand for shipping is not
primarily determined purely as that of a derived demand, but by the
substitution possibilities, or more exactly, by the existence of competition from
other sources of commodity supply and/or from other modes of transport.
This conclusion follows inevitably from a simple but fundamental price-
theoretical dictum: the absolute value of the price-elasticity of the demand
facing a profit-maximizing seller/producer of goods or services must exceed
unity at the current price level because if the price elasticity were less than
unity, it would be highly profitable to raise the price: total revenue would
increase and total cost would decrease (since output is reduced). We mean that
it is inconceivable that each particular liner conference could boost total
profits, and get rid of all financial worries of their members, simply by
substantially raising all freight rates. That would result in losses of business
that most likely would reduce total freight revenue.
It is consequently necessary to supplement the previous analysis of derived-
demand elasticity by a discussion of how different substitution possibilities

affect the freight-rate elasticity of liner-shipping demand. The following
discussion first takes up the possibility of supply from other sources, i.e.
import from other countries than the country at the other end of the liner
trade in question. Competition from other modes of transport is taken
up next.
4.3 THE ROLE OF COMPETITION FROM OTHER SOURCES

OF GOODS SUPPLY FOR SHIPPING DEMAND ELASTICITY
The basic point is that in case when the M-country can (and does) import
. 'urea' also from other countries than the X-country, ED in the e formula (4.7)
above, that is the price elasticity of demand for urea import to the M-country
from the X-country, can take practically any higher value than the price
elasticity of total demand for import of the commodity in question to the M-
country.
The problem of estimating ED in the realistic case of exporter(s) in the trade
concerned facing competition from exporters of other countries has to be
tackled in different ways depending on the character of this competition. In the
following discussion we distinguish perfect competition and monopolistic
competition.
When it comes to the important case of oligopoly a different approach is
called for. In that case ED is not the primary object of study, but rather the
'tolerance level' ofthe freight rates charged to exporters selling in oligopolistic
markets.
4.3.1 Estimation of import and shipping demand in the case

of perfect competition in the market for the traded goods
In cases where a large number of exporters from different parts of the world are
suppliers of a particular commodity imported by the M-country, it would be
far too cumbersome to trace out each particular supply curve in order to
derive the demand for import from the X-country of the commodity
concerned. We think that one can focus more directly on what can loosely be
described as the 'trade potential' of the commodity.
The problem is to find an operational measure of the trade potential. It is
conceptually some sort of differential - the difference between, on the one
hand, the willingness to pay for a particular commodity in the importing
country, and on the other the cost of production in the exporting country.
Homogeneous primary products and industrial input goods are traded in
world markets characterized by perfect competition, and exporters are largely
price-takers. Oligopolistic or monopolistic competition are the typical market
forms so far as differentiated intermediate and final products are concerned,
and exporters of these products are price-makers to a large extent.
(a) The pre-trade price gap and optimal freight rates for standard goods
Now we shall consider the trade between the X-country and M-country in a
particular raw material or standard product, which occurs in many trade
relations all over the world. It is convenient to have a name for the commodity
in question: we will caIl it 'urea' in the following discussion.
The 'pre-trade price gap' measures the difference between the price of urea in
the M-country and the price of urea in the X-country when no trade in urea
takes place between those two countries. If the pre-trade price gap is less than the
marginal cost of shipping urea from the X-country to the M-country there is
no potential for trade in this commodity at the present time.
If the pre-trade price gap exceeds Me, the question is for the liner conference
covering the trade between the M-country and X-country, which freight rate
wiIl maximize profits (to the conference) of shipping urea? It can be shown that
the pre-trade price gap is a strategic factor for this question. We will show this
with the aid of the 'back-to-back' diagram of Fig. 4.1. In this diagram quantity
M -counrry X -counrry
$
Pre-rrade
price gap
G
Pre-rrade
demand
Tons ________________________~~~~~~~~~~~_______ Tons

of urea 0 of urea
Figure 4.1 Derivation of the demand for trade between the X-country and the M-
country as a function of the transport cost.
of urea supply and demand of the M-country is measured to the left, and
quantity of urea supply and demand of the X-country is measured to the right
on the horizontal axis. Supply and demand of the M-country depend on the
domestic price in the M-country, Pcif' and supply and demand of the X-
country depend on the domestic price in the X-country, Pfob'
In the pre-trade situation (so far as urea between the X-country and M-
country is concerned) the price of urea in the X-country, Pfob' is determined by
the intersection of the domestic supply curve of the X-country ('Supply and
pre-trade demand' in Fig. 4.1). Similarly, in the pre-trade situation the price of
urea in the M-country, Pcif' is determined by the intersection of the domestic
demand curve of the M-country and the curve for the total supply from
possible domestic sources as well as foreign sources except for the X-country
('Demand' and 'Pre-trade supply' in Fig. 4.1).
The supply curve for export of urea from the X-country to the M-country
denoted SXM in Fig. 4.1, is derived by subtracting horizontally the pre-trade
demand quantity from the supply quantity for each given price in the X-
country. Similarly, the demand curve for import of urea to the M-country from
the X-country, denoted D MX in Fig. 4.1, is derived by subtracting horizontally
the domestic demand quantity from the pre-trade supply quantity for each
given price in the M-country.
The demand for trade in urea between the X-country and the M-country,
D Q , as a function of the total transport cost is in turn derived by taking the
vertical difference between D MX and SXM for each given volume of trade.
The demand for shipping of urea, finally, as a function of the freight rate is
obtained by moving up the quantity axis to the level of the 'cost, insurance'
constant k. Although the urea demand and supply in the M-country and X-
country are not necessarily linear in their whole ranges, it is a reasonable
assumption to regard D MX and SXM and thus the shipping demand curve, which
correspond to limited segments of the urea demand and supply curves, as
linear. The exact shapes of D MX and SXM can never be established; a linear form
is, a priori, the most sensible choice.
After trade has been established, the price of urea changes both in the M-
country and the X-country. The level of the new prices, Pcif and Pfob depends
on the volume of urea trade, Q, that will be moving between the two countries.
Let rx represent the (negative) slope of D MX and f3 the slope of SXM' Then the
relationships between Pcif and Pfob, respectively, and the trade volume, Q, can
be written:
P Cif = PCif - rxQ (4.8)
Pfob = PfOb + f3Q. (4.9)
The freight rate, F, equals the difference between P cif and Pfob minus k. The
relationship between F and Q is obtained by subtracting equation (4.9) from
equation (4.8). The pre-trade price gap is denoted G, which equals the
difference between P cif and P fob (see Fig. 4.1)

F = Pdf - P fOb - (ex + f3)Q - k
= G - (ex + f3)Q - k. (4.10)
For profit maximization on the part ofthe liner conference it is required that
the marginal freight revenue is equal to the marginal cost, Me.
The marginal freight revenue is obtained by taking the derivative of the
product FQ with respect to Q
o(FQ)
-aQ = G - 2(ex + f3)Q - k. (4.11)
Setting equation (4.11) equal to the marginal shipping cost, MC, and using
equation (4.10) to eliminate Q, the optimal freight rate, F*, can be expressed in
this way:
F*= G-k+MC (4.12)
2 .
An exceedingly handy rule-of-thumb has been obtained. The optimal freight
rate should be equal to the mean of the pre-trade price gap minus k and the
marginal shipping cost. This makes sense: If G - k is just above MC there is
obviously very little room for a 'contribution margin', for the shipping lines on
this particular commodity. The freight rate has to be close to the marginal cost.
If G is well above M C, on the other hand, there is room for a good margin. It
would be unwise to add such a substantial margin to the marginal cost that the
whole pre-trade price gap is exploited. That would kill the trade potential. It
would be equally unwise (for profit maximization) to set the freight rate close
to the marginal cost. That would make the most of the trade potential, but it
would not help shipping profits. A solo monic compromise between these two
extremes is apparently the right solution.
Problems of application of this simple rule-of-thumb will arise as soon as the
pre-trade stage is far back in the past. When trade in urea between the X-
country and the M-country has been taking place for a long time, the pre-trade
price gap, G, is a hypothetical magnitude, which can be very difficult to
estimate. The value of G, say 10 years ago, may have little relevance for the
present time. In such a case, how can it be checked that the actual freight rate,
F, does not deviate from the profit-maximizing freight rate F*?
(b) The importance of the share of the trade in the total consumption
of the importing country, and in the total production
of the exporting country
The share of the X-country's export to the M-country, (a) in the total
consumption of urea in the M-country, and (b) in the total production of urea
in the X-country are two important magnitudes to consider in this connection.
From elementary price theory it follows that, if the former share is small, a
withdrawal of the supply of urea from the X-country would affect the price of
urea in the M-country very little, if at all. If the latter share is small also, it
means, similarly, that if the M-country stops importing urea from the X-
country, it would affect the price of urea in the X-country very little, if at all.
The pre-trade price gap is likely to be only slightly larger than the current
difference in price of urea between the M-country and the X-country. In these
circumstances it is apparent that an increase in the current freight rate for urea
could easily result in a complete loss of the urea trade; the demand for shipping
urea is likely to be very elastic. Under this condition a decrease in freight rate is
the only possibility worth considering, unless, of course, the freight rate
already is close to the shipping marginal cost.
If the urea trade from the X-country to the M-country constitutes a
relatively large market share in the importing country and/or share in the
production, it can be very difficult to predict what the pre-trade price gap
would be. There is, unfortunately, no short-cut to the estimation problem of
tracing the pre-trade supply and demand curves of the M-country, and the pre-
trade demand and supply curves of the X-country.
4.3.2 Estimation of import and shipping demand in the case

of monopolistic markets for the traded goods
The core of liner cargo is normally constituted by more or less differentiated
finished products. Products which are customarily assigned to this category,
but which have a number of close substitutes, are probably best dealt with by
means of the approach just outlined focusing on the pre-trade price gap.
Processed food can be an example of this type of product. When it comes to
products which are more markedly differentiated this approach will not do,
simply because a 'market price' as distinct from the price of the differentiated
product concerned is very difficult, or impossible to identify.
If a certain type of machinery - 'special machinery' from now on-
produced in the X-country and exported to the M-country is withdrawn from
this trade, a pre-trade price of special machinery would not exist, because the
product in question would not exist in the X-country. It is important for the
liner conference, when rate-making, to bear in mind the fact that (by definition)
the exporter of special machinery faces a downward-sloping demand curve for
his product in the M-country (rather than a given price as in the standard-
goods case). The exporter of special machinery has a still greater incentive than
the liner conference to estimate the demand for his product in the M-country.
The shipping lines in the trade concerned serve exporters of hundreds of
heterogeneous products. Each of these exporters should have information on
the price elasticity of each particular product of a far more profound nature
than the conference rate-makers could ever produce on their own. Therefore, a
seemingly natural procedure would be for the conference rate-makers to
gather the required information en demand in the M-country from the

exporters of the X-country.
Conferences do try to get as much relevant information as possible from
exporters/importers with a bearing to the elasticity of demand for import. A
common practice is that shippers are told that if something happens which
threatens the trade in a particular product, the conference is open for
discussing the current freight rate. In these discussions the conference is in a
position to obtain a lot of useful information. Most rate changes take the form
of across-the-board rises by a common percentages. Some articles may,
however, be exempted from a general rise, if shippers can give convincing
reasons for the necessity of making an exception. For example, the North
Atlantic/UK Freight Conference used to request certain information from
shippers, whenever an application for rate modifications was made. The
shipper concerned was asked to provide information on whether the product
in question was hazardous, the nature, size, and weight of packages, the value
and the duty, the point of origin and destination, the anticipated volume of
total shipments, as well as information on competitive products and their
prices (Federal Maritime Commission 1968).
The general problem is, of course, that rate-makers and shippers have
sharply conflicting interests when it comes to the crucial matter of what the
traffic can bear. If the demand for special machinery in the M-country is rather
inelastic the producer of special machinery could earn a handsome profit on
the export to the M-country - the price charged in the M-country could
exceed the marginal cost of production by a substantial margin. If the liner
conference were aware of this fact they could get a substantial share of the cake.
The exporter is not very keen to disclose anything which could lead to this. In
discussions with the conference the exporter is more likely to overestimate the
price elasticity by pointing out all sorts of factors speaking against the
supposition that special machinery can bear a very high freight rate.
(a) Indirect way of getting at the demand elasticity

via the exporter's profit margin
There are, however, some possibilities of getting some information on the
exporter's view on the price elasticity without having to ask him directly.
Were it known what the (marginal) cost of production of special machinery
is, the size of the profit margin on export to the M-country would be quite
revealing. Presuming profit-maximization on the part of the exporter, one has
simply to apply the general relationship between price, marginal revenue, and
demand elasticity: ED = P/(MR - P). Substituting Me of production (includ-
ing other transport costs than the shipping freight rate, that is, k) for M R, a
value for ED is obtained.
The problem with this approach is that the marginal cost of production can
be difficult to ascertain for an outsider. It may be thought that the fob price or
the domestic price in the exporter's home country could be used as an M C
proxy. This would be fine in a constant-cost industry. Assuming constant
returns to scale is convenient, but hardly generally justified so far as
monopolistic and oligopolistic industries are concerned. Decreasing returns to
scale, and rising supply curves are to be found almost exclusively in the
primary goods sector, i.e. in the extraction industries (mining etc.), agriculture,
fishing and forestry. However, increasing returns to scale is the rule rather than
the exception in the manufactured-goods sector, and in this case it can be very
difficult to infer from Prob where the level of MC may be.
4.3.3 The tolerance level of freight rates for firms selling
in oligopolistic markets
So far we have assumed monopoly or monopolistic competition so far as the
goods markets are concerned. Exporters of manufactured goods often perceive
the foreign markets where they are selling as oligo polis tic. The characteristic of
this market form is that each individual seller believes his present market share
cannot be increased simply by a price cut, because all the others will follow
suit, while a price rise may be disastrous for his market share, as it then can be
expected that the others will stay put. This is the well-known case of the kinked
demand curve. In this case a shift in the marginal cost of an individual seller
will in a wide range have no effect at all on price or quantity supplied, but the
seller in question will either simply absorb the cost increase by accepting a
lower profit margin or he will succeed in finding a way of offsetting the cost
increase, for example by factor substitution.
For the liner conference the question is, when it comes to exporters selling in
oligopolistic markets, which freight rate levels can they absorb before they
seriously look around for an alternative mode of transport?
In the economically imperfect world we are living in, it is not always true
that the price of manufactured goods is equal to the average cost including a
normal profit to the owner. Profits vary widely between firms in practice. In
cases where super-normal profits are earned, there are better odds for a
relatively high freight rate to be accepted than in cases where profit margins
are pressed. It is not always possible to obtain reliable information about profit
margins. In that case it is close to hand to use product value as a proxy for
freight-rate tolerance. Were profit margins proportional, on average, to
product prices, this would not be unreasonable. However, on second thought
it should be clear that profit per unit of output is more likely to be proportional
to the capital cost content in prices. Returns on capital investment minus costs
of debt servicing is equal to gross profit. The labour cost content and the input
goods cost content in prices, per se, should normally not be related to profit per
unit of output. Therefore a superior rule-of-thumb seems to be to take the
capital cost content rather than the whole price as a proxy for the willingness
to absorb freight costs.
The substitution possibilities as regards the shipping services are obviously
also of vital importance for the 'tolerance level' of freight rates. We now turn to
the second type of competition which is often the most important reason for
liner shipping demand being far more elastic than is suggested by just looking
at the trade potential.
4.4 COMPETITION FROM 'OUTSIDERS' AND OTHER MODES

OF TRANSPORT (SEE ALSO DISCUSSION IN SECTION 2.2.2)
So far as the shipping services offered by liner conference members are
concerned, the main source of competition is perhaps that from other lines.
That the 'seas are open' is more than a phrase. If a conference raises freight
rates so that the trade route becomes very remunerative, other lines will be
attracted into the trade - either by forcing their way into the conference, or by
operating as 'outsiders'. The threat of potential entrants into the trade is a
permanent one, and sets a limit in the first place to the general level offreight
rates.
Tramps and specialized bulk-carriers form another source of competition.
They mainly compete on the bulk cargo, when the size of the shipment is
sufficient to fill a ship. The great bargaining power of big shippers forces down
the rates of bulk commodities. Conferences, therefore, often declare rates of
these commodities 'open', or else fix the freight rates close to the corresponding
tramp rates. Bulk cargo can be important for some liner services. It usually
serves to fill gaps in the availability of break-bulk cargo - on the backhaul, or
in off-peak periods. The growing use of chartered ships for consolidated
parcels of minor bulk commodities, 'neo-bulk shipping', and the possibility of
tramps topping up their base cargo (i.e. bulk cargo) with break-bulk cargo
have the effect in some trades of extending the impact of tramp competition to
most commodities carried there.
Airline competition is a third source that limits the possibility of the
conferences to raise freight rates. Technical developments in the airline
industry have made competition with liner shipping more intense. Airlines
mostly compete on high-value commodities. They are therefore a threat to the
'cream' of the liner trade. (It has been estimated that in 1969 air cargo
accounted for 22% of the total dollar value of all foreign trade moving through
the New York Boat district, although it comprised less than 1% of the total
tonnage. Madden (1970; p. I). In 1970 air cargo accounted for 16.6% of the
value of US exports and 9.4% of the imports value, see McCaul (1970).
4.5 SUMMARY AND CONCLUSIONS

The preceding analysis of the freight-rate elasticity of demand for liner
shipping of different commodities can be summarized with reference to
Fig. 4.2.
We have discussed the problem in three stages. First we have shown that by
Demand for shipping urea from

all expor~ing coun~ries ~o ~he M -coun~ry
Demand for shipping urea from

~he X-coun~ry ~o ~he M-coun~ry,
no compe~ing mode of ~ranspor~
Final demand
for shipping
urea from ~he
Ra~e ceiling se~ by competing
X-coun~ry
by liners
I-..,..--.....~--\-------- mode of transpor~
Tons of urea
Figure 4.2 Derivation in three steps of the demand for liner shipping from the x-
country to the M-country of a particular commodity.
a derived-demand approach, which has the freight-rate elasticity, e, of demand

for shipping as (approximately) the product of the freight rate content of the
cif price and the price elasticity of demand for the commodity in the importing
country, unbelievably lowe values are obtained as long as competition from
other sources of goods supply and/or other modes of transport is not taken
into account. In the second stage we therefore have outlined a method of
incorporating 'supply from other sources' into the analysis, first so far as
standard goods are concerned, which are traded in competitive markets.
Differentiated products require a somewhat different approach. By definition
there is, strictly speaking, only one seller (exporter) of each particular product
and the freight-rate elasticity of demand should be considered on the
individual firm level. We have discussed an oligopoly case, too, which is
particularly complicated when different exporting countries are involved. The
third stage, the existence of an absolute upper limit for most freight rates, has
been recognized. Depending on the category of cargo, this limit is set by

competing 'outsiders' (shipping lines operating outside conferences), tramps,
or air cargo carriers.
One important qualification of the previous conclusion about the importance
of commodity value for freight rates has come out. The value of products
cannot be regarded as a direct factor of great importance for the freight-rate
making. For mainly two reasons the freight rates are none the less positively
correlated to the value of the traded goods, namely:
Due to competition from tramps and neo-bulk carriers, the average freight
rate ceiling is typically much lower for primary goods than for more
valuable processed goods.
2 As freight rates are expected to be related to the (absolute) profit margins,
they should also be related to the prices (commodities) of the products
concerned. The relationship between price and profit margin is, however, an
indirect one. The profit margin should be more directly associated with the
part of the value added represented by the capital cost. *
*For example, the profit margin per motor car sold from a car-parts assembly plant is normally
much lower than the profit margin per motor car sold from a fully integrated car-making plant.
The exporter/producer's capital cost per product unit can be expected to be increasing at a
markedly degressive rate with increases in the total value (price) per product unit, because the
more valuable a product is, the more process stages it is likely to have passed, and the smaller
proportion of the total value is likely to have been added by the exporter/producer.
PART LINER SERVICE OPTIMIZATION
TWO
The principal question to which the five chapters of this part are
devoted in different ways are: How is the transport of a given
volume of seaborne trade to be carried out in the least costly way?
In the dense trade sector the optimal design of ships and liner
services is found by minimizing the shipping costs directly borne by
the shipowners. In the thin-trade sector shippers' costs of storage
etc., and the feeder transport costs have to be treated on a par with
the shipping costs.
A 'thin-trade problem' exists where liner services cannot be
arranged on a port-to-port or even country-to-country basis, but
the cargo catchment area at one or both ends of a trade has to
embrace a substantial part of a whole continent in order to
maintain an adequate frequency of sailings. The problem can be
formulated in a formalized way by the following 'sailings-frequency
identity':
Where
N = total sailings frequency
Q = total cargo volume on the fat leg of the trade
A 1 , A2 = cargo catchment areas of the trade
S = ship size (average holding capacity of ships on the route).
It is common to regard the sailings frequency as a constraint, e.g.
that less than fortnightly, or less than weekly sailings are 'inade-
quate'. By such an approach one starts from what is judged to be an
adequate sailings frequency, and then adjusts the cargo catchment
areas and the ship size in the best way to meet the imposed
constraint.
We think that a more fruitful approach is to treat the problem of
liner service design as a problem of trading off shipping costs
against costs of 'shipload consolidation in time and space', which
largely constitute costs borne by the shippers. To realize the
shipping cost economies of ship size (the topic of chapter 5) also in
thin trades, full shiploads have to be gathered either by extending
the cargo catchment area(s} or by increasing the interval between
sailings. An enlargement of the cargo catchment area(s) of a trade
will result in higher feeder transport costs. When a number of ports
are to be served the important problems of multi-port calling versus
trans-shipment arises (the subject of chapter 6). The sailings
frequency is a determinant of certain costs which are borne by the
shippers: a lowering of the sailings frequency will manifest itself to a
large extent by increases in the storage costs of shippers (chapter 7).
A condition for economic efficiency as well as profit maximiz-
ation is that the sum of the shipowners' costs, the port costs, and the
shippers' costs are minimized for each given volume of trade. This
poses particularly difficult problems of shipping and port adjust-
ment (discussed in chapter 8). In the final chapter of this part we put
all the pieces together in a schematic model of a liner trade, where
we show the result of a simultaneous optimization of ship size,
cargo catchment areas, port calling, and sailings frequency. We will
examine how route characteristics like the route distance and the
trade density influence the optimal design of liner services, and
freight costs. It should be emphasized that we assume the point of
view of the liner conference, i.e. of all shipping lines operating in the
trade concerned. The shippers' costs, which are an essential part in
the total costs, depend on the aggregate supply of shipping services,
so a total cost minimum (optimum) cannot be obtained unless this
is taken into account. This is in fact the rationale for service
coordination by conference lines, and, as will be argued in part III,
the real raison d'etre of liner conferences.
5 Ship size and shipping costs
Why are liners not as big as bulk carriers even in very dense trades? Is it
because general cargo ports cannot accommodate very big ships, or is it
because an adequate frequency of sailings cannot be maintained with too big
ships? This is only part of the truth. In this chapter we go into a more
fundamental reason why ship-size economies cannot be realized to the same
extent, by far, in general-cargo shipping as in bulk shipping.
The main aspects of 'ship design' can be summarized as three capacities: the
cargo-holding capacity, the cargo-handling capacity, and the cargo-hauling
capacity of ships. Recent studies have put emphasis on investigating alterna-
tive methods of handling general cargo (Laing, 1975; Gilman, 1977; Ahle et al.,
1977; Buxton et al., 1978). The most topical problem has been the choice
between a unit-load system and conventional cargo handling, and if the former
alternative is opted for, which type of unit-load cargo-handling system should
be chosen - container lift-on/lift-off, RoRo, pallets via sideports, or some
other system?
The approach taken here is to consider first ship design and shipping costs
without specifying the type of cargo or package to be handled, or whether the
ships are to be engaged in liner shipping, tramp shipping or 'own shipping'. We
will gradually introduce specifications of the model by which liners will be
distinguished. Ship size is singled out as the most important design variable to
be optimized. By this we follow a long tradition of previous studies: Thorburn
(1960); Benford (1968); Heaver (1968); Erichsen (1971); Goss and Jones (1971);
Kendall (1972).
In chapter 1 we have drawn attention to the fact that the average liner
freight rate per ton-mile is some ten times higher than the average freight rate
per ton-mile of all other shipping. Half the explanation for this has already
been given: the labour cost ofloading and unloading break-bulk cargo and the
capital and labour cost of container handling is much higher than the bulk-
cargo handling cost. Also the pure hauling cost of general cargo shipping is of a
higher order of magnitude than the hauling cost of bulk shipping. No obvious
explanation for this can be pointed at. The first thought is rather that the great
difference in handleability between general cargo and bulk cargo should not
matter after cargo is stowed in the ship's hold.
5.1 SIZES OF SHIPS OF DIFFERENT CATEGORIES:

THE STATISTICAL PICTURE
The explanation why hauling costs are also much higher in general-cargo than
in bulk-cargo shipping can start by drawing the attention to one conspicuous
114 Liner service optimization
difference between general-cargo and bulk-cargo shipping: the size of ships.

In Table 5.1 the average sizes of tankers, dry-bulk carriers, container ships,
and conventional general-cargo ships are given. Since the development of ship
sizes of the two former categories has been very dynamic in recent years, a time
series of figures are presented. In the liner sector the only more important
change in ship size that has taken place latterly is the steady growth of the
average size of container ships during the 1970s.
These average figures hide, for every ship category, a very wide span of
variations in ship sizes. Oil tankers of 500 000 dwt exist, but tanker sizes range
down to below 1000 dwt, and the spread is fairly even in terms of numbers of
ships. No very pronounced concentration to a particular size range can be
discerned. The same pattern applies to the dry-bulk carriers, although the
maximum ship size in this category is half that of tankers.
Table 5.1 Average size of ships of different categories
Conventional
Dry bulk Container general-
Date Tankers' carriers' Date shipb cargo shipsb
1/1/64 26147 20284 1/7/70 11425 3268

1/1/65 28123 21046 1/7/71 12038 3266
1/1/66 30478 22553 1/7/72 13 814 3259
1/1/67 32902 23996 1/7/73 14972 3249
1/1/68 35211 25834 1/7/74 15269 3248
1/1/69 38304 26916 1/7/75 14902 3296
1/1/70 42985 27596 1/7/76 15091 3391
1/1/71 48060 28484 1/7/77 14878 3494
1/1/72 52526 29552 1/7/78 16335 3561
1/1/73 58252 30465 1/7/79 16868 3591
1/1/74 64439 31643 1/7/80 17030 3593
1/1/75 73487 32185 1/7/81 17386 3602
1/1/76 83973 32599 1/7/82 18025 3576
1/1/77 90682 33366 1/7/83 18197 3556
1/1/78 98941 34024
1/1/79 103762 34250
1/1/80 104603 34468
1/1/81 103403 34679
1/1/82 102376 35462
1/1/83 101 733 36509
Source: Various issues of Drewry (Shipping statistics and economics, H.P. Drewry, Shipping
Consultant, Ltd.)
Lloyd's Register of Shipping, Statistical Tables, 1970-83.
"Total dwt of ships greater than 10000 dwt divided by number of ships in the category.
"Total GRT of ships greater than 100 GRT divided by the number of ships in the category.
Ship size and shipping costs 115
Container ships range to over 40000 dwt while the size of the largest
conventional liners is only about one-third of the size oflargest containerships,
at least in terms of bale (volume) capacity. Below 12000 GRT all size ranges
are, however, well represented in the world liner fleet.
There are three interesting questions to answer. Why there are such great
differences between the average sizes of each category of ships? Why there is
such a wide range of ship sizes within each particular category? What
implications do these differences in ship size have for the costs of shipping? The
ship is the least production unit, the 'plant' of a shipping company. Plant size is
an interesting feature also in other sectors of the economy. A brief look at
industrial-plant-size economies will give some perspective to the present issue.
5.2 PLANT-SIZE ECONOMIES IN GENERAL

A well-known feature of practically all branches of industry is that average
plant sizes have been steadily growing, because the current 'best practice'
plants are rapidly becoming bigger and bigger. Engineering cross-section cost
studies of industrial plants show almost invariably that there are unexhausted
economies of scale of industrial plants; the main factor limiting the growth of
plant size is unsolved technological problems in connection with building very
large plants. Market size may also be a limiting factor. Generally, however, the
rate of development of big-unit construction technology determines the rate of
plant-size growth. As far as pure production is concerned, the 'biggest is also
the best'.
This principle is convincingly illustrated in a paper by Haldi and Whitcomb
(1967). Using data collected from a large number of engineering cost studies of
industrial plants, they calculated the elasticities of capital costs and labour
costs with respect to output capacity, or 'plant size'.
Their calculations fit a function of the form:
TC= constH b
where TC is cost of capital or labour, respectively, and H is plant capacity. A
value of the size elasticity, b, less than unity implies economies of plant size; a
size elasticity greater than unity implies diseconomies of plant size.
Haldi and Whitcomb (1967) produced two interesting results:
1 Most of their 221 different estimates for the elasticity of capital cost with
respect to plant size, taken from a wide range of industries, were in the range
of b = 0.6-0.8. Thus they confirmed the 'two-thirds power rule' which states
that capital costs will increase at the two-thirds power of the increase in
plant capacity. These economies of plant size are mainly explained by a
family of geometric relationships that relate the material required for the
building of equipment to the capacity of this equipment. The amount of
material required to build containers (tanks, furnaces, kettles, pipes, etc.)
depends on the surface area whereas container capacity depends on the

volume enclosed. Thus, for a pipe of given length, for example, circum-
ference will be the main determinant of material requirements, whereas
capacity depends on the cross-sectional area of the pipe.
2 More important, perhaps, they found that the principal source of plant-size
economies is the saving in labour costs. Most of the elasticities from the
sample for this cost category were below 0.4. There is no simple geometric
principle explaining this. It just appears that big units of equipment in big
plants are for various reasons markedly labour saving.
Does this general picture of plant-size economies apply to shipping? At first

sight the geometric relationships that account for economies of plant (ship)
size and the saving of labour (crew) costs seem to apply to shipping. However,
it will be demonstrated in this chapter that the analogy between industrial
plant-size and ship-size economies holds true only so far as the pure hauling
operation of ships is concerned. For the equally important handling operation
a large ship size is generally disadvantageous.
A clear indication that universal ship-size economies cannot be ruling is
that all new ships and ships on order are certainly not of the largest possible
size. Sizes of new ships for bulk cargo and sizes of new ships for general cargo
are, like the average sizes of the total existing fleets, of different orders of
magnitude, and within each category new buildings exhibit a very wide span of
sizes.
In other words, it is not, as in many branches of industry, that the relatively
small plants are the oldest, obsolete ones. Three main factors explaining why
the economies of ship size are far from indefinite can be listed in order of
increasing explanatory power, as follows.
1 The water depth of ports puts an upper limit on the draft of ships. This
constraint on ship size is relevant in the first place for oil tankers and dry-
bulk carriers.
2 The factor most frequently held up is 'cargo availability'. If there is not
enough cargo to maintain a reasonable sailing frequency with very large
ships, the ships have to be smaller. This explanation cannot be exhaustive,
however, because also on very dense routes, where frequency considerations
are of minor importance, the size ofliners is very limited compared to sizes of
ships for bulk cargo, and the variations in size of liners operating in the
dense-route sector are almost as wide as in the liner-shipping industry as a
whole.
3 The most important factor is, however, that diseconomies of ship size in the
cargo-handling operations can be as pronounced as the economies of ship
size in the hauling operation. In this respect shipping, and transport in
general for that matter, differ markedly from manufacturing industry. There
is a basic technological conflict of transport-vehicle design between cargo-
hauling and cargo-handling considerations, which has its most clear

manifestation in the choice of vehicle size.
The model for ship-size optimization that will be presented below is
constructed on the assumption that the water depth or any other port facility
constraint is non-binding, as well as that cargo availability neither imposes a
constraint on the optimal ship size. The model is therefore applicable in the
first place to the dense-route sector of the liner-shipping industry.
The implications of 'trade thinness' for optimal ship-size and liner-service
design will be analysed in chapters 6, 7 and 9. The problems of adjustments of
ships to ports and/or ports to ships will be taken up for discussion in chapter 8.
5.3 THE THREE SHIP CAPACITIES

Another difference between shipping and industry, which should be men-
tioned is that, whereas 'plant size' is synonymous to output capacity of
industrial plants in normal usage, this is not true about ship size. The definition
of the output capacity of a ship, or any other transport vehicle, is not self-
evident. There are three 'sub-capacities' involved, which can be defined as
follows.
The holding capacity (H 0): the maximum amount of cargo that the ship can
hold; the ship size is defined as the holding capacity of the ship.
2 The handling capacity (H 1): the amount of cargo that can be loaded and
unloaded to/from the ship per unit of time.
3 The hauling capacity (H 2): the number of ton-miles hauled per unit of time.
The hauling capacity is the product of the hauling speed, V, and the holding
capacity: H2 = VHo·
Most ship-optimizing models are heavily 'at-sea biased', in spite of the fact
that the costs incurred in port are generally of a comparable order of
magnitude as the costs incurred at sea.
The total capacity of a ship or any other transport vehicle is in fact a
combination of the handling capacity and the hauling capacity. Therefore, the
relationship between the total transport cost and the transport capacity of a
transport vehicle is a rather complex matter. The problem of optimal transport
vehicle capacity is a sub-problem of the general problem of optimal 'plant
design' to a higher degree than for industrial plants.
5.4 THE MODEL

Our model will focus mainly on one ship characteristic: the ship size. It is
evident that the problem of optimal ship size is by nature a sub-problem of the
general problem of optimal ship design. We will start by considering the
general problem so that the strategic simplifying assumptions made for our
particular purpose will be fully comprehended (compare Buxton, 1971).
5.4.1 The general problem of optimal ship design

On a dense route where the cargo base is sufficiently substantial not to impose
a constraint on the choice of ship design, the optimal ship for the route
concerned is defined as the ship that carries cargo of a given composition at the
lowest total cost for the shipowner per cargo ton. With this definition there is
no need to treat the total number of ships on the route as an independent
variable; given the optimal ship, the required total number of ships follows
from this and the total volume of cargo to be carried. The route where the ships
to be optimized are to be employed is specified by the cargo composition, the
directional cargo balance, the route distance, and the characteristics of the
ports of call, which can be symbolized by a vector X. The ship-design variables
to be optimized are denoted without further specification by the vector Y.
The three ship capacities, H 0, Hi and H 2> as well as the factor costs - ship
capital cost, costs of crew, fuel, stevedoring labour etc. - are determined by the
design variables, and, in the case of the handling capacity and the costs
incurred in port, by the port characteristics in addition.
Ho = Ho(Y)
Hi = Hi(Y,X)
H2=HoV(Y)
The total shipping cost can be divided into two main categories: so-called
cargo costs which are by and large proportional to the cargo quantity, and
costs which are time-proportional. To the latter category we assign also the
fuel cost. This cost is otherwise commonly referred to as a category of its own;
it is naturally regarded as miles-proportional, but, given the speed a miles-
proportional cost can just as soon be treated as a time-proportional cost.
The time-proportional costs incurred in port, and at sea, respectively, are
not completely overlapping. The cost offuel is the most important cost, which
is (practically) only incurred at sea, and lay-time proportional port charges are
only incurred Import. We therefore make this notational distinction: the ith
factor cost is in all cases incurred in port, and in some cases at sea, too, and the
jth factor cost is in all cases incurred at sea, and in some cases it is incurred in
port, too.
Total time cost per day in port = I,J;(X, Y,pJ
i
Total time cost per day at sea = I,fiY,p)

i
Total cargo cost per ton of cargo, C 3 = I, fk(X, V).
k
In the functions for the time-proportional factor costs the applicable factor
prices, Pi and Pi' respectively, are also included as arguments. The cargo costs
appear to the shipowner as various charges; from the shipowner's point of
view a distinguishing of the factor-use and the factor-price effects on costs is

less interesting in this case.
To express the daily cost in port per ton, this cost has to be divided by the
handling capacity in tons loaded/unloaded per hour, H l ' times the number of
effective work hours per day, n. The resultant cost should, finally, be multiplied
by 2, since each ton is handled twice. (No distinction is made in the model
between loading cost and unloading cost. C d2 should be regarded as an
average of these two costs.)
2L:!;(X, Y,Pi)
Cost per ton in port, C 1 = --'-i_ _ __
nH 1 (X, Y) .
The daily cost at sea can be transformed to a cost per ton in two steps. First
the daily cost at sea is divided by the hauling capacity in ton-miles per day, H 2,
times the cargo balance factor, Ji. (The factor Ji gives the ratio of the total
volume of cargo on both legs to the volume of cargo on the fat leg.) This yields
the cost per cargo ton-mile. Then this figure is multiplied by the round voyage
distance, 2D, to get the hauling cost per ton of cargo carried on the route in
question.
2DL:fiY ,p)
Cost per ton at sea, C 2 = _--oJ,---.- - -
JiH z(Y)
The total cost per ton of cargo can now be written as:
C = C 1 + C2 + C 3 .
The optimal ship design is obtained when, given D, Ji, n, and X, as well as Pi
and Pj' the design variables, Yare chosen such that the total cost per ton of
cargo, C, is minimized.
The salient feature of this optimization problem is a trade-off of handling
costs against hauling costs, or vice versa. This character of the problem boils
down to an inherent technological conflict of design of transport vehicles,
which is manifest in all modes of transport.
( a) Basic technological conflict oj transport vehicle design

The vehicles of (almost) every mode of transport engage in two main
operations, which put markedly conflicting demands on vehicle design. The
hauling-operation benefits, for instance, from a high power: weight ratio and
streamlining of the body, whereas these are useless (but costly) or actually
harmful features for the port operation, i.e. the handling of cargo (or
passengers). The reverse applies for example to handling equipment mounted
on the vehicle, a body shape that minimizes stowage efforts, and sideports to
avoid vertical movements of cargo.
A radical solution of this basic conflict is a total or partial functional
Table 5.2 Groups of ship design variables which determine the ship
capacities
Capacity determinants Capacities
Main dimensions
Main dimensions, access to holds,
cargo gear on ship, port facilities
Main dimensions, machinery, access
to holds, cargo gear on ship
decomposition of the vehicle 'unit'. Railway transport, where the locomotive

of a train of freight wagons can be uncoupled and employed elsewhere during
the loading and unloading of the wagons, tractors and trailers, tugs and
barges, are the most common cases in point. The lighter-aboard-ship (LASH)
system is a modern variant of this principle. The characteristic feature of a
container transport system is that the most time-consuming part of the
loading and unloading operations ~ the stuffing and stripping of the
containers ~ is performed when the container ship is engaged in hauling
operations. The loading on the ship and the discharge of the filled containers
take only a fraction of the time which would be required if the various articles
were stowed directly into the ship. If one regards the containers as integral
parts of the container ship, the idea of containerization is clearly another
variant of the 'tugs and barges' solution to the basic conflict of transport-
vehicle design.
Disregarding the possibility of a functional decomposition of the vehicle, the
typical result of the conflicting demands is a vehicle design which is a
compromise between handling and hauling considerations.
The ship design variables, Y can be classified in four broad groups, ship's
main dimensions, design of the access to holds, type of cargo gear on ship, and
machinery, which can be distinguished as determinants of one or more of the
ship capacities according to Table 5.2.
In choosing the main dimensions of a ship, the horsepower of the machinery
etc., the positive effect on the cost per ton at sea and the negative effect on the
cost per ton in port, or vice versa, are to be balanced.
(b) Continuous design variables and class variables

Most of the design variables are continuous, and the question is how much of
this or that design characteristic is to be chosen in order to balance the
handling and hauling costs? Some important design characteristics can,
however, not be expressed by continuous variables; it is a question of either/or.
A typical class variable is the engine type: one has either to choose a steam
engine, a diesel engine, or some other type of engine. It cannot be a question of

more or less steam or diesel.
Similarly, it is very difficult to describe fully the difference between a
container ship and a conventional general-cargo ship solely in terms of weight,
length, area, volume etc. Mathematical models for optimizing ships have to be
restricted to one broad category of ships. In the case of general cargo, for
instance, it is virtually impossible - even conceptually - to imagine that one
optimization model would answer the question whether a container ship, a
pallet ship, a RoRo ship, or a conventional general-cargo ship is the right type
in a particular situation. Separate optimization models have to be constructed
for every ship category, and the final choice is made by comparing the optimal
container ship, the optimal pallet ship etc.
One consequence for the model of this limitation is that, keeping to a given
ship type an important simplifying assumption seems justified. The cargo costs
which consist of commissions and various charges - mainly stevedoring
charges - can be assumed to be largely independent of the ship-design
variables.
5.4.2 From the general problem of ship design to an operational

theory of optimal ship size
The holding capacity is of a somewhat different character than the handling
capacity in as much that Ho is on the border of being a primary design variable
itself rather than -like H 1 and H 2 - a capacity dependent on a number of
primary design variables.
In view of the purpose of the present analysis, a reasonable approximation is
to substitute the holding capacity, H 0' for the 'main dimensions' group of
design variables and regard H 0 as a primary design variable. The justification
for this is that, given the type of ship, the hull form varies not very much, i.e. the
length, beam and draft of ships appear in roughly constant proportions to each
other.
Given the ship type, the holding capacity and the (exogenously deter-
mined) port facilities, it can further be assumed that the remaining determi-
nants of H 1 - the design of the access to holds, and the cargo gear on ship - are
confined to fairly small variations, which will be of major importance neither
for H 1 nor for H 2. Concerning the hauling capacity, H 2 it is clear that
'machinery' group of design variables is very important (for V) besides the
main dimensions, and that, for example, the installed horsepower can vary
widely. However, as will be shown in the following empirical analysis, it seems
that actually installed horsepower and the holding capacity are closely
correlated. This can be interpreted to imply that the most important
determinant of the optimal design speed is H o.
The strategic simplifying assumptions of our model as regards the
determination of the handling and hauling capacities can consequently be
summarized in this manner. To mark the step from a general ship design
optimization model to a model for ship size optimization, the symbol S( = ship
size) is replacing H o.
Ho=S
H1 =H 1 (S,X)
H2 = SV(S)
Similarly, the time-proportional factor costs incurred in port and at sea are
written nS, X, Pj) and liS, p), respectively.
To operationalize the model these relationships have to be specified.
Shipbuilding and marine-engineering cost studies have shown that an
exponential function is the most suitable form of expressing the relationships
between H 1 and H 2, and ship size, as well as between each factor cost and ship
size. To an extent this form is a reflection of the fact that certain geometric
principles relating volume, surface area, and length are at work. A good
example is the cost of painting the hull. This cost is expected to vary in
proportion to the surface area of the ship, which in turn is roughly
proportional to the two-thirds power of the ship size.
The relationship between handling capacity and size and hauling capacity
and size will therefore be expressed as:
H l(S, X) = h 1 S E1
H2 = SV(S) = h 2S E2
The proportionality constant h1 is specific to each ship type. It also reflects
exogenous factors, like cargo composition, port capital and labour productiv-
ity. Likewise, h2 is expected to differ among ship types. The exponents E1 and
E2 are the elasticities of handling capacity and hauling capacity with respect to
ship size.
The basic technological conflict between handling and hauling consider-
ations is expected to manifest itself in a comparatively low value of E l ' and in a
comparatively high value of E 2 : as the ship size is growing the handling
capacity is expected to increase much slower than in proportion to S, while the
hauling capacity is expected to increase at least in proportion to S.
The time-proportional factor costs are most suitable to write in this way,
where factor price and factor use are clearly distinguished.
fj(X, S, pJ = pjqjse;
fj(S,p) = Pjqjse j •
In the case of fuel cost, for instance, Pj represents the price of fuel, and qjse j
represents the fuel consumption per day at sea when cruising at the design
speed.
The total time cost in port per ton, C 1, and the total time cost at sea per ton,
C 2' are obtained as before, by summing over all i and j, and dividing by the
handling capacity and hauling capacity respectively, as well as inserting the

relevant route characteristics.
2DLPjQj se j
C2 = J.l~2SE2
By including the total cargo costs per ton, C 3' the total cost per ton, C, on the
route concerned can, finally, be written in this form:
(5.1)
Our hypothesis is that economy of ship size is enjoyed in the hauling

operation, i.e. that the hauling cost per ton (the second term) is decreasing with
increases in ship size. This will be the case if ej - E2 < 0 on balance. On the
other hand, we expect that diseconomy of ship size is suffered in the handling
operation, i.e. that the handling cost per ton (the first term) is increasing with
increases in ship size. This will be the case if ei - E 1 > 0 on balance.
5.5 ESTIMATION OF SHIP SIZE ELASTICITIES

OF HANDLING AND HAULING CAPACITIES
AND FACTOR COSTS
The values of e i and ej , on one hand, and of E1 and E 2 , on the other hand, are
equally important for the issue of (dis)economies of ship size. The relationship
between the various factor costs and ship size has been the subject of a number
of engineering and economic studies. The least-studied relevant relationship is,
strangely enough, that between the handling capacity and ship size, which, as it
will appear, is of particular importance for the whole issue of ship size. A
notable exception is Professor Thorburn's (1960) study, which includes a
tramp-shipping model, in which the observed (by him) markedly diminishing
returns to ship size in the handling operation is the strategic ingredient.
In this section we will summarize the empirical evidence with a bearing to
the size-elasticities in question that has been produced in previous studies, as
well as present the results of the empirical tests of the relationships of our
model, which we have been able to make.
5.5.1 The size elasticity of the handling capacity

The time it takes to fill or empty a bathtub of water is proportional to the
volume of the tub, given the capacity of the waterpipe or the discharge pipe.
The loading or unloading speed in such a case = const So, where S is the size, or
holding capacity of the tub. This equation implies markedly diminishing

returns to size: thus two tubs that are each half as big, but together hold the
same amount of water as a large one can be filled and emptied in half the time.
There are transport vehicles which suffer similar diminishing returns in their
loading and unloading operations. A bus equipped with one entrance and one
exit door is a case in point. Freight vehicles are seldom that uneconomically
designed. The number of inlets/outlets is, as a rule, increased as the size of the
hold becomes larger. The question is: At which rate in relation to the increase
in size?
For geometric reasons, it is unconceivable to make the number of
inlets/outlets increase in proportion to the volume of the hold. At the very
most, they might increase in proportion to the surface
2
area of the hold. In that
case the handling capacity could be = const S3.
This would still imply diminishing returns to size in the handling operation
(although not necessarily diseconomies of size, as this also depends on the cost
of the vehicle as a function of S). A ship that normally loads and unloads its
cargo over just one side is not likely to exhibit a size elasticity of the handling
speed nearly as high as two-thirds.
These principles were confirmed by Thorburn, who studied tramp ships,
and found that loading and unloading capacity increases considerably less
than proportionally to the surface area of the ship. His results confirmed in fact
an hypothesis that handling speed is roughly proportional to the length of
ships. The rationale for such an hypothesis is that the number of hatches (and
cranes) is, on average, proportional to length. Provided that the ship
dimensions are in constant ratios to one another, the handling capacity
becomes proportional to the one-third power of ship size; that is, handling
capacity = hIS! where the proportionality constant hI takes different values,
depending on the ship type and exogenous factors like the productivity of port
capital and labour.
Evidence from the data of loading and unloading performances of ships in
the ports of Haifa and Ashdod supports the 'one-third power formula', at least
so far as all-purpose tramps and cargo liners are concerned. The relationship
between handling capacity and ship size was estimated by applying regression
analysis on cross-section data from these ports. Alternative specifications of
the equations were tried and two different samples pertaining to different years
and different groups of commodities were analysed.
It should be pointed out that the relationship between handling capacity
and size was specified assuming all other variables to be constant. Our sample,
consisting of different ships calling at the ports investigated over a given period
of time, clearly contains the influence of other variables. We did not attempt to
construct a model that includes all variables that may affect handling
performances, like weather conditions, port congestion, 'priorities' in loading
and unloading, and lot size of cargo. This is expected to be reflected in the
goodness of fit of the equation that is used. The magnitude of the size
coefficient, however, should equal the 'true' coefficient, if other possible

explanatory variables are uncorrelated with the size variable.
The first sample included ships which loaded citrus fruit in the ports of Haifa
and Ashdod during 1969/70. The sample contained 156 observations of 17
different sizes of ships. Only ships that were fully loaded in one of these ports
were included. The source of the data is Shipping Report, The Israel Citrus
Marketing Board, 1969/70. The selection of this sample was affected by the
following considerations.
The choice of a homogeneous commodity that is loaded by conventional
means made it possible to exclude variations in handling speed that are
caused by the commodity type.
2 The effect of size on handling speed is expected to be more pronounced the
higher the proportion of cargo handled in each port to the total size of the
ship. As long as just a part cargo is handled in each port, which is not spread
over all holds, hardly any tendency is likely for bigger ships to achieve
higher handling speed than smaller ships. We therefore confined our sample
to ships that were fully loaded in one of the two ports investigated - either
Haifa or Ashdod.
Our data record the port time as from the time of 'commencement of
loading' until the time of 'commencement of sea passage'. This measure oftime
includes nights, holidays, strikes, work stoppages, shiftings, seaclear and
pilotage, all in addition to the actual handling time.
The result of regressing total handling time (T) on ship size, using the log
form, was:
log T = log2.3 + 0.7610gS iF = 0.28
(0.1)
where S is the dwt of the ships. The number in brackets is the standard
deviation of the coefficient. While iP is quite low, the size of the coefficient is
highly significant. Dividing through by S and taking the inverse of the
expression, we find that the elasticity of the handling capacity with respect to
size, (Ed, is 0.24. This is not very far from the 'one-third power formula'.
The ports of Ashdod and Haifa also collect data on the loading and
unloading time of general-cargo ships. The data refers to the whole ship load
and does not distinguish between different types of commodities.
The sample that was used contained ships that arrived at the port of Haifa
during the second half of 1972. Only vessels discharging cargo were
considered, and only those that discharged more than 80% of their dwt
capacity were included. The sample includes 122 observations, each arrival is
taken as one observation.
Regressing total discharge time on size, using a log form, we get:
log T = - 0.783 + 0.80810g S iF = 0.54
(0.107)
where, as before, T is the total discharge time, and S is the dwt of ships. The
number in brackets is the standard deviation of the coefficient.
The resulting elasticity ofthe handling capacity with respect to size of 0.19 is
of the same order of magnitude as our previous result. The goodness of fit of
the equation shows a substantial improvement: jp = 0.54.
We do not consider these empirical results as a conclusive evidence of the
handling-size elasticity in ports. For one thing th:-y run contrary to the only
other study that we are aware of - the one by Robinson (1978) - who found for
the port of Hong-Kong that turn around time for bigger ships is in fact smaller.
To make a more concrete argument, more evidence is required from other
ports in the world. In particular, the handling-size elasticity of container ships
is still a question mark. More information on this - for ports in South East
Asia and South Africa - will be found in chapter 7, as a part of our route case
studies. Here we will supplement the previous results, with more empirical
effort towards estimating the handling-size elasticity of container ships in the
port of Haifa.
The data we investigate pertain to container ships that called at the port of
Haifa from January 1980 until December 1981. During this period a total of
700 ships called at the port. After excluding ships that handled less than 60% of
their TEU capacity, we were left with sixty-five different container ships which
made 113 calls during the period sampled, and ranging in size from 98 to 2436
TEUs. Three different periods were distinguished in our analysis and a separate
regression equation was run for each period. The three periods were, (a)
January 1980 - July 1980, (b)January 1980 - December 1980 and (c) January
1980 - December 1981. The longer the observation period, the more dis-
turbances from other factors can be expected which may bias the estimation.
This expectation was borne out in the results of the three regression equations,
which are summarized below.
log T = - 1.346 + 0.809 log S

(0.29)
Number of observations: 56 calls

jP: 0.285
Handling-size elasticity (E 1): 0.l9
log T = - 1.203 + 0.785 log S
(0.29)

R2: 0.263
E 1: 0.242
log T = - 0.537 + 0.577 log S
(0.28)

iP: 0.183
E1: 0.423
On the basis of these results it can be concluded that the results obtained for
general-cargo ships by and large carryover to container ships. The handling-
size elasticity falls roughly in the same range as is expected for break-bulk
ships. We have comparatively less confidence in the result of the third
regression.
The proportion of variations explained by the equations, iF, is low for all
three equations. This should be attributed to the large number of random
influences that affect port operations - number of cranes available at the time
ofloading, differences in the handling speed due to the exact berthing location
of the ship, number of crew, strikes, and weather conditions. As long as the ship
size provides a systematic explanation of the variations in the handling time,
all these random variations can be assumed to be commensurate to this
systematic component.
In our effort to find some general principles ofliner service optimization, we
will make use of the relation HI = hISEl, where a lower limit for the value of El
seems to be about 0.2 and a likely upper limit in the neighbourhood of the
original value of 0.3 implied by Thorburn's principle. In specific case studies,
where data are available, a separate estimate of this relation would be
desirable.
5.5.2 The size elasticity of the hauling speed

A high design speed is very costly, both in terms of required horsepower and in
terms of fuel consumption. However, to achieve a certain speed the required
horsepower is less than proportional to ship size. This phenomenon is
explained by the principle that the resistance ofthe water against the ship's hull
does not increase at the same rate as the volume of the hull. The cost of the
machinery per effect unit also declines. It pays to increase the design speed, as
ships get bigger, also for this reason.
According to a time-honoured rule-of-thumb of naval architects, the design
speed should increase by the square root of the length of the ship if the block
coefficient and the Froude Number are held constant. In ship building this old
rule-of-thumb is called the 'inch rule'. It implies that V = const st.
Our estimates of the size elasticity of the hauling speed adhere to the 'inch
rule' so far as general-cargo ships are concerned. Three samples from this ship
category were taken, and the regression of speed on ship size gave very similar
results. As can be seen from Table 5.3, the three general-cargo ship size
coefficients are almost identical and all are highly significant. Applying the
same regression to tankers and bulk carriers produced different results.
The size elasticity of the hauling speed of tankers is close to zero. The size
coefficient is significant at the 1%level, and the equation (last row in Table 5.3)
Table 5.3 Results of regressing speed on size: log V = log canst + rx log S + log e
Number of
Ship type observations log canst log S iP
General cargo ships' 50 1.3 0.16 0.42
(1.02)d (0.04)
General cargo shipsb 48 1.19 0.17 0.35

(1.01) (0.034)
General cargo shipsc 34 1.2 0.16 0.54

(0.026)
Dry bulk carriers' 50 2.59 0.013 0.015

(1.36) (0.01)
Tankers' 50 2.18 0.05 0.46
(0.08) (0.008)
·Source: World Ships on Order, February 1975.

bSource: Shipping Statistics and Economics, H.P. Drewry (Shipping Consultants) Ltd. Various
issues, February-April, 1975.
cA sample of ships of Zim Navigation Company taken in February 1976 by Nir Serlin.
dFigures in parentheses are standard deviations of the coefficients.
explains 46% of the variations in the design speed. In the case of dry-bulk
carriers, no significant relationships were found between the design speed and
size.
We can summarize our findings by the following interval for values of the
ship-size elasticity of the hauling capacity (= SV), where it seems that values
applicable to general-cargo ships are to be found close to the upper limit, and
values applicable to bulk-cargo ships (including tankers) are to be found close
to the lower limit
where 1.00 < E2 < 1.17.
5.5.3 The size elasticities of the major factor costs

In the shipbuilding literature calculations of ship-size elasticities of various
individual input requirements are common. From this source a complete list of
ship-size elasticities of all major factor costs is, however, difficult to compile.
Shipping economists - notably Thorburn (1960) - have studied the relation-
ship between shipping costs and the size of ships of different types using a
somewhat different breakdown of the costs than is usual in engineering-cost
studies. The general pattern, if not exactly the size elasticities, of the
dependence on ship size of the main accounting cost items - capital cost,
operating costs (or 'day costs'), and bunker cost - is fairly well documented in
the shipping-economics literature. We have contributed some further empir-
ical evidence of the size elasticities of these costs. A disadvantage of adhering to
the rather aggregated accounting cost categories is that the real sources of the
observed economies of ship size will remain hidden to some extent. In the
following discussion we have tried to go into more detail in some respects by
drawing on the results of some marine-engineering studies, too.
(a) Capital costs of ship and cargo

The capital cost of the ship and the cargo aboard the ship per day can most
adequately be regarded as an opportunity cost. An alternative use of the ship
which may be interesting for the owner is, for example, to charter out the ship.
In this case the ruling-time charter rate is the ship's capital cost. In another
case the best alternative use can be to employ the ship in another liner trade.
The net earnings per day foregone by not seizing this opportunity is the
ship's capital cost in that case.
The point is in the present connection that at the time when the ship was
ordered, the expected total capital cost defined as above, will under
competitive conditions coincide on average with the cost of building the ship.
The following discussion is therefore concerned with the relationship between
the shipbuilding cost and the ship size.
The opportunity cost of the cargo aboard the ship is traditionally calculated
as the cost of interest of the goods making up the cargo. Either the exporter or
the importer of the goods will suffer a delay in sales revenue corresponding to
the time oftransit. This view ofthe transit-time cost of the cargo will do well for
the present purpose. In chapter 7 a more penetrating discussion of this matter
is presented. Note also that this cost is indirectly borne by the shipowner. The
wareowners' interest costs will be reflected in the freight rates that they are
prepared to bear. The ship-size elasticity of the interest cost of the cargo is
obviously unity, since the ship size is defined as the holding capacity of the
ship. The size elasticity of the building cost of the ship is a considerably more
involved matter.
The most well-known geometric principle with a bearing to shipbuilding
cost is the 'two-thirds power rule'. The holding capacity of any container is
equal to the volume, whereas the construction cost tends to be proportional to
the surface area of the container, no matter whether it is box-shaped, ball-
shaped or has the form of a ship's hull. There are, however, many more aspects
to the matter of the relationship between ship capital cost and ship size.
The main components of capital costs are, (a) the hull costs, and (b) the cost
of the propulsion machinery. The former is about two to three times (in the
case oflarge bulk carriers and tankers) the latter. The hull cost is traditionally
divided into hull engineering, outfit, and steelwork, of which the latter can
make up almost one-halfthe total hull cost, although it varies with the price of
steel.
The least-important source of the economies of size is, in fact, steel
requirement. It is true that the area of the enclosed space varies approximately
as the two-third power of ship size. This potential sa ving is, however, offset to a
large degree by the need for thicker steel plate as ships get bigger. On the other
hand, savings in shipyard cost of labour of erecting the hull structure are
possible, as larger elemental pieces of metal are used and larger subassemblies
employed for bigger ships.
Engineering studies of shipbuilding economies of ship size indicate that it
is the labour input, rather than the input of material, that decreases per ton
of dwt as ships get bigger. Erichsen (1971) quotes a number of studies giving
formulae for the labour and material costs of hull engineering, outfit, and steel
structures that imply that the size elasticities of the labour inputs are in the
0.6-0.7 range, whereas the size elasticities of material requirements exceed
0.8 and even, in the case of the steel structures of container ships, 0.9.
To attain a certain speed, the horsepower requirement of the machinery is
less than proportional to ship size. This advantage of size is often traded off
against higher speed; but as the construction cost of the machinery per effect
unit seems to decrease in a wide range, the cost of machinery contributes to the
size economies in capital costs, even if installed horsepower is commensurate
with the size of the ship.
This can be exemplified by means of the shipbuilding rule-of-thumb that
makes horsepower (HP) proportional to the two-third power of the 2
displace-
ment, multiplied by the cube of the design speed; i.e. HP = const S3 V 3 • Given
the speed, it is clear that substantial savings in horsepower per dwt ton can be
realized. Only a minute increase in speed will, however, easily offset this saving.
According to Chapman (1969) the elasticity of the capital cost of a diesel-
engine plant with respect to the brake horsepower equals 0.614. As for steam
turbine plants, Benford (1968) gives a formula in which the capital cost is
proportional to the shaft horsepower raised to the power of 0.6.
The results of our empirical analysis suggest that the sum of all the various
economies of ship size in shipbuilding cost happens on balance to adhere to the
'two-thirds power rule'.
Our sample consisted of fifty observations of the contracted prices of bulk
carriers taken from various issues of Drewry. Only ships that were due for
delivery in 1976/77 were included, so that inflation was neutralized.
Regressing the costs of new building on the size of the ship, using an
exponential form of the regression equation,
log (building cost) = - 4.236 + 0.655 log S iP = 0.34
(0.818) (0.088)
where S is the deadweight tonnage ofthe ship The results clearly conform with
the 'two-thirds power rule' but there cannot be a single rationale for this. The
result should be interpreted in this way. There are more or less marked
economies of ship size in the costs of machinery, hull engineering, outfit,
steelwork etc., and as a whole it seems that the ship capital cost is proportional
to the two-thirds power of the ship size. This result has been confirmed by a
number of other studies (see the summary below).
(b) Operating cost

Within the aggregate of operating cost, mutually counteractive forces are
concealed. So far as the development of costs with increases in ship size is
concerned, the single, most important source of size economies are crew wages.
The manning requirement is determined by a fairly fixed number of ' tasks'. The
extent of each task will increase much more slowly than in proportion to ship
size. This is the same principle, basically, as that exemplified by the simple fact
that 'there is no need for more than one driver, however big the car'.
Automation in shipping will eventually make crew wages a fixed cost with
respect to ship size. Goss and Jones (1971) fix the crew size of dry-bulk carriers
at thirty-eight men for all ships bigger than 25000 dwt (the biggest is 200000
dwt). Due to automation and reorganization of the functions of the crew,
newly built large bulk ships, container ships and tankers have crews of
eighteen to twenty-one men. Erichsen (1971; p.192) gives the elasticities of the
crew cost with respect to size as 0.10 for container ships and 0.03 for tankers,
claiming that these values are applicable to ships 'having a level of automation
which is practical today'.
Crew cost is counterbalanced by maintenance and repair costs and
insurance, which together are of an order of magnitude comparable with the
crew cost. For smaller ships, crew cost is normally the larger item, but it is the
smaller item for bigger ships. The size elasticity of maintenance and repair cost
is roughly the same as that of the total capital cost. The size elasticity of
insurance is higher for very large ships than for ships of moderate size.
Erichsen has calculated this size elasticity as 0.7 for container ships and 1.25
for tankers exceeding 100000 dwt.
Our empirical analysis of crew costs is based on data of thirty-four ships of
Zim Navigation Company. Information on costs was taken from the
company's accounts. The regression result is summarized below:
log (crew cost) = log 12.8 + 0.03 logS R2 =0.003.
(0.10)
The size elasticity of the crew cost is very small (close to zero) as predicted.
The size coefficient, however, is certainly not significant and the proportion of
variations explained by the equation is trivially small. Our results, therefore,
did not point at any significant relationships between size and crew costs.
We have also explored the relationships between all operating costs (except
fuel) and ship size on the same sample. The result was:
log (operating cost) = log 10.5 + 0.43 log S iP = 0.41.

(0.09)
The explanatory power of the equation is now much greater, and the size
coefficient is highly significant. The ship-size elasticity, 0.43 adheres closely to
the result of other studies (see below).
( c) Fuel cost
In every marine engineering study that we have consulted, fuel consumption
and installed horsepower are assumed to be proportional. Economies of ship
size in the fuel consumption can therefore be expected to be enjoyed on
account of the fact that for a given design speed the horsepower requirement is
somewhat less than proportional to ship size.
This effect can be difficult to isolate as, so far as general-cargo ships are
concerned, the design speed is normally not constant with respect to ship size.
Normally the observed relationship between fuel consumption and ship size
would reveal the total size elasticity of fuel consumption.
We have estimated the partial elasticity of the fuel consumption with respect
to ship size by selecting a sample of ships of different sizes of Zim Navigation
Company in which the variations in design speed are minute. We have
regressed the fuel costs recorded in 1976 on ship size, with the following result:
log(fuel cost) = log 6.25 + O.72logS iP = 0.74.
(0.07)
( d) Port charges on the ship

The most important charges payable by shipping lines in port are the
stevedoring charges. These are assigned to the cargo costs.
The port charges intended to recoup the port authorities' cost of berthing
facilities, cranes etc., from the shipowners are in total many times less than the
stevedoring charges. These port charges are levied partly on the cargo
loaded/unloaded by the ships, and partly on the ships themselves in one way or
the other. The former category of port charges can obviously be referred to the
cargo costs. The latter category of port charges can be further divided into, (a)
time-proportional berth occupancy charges, and (b) charges on the ship which
are independent of the lay time of the ship.
Concerning group (a) the question is, how the charge per unit of time is
differentiated between different ships? In a large majority of cases some
measure of ship size - most often the net registered tonnage (see Table 5.4) - is
the basis of differentiation. In this majority case the size elasticity of the port
charges on the ships can be taken to be unity. If the berth occupancy charges
are differentiated according to the length of ships which is the case in some
ports, the size elasticity of these charges is as low as one-third.
Table 5.4 Percentage distribution of cases where port charges on ships were based on
Length Draft
N arne of charges GRT NRT of ship of ship Other"
Port time due on ship 21 68 5 6 100

Aids to navigation 8 82 100
Pilotage 28 38 17 100
Towage 38 12 100
Berthing/unberthing 25 20 5 tOO
Berth occupancy 18 42 30 tOO
Source: Port Pricing; Report by the UNCT AD Secretariat, TD/B/C.

4/110, United Nations, New York, 1973.
"The 'other' basis includes flat charges per operation, and, for example, per hour of tug use for
towage.
The UNCT AD secretariat has made a survey of the port-charging practices

in over 100 ports of the world. Table 5.4 summarizes the findings of the survey
as regards the bases of differentiation of both time-dependent and time-
independent port charges. In a majority of cases the berth occupancy charges
were time proportional.
The time-independent port charges on the ship are typically paid for specific
services like aid to navigation and towage, but can also be imposed on very
general grounds; the so-called 'port dues on the ship' in the UNCT AD survey
were found to be time-independent in more than half the cases.
The bases for differentiation between ships of the time-independent port
charges vary a great deal from one port to another. One common basis of
differentiation is, as in the case of time-proportional charges, the GRT or
another measure of ship size. In that case the charge can be referred to the
cargo costs, because, on the assumption that the total cargo and the ship size
are proportional, time-independent charges of the ship, which are differen-
tiated according to ship size will, in effect, be proportional to the tons of cargo
handled.
Normally, however, there is a final pot ofleft-overs - port charges which can
be assigned neither to the time-proportional costs nor to the cargo costs. These
charges can be time-independent flat charges (i.e. invariate ofthe type or size of
ships), or time-independent charges, which increase less than in proportion to
the ship size.
These 'left-overs', which will be referred to as flat port charges, are so
relatively insignificant that they could very well be disregarded in the model.
However, there is another analytical problem associated with the model,
which so far has not been mentioned, which, as a matter offact, becomes easier
to handle if the flat port charges are taken into account.
( e) Time-independent, flat port charges and transitory time

So far we have implicitly assumed that the time of service of a ship per year is
spent either in handling or in hauling operations. This may seem to neglect so
called 'transitory time'. Port time typically includes a fixed (but subject to
random variations) portion and a portion which is approximately propor-
tional to actual cargo-handling time. The fixed port time is here called
transitory time, because it occurs between the time of the start or the end of
handling activities and the time of proper hauling activities. (The fact that
handling operations do not go on 'round the clock' does not matter as long as
the time of stoppages etc., is proportional to effective cargo handling time in
the same way as nights are proportional to work days.)
The models would become less handy if a third item of the service time of
ships were to be included. A 'trick' which avoids this complication without
doing much harm to the realism of the model, is to refer transitory time to at-
sea time. All costs incurred at sea except fuel costs are also incurred during the
transitory time in port. By the following procedure this inaccuracy will be
eliminated to some extent.
The model would likewise be less handy if costs were not time-proportional
or proportional to tons handled, like the cargo costs. The flat port charges
which have been left over, constitute such an irregular item. However, by
assuming that the flat charges for pilotage, towage, etc. are incurred during
transitory time, the cost per hour of transitory time becomes close to the cost
per hour of progress-at-sea time.
Therefore, by simply adding to the distance, D, an increment that - in
miles - corresponds to the duration of transitory time, we get rid of two
problems at a very small cost in terms of reduced precision. The time at sea on
each leg is thus to be regarded as the time from stowing the last ton of cargo in
the port ofloading to the placing on the quay of the first ton of cargo in the port
of discharge.
( f) Summary of the analysis of the size elasticities of the factor costs

Our findings as to the ship-size elasticities of the time-proportional costs are
summarized in Table 5.5. There some comparable results of four other
representative studies are included.
As can be seen the general agreement is quite striking so far as the capital
and operating costs are concerned, even between different ship types. The
lowest size elasticity is in all cases exhibited by the operating costs, and ship
capital cost comes in second place.
Our estimate of the partial size elasticity of the fuel cost is consistent with the
findings as to dry bulk carriers and tankers of Goss and Jones (1971) and
Heaver (1968), but deviates a great deal from Thorburn's (1960) result. The
explanation is that dry-bulk carriers and tankers show very small increases, or
Table 5.5 Ship size elasticities of capital cost, operating cost, and fuel cost
Capital Operating Fuel cost

cost cost (for
Ship type (except fuel) propulsion)
Tramps
(Thorburn) 0.67 0.4 1.00
Liner
(Getz et al.) 0.6 0.6
Dry bulk carrier
(Goss and Jones) 0.7 0.4 0.8
Tanker
(Heaver) 0.6 0.3 0.6
Authors' estimate
(regression results) 0.6 0.4 0.72
no increase at all, as we have found in the case of tankers, in design speed with
increases in ship size. The considerably higher size elasticity given by
Thorburn (1960) is not a partial elasticity, and the design speeds of the ships in
his sample were increasing with growing ship size according to the inch rule,
which works to raise the total size elasticity of the fuel cost quite substan-
tially.
The wide span of the size elasticities of the berth occupancy charges given in
the bottom row gives an exaggerated impression of great variations. In most
cases unity is the applicable value. However, it is reported that some ports
differentiate the occupancy charges according to ship length rather than
according to ship size.
5.6 ECONOMIES OF SIZE AT SEA - DISECONOMIES

OF SIZE IN PORT
We have now the required information about shipping costs and ship size for
fulfillment of one main purpose of this chapter - the demonstration that
economies of ship size are enjoyed at sea, while diseconomies of ship size are
suffered in port and that the choice of optimal ship size involves a balancing of
the cost per ton at sea and the cost per ton in port.
By applying the estimated size elasticities, ei,ej'£l and E2 to the total cost
per ton of equation (5.1), the following conclusions can be drawn.
The difference ej - E2 is negative for all cost items. This is a result of our
finding that £2 is greater than 1, while the values of ej range from about 0.4
to 1.0. The total hauling cost per ton, consequently, decreases as ship size
increases.
2 The difference ei - E 1 is positive for all cost items. This is a result of our
finding that E 1 is in the 0.2-0.3 range, while the values of ei are in no case less
than 0.3. Since cargo costs are invariant to ship size, it is clear that the total
handling cost per ton increases with ship size.
We are in a position now to compare the nature of economies of 'plant size'
in shipping with that in industry in general.While plant size can unequivocally
be defined as plant-output capacity, ship size is certainly not synonymous with
the capacity of shipping services. Ship size equals only to holding capacity. It is
instead the handling and the hauling capacities which correspond to the plant
output capacity. The elasticities of total capital cost and total operating cost
will, therefore, be calculated with respect to HI and H 2, and a comparison will
be made with the previously cited elasticity values derived by Haldi and
Whitcomb (1967). The H I-elasticity of the ith factor cost is given by
the ratio e 1/E 1 and the H 2-elasticity of the jth factor cost is given by the
ratio ej /E 2 •
From the discussion ofthe previous section it follows that a size elasticity of
the capital cost of 0.6 and a size elasticity of the operating cost of 0.4 are
representative. The size elasticities of the handling capacity, E l' can be
assumed to be in the 0.2-0.3 range, and the size elasticity of the hauling
capacity, E2 ranges from 1.17 down to unity.
Recalling that Haldi & Whitcomb (1967) have found that the capital-cost
elasticity with respect to industrial plant capacity is concentrated in the 0.6-
0.8 range, and that the labour cost elasticity with respect to industrial plant
capacity is normally less than 0.4, it is striking how typically ship capital and
operating costs develop with respect to the hauling capacity, H 2' in the range
of 0.57-0.67 and 0.34-0.4 respectively and how atypically these costs develop
with respect to the handling capacity, HI' 2-3.33 and 0.2-2 respectively.
It should be mentioned that crew costs, rather than operating costs, would
be more comparable to the labour costs calculated by Haldi and Whitcomb
(1967). The elasticity of crew costs are still lower than that of ship-operating
costs. As for fuel costs, Haldi and Whitcomb (1967; p. 192) concluded that 'unit
costs for utilities (fuel, electric power, etc.) sometimes decline slightly with size
increases, because larger furnaces, motors and other such equipment units
perform more efficiently than smaller ones'. This assessment also agrees well
with our findings regarding the elasticity offuel cost with respect to the hauling
capacity.
5.6.1 Some reflections about the economies and diseconomies

of size in port of bulk carriers and tankers
The key aspect of our model of ship-size optimization is that the size elasticity
of the handling capacity, E 1 , is comparatively low, lower, in particular, than all
values of ei .
The authors' estimates of the value of E 1 apply to conventional general-

cargo liners and tramps. We have no evidence of the value of E1 for bulk
carriers and tankers. Can it be assumed that diseconomies of size in port are a
valid proposition also for these ship categories?
Some authorities contend that a size elasticity of 0.3 is too low for bulk
carriers and tankers. Goss (1970), in a study of bulk carriers, goes as far as
saying that 'at the moment I do not think we can even say that most big
ships take longer to turn round than most of the smaller ones; for big ships
often get the better berths, while small ships may be relegated to the older
ones'.
An implicit premise of the theory that handling capacity is proportional to
length is that each hold is worked at a constant speed irrespective of ship size.
It is only by variations in the number of holds that ships of different size exhibit
different overall handling speeds. This premise may be qualified on two counts.
Two forces - working in opposite directions on handling capacity - should be
mentioned.
First, as each hold is wider and deeper the bigger the ship is, the crane cycle
will be longer the bigger the ship is. This would tend to reduce the handling
speed per crane. On the other hand, the incentive to improve the handling
performance will be greater, the greater the potential cost savings are. The
question is how strong this incentive is in different cases, and how costly it is to
improve handling performances. Goss and Jones (1971) observe in discussing
the economies of size in bulk carriers that 'it is worthwhile providing better
equipment on the berths they are to use, and this seems to be supported by the
experience of tanker owners, who install more powerful pumps in the larger
ships, so that their loading and discharging rates may be roughly propor-
tionate to their size, and their turn round times much the same as the smaller
ships'.
The implications of these points may be elucidated by considering the
expression for C 1 (the indirect handling cost per ton, i.e. total handling costs
per ton minus direct stevedoring charges)
The first point, that the biggest ships get the best berths, would ceteris
paribus raise E 1 above the value of 0.3 predicted by the theory of length-
proportional handling capacity. It would, however, not leave all other
elasticities in the expression for C 1 unaffected.
It is unlikely that the big ships receive higher-quality port service for
nothing. It should be reflected in the port dues - in 'cranage' in particular -
which would raise the value of ei pertaining to port charges in the expression
above.
The second point, that the ships themselves tend to be equipped such, or
constructed in a way, that offset the basic loading and unloading diseconomies
of size, should also be reflected in the value of e i , besides the value of E 1. The
size elasticity ofthe capital cost should go up together with the size elasticity of
handling capacity.
The handling operation does present the greatest problem for research into
optimal ship design for the simple reason that ports around the world are so
very different. The hauling operations of ships do not depend very much on
exogenous circumstances but this is certainly not so with regard to operations
in port. Many, therefore, felt understandably reluctant to go very deep into the
dependence of the handling capacity on ship size. 'I doubt whether any general
relationship· .. can be specified and certainly not in a simple way. The area
could perhaps be explored by the use of multiple regression analysis, but
systematic data on ship turnround is not published··· ' (Goss 1970).
Something has to be assumed about port time, however, in order to produce
a complete cost estimation. The almost unanimous choice seems to have been
to assume turnround time to be constant, i.e. independent of ship size. This
assumption implies that there are significant economies of size also in the
handling operation. This implication does not seem to be fully appreciated;
constant port time is supposedly considered to be the most 'neutral'
assumption. Constant port time means that the handling cost per ton is falling
as ship size is increasing because e i - E 1 is negative for all i.
An alternative, equally simple, and more realistic provisional convention
would be to assume the indirect handling cost rather than the time in port to be
constant. This would mean that the weighted average of e i - E1 is assumed to
be equal to zero. In the absence of systematic data for handling speeds of
tankers and dry-bulk carriers this seems to be a preferable assumption to base
a cost model on.
A great deal of research is required to establish the relationship between
handling capacity and ship size. It would be very interesting to examine if
cargo-handling productivity improvement have been 'size-biased' to such an
extent for tankers and bulk carriers that the point is reached where
diseconomies of size in port no longer apply. Finally, it should be pointed out
that port charging practices play the role of 'the joker' in this game. To some
extent it is up to the port authority whether port diseconomies of ship size will
be realized or not by the shipowner.
5.7 OPTIMAL SHIP SIZE

The optimal ship size is obtained by trading off economies of size in the
hauling operations with diseconomies of size in the handling operations.
The model can be given the standard engineering cost balancing form
shown in Fig. 5.1.
The optimum ship size is found at the point where the slope ofthe handling-
C - C3 = Total cost per ton

minus cargo costs
C1 : Handling cost per ton
Cz : Hauling cost per ton

I
Optimal I
Shipsize~
I
Ship size
Figure 5.1 Handling cost and hauling cost trade-ofT.
cost curve and the slope of the hauling-cost curve have the same absolute
value. Algebraically this balancing point is reached by setting the derivative of
the total cost per ton, C, with respect to S equal to zero. From equation (5.1)
the following optimum condition is thus obtained.
Given all parameter values - the route characteristics, and the factor
prices - the optimal ship size, S*, can be solved from (5.2).
5.8 ANALYSIS OF THE EFFECT ON OPTIMAL SHIP SIZE OF

PARAMETER CHANGES IN THE MODEL
The second main purpose of this chapter is to explain the wide variations in
ship size in a cross-section of trades all over the world.
A third purpose is to indicate then main factors of influence on the rates of
growth of the average size of different ship types, and outline an extension of
the present model towards a model for prediction of ship-size growth.
For the cross-section analysis the class of parameters, which we have called
'route characteristics' (including the cargo characteristics) is relevant, and for
the analysis of developments over time the factor prices and productivity
coefficients are the parameters of prime interest.
5.S.1 Cargo and route characteristics and optimal ship size

The route characteristics included in the model are: the directional cargo
balance, p,; the average handleability of cargo and/or the port productivity,
which are both incorporated in hI; the number of work hours per day
in port, n.
The effect of a change in the route characteristics on the optimal ship size is
shown by calculating the partial derivative of optimal ship size (S*) from
equation (5.2) with respect to D, p" n, and hI. On the basis of our results that
ei - El is positive and ej - E2 is negative, for every i andj, the following signs
of the partial derivatives can easily be shown to apply.
Positive derivatives
as* as* as*
->0
aD ah 1 > 0, an >0.
Negative derivatives
as*
ap, <0.
Distance, as expected, has a positive effect on ship size, which can be explained
in diagrammatical terms by the aid of Fig. 5.1. An increase in D shifts the C 2 -
curve proportionately upwards. The slope ofthe C 2 -curve, therefore, becomes
steeper, and the point of the minimum of the C-curve will move to the right in
the direction of increasing the ship size.
An increase in the average handleability of cargo, or the level of port
productivity per hour, and an increase in the total number of hours of work per
day in port will have the same positive effect on ship size. Diagrammatically,
an increase in hi or n will shift the C I-curve proportionately downwards so
that its slope becomes flatter, which will move the minimum point of the C-
curve to the right.
The cargo balance in the trade is a factor which plays a perhaps somewhat
unexpected role for the optimal ship size. The more balanced the route is the
smaller the optimal ship size tends to be. An increase in p, will shift the C 2 -curve
downwards so that its slope becomes flatter, which will move the minimum
point of the C-curve to the left. In Part III we will return to the issue of optimal
ship size and the cargo balance. We will show that in an unbalanced trade,
there are two optimal ship sizes: one larger size of ships, which load cargo only
in the fat direction and sail in ballast on the meagre leg, and another smaller
size of ships, which sail fully loaded on both legs. However, it will be shown
that this division of labour will be realized only provided that the levels of
freight rates in the two directions are disparate in accordance with the
disparate levels of the marginal costs of shipping. As this proviso is not fulfilled
in liner trades, the two optimal sizes in one and the same trade cannot be
observed in reality.
The degree of cargo imbalance is a very interesting aspect in the present
connection although it cannot be claimed to be of central importance for the
general issue of optimal ship size.
The relative strength of the partial effects of the different route character-
istics on optimal ship size can be measured by the respective partial elasticities.
It is easily shown that the absolute values of the partial elasticity of S* with
respect to each of D, jl, hi and n are all identical.
(~~)(~ )=( _a~*)(:* )=(~!~)(~~ )=(a!*)(s: )=e.

The value of e depends first on the values of the size elasticities ei,ej,E i
and E2, and second on the factor proportions in the handling and hauling
operations, respectively. The former set of values are inherently fixed to a
high degree, while the latter set of values show some variations between
different trades, in particular between short-sea and deep-sea trades. The
variations are, however, not more important than that e seems to be confined
to a rather narrow band of values from about 1.00 to 1.25 in the great majority
of realistic cases.
The two route characteristics which exhibit by far the widest span of
variations are the route distance, D, and the handleability of cargo, expressed
in hi' The cargo balance varies only between 1 (representing a trade where zero
cargo moves on the meagre leg) and 2 (representing a perfectly balanced trade),
and the relative variations are of a similar order of magnitude.
In view of this and the aforementioned fact that the absolute values of
partial elasticities of S* with respect to all route characteristics are the same, it
is clear that the greatest differences in ship size are to be found between short-
sea and deep-sea trades, on one hand, and between trades in different
commodities, on the other.
These two aspects - the ship-size distribution with respect to route distance,
and the ship-size distribution with respect to cargo handleability - are worthy
of a fuller discussion.
( a) Ship size distribution with respect to cargo handleability

In the past the quickest 'loading and unloading' by far was achieved by ships
for passengers. Therefore long-distance passenger liners used to be the largest
ships on the seas, at least in terms ofGRT. Liquids, like crude oil, are the most
easily handled freight, provided that the carrier is built as a tanker. The
handling speed attained by some dry-bulk carriers is, however, not much
behind that of oil tankers. The giant ships of today are consequently oil
tankers and, second, dry-bulk carriers. The reason for the wide span of ship
sizes on a given trade route, from conventional general-cargo liners at one end
of the span to oil tankers some thirty times larger at the other end, can be
explained to a large degree by the very different values of hI' A contributory
cause may be that the size elasticity, E 1 , of the handling speed is higher for oil
tankers than for general cargo ships.
Table 5.6 below exemplifies the enormous differences in the handling
capacity attained by ships for different types of cargo. In spite of the fact that,
for example, an oil tanker handles some ten times more cargo per round
voyage, it spends only a tenth of the time in port of a conventional liner.
With reference to the model we can now be precise about the 'missing half of
the explanation why liner freight rates per ton-mile are on average some ten
times higher than the freight rates per ton-mile of other shipping.
One half of the explanation was pointed out in chapter 1. The stevedoring
charges for handling general cargo are on average at least ten times higher
than those for handling bulk cargo. At the outset of this chapter we have drawn
attention to the fact that the average ship size is many times larger in bulk
shipping than in general-cargo shipping. In further analysis we have shown
that very pronounced economies of ship size are enjoyed in the hauling
operation. Now it may seem pertinent to ask whether the fact that liner cargo
ships are much smaller for some reason than bulk cargo ships constitutes the
missing 'half explanation'? Our analysis does, however, not support such a
conclusion. On the contrary, the perhaps somewhat paradoxical result of the
analysis is that, if liner-cargo ships were made as big as bulk-cargo ships the
wide gap between liner freight rates and bulk freight rates would be wider still.
The increase in the lay time cost per ton in port (C 1) that would follow if the size
of liners were increased, would outweigh considerably the decrease in the
Table 5.6 Time in port of different ships in selected trades
Days in
port per
round
Cargo and trade route Ship type Ship size (dwt) voyage
Oil from Persian gulf

to Europe Tanker 200000-250000 3-4
Iron ore from Australia
to Europe Bulk carrier 60000-80000 5-6
Coal from USA to
Europe Bulk carrier 40 000-60 000 8-9
Containers from the Far
East to Europe Container ship 30000 20
General cargo on Conventional 12500 40
various routes liner
Source: Laing, E.T. (1975) Containers and their competitors, University of Liverpool.
hauling cost per ton at sea (C 2 ). The fact that liners are ofa small size relative to
bulk-cargo ships has the effect of somewhat reducing the gap in costs between
liner-cargo shipping and bulk-cargo shipping.
The root cause of the tenfold excess of liner freight rates over other shipping
freight rates is, in conclusion, nothing more than the handling difficulties of
general cargo. This makes, (a) the direct handling cost (the stevedoring
charges) much more expensive, and (b) the indirect handling costs (lay time
costs of the ships) much more expensive, too. This latter effect can be
counteracted to some extent by decreasing the ship size. This cannot go on for
too long, however; at some point - the optimum ship size - the reduction in
the (indirect) handling costs per ton will be balanced by the increase in the
hauling costs per ton.
(b) Ship size distribution with respect to route distance

The implication of the mentioned range of values of 1::, so far as route distance is
concerned, is that a 10% increase of the distance will, ceteris paribus, be
associated with a 10-13% increase in ship size.
VI 14
~
°E 13 f-
1:> New Zealand+
C
0
I/) 12 e-
~ Aus~ralia -t
0
11 Japan+
.....
~
c 10
0
1:>
+ China
C
0
....J
9
+ Far Eas~
E 8
0 India+
....
L.
II!
u
7 Persian Gulf + + Mozambique
c India+ + +Argen~ina
0
.L.
I/)
6 Sou~h
0-6 Sou~h America + Africa
II! 5
01
0 Nigeria+ +Wes~ Indies
>- 4
0
l
Eas~ern Medi~erranean
> Germany + + + USA
II! 3 Sweden + Yugoslavia
~ I
(; Canada
E Finland
2 +Spain
>(
0
L-
a.
+ Norway +USSR
a. ~ + +Denmark
<{ +Hollpnd
0
0 1 2 3 4 5 6 7 8 9 10 11 12
Average vessel size (rhousand ner regis~er ~ons)
Figure 5.2 Ship size and voyage distance of ships using the docks of the Port of
London. Reproduced with permission from Ship/Shore - 1980, issued by National
Ports Council in U.K. Summer, 1968.
Available evidence seems to indicate that this order of magnitude is not too
far off the mark. By way of confirmation Fig. 5.2 compares the average size of
ships using the docks of the Port of London with the voyage distance from the
port.
It must be borne in mind, of course, that by the very definition of a partial
elasticity the observed size distribution among the different routes cannot be
expected to be explained only by distance. The distribution is the result of the
combined impact of all route characteristics, D, 11, hl and n, to mention the
ones included in the model.
The ship-size distribution with respect to distance was a principal object of
study in the work by Thorburn. He approached it from a somewhat different
angle. His point-of-departure was the influence of the distance onfreight rates.
Thorburn devised a useful diagrammatic technique in the process, which is
briefly sketched below. It provides an indirect proof that the optimal ship size
is growing as the route distance gets longer and longer.
It is a well-known fact that the freight rate per ton of a particular commodity
tapers off quite markedly as the transport distance increases; i.e. the freight rate
grows but far less than in proportion to the distance. The characteristic shape
ofthe 'freight curve' is portrayed in Fig. S.3a. In the long run, the time average
of the freight rates of different distances that make up the freight curve should
correspond to the total cost per ton of the optimum ship for every particular
distance.
How is the shape of the freight curve to be reconciled with the linear
relationship between the cost per ton of a given ship and the distance? Given
the ship size, the cost per ton as a function of distance is described by a straight
line such as
C = fl(S) + D[f2(S)].
The ordinate of the line'!l (S) gives the handling cost per ton, and the slope of
Cos~ line of
Freight curve given ship
$ $
(b)
D D
Figure 5.3 (a) Typical shape of the freight rate per ton of a given commodity as a
function of the distance. (b) The cost per ton of a particular commodity carried by a
given ship as a function of the distance.
Distance
Figure 5.4 Cost per ton for different ships as a function of distance.
the line,j2(S) gives the hauling cost per ton-mile. In Fig. 5.4 the cost per ton as
a function of distance for three different ship sizes are given. The flattest line
applies to the biggest ship, etc. The handling cost per ton becomes higher as
ship-size increases, whereas the hauling cost per ton becomes lower.
The only way to reconcile the shape of the freight curve with liner cost
functions for ships of given size is to regard the freight curve as an 'envelope'
that is tangent to each but intersects none of the cost lines. This is shown in
Fig. 5.5. The tangency point between a particular line (representing a
particular ship size) and the freight curve indicates the distance for which a
certain ship is the optimum size.
As can be seen from Fig. 5.5, the longer the distance is, the flatter will the cost
line be which is tangent to the freight curve. And the flatter the cost line is, the
Freight curve
Distance
Figure 5.5 The freight curve as an envelope to cost lines of given ships.
16
15
14
13
12
11
10 C=C1+C2
c: 9
0
......
~
8
2000 4000 6000 BOOO 10000 12 000 14000

8881 Dwt
Figure 5.6 The optimal size of a reefer ship.

bigger is the applicable ship. Hence, the longer the distance is, the bigger the
optimal ship size will be.
5.9 THE OPTIMAL SIZE OF A PALLETIZED REEFER SHIP:

A CASE STUDY
We will now use the model to determine the optimal size of a palletized
refrigerated ship. The ship to be optimized will be engaged in the trade of
agricultural products, and will shuttle between the port of Haifa (Israel) and
the port of Marseilles (France). The quantity carried in 1982 was estimated as
the equivalent of to 000 pallets and by 1985 this figure will have risen to 16000
pallets.
13000
12000
11000
s * 10000
9000
8
7000
1200 1300 1400 15001600 1700 1800 190020002100 220023002400

Distance
Figure 5.7 The optimal ship size and distance (a case-study of a reefer ship).
13000
12000
11000
5 * 10000
9000
8000
7000
2500 2m 2900 3100 3300 3500 370039004100 4300 4500 4700 4900
Port productivity
Figure 5.8 The optimal ship size and port productivity (a case-study of a reefer ship).
The optimal size was arrived at by minimizing total costs per ton of cargo of
ships of different sizes. First, the breakdown of costs of 4400 dwt were
calculated. These are:
Capital costs per ton per daY,Plql: $4.88
Operating costs per ton per day, P2q 2: $80.2
Fuel in port per ton per day, P3q3: $0.7
Fuel at sea per ton per day, P4Q4: $9.3
Port charges per ton per day,psqs: $6.9
11000
10500
10000
9500
s * 9000
8500
8000
16/11 17/11 18/11 19/11 20/11

Trade balance
Figure 5.9 The optimal ship size and trade balance (a case-study of a reefer ship).
11000
10 500
10000
s * 9500
9000
8500
8000
7 B 9 10 11 12 13 14
Fuel price
Figure 5.10 The optimal ship size and fuel price (a case-study of a reefer ship).
The variations of these costs categories with the size of the ship were
calculated using our previous estimates of the ei and e j elasticities. For the
output elasticities, E1 and E 2 , different values were found. Given the existing
equipment and organization, the handling elasticity, E 1 , is close to 0, and the
hauling elasticity, E 2 , is close to 1, as speed hardly varies at the relevant range
of ship sizes. Given values of Piqi, ei , ej , E1 and E 2 , and using equation (5.2), the
optimal ship size for this trade is 8881 dwt, equivalent to approximately 400
TEUs (under-deck). Figure 5.6 depicts the costs curves and the optimal
ship size.
We have carried out comparative statics of the optimal ship size with respect
to distance, trade balance, port productivity, and fuel costs. The variations of
ship size with respect to these are summarized in Figs 5.7-5.10. The calculated
elasticities of ship size with respect to distance, trade balance and port
productivity were all around unity (with a minus sign for the trade balance)
and constant. The elasticity of the optimal ship size with respect to fuel was
much smaller (0.35) and showed greater variations for different ship sizes.
5.10 TOWARDS A MODEL OF SHIP SIZE GROWTH

Besides the route characteristics the model includes a second group of
parameters, which are interesting to analyse, viz. the factor prices, Pi and Pj' the
factor use coefficients, qi and qj' and the handling and hauling-capacity
coefficients, h1 (which incorporates route and cargo-handleability character-
istics, too), and h 2 • As distinguished from the cargo and route characteristics,
these parameters all undergo more or less continuous changes over time.
The analysis of the effect on optimal ship size of changes in factor prices and
productivities is, therefore, particularly relevant for that other important
aspect of ship size - the growth in ship size over time. This aspect is interesting
for shipbuilders, shipowners, as well as port authorities. Ships have an
economic life of 20-30 years. In the choice of ship size, a shipowner has to
modify the result of the static optimum ship size by taking into account likely
factor price and productivity changes during the lifetime of a ship. In-
frastructural investment in ports have almost indefinite physical lives; to avoid
premature obsolescence of port facilities long-term forecasting of develop-
ments in shipping including the growth of size is a very important task for port
planners.
The cost model can be usefully employed to accomodate the long-term effect
on ship size of continuous factor productivity and factor-price increases. A
distinguishing characteristic of the 'engineering approach' to production
functions is that it focuses on the inherently stable relationship between factor
inputs and output capacity. The ship-size elasticities constitute 'something to
hold on to in a changing world'. This means, more specifically, that factor
productivity improvements can be expected to be mainly neutral with respect
to the ship-size elasticities. Productivity improvements can take two forms:
they can be either capacity increasing or input saving. In the former case the
handling capacity and/or the hauling capacity will go up, while the use of
factor inputs remains constant. In the latter, the use of one or more factor
inputs will go down, while the handling and hauling capacities are constant.
An example of a great productivity improvement of the capacity-increasing
kind is the introduction of the triple expansion steam engine in the end of the
last century, which caused a dramatic increase in the hauling speed without a
corresponding increase in fuel consumption. An example of a productivity
improvement ofthe input-saving kind is the automation in shipping which has
made a large reduction in the manning requirement possible without a
decrease in the hauling or handling capacity of ships.
An 'E-neutral' capacity-increasing productivity improvement will be re-
flected in an increase in hi or h2 (rather than E 1 or E 2), and an 'e-neutral' input-
saving productivity improvement will be reflected in a reduction of qj or qj
(rather than e i or e j ).
Our empirical results showed that the size elasticities found in shipping cost
studies of quite different ages are of the same order of magnitude, which lends
support to our assumption of the relative constancy of size-elasticities.
5.10.1 Partial effects on optimal ship size of factor price

and productivity changes
One reason for distinguishing capacity-increasing and input-saving product-
ivity improvements is that the tracing of the effects on optimal ship size is
analytically different in each case.
The effects on optimal ship sizes of changes in hi and h2 are easily
pinpointed, because the absolute value of the partial elasticity of S* with
respect to hi and h2' respectively, is equal to t:, i.e. equal to the partial
elasticities of S* with respect to all route characteristics included in the
model - the coefficient hi incorporates both cargo handleability and port
facility effects on the handling capacity. It is interesting to note that an increase
in h2' i.e. an increase in the hauling capacity, tends to reduce the optimal ship
size; the partial elasticity is
( 8S*)(h2)
8h 2 S* = -t:o
This is perhaps not generally realized. Diagrammatically it can be explained

with the aid of the handling cost and hauling cost curves of Fig. 5.1. An
increase in h2 shifts the Crcurve proportionately downwards, which makes
the curve flatter. The minimum point of the C-curve will then move to the left,
in the direction of reducing the ship size.
The effects on optimal ship size of various input-saving productivity
improvements - represented by reductions in qi and qj - are the reflected
image of the effects of increases in the corresponding factor prices. This is
apparent as the total factor costs in the model are written:

and
In practice the most interesting entity is the difference between the
percentage rise in each particular factor price and the percentage decline in the
corresponding factor-use coefficient. If the productivity changes all the time
match the factor price changes, i.e. if the factor costs remain the same for a
given ship size, no effect on optimal ship size will emanate.
It is more difficult to trace the partial effect on S* of a change in a factor cost
by a diagrammatic analysis, because changes in Pi' Pj' qi' or qj do not give rise to
proportionate shifts in the C 1- and C rcurves, and, in addition, both curves
can be affected by the change of one parameter value (in case the factor is an
input in both the handling and the hauling operation).
Another way of intuitive reasoning seems more illuminating under these
circumstances. The basic idea is that a factor price change should result in
factor substitution, and a characteristic of the model is that factor substitution
takes place exlusively via changes in ship size. Provided that the size elasticities
of the various factor costs, e i and ej are different - which they are - the factor
proportions will change with changes in ship size. An increase in the price of a
factor which is used relatively less by large ships than by small ships will result
in some substitution of other factors for the factor which has risen in price by
an increase in ship size, and vice versa (see also Johansen, 1972; chap. 9).
As regards factors which are used both in the handling and the hauling
operation, the size-elasticities, e i = ej , are decisive for whether a factor price
rise will lead to an increase or a decrease in optimal ship size.
As the size elasticity of crew costs is extremely low the continuous increase in
crew wages works in the direction of making bigger and bigger ships profitable
as the crew-cost proportion in total cost, both at sea and in port, will be less the
larger the ship size is.
An increase in the price of capital cost will work in the opposite direction,
because the size elasticity of capital cost is above the value of the weighted
average size elasticity of all factor costs. If ships become generally dearer to
purchase, or to finance, a tendency to go down in ship size would occur, as
smaller ships are a bit less capital intensive than larger ships.
Concerning the effects of changes in prices of factors, which are only used
either in port or at sea somewhat different considerations are applicable. A
general increase in costs at sea will, ceteris paribus, lead to an increase in ship
size, whereas a general increase in costs in port will, ceteris paribus, result in a
decrease in ship size. In addition, however, the effect of a change in factor cost
proportions within the costs at sea and within the costs in port is at work. As
the size-elasticity of fuel cost is rather high, an increase in the price of fuel will
on this account tend to reduce ship sizes, i.e. act against the mentioned main
effect. In the case of berth occupancy charges, on the other hand, this
additional effect will work in the same direction as the main effect.
Therefore, an increase in the price of fuel can in the short term be expected to
be almost neutral with respect to ship size. The fuel cost constitutes an almost
constant proportion in total cost for every ship size. It is true that fuel costs
makes up a greater and greater part of total hauling costs as ships grow larger,
but this is offset by the fact that larger ships will, given the distance, spend
proportionally less time at sea than in port.
In the long term a fuel-cost increase may have effects that are not taken into
account in the model. A permanent rise in fuel prices should result in a
reduction in design hauling speeds via a reduction in installed horsepower.
Thus a fall in h2 will in turn tend to increase ship sizes.
Time-proportional berth occupancy charges which are differentiated
according to gross or net registered tonnage do not make up a large part of the
total costs. However, an increase in these charges can have a significant effect
on the ship size in the direction of reducing the optimal size, because by
reducing the ship size both the proportion of port costs in total costs and the
proportion of port charges in total costs will go down.
To give an illustrative example of the relative strength of the effects on ship
size of different factor price changes in the model, we have calculated the
partial elasticities of S* with respect to all parameters included in the model for
a conventional British liner in the medium-size range. (It should be remem-
bered that these partial elasticities are not constant in the whole range of ship
sizes.)
The absolute values of the elasticities of S* with respect to each route
characteristic as well as with respect to the handling and hauling capacity
coefficients are identical. In the present case e = 1.20 (see Table 5.7). Of the
factor cost elasticities of S*, the two most striking values are the relatively high
operating-cost elasticity (0.50) and the relatively low fuel-cost elasticity (0.05)
of the optimal ship size.
Table 5.7 Approximate values of partial elasticities of the optimal

size of general cargo ships with respect to the parameters of the model
Parameters Partial elasticities
D,h 1 , /I 1.20
/1,h z -1.20
Capital cost -0.22
Operating cost 0.50
Fuel cost 0.05
Berth occupancy charges
proportional to ship size
5.10.2 A ship size 'growth form' of the model

For predictive purposes it will rarely do to consider the influence of just one or a
few ship-size determinants. All the partial elasticities have to be taken into
account simultaneously when it comes to forecasting the future development
of ship sizes.
It is convenient to give the model a standard 'growth form'. The dependent
variable is the rate of growth. in ship size ('S*'), and independent variables are
the rates of growth of all factor price and productivity parameters. The model
can then be summarized:
where k represents hI' h 2 ,Pi,Pj' qi and qj.

Separate forecasts of the rate of growth of all the parameters, k, i.e. of the
development of factor prices and productivities have to be made. The
combined effect on ship size growth is then obtained by summing up all the
products of the partial elasticities and the forecast rates of growth of the
independent variables.
5.10.3 Main factors behind the high rate of growth in ship size
in recent times
It is beyond the scope of this study to test the ship-size growth form of the
model on historical data of the ship size, factor price, and productivity
developments. On the basis of the previous analysis it is, however, possible to
pinpoint the likely main causes of some salient features of the development in
ship size.
In the first half of this century it is believed that crew wage increases and crew
productivity increases were by and large matching one another. Since the
Second World War, however, at least so far as the traditional shipping
nations - Britain, USA, Holland, and the Scandinavian countries - are con-
cerned the development of seaman's wages has been inflationary, that is Pcrew
has grown at a higher rate than the rate of decline in qcrew. The fall in qcrew
which has occurred means that the manning requirement has gone down
thanks to automation for each given ship size. On top of this the crew wage
inflation has probably contributed quite considerably to the fall in the total
demand for seamen by stimulating the growth in ship size, which has occurred
since the war. Increasing the ship size is, as mentioned, one method of reducing
the crew labour input per unit of output (ton of cargo).
The most important factor behind the high rate of growth in ship size since
the war has, however, been capacity-increasing productivity improvement.
In recent times no very dramatic change in h z has occurred. This stands in
vivid contrast to the development of hi. Since the war very significant
improvements in bulk-cargo handling techniques have been achieved. This is

probably an important contributory cause of the unprecedented rate of
growth of tanker and bulk carrier sizes in the 1960s and 1970s. On the other
hand, the technical progress in break-bulk cargo handling has been rather
modest for a long time, which is reflected in the static picture of ship size
development of conventional liners and all-purpose tramps.
In the general-cargo sector, the most interesting event is, of course, the
tremendous increase in handling capacity that has been achieved by con-
tainerization and other systems of cargo unitization. The difference in size
between container ships and conventional general-cargo liners in comparable
trades is substantial, a second-generation container ship is perhaps three times
larger than a modern conventional liner. The third-generation container
ship - the Very Large Container Carriers (VLCC) - have, in 1985, reached the
size of a bulk panamax. First, came sizes of container ships of 2500 to 2700
TEUs - American President Lines (APL) with three vessels of 2500 TEUs
each and Evergreen with a fleet of twenty-four vessels of 2700 TEU s each. US
Line has been the pioneer in the development towards bigger ships. Already
having a fleet of twelve vessels each carrying 3600 TEUs, it has introduced the
largest container ship yet in operation of 4400 TEU s; that is, of a size
equivalent to approximately 65000-70000 dwt. This tremendous increase in
ship size is by and large to be explained by the rise in productivity in ports. The
typical two cranes per berth that are employed in the handling of a second-
generation container ship, is unlikely to lead to an optimal size of 4400 TEU
ship. Assuming an average rate of handling of fifteen containers per crane
hour, it will take approximately 6 days to unload a 4400 TEU container ship.
Having two ports in the shuttle service, the total time in port would then be 24
days (loading and unloading the full-size ship in the two ports). A figure which
would exceed, for example, the at-sea turnround time on the dense route of
Japan-West Coast USA. However, when six cranes are employed for these
VLCCs, time in port is reduced by half, making indeed a 4400 TEU ship a
possible optimal size on dense routes, where frequency of services is relatively
unimportant.
Does our optimal ship-size model predict ship sizes as big as they are
currently built? Let us examine this with a constructed example of a typical
dense container trade having one port of call at each end of the route. The
characteristics of the route and the parameters used are listed below. The
parameters used were calculated on the basis of the daily costs of a 15000 dwt
container ship.
Route characteristics
Round trip distance, D = 10400.
Number of ports = 2.
Trade balance coefficient, J1. = 1.5.
Output functions (daily)
Ton-miles, h 2 S E2 = 24 X 3.1251.17 where a 15000 dwt ship is assumed to travel
at a speed of 16 miles per hour
Tons loaded and unloaded, nh1S E1 = 24 x 19.55So. 3 .
This assumes productivity of 350 tons per two crane-hour (thirty-five
containers of 10 tons each) for a 15000 dwt vessel. Productivity is assumed to
increase continuously with ship size by the one-third power of the ship size.
This is mostly explained by using more cranes as ship size increases, which on
average, for a large number of ships of each size, may lead to a continuous rise
in handling productivity. Alternatively discrete number of cranes can be
assumed to handle each range of ship sizes. For example, two cranes up to
15000 dwt, three for 15000-25000 dwt, etc.
Daily costs
Total capital costs, Plq1se 1 = 8.88So. 7 .
For a 15000 dwt this amounts to $7441 per day. This calculation is based on a
price of $17 million for a newly built 15000 dwt container ship (quotation for
Table 5.8 The optimal ship size of a container ship on a dense route
Costs per ton Costs per ton Total costs

in ports at sea per ton
Ship size ($) ($) ($)
3300 3.9066 45.1922 49.0988

3666 4.0564 43.2978 47.3542
4125 4.2335 41.3054 45.5389
4714 4.4462 39.2083 43.6545
5500 4.7098 36.9771 41.6869
6600 5.0489 34.5812 39.6301
8250 5.5096 31.9685 37.4781
11000 6.1910 29.0538 35.2448
16500 7.3604 25.6730 33.0334
25000 8.8948 22.9214 31.8162
30000 9.7070 21.9014 31.6085
31000 9.8637 21.7287 31.5924
32000 10.0187 21.5645 31.5832
33000* 10.1720* 21.4080* 31.5801 *
34000 10.3240 21.2587 31.5827
35000 10.4745 21.1160 31.5905
40000 11.2080 20.4880 31.6960
45000 11.9120 19.9710 31.8830
1985), 12 years life-span of a container ship, and 12% annual interest rate.
Capital costs were calculated assuming equal monthly installments of the loan
and interest and assuming 350 working days.
Total operating costs, P2Q2se2 = 36.65So. 5 , which is equivalent to $4.488 per
day for a 15000 dwt ship.
Total fuel costs at sea, P3Q3 se3 = 0.13S1.1 7 ($9999 daily).
The at-sea costs and port costs per ton for different ship sizes are given in
Table 5.8 and Fig. 5.11. The optimal ship size of 33000 dwt is three times
greater than a good-size conventional liner cargo, but is half the size of the
4400 TEU of US lines. Does the model fail to predict the true optimal size, or
has US Lines overshot the optimal size? The explanation for the difference is in
the assumed port productivity. By our assumed port productivity a 4400 TEU
will be loaded/unloaded with approximately three cranes each handling
seventeen containers per hour. If instead six cranes are worked on the 4400
TEU container ship, as indeed is the case in some ports, productivity doubles
and the size ofthe ship increases substantially. Doubling the port productivity,
all other parameters of our example unchanged, increases the optimal ship size
from 33000 dwt to 57000 dwt. On dense routes, the VLCCs conform with the
prediction of the model, on the condition that six cranes are operating at each
port at the end ofthe route. Other problems that arise from the introduction of
VLCCs, especially in thin trades, which are related to the decrease in frequency
and the logistics of feeding the VLCC with cargo, are discussed in chapter 6.
50 o _ per ton at sea

Cos~s
;, 0- - 0 Totalper ~on
cos~s
45
0---0 Cos~s per ~on in ports
40
$
35
30 --- - - 0 - _ _ 00-00-0-0- - 0 _ - - - 0
25
20
15
10
5 s*
I
6000 12000 18000 24000 30000 36000 42000

Ship size (dwt)
Figure 5.11 Costs per ton for alternative ship sizes.

6 Multi-port calling versus trans-shipment
6.1 THE GENERAL PROBLEM: FEEDER-TRANSPORT COST

MINIMIZATION IN A GIVEN SERVICE RANGE
The cargo catchment area of a liner conference is best viewed as a stretch of
coastline, because the depth of the catchment area is normally left undefined.
We will call the cargo catchment area of a particular conference the 'service
range' of the conference lines.
The service range (at each end ofthe trade route) is defined either simply as a
naturally delimited seaboard of a country or continent like the Atlantic Coast
of North America, or, when more exact borderlines in relation to service
ranges of other conferences are required, as the seaboard between two given
ports, e.g. the Hamburg-Dunkirk range. In either case all the ports to be
included in the service (i.e. called at) are not given by the definition of the
service range.
It is important to separate the problem of choice of service range from the
problem of choice of ports-of-call, i.e. which ports are to be served. In this
chapter we take the range for given, and consider only the second problem. In
the last chapter of this part (chapter 9) the optimal extent of the service range is
considered in a simultaneous minimization of shipping, port, and shippers'
costs.
By introducing a somewhat wider definition offeeder transport than is usual
the solution of the present problem can be regarded as a straightforward
minimization of total feeder transport costs of the liner cargo generated in a
given service range.
Each total door-to-door transport is a chain of a number of hauling and
handling links. The hauling links can be divided into a trunk line link, and one
or more feeder transport links. In the case of a liner-cargo shipment it may
seem natural to define the start of the trunk line link where the shipment is
loaded on to the liner, and to end where the discharge from the liner takes
place. A more appropriate definition is, however, to regard only the sea
crossing as the trunk line. Given the cargo catchment area of a liner service, the
possible coast-wise cruising and multi-port calling by the liners are a substitute
for inland-feeder transport or sea-feeder transport by separate ships.
6.2 THE SPECIFIC PROBLEM: THE POTENTIAL

OF SEA-FEEDER TRANSPORT
In the thin-trade sector five to ten or even more calls per round voyage is
common in break -bulk cargo shipping on longer routes. This practice has been
considered by many observers to be a rather costly way of collecting a full

shipload together for the trunk haul.
If the cargo in question is easy to handle a shuttle service supported by sea-
feeder transport may be a viable solution to the thin-trade problem. Whilst
trans-shipment has been a common practice in serving the more remote parts
of the world (e.g. for shipping of oil), sea-feeder services have never been
practised on a large scale in the liner shipping sector. However, already from
the start of containerization it was commonly held that a shuttle-service
pattern is inherently the least-cost solution of a container service (British
Transport Docks Boards 1967). The required feeder transports could be
performed by rail, road or sea, whichever turns out to be the cheapest mode in
each particular case. Long-distance road transport of containers cannot
compete with rail transport as soon as the annual volume of cargo is at all
appreciable (Johnson and Garnett, 1971). Sea-feeder transport of unitized
cargo is competitive to land-feeder transport, first, where a rail freightliner
system does not exist for economic or geographical reasons, and, second,
where a good deal of the cargo is generated in the proximity of seaports.
Lately sea-feeder transport of containers has been held up as an integral part
of future optimal container transport systems in general (see chapter 8,
section 8.2.3), and, more particularly, to be the solution to the old thin-trade
problem aggravated by the increase in container ship size. The persistent
continued practice of container shipping lines to call at an appreciable number
of ports each round voyage may seem 'contrary to the basic idea of
containerization', but is probably simply a sign that the point of balance
between a trans-shipment solution and traditional multi-port calling is further
to the advantage of the latter than has been expected on the basis of
McKinney-style model results. Trans-shipping of cargo means that the direct
handling costs per ton will be doubled. This is a severe disadvantage even for
unitized cargo. Advocates of a shuttle-service/sea-feeder transport system
seem to believe that this disadvantage will be offset by savings of the very
expensive time of big trunk liners.
From the point of view of the conference lines operating in a particular trade
the feeder transport problem can be summarized by the following three
questions. Given the service range:
Which ports are to be included in the liner services, i.e. which ports are going
to be 'conference ports'?
2 Of the included ports, which ports should be called at by the trunk liners?
3 How should the required feeder transport be organized for cargo generated
in the conference ports which are not called at by the trunk liners?
The solution to this three-phase problem can he either, (a) multi-port calling
by the trunk liners at all ports declared to be conference ports, (b) a shuttle
service between two 'base ports' at each end supported by sea-feeder transport
Multi-port calling versus trans-shipment 159
from the 'outports' on either side of the respective base ports, or (c) a 'mixed
system' meaning that the liners call at more than one port at each end every
round voyage, but not at all conference ports; feeder transports are arranged
by the shipping lines for the cargo generated in the conference ports which are
not called at by the trunk liners.
6.2.1 Comparative costs of the two extreme cases

By a schematic model we shall compare the costs of alternatives (a) and (b)
above. In a following section alternative (c) will be discussed by a 'marginal-
is tic' approach; in that case the optimum solution is found by trying out
different combinations starting from excluding the most unlikely 'marginal'
port. Here we will consider the service range at one end of a containerized liner
trade route, where a given number of ports are situated in the service range. In
case a shuttle service is arranged, one port in the middle will be appointed the
'base port': this location ofthe base port is preferable from the point of view of
feeder-transport distance minimization. The remaining ports on either side of
the base port are called 'outports'. We will alllow for different proportions of
the total cargo volume generated in the base port and in the outports, on one
hand, and for differences in cargo volumes between different outports, on the
other hand. In two respects, however, we will assume that all ports are similar,
(a) the cargo handling performance is the same in all ports, and (b) the balance
of import and export of liner cargo is the same in all ports, and consequently
equal to the directional balance of the total trade flow on the route.
The consequences in terms of the trunk-liner's time requirements of making
a diversion to call at a number of outports besides the base port can be divided
into additional handling time, additional hauling time and additional
transitory time, and be considered separately.
Additional time for actual cargo handling is insignificant. A given quantity
of cargo is loaded and unloaded each round voyage no matter what the
number of ports of call is. If a given number of cranes is used in each port -
irrespective of whether a full shipload or a part load is handled - total
effective handling time should be independent of the number of ports of call.
In the RoRo case this holds true without reservation.
2 Considerable additional time at sea will be incurred by coastwise cruising in
the service range.
3 Considerable additional transitory time will also be incurred by multi-port
calling. The most reasonable assumption about this category of ships' time
is that the transitory time per call at a particular port fluctuates widely in a
random fashion but is, in principle, independent both of the ship size and the
quantity of cargo loaded/unloaded in the port.
Against the costs of the additional time of multi-port calling diversions of
the trunk liners, the costs ofthe total time of the feeder ships are to be put. We
assume that only one size - the optimal size for the total feeder transport
task - is represented in the fleet of feeder ships.
(a) Simplifying assumptions regarding the size-elasticities of

shipping costs and capacities
With the approach taken in the modelling of shipping costs in chapter 5, we
need not specify the total time requirements either of the trunk liners, or of
the feeder ships, but can express the comparative costs on a per ton basis
directly. A strategic simplification of the model of chapter 5 is afforded by the
following 'square-root approximation' of the ship-size elasticities of the
handling and hauling costs per ton and ton-mile, respectively.
THE AVERAGE SIZE ELASTICITY OF THE HANDLING COSTS PER TON

(ei - Ed. It so happens that, provided that the berth occupancy charges are
differentiated according to the size of the ships and that the value of the cargo is
relatively high, the weighted average of the size-elasticities of the time-
proportional costs incurred in port (see Table 5.5), just exceeds 0.7. We have
previously concluded that the size-elasticities of the handling capacity is likely
to range between 0.2 and 0.3 for general-cargo ships (see section 5.5.1).
Assuming that a value close to the lower limit of his range applies to
container ships, it follows that the size elasticity of the total indirect handling
costs per ton is about 0.5.
THE AVERAGE SIZE ELASTICITY OF THE HAULING COSTS PER TON-MILE

(ej - E2)' The weighted average size elasticity of the main factor costs incurred
per day at sea - the costs of capital, bunkers, crew etc. - is just above 0.6 (see
Table 5.5). We have also concluded (see page 128) that the size elasticity of the
hauling capacity is confined to the range of 1.00 to 1.17, and that the values
applicable to liners are to be found in the upper-half range. Therefore, in view
of the considerable facilitation of the calculations achieved, fixing the size
elasticity ofthe total hauling costs per ton at the round figure of 0.5 seems well
justified.
According to the 'square-root approximation' we thus have:
Indirect handling cost per ton = a 1 -j(S) ,
where S stands for ship size, and the proportionality constant a 1 incorporates
the level of port productivity;
· cost per ton-ml'1e = a 2 -j(S)
Hau Img 1 .
To get the hauling cost per ton the hauling cost per ton-mile is to be
multiplied by the round-voyage distance, and divided by the directional cargo
balance factor, J1.. As before the coast-to-coast route distance is denoted by D.
We will now make explicit use of the concept of the 'gross round-voyage
distance' which was developed in chapter 5 in the discussion of transitory time.
By converting the total expected transitory time per round voyage to voyage
miles, and adding these 'miles' to the actual (net) nautical miles of the round
voyage, the gross distance, G, is obtained. The round-voyage G of a shuttle
service is consequently equal to 2D plus the transitory time in port at both ends
converted to miles.
In the comparison of the multi-port calling costs per ton with the costs per
ton ofa shuttle-service/sea-feeder transport system, we will only go into details
of one service range. The organization of the operations in the other service
range is held constant throughout the comparison. It is therefore inappropri-
ate to include the transitory time suffered at the other end in the round voyage
distance 2D; to get the gross distance G only the transitory time suffered in the
service range at one end has to be added.
(b) The comparative costs excluding the direct handling costs

The ports of call in the service range under study are numbered from one end
to the other 1 ... k . .. n, where the kth port is the base port, which will be used in
case a shuttle service supported by sea-feeder transports is organized. Any port
in the sequence of ports including the base port is called the ith port, and
any port in the sequence of port excluding the base port is called the jth port.
The distance from each port to the base port is denoted d~. The distance of
feeder transport of export and import between an outport and the base port is
consequently equal to 2d~.
The distance between successive pairs of ports included in the service is
d:
denoted + l ' In the multi-port calling case the coastwise cruising distance is
assumed to be equal to the sum of all these distances.
The expected transitory time per call converted to miles at sea is denoted t;
or tj depending on the context.
We can then define the following gross distances.
GROSS DIST ANCES
Shuttle service round-voyage gross distance, G1 =2D + t k •

n n
Multi-port calling diversion gross distance, ci1 = I d:+ 1 + I t j .
i=l Uk
Round-voyage gross distance of feeder
transports to serve the jth port,
n
Average round-voyage gross distance I QPd~+tj+tk)

of feeder transports, Gf = ,,--U~k- - - : - n - - - -
I
Uk
Qj
The total costs per ton of shipping the given volume of import and export
cargo Q = Li = 1 Qi on the route concerned in the multi-port calling case, and in
the shuttle service/sea-feeder transport case, respectively, are calculated by
first determining the optimal ship sizes in the two cases.
The optimal size of the liners in the multi-port calling case is obtained by
minimizing the total costs per ton of cargo in both directions, C.
C= I(S) a2(G I + Gl ) (6.1)

a1v + JlJ(S)
Setting the derivative of C with respect to S equal to zero yields:
ac =~_ a2(G + Gl) =0 I

(6.2)
as 2.,)(S) 211.8 J(S) .
The optimal ship size S* can be solved from equation (6.2)
S* = a 2 (G I + Gl ). (6.3)
a1Jl
Inserting this value for S* in equation (6.1) above the minimum total costs
per ton in the multi-port calling case is obtained
(6.4)
The minimum total costs per ton in the shuttle-service/sea-feeder case is

obtained by adding together the costs per ton of the shuttle service performed
by ships of optimal size, ct, and the costs per ton of the feeder transports, Cj,
likewise performed by the optimal ships for the task. Concerning the costs per
ton of the shuttle service it is unnecessary to go through the complete
derivation via the ship-size optimization. The following result is self
explanatory
(6.5)
The calculation of the total costs per ton of the feeder transports is not quite
analogous, and is explicitly shown.
The optimal size of the feeder ships is obtained by minimizing the total costs
per ton of the feeder transports
(6.6)
Setting the derivative of Cf with respect to Sf equal to zero yields:
(6.7)
2/1 L QjSf.j(S f)
Hk
The optimal feeder ship size, Sj, can be solved from equation (6.7)
(6.8)
a 1 /1 L Qj
Hk
Introducing the symbol Gf for the weighted average gross distance per
feeder transport round voyage, the optimal feeder-ship size can be expressed in
this simpler way:
S* _ a 2 Gf (6.9)
f - a 1 /1
The minimum total cost per ton of the feeder transport is not unexpectedly
equal to the cost per ton for a round voyage of the gross distance Gf' by a ship
of size Sj. This result is obtained by inserting the above value of Sj for Sf in
equation (6.6).
(6.10)
When adding the cost per ton of the shuttle service and the cost per ton of
the feeder transports, it has to be observed that cargo generated in the base
port does not require sea-feeder transport. Therefore Cj has to be modified by
multiplying it by the ratio of the total outport cargo volume to the total cargo
volume including the base-port volume. Denoting this ratio by tjJ, the relevant
total cost per ton in the shuttle-servicejsea-feeder transport case is written:
ct + tjJCj = 2 J(a 1: 2 G + 2tjJ )J(a a~

1 Gf ). (6.11)
where
We now want to compare C* and ct + tjJ Cj. Which cost is the lowest under
different circumstances?
We form the difference (Cr + I/ICj) - C*; when this difference takes positive
values, it is certain that multi-port calling is the superior system. Even for
values somewhat below zero, one can be pretty sure that the shuttle-
service/sea-feeder transport system none the less comes out as more expensive
in view of the fact that the direct cargo-handling costs, which are not included
in the present cost comparison, are doubled when sea-feeder transport is
applied:
Cr + I/ICj - C* = 2 J(a1;2) [J(G I)+ I/IJ(a

f)- J(G I+ GI)] (6.12)
The outcome of the comparison depends obviously on the values of the

included route characteristics, GI , GI , ai' and 1/1. It is interesting to examine the
direction of influence of these route characteristics on the cost comparison.
To begin with it is apparent that the greater the multi-port calling diversion,
GI , is, and the smaller the average gross distance of feeder round voyages, f' a
the better will the case for a shuttle-service/sea-feeder transport system be.
However, both GI and af are determined by di,d j , tj and n, when the two are
strongly correlated, so it is difficult to say something definite about the total
effect of these route characteristics from the two partial effects. An unam-
biguous effect emanates from the ratio 1/1. A large output cargo volume relative
to the base-port cargo volume speaks for multi-port calling. This is intuitively
very reasonable: the greater 1/1 is, the more worthwhile will the coastwise
diversions ofthe trunk liners be. Equally unambiguous, but less obvious, is the
effect of the trunk-line gross distance, GI . But it can be easily checked that the
longer the route is, the better will be the case for multi-port calling. The reason
for this is basically that on long-distance routes the difference in size between
the trunk liners and the feeder ships is relatively great which means that, thanks
to the economies of ship size in the hauling operation, the coast-wise hauling
costs in the multi-port calling case will compare rather favourably to the
feeder-transport costs.
a
The ratio f/G I and 1/1 describes two aspects of basically the same route
characteristic: the degree of cargo dispersion in the service range. We might as
well combine these, observing that 1/1 and J(af/GI) are more comparable, and
J(~ )
define:
1/1 = Index of 'cargo dispersion' in the service range.
Similarly, it is more meaningful to consider the ratio of the gross coast-to-coast

distance, GI , to the service range, i.e. the coast-wise cruising distance, GI than
the former in isolation.
G: = ratIo. of coast-to-coast distance to coast-wise cruising distance.

G
In Fig. 6.1, it is shown under which conditions, with respect to the cargo
0,7
5 0,6
~
QJ
~ D,S
"ii
o
o 0,4
0>
u
'0
~ 0,3
"C
c:
0,1
2 3 4 5 6 7 8
Raho of ocean crossing distance to coastwise cruising
Figure 6.1 The small range where feeder-transport services are superior to multi-ports
calls.
dispersion in the service range and the ratio of the coast-to-coast distance to
the required coast-wise cruising distance (in the multi-port calling case),
shipping cost per ton in the case of a shuttle service supported by sea-feeder
transport is lower than in the multi-port calling case, and vice versa. In the
shaded region multi-port calling is less expensive. All the combinations of
values of the cargo dispersion index and the ratio of the coast-to-coast distance
to the coast-wise cruising distance found in the unshaded region are not
realistic. A realistic lower limit for the cargo dispersion index is about 0.2. This
figure comes out, for example, if the base port generates as much as two-thirds
of total cargo (then t/J = 0.3), and the average feeder distance is only one-third
of the required coast-wise cruising of the trunk liner in the multi-port calling
case.
A lower limit for Gt/(J/ is about 2 (to be on the safe side). Putting in these two
limits as constraints in Fig. 6.1, we find that for realistic combinations of the
cargo dispersion index and the distance ratio, the area where multi-port calling
is more expensive than a shuttle service supported by sea-feeder transport is a
rather tiny corner of the market. And again, it should not be forgotten that the
extra cargo-handling charges incurred in the latter alternative are not included
in this picture.
( c) Intermediate conclusions
Our discussion so far indicates that a shuttle-service/sea-feeder transport
seems worthwhile only in exceptional cases where these route characteristics
co-exist:
1 A very low trade density, which requires a very wide service range relative to
the coast-to-coast distance.
2 A markedly non-uniform spread of the cargo in the service range implying,
in particular, that a large proportion of the total cargo is generated in the
hinterland of the base port.
3 The ports are situated deep into the country along a much-indented coast,
or on scattered islands of an archipelago.
The low score of shuttle-service/sea-feeder transport systems may be
counter intuitive; the main argument against multi-port calling, which stresses
the waste of expensive ships' time caused by lengthy diversions to collect part-
cargoes in several ports may at first seem more convincing. It can be
worthwhile to attempt to pinpoint two stumbling blocks for an intuitive
approach to the issue at stake.
THE ECONOMIES OF SHIP SIZE IN THE HAULING OPERATION ARE

UNDERESTIMATED. According to the 'square-root approximation' the size-
elasticity of the hauling cost per ton-mile is = - 0.5. This means that if the
trunk liners are, say, nine times larger than the feeder ships, the cost per ton-
mile of hauling cargo by fully loaded feeder ships will be the same as that of
two-thirds-empty trunk liners. Another matter is that the diseconomies of ship
size in the handling operation are very significant, too. However, a basic
assumption is that the actual handling time of the trunk liners can be assumed
to be roughly independent of the number of ports of call per round voyage. It is
the transitory time that will increase more or less in proportion to the number
of calls. But transitory time costs are high for the feeder ships, too.
THE TRANSITORY TIME COST SHOULD BE CONSIDERED PER

CONT AINER. If a big container ship has to wait one day for a berth, the total
queuing cost is very high. If the container ship loads/unloads a substantial
number of containers, however, the queuing cost per container need not be
terribly high, and this is also a highly relevant figure for the comparison. On
the assumption that transitory time is independent of ship size it follows that
the expected transitory time cost per container of a feeder ship that loads a
whole shipload is the same as the transitory time cost per container of a nine
times larger ship loading only one-third of a whole shipload.
6.2.2 A marginalistic approach

The problem of multi-port calling versus a shuttle-service/sea-feeder
transport system has so far been discussed in 'either/or' terms. This must not
obscure the fact that a mixed system is an interesting alternative in many
trades, where the cargo base is markedly unevenly distributed between the
ports of a service range. An extreme output in a deep-sea trade may well be best
served by trans-shipment if only a modest volume of cargo is generated in the
port, without all the other ports having to be served in the same way.
The previous model for calculation of the comparative shipping costs of
pure multi-port calling and a shuttle-service/sea-feeder transport system is
useful also when a marginalistic approach is taken. When we want to examine
whether a 'marginal port' should be dropped from the itinerary of the trunk
liners, and instead be served by sea-feeder transport to the nearest trunk-liner
port of call, the gross diversion distances Gl is replaced by the diversion
required solely on account of a call at the jth port, Glj , and the average gross
feeder-transport distance, Gf , is replaced by the gross feeder-transport
distance from thejth port to the nearest port of call, Gfj' The trunk-liner gross
distance, G l , should not be interpreted as the shuttle-service distance now, but
as the gross round-voyage distance of the liners including calls at outports
except for the jth port.
The value oft/! now represents the ratio of the cargo volume generated at the
jth port to the total cargo volume of the trade. This ratio can now be much
lower than assumed in Fig. 6.1. The horizontal boundary line can be moved
downwards considerably, and the area where sea-feeder transport is a feasible
alternative will increase downwards in the diagram. On the other hand, the
relevant ratio of the gross distance to the diversion required to call at the
marginal port on the horizontal axis, is in most realistic cases much greater
than 2, so the previous lower limit is now moved forward to the right in
Fig. 6.1. The meaning of all this is simple enough: the likelihood that a
marginal port should be skipped by the trunk liners (and served by feeder
transport) increases with, (a) decreases in the proportion of the total cargo
generated in the marginal port, and (b) increases in the relative (to the total
round voyage) diversion necessary to call at the marginal port. To give some
examples, the model predicts that when the cargo generated in the marginal
port is no more than 5, 10, 15, or 20% of the total cargo, the required diversion
must not be more than approximately 1%, respectively, of the gross distance of
the round voyage to make it worthwhile.
( a) Variability in demand - some further considerations

regarding 'marginal ports'
One interesting aspect of this problem is the importance of variations over
time in the cargo volume generated in a marginal port. The best can be made of
the fact that such variations occur by exercising a certain amount of flexibility
in the itinerary from one round voyage to another.
The core of the idea is to regard a particular marginal port as a 'groupage

depot', and hold it open to the last possible day each round, whether or not a
call will actually be made at the marginal port. If very little cargo has arrived at
the marginal port one particular round, it is cheaper to haul this quantity of
cargo by another means of transport - road, rail, or sea-feeder transport-
to a nearby port, which normally generates a sufficient quantity of cargo to
warrant a call, than to make a separate call at the marginai port. Figure 6.2
depicts the essentials of the matter.
A basic premise of the situation at hand is that the jth port has just passed
the test for inclusion in the liner services. In other words, it has been
established that the sum of the additional inland-feeder-transport costs, which
the shippers would incur ifthejth port were excluded, exceeds the incremental
cost of the diversion (in the form of cruising time and/or transitory time)
required for calling at thejth port. The horizontal line of Fig. 6.2 gives the level
of the incremental cost per call at the jth port. This cost is independent of the
quantity of cargo loaded/unloaded, Qj' since it is assumed that this quantity
will be handled anyway but not necessarily in the jth port. The upper
digressively increasing curve represents the cost of the cheapest feeder (land or
sea) transport alternative of Qj to and from a nearby port of call.
It is assumed that the quantity of cargo generated in the jth port fluctuates
such that it sometimes is less than Qj (see Fig. 6.2), and sometimes-
presumably more often otherwise the port should not have been included in
the first place - is greater than Qj" Ifless cargo than Qj is expected (the quantity
(2) Total cost of feeder

transport between the
j th port and a nearby
port of call
$
(1) Incremental cost
of a call at t"he
j th port"
I'"
IQ·
I )
I
Qj
Figure 6.2 Costs per round voyage, (1) calling at the jth port, and (2) hauling the cargo
generated in the jth port to/from a nearby port of call.
to be unloaded is, of course known, once the liner has embarked upon the sea
crossing) it is apparently better not to call at the jth port, but handle the cargo
in a suitable nearby port after the quantity to be loaded has been hauled by
road or rail to the nearby port. The cargo destined to the jth port unloaded in
the nearby port should subsequently be hauled to the jth port, where the
consignees can collect their consignments. The point is that shippers should be
given the same service as if the jth port were called at every round voyage.
The gain for the shipowners of the flexibility can be shown in Fig. 6.3 by
constructing the expected incremental cost of including the jth port in the
service. The expected cost curve is constructed on the basis of curves (1) and (2)
in Fig. 6.2, and the probability distribution of demand for shipping to and
from the jth port. The relevant segment of curve (1) is that to the left of (L, and
the relevant segment of curve (2) is that to the right of Qj. According to
'Jensen's Inequality' it follows that, since the combined shape of these two
segments is concave, the expected cost curve (3) will throughout be below both
curves (1) and (2). The expected cost will approach the incremental cost per call
asymptotically from below as the expected cargo quantity, E(Q), increases.
If no flexibility of the sort just described were applied, but a call is made at
the jth port each round voyage irrespective of the actual level of Qj' the
expected cost per call would obviously coincide with (1). The expected gain per
round voyage from the flexibility is consequently equal to the vertical
(2)
$ r---------~---------------------------- (1)
(3) Expec~ed cos~

per round voyage
Figure 6.3 Expected cost per round voyage of serving the jth port under conditions of
flexibility as to the form of service.
difference between (1) and (3) at the applicable level of the expected cargo
quantity.
Uthejth port is a truly 'marginal port', the expected cargo quantity is to be
found in the neighbourhood of the point of intersection of (1) and (2), and, as
can be seen, the gain from the flexible policy is relatively important. On the
other hand, if the expected cargo quantity is rather greater than that, the gain
from the flexibility will be insignificant. The port in question is not a 'marginal
port', and the cargo quantity generated per round will rarely be so small that it
is profitable to skip the call, and arrange feeder transports to and from a
suitable nearby port.
6.2.3 Combinations of multi-port calling and sea-feeder

transport on heterogeneous routes
The existence of marginal ports, i.e. ports where relatively little cargo is
generated, is but one example of trade-route heterogeneity in real life, which
can make a significant difference to the conclusions drawn in a markedly
homogeneous setting like that of our preceding model. Another interesting
example is when there are a number of 'marginal ports' in one part ofthe service
range, where each one is too small to warrant a call, but which together
generate a sufficient amount of cargo to justify at least one diversion. This
diversion would in that case be to a sort of regional base port where export
cargo is accumulated and from which import cargo is passed on by sea-feeder
transport to the rest of the ports of the region concerned. 'Region' is not always
an adequate term; it can represent a whole continent like Australia in the
trade between, e.g. Europe and Australasia. In other words, it may not be
sufficient to check first, as was done in section 6.2.1, which alternative is
cheaper, calling at all ports in the service range concerned, or calling just at
one port and serving the rest by sea-feeder transport, and then, in case the
multi-port calling alternative turns out to be the cheaper, to check in the way
that was indicated in section 6.2.2 that each 'marginal port' really pays its way.
One should also examine possible 'mixed cases' which look interesting. This
may be to make the base ports (which are called at by the trunk liners) two,
three, or four out of a total of the ten to twenty ports in a service range. It is
impossible to generalize in this case; conditions vary too widely from one trade
to another in respect of natural geography, cargo generation, port facilities etc.
Below we point at some further factors that should be borne in mind. We will
comment on the complications that calling at a great number of ports involve,
in particular, where conventional break-bulk handling is still in use.
( a) Concluding remarks on the routing scheduling and stowage

planning interdependency in the multi-port calling case
In the previous discussion it has been assumed without reservations that in the
multi-port calling case only one call per port is made. This may seem to be a
rather strong assumption at closer scrutiny at least in cases where the number
of ports of call is relatively great. Some final comments on certain relevant
problems which so far have been left out of consideration can be appropriate.
In particular so far as a break-bulk cargo shipping is concerned, the choice
of ports of call for a particular service can be rather difficult owing to the
complicated interrelationships between routing, scheduling and stowage
planning. With containerization the skill of stowage planning has to some
extent become redundant, due to the possibility of container 'shifting'.
To give flavour of the intricacy of a meticulous optimization of a break-bulk
liner service a few comments on the interdependency of routing, scheduling
and stowage planning will be made. In deep-sea trades it is usual that liners call
at some eight to ten ports per round voyage. This causes very tricky problems
of operations analysis. In which order are the ports to be called at? How is the
cargo to be stowed in order to minimize the sum of handling time and hauling
time? Moreover, these questions have to be given answers which are consistent
with a viable schedule, i.e. the time span between ships (given the ship size) has
to be such that the demand for hold space is adequately matched. Consider a
ship steaming fully loaded towards the first port of call, port 1, in a range of
ports, where the cargo is to be discharged, but also where cargo for the back-
haul is to be loaded. It is obviously a great advantage for the shipowner to
avoid calling twice at port 1, i.e. once for unloading, and once for loading on the
return. This is easily accomplished if one hold is reserved for cargo destined to
and originating from port 1; if the cargo to be discharged in port 1 is
concentrated in one hold, the total handling speed will be lower compared to a
situation where a number of holds are being worked simultaneously.
Spreading out cargo destined to port 1 over several holds, on the other hand,
may require a second call at port 1 for the loading of cargo, unless this cargo is
quantitatively insignificant.
It should also be mentioned that the stowage planning has to take stability
aspects into account. For instance, it may seem pertinent to stow cargo
destined to a particular port vertically and along the whole ship-side with a
view to working every hold simultaneously, and avoid calling twice at the
same port. However, such 'lop-sided' emptying of the ship is not possible for
stability reasons.
6.3 THE VERY LARGE CONTAINER CARRIERS (VLCC)

AND FEEDER SERVICES
The introduction of the VLCCs has forced shipping lines to call at fewer base
ports, and rely to a greater extent on feeder services. Several lines have
introduced around the world service combined with their VLCCs. Evergreen
operates twenty-four ships in their round-the-world service (R WS) - twelve in
the eastbound and twelve in the westbound leg. US Line operates twelve ships
in the R WS, and there are others which, on a smaller scale, provide R WS - the
Danish Barbar Blue Line, the Belgium ABC line, the Singaporian Neptune
Orient Line (NOL), and the Hong Kong based Orient Oversea Container Line
(OOCL). When VLCC ships are used in these services (or indeed elsewhere)
such as the US Line's 4400 TEUs and Evergreen's 2700 TEUs, the pattern that
is envisaged is of the big vessels calling at few ports (San Francisco-
Yokohama, for example) and feeder services - by land or sea - transporting
the cargo to the base port. Producers' economies of ship size, it is hoped, will be
made possible by the smooth efficient feeder services that would fill the VLCC.
Against this, our feeder-services model delivers the following message: do
not overrate the savings in costs by substituting sea-feeder transport for multi-
port calling by ocean liners, and do not underrate the extra costs of double
handling. Technically, the system of a shuttle service provided by VLCC,
supported by feeder services, look quite appealing, but cost comparisons speak
a different language.
The only conceivable way by which these VLCC can survive, is by
increasing their own share at the expense of others. Their time-proportional
share of cargo will probably have to be tripled, to fill the ship. This may well be
possible to achieve on dense routes. Approximately four ships depart daily
from Yokohama to the US West coast. Replacing these by one or two VLCC
may be obtained without imposing extra costs to shippers due to lower
frequency.
On other thin-trade routes, the VLCC would mean either too high feeder
costs or else too low frequency service - both undermining the chances of
success of the VLCC.
7 Shippers' costs of sailings infrequency and
transit time
The greatest problems in the optimization of the liner shipping serving a

particular trade are associated with the quantification of shippers' costs. In
chapter 5 we have already dealt with the interest costs of cargo in transit. In
this chapter we move ashore and examine some other items of shippers' costs
which will rise by a lowering of the sailings frequency and/or increase in transit
time.
The fact that there is a shorter or longer interval between the placing of an
order overseas and the date of delivery gives rise to costs to shippers of, in
principle, three different kinds, depending on the type of goods.
A lengthening of delivery times takes the form of an increase in the storage
costs.
2 A lengthening of delivery times takes the form of disruption costs for the
importers/users of goods which are not stored by them.
3 A lengthening of delivery times takes the form of a decrease in value of the
traded goods.
The first-mentioned type of cost is the only one really susceptible to monetary
quantification. Therefore, the following discussion is largely about storage
costs. At the end of the chapter some further comments are made on the nature
of the other two types of cost.
7.1 STORAGE COSTS

Generally speaking, the storage of goods is often necessary because the rate of
production and the rate of consumption of the goods are more or less ill-
matched. Two extreme examples are storage of agricultural products, which
are forthcoming in a short harvest period, and storage of seasonal sport
equipment like skis, which may be produced at a fairly constant rate
throughout the year, but used only during a relatively short period. Over the
business cycle large stocks are built up and run down in all industry with the
purpose of maintaining capacity utilization and employment at a reasonably
constant level.
This main type of stockholding is not relevant in the present connection.
Here we shall focus on the storage costs which are dependent on transport-
service characteristics. Then we shall go into more specialized storage
functions.
7.1.1 Forced and deliberate shipment accumulation stocks

and safety stocks
The three reasons for stockholding which are relevant for our purpose are:
Forced accumulation of stocks due to the fact that transport service can be
obtained only with more or less long intervals.
2 Deliberate accumulation of stocks in order to attain an economical
shipment size.
3 Keeping more goods in stock than are normally required to guard against
stockouts in the face of unpredictable variations in demand.
The pure case of forced stock accumulation is straightforward and simple
when it comes to storage-cost calculation. Given an interval of 365/N between
sailings (N = number of sailings per year) the stock-profile of an importer
takes the shape illustrated in Fig. 7.1 in a pure deterministic case, and the total
storage costs per year of the importer in question can be put like this:
TCstorage =(2 +
rv C
)365
N q (7.1)
where r = rate of interest

V = commodity value per ton
C = cost of storage facility
N = number of sailings per year
q = demand per day of the commodity (corresponds to the slope of the
depletion stock profile of Fig. 7.1).
The storage costs are divided into two main components - the interest costs of
the cargo in storage, and the costs of the facility where storage is taking place.
The total interest cost is proportional to the mean stock ( = 365q/2N), and the
storage facility cost to the maximum stock - 'stockmax' - which is equal to the
shipment size.
·1 Chronological ~ime
Figure 7.1 Time profile of shipment depletion (the counterpart to shipment accumul-
ation stock at the other end) in a deterministic case.
Shippers' costs 175
7.1.2 Trade-offs for different categories of shippers

The pure-and-simple case above is seldom wholly relevant, because few
shippers would choose to send or receive shipments continuously. The
transport costs per ton of small shipments is normally higher than of larger
shipments mainly for two reasons: there are certain costs which are by and
large fixed per shipment, and so far as full-shipload shipments are concerned,
the freight rate per ton is decreasing with shipment size because of economies
of ship size.
In the inventory management literature costs which will increase almost
commensurately with the number of deliveries per year are commonly referred
to as 'billing cost', although the cost for general documentation is not the only
cost which is basically fixed per shipment. The cost of the inland transport
from the port to the importer's warehouse is also a cost which is almost fixed
per shipment as long as the shipment size does not exceed a full truckload, or a
full container when applicable. For convenience we use the name 'billing cost',
B, for the costs which can be assumed to be fixed per shipment.
The optimal pattern of deliveries is that which minimizes the total storage,
billing and freight costs, given the annual volume of import, Q ( = 365q). The
main control variable is the number of shipments per year received by the
importer in question, n, and a main constraint on the optimization problem is
supposedly the sailings frequency, N, so far as shippers of general cargo are
concerned. We can write total shipper's cost in the two cases of general cargo
and bulk cargo in this way:
TCgeneral cargo = ( 2rv + C )Q-;;- + nB + QF (7.2)
where n < N
TCbu1k = (r; +C )~+ nB+ QF(~} (7.3)
The two differences between general cargo and bulk shippers are, (a) that the
latter can choose without constraints when shipments are to be dispatched,
and (b) the freight rate per ton (F) is a decreasing function of bulk cargo
shipment ( = shipload) size.
For bulk-cargo shippers the tapering off offreight costs with respect to ship
size is such an important effect that the trade-off often results in quite large
voluntary 'shipment accumulation' stocks. When it comes to general-cargo
shippers, the control variable n does not appear in the freight-cost term, but
only in the storage-cost and billing-cost terms. It is obvious that the trade-off
of part-load shippers, i.e. users of liner shipping services, results in far less
stockholding than in the case of bulk cargo. This does not mean that storage
costs are unimportant in liner shipping service optimization. The cargo is
normally much more valuable, so even relatively modest stocks can carry
appreciable storage costs. On the other hand, the billing costs are often so
important that many liner-cargo shippers deliberately choose to send or
receive shipments less frequently than the sailings frequency would allow. In
that case the storage cost of equation (7.2) would seem to be independent of
both the sailings frequency, N, and the transit time. So what then would the
raison d'etre of this chapter be?
However, to get a complete picture of general cargo storage, the determin-
istic model discussed so far must be abandoned, and the real-life feature of
unpredictable demand has to be brought into the picture.
7.1.3 Model of safety stock determination

When it comes to general-cargo shipping it is rarely the preferred number of
shipments of each particular shipper which is constrained by available
shipping services. An effective constraint will instead typically be imposed on
the timing of individual shipments, given the number of shipments per year. A
manifestation of this difference in the nature of the storage costs of shippers of
liner cargo is the fact that it is unusual that a shipper uses every sailing offered
in a particular trade. How will the storage costs be affected by the changes in
the timing of sailings?
Let us consider a liner trade between two coastlines. At either end numerous
shippers and receivers of general cargo exist. Looking at a particular business
relation, a typical pattern is that a producer/exporter of a certain article, which
we call 'widgets', has a fairly wide circle of customers not just in this trade but
also in a number of other trades. Each individual importer at the other end of
the particular route under study buys only a small fraction of the exporter's
total production of widgets. The importer, typically a wholesaler, resells
widgets to a large number of widget retailers in the hinterland of the seaport
where the importer's warehouse is situated. The demand of the retailers is
more or less variable. Since the widget importer can get delivery from
overseas only with a time lag (after he has placed an order) of x days, it is
obvious that he must not wait until his stock of widgets is completely run down
before placing an order. He has to order another shipment of widgets as soon
as his current remaining stock has fallen to a level which the importer
estimates is just sufficient to meet the demand of x days. Were the demand
during these x days perfectly predictable, the importer could follow an
inventory policy implying that his stock is always run down when a new
delivery arrives. In practice it is rarely so. Day-to-day demand is seldom
perfectly predictable. The importer should hold a certain safety stock to make
sure that he will not be out of stock before a new shipment arrives, also when
demand temporarily happens to be unusually high. The safety stock is defined
as the average level of remaining stock at delivery days. It should be intuitively
clear that the greater x is, i.e. the longer it takes to get delivery after placing an
Shippers' costs 177
order, the larger the safety stock has to be. the transit time as well as the
sailings frequency will therefore affect the level of the importer's safety stock.
The exporter/producer of widgets also holds a safety stock, but his safety
stock is not related to the sailings frequency. He may hold a safety stock
because his production capacity has a limit, or because the delivf..fy of inputs
into the production of widgets is infrequent, and therefore a sudden increase in
demand for widgets may not be possible to meet by current output. However,
in this context the important point is that the probability distribution of the
demand for widgets facing the producer/exporter - the incoming orders from
all over the world - can be assumed to be independent of the transit time and
sailings frequency in anyone trade. We can then proceed to show how the cost
of safety stock of a particular widget importer is related to the transit time and
frequency of liner shipping services.
The mean level of safety stock of the widget importer is determined by three
factors, (a) the variance of the demand for the article in question, (b) the chosen
'standard' with respect to the probability of stock outs, and (c) the delivery
time.
In the present case where the buyer relies on a liner service, the delivery time
is not constant over time but varies depending on when an order is placed. Just
before the date of a sailing the delivery time is equal to the transit time, T, and
just after a sailing the delivery time is equal to T plus the interval between
sailings, 365/ N. There are a number of possible delivery dates t1 , t2 , G... with
intervals of 365/ N days.
To get delivery at tl an order has to be placed on f1 at the latest, which is (at
least) T days before t1 • To get the latest possible information about the current
stock level the importer should wait to the latest possible order date before
deciding whether or not an order is to be placed for delivery at a given date.
The applicable order dates, fl' f2' t3'" corresponding to the aforementioned
delivery dates occur obviously with the same intervals of 365/N days.
However, it is not necessary to make use of every order date. If the current
stock level is adequate for the forseeable demand a relatively long time ahead,
it is pointless to place an order just because a ship is soon to depart from the
exporter's port. The optimal ordering policy is to place an order at an order
date only when the current stock level is below a certain 'critical level'.
(a) The critical stock level

At an order date, an order will be placed only if the current level of stock is
below a 'critical level' which is determined by the following considerations. If
an order is not placed now the next order date will occur after 365/N days, and
delivery cannot be obtained until (365/N) + T days have passed. In case the
actual stock exceeds the expected demand during a period of time of this
duration plus a safety margin which is required on account of the variability of
demand, there is no need to place a new order; one can wait and see how the
situation is at the following order date. The safety margin should be

determined according to a chosen standard with respect to the probability of
stock outs.
The safety margin can be calculated by using Chebyshev's Inequality, which
states that the probability of a random variable, X, taking a value which differs
from the expected value, E(X), by more than K standard deviations, is less than
1/K2. If a standard is set implying that the probability of stockouts must not
exceed P, and assuming a symmetrically distributed demand, it follows that
the safety margin has to be 1/.J(2P) standard deviations of the expected
demand. Denoting the variance Var(X), the safety margin is thus equal to
.J [Var( X)/2P].
The safety margin does not constitute the whole safety stock as previously
defined. To derive a useful expression for the safety stock, let us assume that the
daily rate of demand is a random variable, q, which is independent of the
previous actual development of demand. The variance of the daily demand is
written S2. On these assumptions the expected demand during a period of time
of (365/N) + T days (e.g. from tl to (2 in Fig. 7.2 and the corresponding
variance are q(365/N + T), and s2(365/N + T), respectively.
The critical stock level can then be specified thus:
Critical stock level = (3!5 + T)q + sJ[(365/~ + TJ. (7.4)
(b) Safety stock as afunction of transit time and sailings frequency

At the date of delivery, (2 in Fig. 7.2, the expected level of stock (just before
replenishment) is equal to the expected level of stock at the date when the order
was placed, t2 in Fig. 7.2, minus the expected demand during the delivery time,
An order is placed
'\1t2
I
t,
Calendar ~ime
Figure 7.2 A segment of the stock time profile during which an order is placed and
delivery occurs.
Shippers' costs 179
which is equal to qT. The fact that an order was placed at t;. indicates that the
level of stock was below the critical level at this particular order date. The
critical level can have been hit at any date between tl and t 2. On average the
level of stock should have fallen to the critical level at a date just between two
consecutive order dates. This means that on delivery day just before
replenishment the stock is expected to equal the critical level minus (365/2N +
T)q. We have defined the safety stock as the expected stock just before
replenishment. We thus have:
Safety stock = q 365

2N + s J[(365/N)
2P
+ T] . (7.5)
As is seen, the safety stock is greater than the 'safety margin' included in the
critical stock level. The reason for the addition of the product of half the
interval between sailings and q is that the delivery dates occur with a certain
interval. If delivery could be obtained at any day only provided that the order
is placed T days before, the critical stock level would be equal to the safety
margin.
Using this expression for the safety stock to make expression (7.2) above for
c: C
the total costs of general-cargo shippers more complete, we can write:
TC = + )~ + (rV + C){2~ + s J[(365~~ + T]} + nB + QF.

(7.6)
The sailings frequency, N, is a determinant of the safety stock, but not ofthe
shipment accumulation stock unless the choice ofthe number of shipments, n,
is constrained by N. It is also noteworthy that the safety stock is independent
of n. The number of shipments is determined by a trade-off of billing costs
against the costs of shipment accumulation stock without regard to the safety
stock.
In the main case of liner-cargo shipping the effect on storage costs of a
change in the sailings frequency is revealed as a change in the costs of safety
stocks only. Further insight into this relationship will be gained by making
certain specifications by which a numerical example can be considered.
( c) Numerical example
Suppose first that the probability distribution of demand adheres to the

Poisson distribution. Then the standard deviation is equal to the square root
of the mean: s = J(q), and the safety stock amounts to:
Safety stock in Poisson case = JL + J[(Q/N) + (TQ/365)]. (7.7)

2N 2P
Next we will fix certain values of T and P. On a deep-sea route the transit
time (including loading and unloading time in port) is several weeks. Let us
assume that T is a good 4 weeks to make the ratio T/365 equal to 2/25. We
further assume no more than a 2% chance that a stockout occurs before the
next delivery is acceptable.
On these assumptions the safety stock per unit of the imported goods, Q, can
be expressed thus:
. 1 25 + 2N
Safety stock in Poisson case per unit of Import = 2N + NQ (7.8)
assuming T/365 = 2/25 and P = 2/100

In Table 7.1 values of this expression are given for a range of values of Nand
Q, respectively.
It is apparent that the annual quantity of import (Q) is very important for the
cost of safety stock. The quantity is defined as the number of product units
imported per annum. What exactly should this stand for? It is clear that a ton is
not a generally adequate unit in this connection. The relevant unit is the typical
quantity per resale transaction. An importer of motor cars for example,
normally resells the cars by the piece; a car is the relevant unit of quantity in
this case. For an importer/wholesaler of matches, a parcel of a certain size
containing thousands of match-boxes is perhaps the most common quantity
per resale transaction.
The variations in the safety-stock requirements per unit are very wide
indeed depending on the value of Nand Q. In the included ranges of these
parameters both trivially small and very high costs of safety stock are
encompassed. Even if the extreme values of the north-west and south-east
corners of the matrix are left out of considerations, substantial differences
between the safety-stock costs can be observed. For example, an importer of
1000 units who can rely on a weekly liner service need only hold a safety stock
which is 6% of the turnover. The stock carrying cost and interest cost is in this
case likely to be below 1% of the total value of the import. On the other hand,
an importer oftwenty-five units per year relying on a shipping line sailing only
every second month has to hold a safety stock more than half the annual
Table 7.1 Safety stock per unit of import for different values of Nand Q
Annual quantity of import
Sailings frequency 1 10 25 50 100 1000 10000
Three times a year 3.32 1.16 0.79 0.61 0.48 0.26 0.19
Every second month 2.53 0.86 0.58 0.43 0.33 0.16 0.10
Monthly 2.04 0.67 0.44 0.32 0.24 0.10 0.06
Fortnightly 1.75 0.57 0.37 0.27 0.19 0.08 0.04
Weekly 1.59 0.51 0.33 0.23 0.17 0.06 0.03
Twice weekly 1.51 0.48 0.31 0.22 0.16 0.05 0.02
Shippers' costs 181
turnover, which will cost him nearly 10% of the total value. As regards high-
value goods this cost is well above the normal freight rate. A number of
interesting features of the pattern of safety-stock requirements is revealed by
the matrix.
Successive halvings of the sailings frequency have an accelerated effect on
the safety-stock requirements. For all except the very big importer the
safety-stock requirements will increase by less than 20% as a result of
reducing the frequency from twice a week to a fortnightly service, while a
further four-fold reduction to sailings every second month will increase the
safety-stock requirements by 60-70%. This supports the general view of
many liner-service operators that a lower frequency than fortnightly sailings
is unacceptable, while it is almost inconsequential for shippers if more than
one sailing per week is offered - at least in a deep-sea trade.
2 The safety stock requirement of very small importers would be almost
prohibitive if the assumed standard with respect to the probability of
stockouts is maintained. This standard is likely to be lowered considerably
when the import quantity is only a couple of units per year, and in the
extreme case no stock is held at all, but the article in question is not ordered
until the need for it has actually arisen. The latter category of import will
apparently not fall under the present main heading: 'Cargo for which costs
of a low-sailings frequency are revealed as storage costs', and is consequent-
ly taken up in the next section.
3 The safety-stock requirements of a very big shipper is almost trivial unless
the sailings frequency is extremely low. The very big importer is likely to
want to receive many shipments per year. According to a well-known
formula the optimal number of shipments is proportional to the square root
of the annual turnover. In case Q is very large it thus can happen that the
sailings frequency becomes an effective constraint on the choice of N. Under
such circumstances the cost of safety stock is not the only item of the total
storage cost which depends on N. To this case we now turn.
7.1.4 Additional costs of shipment accumulation stock when the sailings

frequency imposes a constraint on the number of shipments
A shipper who uses the liner services on the route practically every sailing, can
be assumed to dispatch a smaller number of shipments per year than he would
like. For such a shipper N will affect both the shipment accumulation stock
and the safety stock. The relationship between costs of accumulation stock
and N can be expressed as the costs of deviating from the optimal stock in an
unconstrained situation.
In a case where the sailings frequency is not an effective constraint the
optimal number of shipments, n *, is found by taking the first derivative of total
shipper's costs, TC, as written in equation (7.6), with respect to n, setting the
resultant expression = 0
* = J[Q(C + rv)] (7.9)

n 2B'
Not unexpectedly the classical 'Wilson square-root formula' is obtained.

Inserting n* for n in equation (7.6) the sum ofthe total storage and billing cost
comes out as given by the square-root expression below:
TC* = J[2BQ(c + rV)]. (7.10)
The additional storage and billing cost caused by the condition that N is a
binding constraint is obtained as the difference between TC assuming that
n = N, and TC* assuming n < N:
TC - TC* = NB + Q(c2:rV) - J[2BQ(c + rV)]. (7.11)
It is illuminating to express this difference in terms of N and the preferred

(unconstrained) number of shipments, n*. Using expression (7.9) for n* we
can write:
TC - TC* = NB + B n*2 - 2Bn*

N
B
=~n*-N)2. (7.12)
N
When N = n* the additional cost is obviously zero, but as soon as N drops

below n* the additional cost starts to rise steeply, both because TC - TC* is
proportional to the square of the difference between n* and N, and inversely
proportional to N.
Put in relation to the cost of shipment, accumulation stock in an
unconstrained situation, which amounts to 2Bn*, it is seen that B will be
eliminated:
TC - TC* _ (n* - N)2 _ ~(n* N) _

(7.13)
TC* - 2n*N -2 N+n* 1.
We can now get a clearer picture of the relative size of the additional costs of
shippers for whom the sailings frequency impose a binding constraint. For
example, if the sailings frequency, N, is only half the desired number of
deliveries, n*, the accumulation stock and billing costs will be 25% higher on
account of the sailings frequency constraint. If the ratio of N to n* is 1:4-
weekly deliveries would be preferred but only a monthly service is available -
the accumulation stock and billing costs are more than doubled.
Shippers' costs 183
7.2 COSTS OF SAILINGS INFREQUENCY AND TRANSIT TIME

FOR GOODS WHICH ARE NOT STORED BY IMPORTERS
Some liner cargo is not likely to be stored at all in the importing country. In
this case the relationship between shippers' costs and the delivery time cannot
be easily estimated. The typical importer of this type of cargo is a producer of
goods or services. Traders, wholesalers/importers are normally not interested
to deal in goods which are demanded so infrequently and irregularly that the
storage costs per unit are bound to be rather high.
If a certain input article used in the production process by a firm is expected
to be badly needed at frequently occurring occasions, the firm is likely to hold a
safety stock. A goods manufacturing enterprise holds, aside from the stocks of
input material, stocks of tools and equipment which are quantitatively
important in the production process. It is, however, uneconomic to have spare
items of everything. The smaller the required number of items of a particular
tool or equipment is from experience, and the more irregularly the need arises,
the less likely it is that items are held in store.
When an accident happens and some special equipment breaks down
beyond repair the cost caused by the interruption can be very substantial
indeed. This is an inevitable fact oflife of goods production; one cannot afford
a complete plant in reserve, standing idle most of the time. Therefore, there
exist articles in liner cargo which are not stored by the importers, and are not
ordered until the need for the articles actually occurs.
An attempt to quantify the expected costs of delivery time of such articles
will obviously encounter serious difficulties. By the nature of the type of
articles concerned each case is a 'special case'.
Two approaches to at least a partial quantification of these costs should,
however, be mentioned. First, an upper limit to the delivery time costs can
perhaps be assumed to be constituted by the hypothetical costs of safety
stocks. The person who knows the costs of delivery time best in each particular
case is the importer himself. The fact that he does not store a particular article
should imply that he expects the costs of a safety stock to be greater than the
costs of the risk of occasionally being short of the article in question.
Secondly, it may be possible to get an idea of how importers would evaluate
a change in delivery time for goods which are not stored by them from the
observed propensity, under different circumstances, of these importers to
resort to the many times more expensive alternative of air transport.
7.3 LOSS OF VALUE OF PERISHABLE GOODS

We can define perishable goods as goods the quality of which deteriorates with
the passage of time. The shorter the time lag between production and
consumption is, the higher will be the value of such goods in the hands of the
consumers. One time lag is constituted by the transit time, and another by the
storage time. All efforts should be aimed at minimizing the storage time.
Exporters of perishable goods should send as many shipments per unit of time
as the sailing frequency allows. Shipment accumulation on account of billing
costs is normally not contemplated.
The transit time is one inevitable component of the total time lag between
production and consumption. On the assumption that both the rate of
production and the rate of consumption are roughly constant over time, the
other time lag will on average be equal to the interval between sailings. (Half
the time lag occurs in the exporting country and half the time lag occurs in the
importing country.)
The introduction of refrigerated holds of ships as well as storage facilities,
and the advances in refrigeration techniques have mitigated quite radically the
loss of value in transit or storage of certain foodstuffs like meat. The capacity
costs of ships and storage facilities have, on the other hand, gone up.
The natural and best approach to a quantification of the delivery-time costs
of perishable foodstuff is simply to read off the market evaluation of different
qualities with respect to freshness of a certain kind of goods. Other types of
'perishable' goods are mail, newspapers, magazines and the like. Mention can,
finally, be made of goods which fall in value because a general slump occurs in
the market concerned during the time in transit. In the days when trans-ocean
transport took several months a very important cost of time for delivery used
to be the risk for a price fall on commodity exchanges in the importing country.
To guard against this risk futures markets have arisen. Nowadays this is a less
important aspect so far as liner shipping is concerned. Transit times are much
shorter and the proportion in liner cargo of primary products which can
suddenly rise or fall in price has decreased.
7.4 HOW IMPORT ANT ARE SHIPPERS' COSTS?

How important are shippers' costs? Will their inclusion in the total costs per
ton affect significantly the optimal size of the ship? To answer these questions
we will construct an example of container services in a thin trade. We take our
example at the end of chapter 5 as a starting point. The round trip distance is
10400 miles and the trade is served by two ports - one at each end of the route.
This is a simplification since there will be more than two ports of call in a thin
trade, but which would not significantly alter the results. All other parameters
are as described in pages 154-156. We take the low port-productivity figure of
350 tons per hour (two cranes handling together thirty-five containers of 10
tons each per hour), which yielded an optimal ship size of 33000 dwt. The
trade volume on the dense leg is equal to the size of the optimal ship (33000
dwt) times the annual frequency of sailings (ten), which gives a total of 330 000
tons annually. Trade is not balanced. Trade on the thin leg is half in volume, i.e.
165000 tons. To measure the effect of users' costs we consider alternative
frequencies (or what are implied ship sizes), holding the total volume of trade
Shippers' costs 185
unchanged. Thus, we will compare the costs of one ship of 33000 dwt, two
ships of 16 500 dwt, three ships of 11 000 dwt etc. For each alternative we will
calculate the shipping-company costs per ton (producers' costs), and the
shippers' costs per ton (users' costs), which include the interest costs of cargo in
transit and the costs of safety stock. The optimal ship size is the one that brings
the sum of the shipping company's costs per ton and the shippers' costs per ton
to a minimum. The calculation of the shipping company's costs was discussed
in chapter 5 and will not be repeated here. The calculation of the users' costs
per ton needs more explanation.
The interest costs on cargo in transit varies with the size ofthe ship. Similar
to the costs of capital and crew, they are incurred all the time - at sea and in
ports - and can be treated in a similar way. Let us denote: r = the interest rate
per ton per day; v = the average value of ton of cargo per day. The interest costs
per ton of cargo in transit, C r , is equal to:
rvS DrvS ]
[ (7.14)
Cr = n(h 1 SE') + j.lh 2 SE2
where all other notations are as explained in chapter 5. Total interest costs
(the numerator) increase in proportion to the size of the ship, S. This is so for
both ports and at sea. It equals the interest costs, r, times the average value per
ton, v, times the number of tons carried, S. The interest costs per ton in ports
(the first term) rise with the ship size because E1 (which we assumed in the
example to take a value of 0.3) is less than the interest cost ship-size elasticity
(which equals unity). Interest costs per ton at sea decline with ship size, since E2
equals 1.1 7.
In the calculation of the costs of safety stock, we assume that demand facing
each importer follows the Poisson distribution, and we can write the safety
stock in the Poisson case as:
S ~ k (Q) + J[(Q/N) +2P(TQ/365)]
a ety stoc = 2N (7.15)
(see equation (7.7».

The costs of safety stock per ton for alternative frequencies (and ship sizes)
was calculated using equation (7.15), making the following assumptions:
The costs of safety stock is incurred by each importer, and should be
calculated separately for each one. The aggregate costs of safety stock is then
arrived at by adding up the costs of safety stock of all importers. This
calculation should be carried out separately for importers at each end of the
route.
2 The price per ton of the safety stock includes the interest costs on goods in
storage plus the charges for the actual storage.
The values of the parameters needed for the calculation are listed below. We
have tested the sensitivity of the results to alternative values of two
parameters - the average value of cargo per ton, and the interest rate. We
therefore conducted nine-ship optimization for each combination of interest
rate and value of cargo.
Values of parameters required to calculate shippers' costs:

Rl = 10%
Annual interest rate, R { R2 = 12%
R3 = 14%
which assuming 350 operating days of the ship gives:
rl = 0.00029
Interest rate per day, r { r 2 = 0.00034.
r3 = 0.0004
Alternative values per ton of cargo were considered for the following range:
Raw materials: value per container, $10000
Leather and cloths: value per container, $20000
TVs: value per container, $30000.
Assuming the same utilization for all three, of 12 tons per container,
Vl = $833.333
The value per ton of cargo, v { V2 = $1666.666.
V3 = $2500.000
The daily interest costs per ton, rv, for these alternative combinations, are
summarized in Table 7.2.
The round-trip time is 36 days, and the frequency of service, N, is 10.
Delivery time, T, is half the round-trip time, and equals 18 days. Although
Table 7.2 Interest costs per ton per day, rv,for alterna-
tive values of interest rates and values of cargo
v($) 0.1 0.12 0.14
833.333 0.2381 0.2857 0.3333

1666.666 0.4762 0.5714 0.6666
2500.000 0.7143 0.8571 1.00
Storage charges per ton were calclated on the basis of $5 per

day per container and a utilization of 12 tons per container.
Shippers' costs 187
Table 7.3 Optimal ship size for the shipping

company plus the shipper, for alternative
values of interest rate, r, and value of cargo, v
11000 8250 8250

8250 8250 8250
6600 6600 6600
speed changes with ship size and by this affects delivery time and frequency, we
simplify and assume that if a 33000 dwt ship makes ten round trips, two ships
of 16500 dwt each will make twenty round trips etc,
There are thirty importers on the fat leg and there are twenty importers on
the thin leg, and all importers at each end import the same annual quantity,
The safety standard P, is taken to be 5%,
The interest costs per ton, the storage costs per ton, and the shipping-
company's costs per ton were calculated for the range of ship sizes (and
accordingly frequencies) between 3300 dwt and 33000 dwt. The optimal ship
size for the nine combinations of r and v are summarized in Table 7,3.
As seen from Table 7.3, the inclusion of users' costs has reduced the optimal
ship size substantially. If we take the extreme case of a low v ($10000 per
container) and a low interest rate (10% annually), the optimal ship size is
reduced from 33000 dwt to 11000 dwt. For the case of a high value of cargo
($30000 per container), the optimal ship size is reduced to 6600 dwt,
irrespective of what values the interest rate takes. The costs of shippers, it
appears, are important both in magnitude and in their sensitivity to the ship
size. This is particularly so for the costs of safety stock. In the appendix to this
chapter we give a detailed account of the variations of producers' costs and
users' costs with the size of the ship.
These results are in contrast to the existing trend to build bigger and bigger
ships. We have argued that on dense trade routes, where frequency can be
neglected, these VLCCs may well be of the optimal size. On thin-trade routes,
much smaller ships are optimal from a social point of view. Our optimal ship
size is obtained by the assumption that the conference acts in unity with all
members to optimize size and frequency of services. Since frequency of service
is a collective quality of all member lines, a particular line may increase the size
of its ship above the optimum in the hope of increasing its share at the expense
of other. The model shows that users' costs should not be underestimated. If
more lines follow suit and the general level of frequency is reduced, a smart
outsider operating with a small ship will have a cost advantage, and will
threaten the conference dominance over the route.
APPENDIX: OPTIMAL SHIP SIZE WHEN BOTH SHIPPING-COMPANY COSTS AND THE SHIPPERS' COSTS ARE
ACCOUNTED FOR
Table A.l Interest cost per ton and ship size
Ship size r1v1 r1v2 r1v3 r2v1 r2v2 r2v3 r3vl r3v2 r3 v3
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
3300 6.1509 12.3017 18.4526 7.3805 14.7611 22.1416 8.6102 17.2204 25.8331
3666 6.0973 12.1947 18.2920 7.3126 14.6326 21.9489 8.5353 17.0705 25.6083
4125 6.0435 12.0870 18.1305 7.2517 14.5034 21.7551 8.4599 16.9198 25.3822
4714 5.9909 11.9817 17.9726 7.1885 14.3770 21.5656 8.3862 16.7724 25.1611
5500 5.9417 11.8833 17.8250 7.1295 14.2590 21.3885 8.3173 16.6346 24.9544
6600 5.9008 11.8015 17.7023 7.8040 14.1608 21.2413 8.2601 16.5202 24.7827
8250 5.8786 11.7573 17.6360 7.0539 14.1077 21.1616 8.2291 16.4582 24.6898
11000 5.9012 11.8024 17.7036 7.0809 14.1619 21.2428 8.2607 16.5214 24.7845
16500 6.0487 12.0973 18.1460 7.2579 14.5158 21.7737 8.4671 16.9342 25.4039
25000 6.3740 12.7481 19.1221 7.6483 15.2966 22.9450 8.9226 17.8452 26.7704
30000 6.5848 13.1697 19.7545 7.9013 15.8025 23.7038 9.2177 18.4353 27.6558
31000 6.6278 13.2555 19.8833 7.9528 15.9055 23.8583 9.2778 18.5555 27.8360
32000 6.6709 13.3417 20.0125 8.0045 16.0089 24.0134 9.3381 18.6761 28.0170
33000 6.7140 13.4282 20.1422 8.0560 16.1127 24.1690 9.3986 18.7972 28.1986
Table A.2 Costs of stifety stock and ship size
Safety stock per

importer Costs of safety stock per ton
(tons) ($)
Ship size Thin leg Dense leg WI VI W IV2 W IV3 W 2V I W 2V 2 W 2V 3 W3 V I W 3V 2 W3 V 3
33000 679.063 524.271 28.7119 39.1522 49.5925 30.7991 43.3266 55.8541 32.8863 47.5010 62.1200
16500 380.627 297.726 16.2008 22.0919 27.9827 17.3786 24.4473 31.5160 18.5563 26.8027 35.0516
11000 279.893 221.123 11.9741 16.3282 20.6823 12.8446 18.0691 23.2936 13.7150 19.8100 25.9068
8250 229.190 182.531 9.8457 13.4256 17.0057 10.5613 14.8571 19.1529 11.2770 16.2885 21.3015
6600 198.640 159.265 8.5629 11.6765 14.7901 9.1853 12.9214 16.6575 9.8078 14.1663 18.5262
5500 178.214 143.702 7.7050 10.5067 13.3084 8.2651 11.6269 14.9887 8.8252 12.7471 16.6702
4714 163.592 132.559 7.0908 9.6691 12.2475 7.6062 10.7000 13.7939 8.1217 11.7309 15.3413
4125 152.608 124.186 6.6293 9.0399 11.4505 7.1112 10.0037 12.8962 7.5932 10.9675 14.3430
3666 144.053 117.663 6.2699 8.5498 10.8297 6.7257 9.4614 12.l970 7.1815 10.3729 13.5653
3300 137.202 112.439 5.9820 8.1573 10.3325 6.4169 9.0270 11.6371 6.8518 9.8967 12.9425
Column 2 is calculated by using equation (16).

Column 3 is calculated by multiplying the price per ton per day of the holding stock, w, by the annual quantity times the number of importers times 350 days
divided by the annual quantity of all importers.
w, is the sum of the interest rate per ton per day, r, plus the rental storage costs per ton per day.
Table A.3 Total shippers' costs per ton (interest costs + costs of safety stock)
Ship size rtv t rtvz rtv3 rZv t rzvz rZv3 r3Vt r3 vZ r3 v3
3300 12.1329 20.4590 28.7851 13.7974 23.7881 33.7787 15.4620 27.1171 38.7756
3666 12.3672 20.7445 29.1217 14.0383 24.0940 34.1459 15.7168 27.4434 39.1736
4125 12.6728 21.1269 29.5810 14.3629 24.5071 34.6513 16.0531 27.8873 39.7252
4714 13.0817 21.6508 30.2201 14.7947 25.0770 35.3595 16.5079 28.5033 40.5024
5500 13.6467 22.3900 31.1334 15.3946 25.8859 36.3772 17.1425 29.3817 41.6246
6600 14.4637 23.4780 32.4924 16.9893 27.0822 37.8988 18.0679 30.6865 43.3089
8250 15.7243 25.1829 34.6714 17.6152 28.9648 40.3145 19.5061 32.7467 45.9913
llOOO 17.8753 28.1306 38.3859 19.9255 32.2310 44.5364 21.9757 36.3314 50.6913
16500 22.2495 34.1892 46.1287 24.6365 38.9610 53.2897 27.0234 43.7369 60.4555
33000 35.4259 52.5804 69.7347 38.8551 59.4393 80.0231 42.2849 66.2982 90.3186
Table A.4 Total costs per ton of the shipping company·
Costs per ton Cost per ton Total costs

in port at sea per ton
Ship size ($) ($) ($)
3300 3.9066 45.1922 49.0988

3666 4.0564 43.2978 47.3542
4125 4.2335 41.3054 45.5389
4714 4.4462 39.2083 43.6545
5500 4.7098 36.9771 41.6869
6600 5.0489 34.5812 39.6301
8250 5.5096 31.9685 37.4781
11000 6.1910 29.0538 35.2448
16500 7.3604 25.6730 33.0334
25000 8.8948 22.9214 31.8162
30000 9.7070 21.9014 31.6085
31000 9.8637 21.7287 31.5924
32000 10.0187 21.5645 31.5832
33000 10.1720* 21.4080* 31.5801*
34000 10.3240 21.2587 31.5827
35000 10.4745 21.1160 31.5905
40000 11.2080 20.4880 31.6960
45000 11.9120 19.9710 31.8830
See chapter 5 page 155.

Table A.5 Total costs per ton - shipping company plus shippers
Total costs per ton
Ship size r1v 1 r1v2 r1v3 r2 v1 r2 v2 r2 v3 r3v l r3v2 r3 v3
3300 61.2317 69.5578 77.8839 62.8962 72.8869 82.8775 64.5608 76.2159 87.8744
3666 59.7214 68.0987 76.4759 61.3925 71.4482 81.5001 63.0710 74.7976 86.5278
4125 58.2117 66.6658 75.1199 59.9018 70.0460 80.1902 61.1803 72.8316 84.4864
4714 56.7362 65.3053 73.8746 58.4492 68.7322 79.0140 60.1624 72.1578 84.1569
5500 55.3336 64.0769 72.8203 57.0815 67.5728 78.0641 58.8294 71.0686 83.3115
6600 54.0938 63.1081 72.1225 56.6194 66.7123 77.5289 57.6980 70.3166 82.9390
8250 53.2024 62.6610 72.1495 55.0933 66.4429 77.7926 56.9842 70.2248 83.4694
11000 53.1201 63.3754 73.6307 55.1703 67.4758 79.7812 57.2205 71.5762 85.9361
16500 55.2829 63.3754 79.1621 57.6699 71.9944 86.3231 60.0568 76.7703 93.4887
33000 67.0060 84.1605 101.3148 70.4352 91.0194 111.6032 73.8650 97.8783 122.9396
8 Port costs and charges and the problem of
shipping and port sub-optimizations
The technical progress in ports seems to be the strategic factor for the
development both of ships and ports. No giant tankers and bulk carriers
would appear on the seas unless a multiplication of the bulk-cargo handling
capacity, and the boom in investments in deep-water facilities had occurred in
the post-war period. The container revolution would likewise not have
happened unless a great number of container ports had emerged almost 'over
night' at the end of the 1960s.
The key characteristic of the relationship between the development of ship
design and the development of port design is the interdependency. On one
hand, improvements in the cargo-handling technique in ports has made new
types of ships, and bigger ships profitable. On the other hand, the profound
change in ship design thus induced has, in turn, put new demands on the
adjustments of the ports.
An individual shipowner takes the general development of ports, and an
individual port authority takes the general development of ships as exogenously
given from their different points of view. Nevertheless, the total effect on ports
of shipowners' decisions about ship investment is of a most profound nature,
and the same is true about the total effect on ships of port authorities decisions
about port investment.
8.1 'PUBLIC' GENERAL CARGO TRANSPORT SYSTEMS VERSUS

'PRIVATE' BULK CARGO TRANSPORT SYSTEMS
In the analysis of the previous chapters of ship size and liner-service design we
have treated shipowners' and shippers' costs and port charges equally. It is
very pertinent to argue that the port charges should reflect the complete real-
port costs caused by ships of different type and size in order to attain a true
optimum. In a 'closed system' context represented by, for example, some bulk
transport systems where the ware owner is a shipowner and port owner as well,
such a total-cost calculation is a matter of course. However, general cargo
ports normally serve many different trades and shipping lines and numerous
different shippers. And it is in fact impossible to devise a system of port charges
which faithfully reflects investment costs caused by different ships without
being in conflict with the aim of optimal use ofexistingfacilities. We argue that it
is illusory to think that the port authorities could steer the ship-design
development in an optimal way by exacting the full 'port cost responsibility'
from shipowners. It is primarily by investments in port facilities that this

development is, and should be, influenced. Efficient port charges can in some
respect, as pointed out below, affect more long-term dispositions of ship-
owners, namely if the short-run marginal costs of using a port are sensitive to
differences in, for example, ship size or shipload size, and the type of cargo.
8.2 BOTTLENECKS IN PORTS

When regarding the port operations from a shipping point of view, as we have
done so far, it is only too easy to focus on the sea-side of ports where the loading
and unloading of ships take place, and forget about the landside operations
and the connecting in-between links.
The main activity of a port is to get goods transferred from sea to land
transportation and vice versa. By 'port services' we will here mean the
complete process of getting cargo thus transferred. The output of a port is
measured in tons per unit of time passing through it, and is adequately called
'throughput'. A schematic picture of the principle sublinks of the throughput
process is given by Figure 8.1. Besides the five links given, there are a number
of other functions, such as customs inspection and warehousing, normally
performed in the port area. Such functions are, however, more supplementary
by nature than intrinsically part of the transfer between sea and land
transportation, and could in principle be performed elsewhere.
Back-up area Loading conroiners

on to inland
~ransport vehicle
Discharge
Passage of of
con~ainers
ship through
approach from ship's
hold to quay
channel up to
quay
2 3 4 5
Figure 8.1 Schematic picture of five links of a container berth.

Port costs and charges 195
That the chain is as strong as its weakest link is an outworn phrase but
nevertheless useful point of departure. In every activity which consists of
distinguishable links it is generally desirable to seek to attain harmony in the
sense that the capacity of each link is equal. When the potential capacity of one
link has been increased relatively by some innovation or other, every effort
ought to be devoted to the improvement of the other links of the chain, in order
to realize the full potential of the original innovation. Technical developments
should be so canalized that the rate of increase in 'strength' of each link of the
chain is on average more or less the same. In the short term, however,
disharmony may occur from time to time on account of the inevitable short-
term random occurrence of major innovations.
Containerization has meant a definite breaking of the bottleneck in
seaborne general-cargo transport which has been prevailing for centuries -
the stowage and unstowage of cargo in the ship's holds. The breaking of this
bottleneck has had a far-reaching impact on the other links of the transport
chain.
The container was the logical continuation of the trend towards bigger
package units. It was an answer to several demands. By standardization of
container dimensions, the multi-purpose conventional cranes could be
replaced by specialized high-capacity container cranes. The
loading/unloading capacity per crane-hour was as a result multiplied
something like thirty times!
When two container cranes, and, as sometimes happens three container
cranes at a time are working on a ship, the turnround time of a container ship
is only about a tenth of the turnround time of a conventional liner
loading/unloading the same quantity of cargo. RoRo methods of loading and
unloading big standardized units constitute, for similar reasons, an equally
dramatic improvement of the capacity per unit length of quay.
One would have thought that containerization should tip the balance in
favour of direct transfer of cargo between sea and, in particular, rail inland
transport, i.e. omitting transit storage. Each container constitutes a complete
carload. Tallying should not be an impediment to continuous direct loading or
unloading. However, this does not seem to have happened. Direct rail-to-ship
transfer of containers is not considered practical since the train of cars would
have to be continuously moved to bring the containers within reach of the
cranes during loading and unloading.
8.2.1 Increasing demand for back-up space

Land requirements of container, RoRo and packaged timber (or other big unit
load) berths are very much greater than of a conventional break-bulk berth.
On the other hand, berth throughput is many times higher in the former case.
The picture is therefore incomplete as long as the land requirement per
throughput ton is not paid attention to. Typical (round) figures for the total
area per berth are: conventional break-bulk, 1-2 ha; palletized cargo, 3-4 ha;
containers (first generation berth), 7-9 ha; RoRo 5-7 ha.
As regards throughput 100000 and 200000 tons per year are considered
good for a break-bulk and a palletized cargo berth, respectively, i.e. between
50000 and 100000 tons per ha per year in both cases. What is to be
considered a normal throughput figure of the first-generation container berths
is more difficult to say, mainly because only a few berths of the world have b~en
working at reasonably full capacity for any length oftime. This is quite natural;
no general cargo port regarding itself as a potential server of containerizable
cargo wanted to be left behind for not being able to offer the service demanded
at the critical moment. Moreover, one sensibly invests for projected traffic
several years hence rather than for current traffic. The overcapacity situation is
reflected in the way of presenting data of container ports. It is much more
common to report what can be or will be performed at the new facilities rather
than what actually has been performed.
Of course, some ports have been very busy with containers for a number of
years. At the European Container Terminus of the port of Rotterdam, for
instance, about 250 000 containers were handled in 1972 on six berths covering
52 ha. With an average load per container of a good 12 tons, this gives a
throughput per hectare per year of 60 000 tons. This is a high figure, matched
only by the very highest figures recorded in American and British ports. The
essence of the issue ofrelative land requirements can be put like this: although
total land requirements did not increase very much more than in proportion to
total port throughput by the advent of the container, the necessary depth of the
back-up area of a container berth outstripped by far that of a conventional
break-bulk berth. The land on either side of one break-bulk berth made
'redundant, by the reduced need for quay length, or number of berths, is
unfortunately a poor substitute for a deeper back-up area. Table 8.1 illustrates
this aspect of the adaptation of ports to unitization of break-bulk cargo.
In terms ofrelative strength of the port sub-links a new bottleneck has arisen
owing to unitization in as much as matching subsequent links to the full
Table 8.1 Cross-section of berths in the Port of London
Period of Depth of
Type of berth construction berth area
Break-bulk cargo, multi-storey shed 1900 40m

Break-bulk cargo, single-storey shed 1920-30 50m
Palletized cargo, spacious
shed plus ample open area 1955-65 160m
Containers, no buildings at all 1966 200-260m
Figures for latest berth at Tilbury

potentials of the traditional bottlenek - the capacity to load and unload ships
is next to impossible in ports designed for traditional break-bulk handling.
What is needed more than anything else is supporting land for storage of
containers in transit and to move them about in feeding the container cranes.
In particular, if the obsolete finger-pier configuration still remains with hardly
any back-up area at all except for some narrow - and, to make things worse,
multi-storey - sheds, the problems of adaptation to the container age are very
pressing. In addition, the water depth is insufficient in many older ports to
accommodate the new bigger ships.
The problem is manifest in the tendency of ports to move out of town, down
the river etc., to cheaper sites and deeper water. In some old ports, where cities
have grown up around the port, this is the only economically feasible
(although not always available) way out for the port. In San Francisco, for
example, no site for a modern container port was available at the right
moment, and as a result the containerizable business went across the San
Francisco Bay from its historical port to Oakland, where appropriate land was
plentiful. In New York City all major improvements to cargo piers on the
Manhattan waterfront have been arrested. New facilities are located chiefly at
Port Elisabeth, New Jersey. The development of the Port of London is a well-
known example of the need to build new berths further and further down the
river estuary.
Second-generation container berths are built to comprise a paved area twice
as large as the first-generation ones - about 16 ha instead of8 ha. The practical
capacity of second-generation berths is, likewise, about twice that of first-
generation berths, which leave throughput per hectare roughly unchanged. At
least this is the picture that comes out from a comparison of the typical
performance of first-generation berths with the highest throughputs reported
so far at recently constructed berths. As was mentioned the practical capacity
of the former is about 10000 tons per week per berth. This can be compared
with some second-generation throughput 'records': at the four single-user
berths of the Sealand terminal of Port Elisabeth a throughput equivalent to a
good 20000 tons per berth per week has been achieved, and in the port of
Oakland, the second-largest container port in the USA, the highest figure per
berth amounted to about 26000 revenue tons per week at the beginning of the
1970s. In Japan the port of Kobe has recorded a container throughput at the
Port Island C berth of about 30000 tons per week at the beginning of the
1980s.
8.2.2 The shipload size rather than the throughput volume

determines the required back-up space
New containerships are getting bigger and bigger, and so are the shiploads of
containers. Regardless, by and large, of the total throughput handled at the
berth per year, space has to be provided which is at least proportional to the
size of the shipload. There are usually two resting areas for the containers, one
close to the quayside and the other further away. The substantial additional
area which is required for internal movements of the containers have to be
considerably more than proportional to the shipload size for smooth and safe
carriage of containers to and from the stacking area. This is a principal source
of diseconomies of shipload size. As mentioned second-generation container
berths are built to comprise a paved area twice as large as the first-generation
berths. Where will this end? Still larger shiploads of containers to be handled at
a time are anticipated. Deep-sea container ships of a carrying capacity around
the equivalent of 2000 20-foot containers are now common. Still bigger ships
are being put into operation on the longest liner-trade routes. The ScanDutch
fleet of cellular container ships, for instance, which provide a service between
Northern Europe and the Far East, have a capacity ranging from 2200 up to
2700 20-foot containers. It is rare that a whole shipload of containers of this
size is loaded or unloaded in one port. The usual route pattern is that more
than one port is called at at either end. The ScanDutch ships call at Gothenburg,
Hamburg and Rotterdam in Europe and at Singapore, Kobe and Tokyo in the
Far East.
It is expected, however, that the original idea of shuttle-services between pairs
of central ports supplemented by feeder-services at either end will eventually
come true. Consequently container-port authorities are preparing to cope
with container flows coming intermittently in lumps of 2000 containers. Crane
capacity is not a great problem; 2000 containers should be possible to load and
unload in 30-80 hours depending on the number of cranes employed to
achieve a reasonably quick turpround. The question is, however, how soon
the next ship can be received? How quickly can a sufficient amount of the back-
up area be cleared so that another container 'avalanche' can be coped with.
Is the rapid increasing land requirement an inevitable consequence of the
growth in size of container ships? Is it not possible to apply a less land-intensive
technique of container handling in the ports? From American experience the
following conclusion can be drawn. Two types of marshalling area designs are
prevalent. In one, the containers remain on the trailer chassis with complete
flexibility of movement. The container trailer combination is towed by the
prime mover to an assigned location in the yard, remaining readily accessible
for coupling to yard tractor for loading aboard ship. This method of operation
requires more marshalling area than any other. The other system in common
use requires block storage of the containers, usually two and sometimes three
or even four high. Containers are placed by straddle carriers and may be
rehandled a number of times before leaving the stackyard for good. In the case
of export containers stacking height is not a great problem. Containers
destined for a certain ship can and must be prestacked in the reverse order in
which they will be loaded. As far as import containers are concerned, however,
this land-saving method cannot be economically used to such an extent,
because it is known exactly when the receivers will collect the containers.
Block storage minimizes the capital investment in rubber-tired chassis and

land area but adds to yard operating costs and can cause delays in the loading
and unloading of the ships.
The development of container terminals towards larger and larger 'plants'
of higher and higher throughput capacity can be characterized as a process of
'breaking design bottlenecks'.
The meaning of a design bottleneck is that in one link of the production
chain pronounced diseconomies of further capacity expansion prevail,
whereas, at least on average, economies of further capacity expansion are
enjoyed in the other links. The second condition is crucial. The idea of
breaking a bottleneck is that something is to be gained in other links by a
greater total capacity of the plant. When this is no longer the case the addition
of another plant is likely to be the best way of further increasing capacity.
The question is now, if the design of a modern container berth represents the
final stage where all major bottlenecks are overcome. The characteristic low
berth-occupancy rate is perhaps a sign that this stage is not yet reached. If the
capacities oflinks 2-5 (see Fig. 8.1) could be enhanced there are still gains to be
made in the form of higher berth-occupancy rates and still quicker turnround
of ships.
8.2.3 Third-generation container ship and port design

Are there more economies of ship size to be reaped in the process of
strengthening links 2-5? The appearance of VLCCs of up to 4400 TEUs, is a
sign that this is the case as far as the at-sea ~osts of the shipping company are
concerned. For port design this imposes a great burden on links 2-5 and will
restrict the number of ports that can be called at, just for this reason. The
proposed tailor-made container terminal operated by conveyor belts sug-
gested by Meeusen (1971) and its counterpart super container ship design
proposed by Rath (1973), have not been adopted. Rath in order to provide
solutions to, (a) problems of longitudinal strength and torsion of open deck
VLCC, and (b) the increase in crane cycle as the beam and depth of ship
increase, suggested a new design of super container ships which would remedy
these size disadvantages. This includes the reintroduction of completely closed
decks, and the abandoning of the lift-onllift-off principle of container loading
and unloading.
Horizontal stowage of containers by means of conveyor belts, would replace
the conventional methods of handling containers. The ships would have no
vertical cells but horizontal longitudinal lanes beside and above each other
from the bow to the stern. The containers from the lower lanes would be
moved to the higher lanes, and vice versa by elevators. Two lanes would be
used for loading and unloading containers in a continuous stream. This should
increase the handling speed quite considerably.
The container terminal has to be tailor-made to these ships to meet the
'systems integration' requirement. The conveyor belts would transport the

containers in different directions to and from the ship. Computer-controlled
overhead cranes would move the containers between the conveyor belts and
the stacking bays, and also to and from rail cars and trucks.
Such a system has been proposed by the consulting engineer, Meeusen
(1971) for the layout of the Rijnpoort container terminal of the Port of
Rotterdam. The terminal is planned to handle ultimately no less than the
equivalence of 1.5 million 40-foot containers per year. The salient feature of
the proposal is that on the seaside of the giant terminal the inlet and outlet for
the ocean-going traffic is confined to the two conveyor belts moving containers
in and out of a super container ship.
The proposed layout is interesting in the present context in that in its final
shape it represents the theoretical extreme endpoint of the capacity-deepening
era of the development of general-cargo port design. The terminal can be
regarded as one giant berth with a twenty times greater throughput than the
throughput of an existing berth. Although a huge back-up area is required the
productivity per cubic metre in envisaged to be about three times higher than
current performances with regard to container throughput per unit of berth
area. In this sense the proposal, if it will be realized, represents a breaking of the
prevailing bottleneck - the land hunger of the handling operations on the
back-up area. The complete automation of these operations will allegedly cure
this to a large extent.
Rath's (1973) and Meeusen's (1971) ideas have not been adopted by the
industry. The new VLCCs are open-deck container ships and are handled by
lift-on/lift-off cranes in ports, with the main difference that four to six cranes
rather than two are being employed. The bottlenecks that will be created in
links 2-5 and the way of coping with these are issues the industry will have to
face, in the future.
8.3 PORT CHARGES AS A MEANS OF COORDINATING

SHIPPING AND PORT OPERATIONS
One question which springs to mind when bigger and more specialized ships
and ports are built is: Whoever can afford the risk of investing a super berth
which requires super container ships to be profitable, or in a super container
ship which requires super berths? No one is likely to venture such an
investment unless assurance is given that the complementary factors are
available.
Against this background the strong tendency to vertical integration in
general-cargo transport which has been noticeable in the wake of containeriz-
ation is not surprising. A similar means to the same end is the more-and-more-
common practice that ports investing in container berths attempt to have the
shipping line(s) share the risk by binding up the user(s) by long-term hire
contracts before the investments are carried out. Many shipping lines
operating container services seem also to prefer an arrangement by which

exclusive use of a berth in each port served is guaranteed.
Common-user berths are, however, still predominant in general-cargo
ports. In this case the port charges are supposed to be the instrument of ship
and port adjustment. In particular one aspect of this problem has drawn the
attention of port planners and economists: the effect on ports of the growth in
ship size.
The unprecedented growth in ship size in recent times has required costly
investments for many ports. This question has been put by many observers of
this development. Is there a guarantee that a total optimum will be reached,
i.e. that the total costs of ships and ports for the seaborne trade will be the
lowest possible? More specifically, many people fear that the economies of ship
size enjoyed by shipowners are more than counterbalanced by the dis-
economies of ship size suffered by port authorities. The investments of primary
concern in this connection has been the creation of sufficient water depth of
port approaches and harbour basins to accommodate the deep-drawing giant
tankers and dry-bulk carriers. An analogous problem is constituted by the
investments in supporting land for handling the large loads of containers of the
biggest container ships.
It is pertinent to think that the port charges should be differentiated in such
a way that the shipowners become fully aware of the costs of increasing the
water depth or the size of the back-up area of berths. At closer scrutiny this
case is, however, difficult to make from a restricted resource allocation point of
view.
8.3.1 The case for zero conservancy charges

The opinions of economists have been very divided on the issue of charging for
deep-water facilities. On one hand, the majority (?) view is that the draft of
ships should be a primary basis of port charges differentiation (Heggie, 1974).
On the other hand, adherents of the short-run marginal-cost-pricing theory
mean that conservancy charges (charges imposed to recover the costs of
dredging etc.) are hitting deep-drawing ships harder than other ships and are
inconsistent with the purpose of investments in greater water depths.
It is true that the ships of the maximum draught can be said to have caused
the cost of the dredging, etc., but it is inconsistent first to undertake the
dredging in order to accommodate larger ships and then to charge those ships
a high price, thereby deterring some of them from calling at the port, when it is
borne in mind that no ship, big or small, will cause any costs at all by using the
approach channel after completion. The crucial decision is the investment
decision in such a case. If the port authority is of the opinion that the reduction
of transport costs in using bigger ships will offset the cost of making the
approach channel deeper, then the authority should go ahead with the
dredging, but not, subsequently, diminish the benefits of the undertaking by
charging for the use of the (then) costless approach channel. The case for a zero
conservancy charge for the use of uncongested dredged approach channels,
advocated by Goss (1968; p. 160) is an example of this principle (see also
Bennathan and Walters, 1983). This is a principle of general validity. (For an
excellent statement of the same principle applied to road investments to
accommodate heavy traffic, see Walters (1968), especially chapter IV.) The
extra cost of designing any service-rendering facility, whatever it may be, in
order to accommodate customers with particular requirements, cannot justify
special 'surcharges' unless the marginal costs of actually rendering the service
do vary between customers. When this is not the case, it is true that a problem
of equity arises. It may seem hard on the 'small one', and rather too favourable
for the 'big one', that the latter shall pay no more than the former, in spite of the
fact that the latter has caused a major part of the facility construction costs.
Those who have criticized the idea of zero conservancy charges from a
purely resource allocation point of view seem to be particularly uneasy about
the long-run effects of ,subsidizing' deep-drawing ships. It is true that by such a
policy of port charging shipowners contemplating investments in still bigger
ships do not take the consequent port costs into account. The reply to this
argument is simply that it is the port authority that should take both ship costs
and port costs into account when investing in deeper water. The port authority
cannot really, unfortunately some may think, pass over this responsibility to
shipowners via the port charging system. * Port authorities should be leading
and shipowners lagging. It is an illusion to think that ports are 'helpless
victims' of an inevitable development of ship-size growth. A port authority
who finds that an investment to accommodate bigger ships is not justified -
that the port costs would exceed the expected benefits accruing to
shipowners - should, of course, not make the investment out of sheer 'growth-
mania' or on some other irrational ground.
I t is true that from the point of view of an individual port the problem looks
quite different. Who is leading, and who is lagging? A general impression is
that many port authorities take a rather passive attitude in this matter,
believing that the continuous ship-size growth is an inevitable fact oflife. They
think that they are 'adjusting' to this development. It is, of course, an illusion to
some extent. Every port that undertakes water deepening and investments in
higher crane capacity contributes more or less to the growth in ship sizes, even
*To be sure, schemes can be imagined by which port authorities in unison place the responsibility
entirely with the shipowners. For example, suppose that port authorities publish charges on ships
which at present cannot be accommodated. Then they wait and see. If no ships more deep-drawing
than present port water depths are built then there is no need for investment in deeper port waters.
On the other hand, if a sufficient number of ships are ordered which will require deeper port
waters, the required investments will be carried out. The problem of this scheme is, of course, that
an individual shipowner will be very reluctant to be the first to take the risk of ordering a ship
which may be impossible to use because no other, or too few other, shipowners follow his example
for port authorities to consider it worthwhile to deepen their ports. A favourable development of
ship sizes may never be realized under these circumstances.
if the port itself regards its action simply as an adjustment to an exogenously

given trend. All ports do not take this passive attitude. Shipowners are
naturally unwilling to take the risk of ordering ships that at the moment of the
placing of the order cannot be used because no port is deep enough to receive
them. Some natural deep-water ports, for which the costs of preparing for still
bigger ships are fairly moderate, have no doubt been leading.
8.3.2 The case for progressivity in charges on shiploads

The interesting thing in this connection is that, while short-run marginal-cost-
pricing theory speaks for a structure of port charges which will not leave any
contribution to the recovery of the costs of investments in deeper water, this is
not so with regard to investments in deeper back-up areas of the berths.
Whereas the expected cost of receiving deep-drawing ships into the port is
practically zero (disregarding pilotage, etc.), once the water has been made
deep enough, the expected cost of handling the cargo of the ships can be very
substantial. And the point is that the cargo-handling costs, in the broadest
sense, are likely to be increasing progressively with increases in the size of
shiploads. The progressivity is particularly pronounced as regards big loads of
containers. If the total quantity of import and export containers handled at a
time (per call) exceeds the 'practical capacity' of the terminal in question, i.e.
the quantity of containers which the terminal is built to handle in the normal
case, very substantial reversible costs of extra men, trucks, straddle-carriers
will be incurred. In addition the terminal will be impossible to use by
succeeding ships for a long time, which can cause severe queuing costs.
The port charges should be differentiated accordingly. There is no point to
penalize the ships because they are big, and can hold a large quantity of cargo.
Instead charges should be imposed on the actual shipload. Ship
loading/unloading small- and medium-size shiploads which can be handled 'at
ease', without extra inputs of capital and labour, and which do not block the
terminal for subsequent users, should be charged the normal price per
container loaded/unloaded. (The notorious 'sticky box' can, of course, occur in
a small load of import containers, as well as in a big load of import containers.
It should be dealt with by means of a storage surcharge on the importer.)
Exceptionally big shiploads should, on the other hand, bear a substantially
higher charge per container, and, it should be emphasized, the charges must be
directed to the shipowner and not the ware owners, because it is the former
who decides how many containers will be handled at a time (Jansson and
Shneerson, 1982; chapter 10).
If relatively big shiploads are frequently handled in a particular port, the
revenue from cargo-handling charges differentiated in the aforementioned
manner may suffice to cover not only the costs of labour and handling
equipment but also the costs of the fixed capital including the paved back-up
area.
If the capacity is very strained, an extension of the terminal may be justified

to ease the pressure on current resources and alleviate the queuing and
congestion. Due to the marked indivisibility of certain port investments, the
paradoxical result of this can be that the justification for levying handling
charges that leave a surplus over the current costs is temporarily removed. As
the traffic has 'grown into the clothes', however, a more normal state of
financial affairs will rule again. Whether or not the port should reduce the level
of charges very drastically during the period of temporary excess capacity is a
matter of judgement in each particular case. In some cases a very flexible
charging policy may have a small allocative effect, and be financially
burdensome, and in other cases it may be the other way round.
9 Acost minimization model of a liner trade
9.1 A LINER TRADE MODEL - PURPOSE, SCOPE AND

ASSUMPTION
The least-cost condition of servicing each level of output at the lowest possible
cost per ton, should now be extended to include simultaneous determination
of ship size, ports-of-call, and frequency.
The problem of designing liner services in thin trades is a problem of trading
off shipping costs against costs of 'shipload consolidation in time and space'.
To realize the shipping-cost economies of ship size in thin trades, full shiploads
have to be gathered either by extending the cargo catchment, i.e. calling at
more ports, or by increasing the intervals between sailings. Extending the
cargo catchment area will result in higher shipping costs to the shipowner, and
an increase in the interval between sailings will increase storage costs of
shippers. The trade-off between the rise in these two cost categories and the fall
in shipowners' costs as ship size increases, is at the heart of optimizing liner
services in thin trades. The design ofliner services in thin trades should include
simultaneous optimization of ship size, cargo catchment areas, and sailings
frequency.
If substantial economies of scale exist, then liner services on thin routes may
be out to compete with their non-schedule rivals. It would be interesting to
study whether intercontinental liner shipping between Africa, South America,
Southern Asia, Australia, Northern Europe etc., where the density of the
general-cargo trade is relatively low, is at any great disadvantage as compared
to liner shipping in the main trades of the world, or, in other words, whether
significant economies of trade density exist in liner shipping. The fact that each
particular market - liner trade - normally accommodates several shipping
lines, suggests that these economies of scale are not marked. Second, the model
should serve the shipping lines as a frame for optimizing their services to meet
the objective of carrying the total cargo at the minimum costs per ton. The
model, by its simplifying assumptions, cannot serve as a substitute to a
detailed system-analysis approach that will have to be adopted in each specific
case. It will help, though, to exemplify the directions of the effect of these
variables when considered simultaneously.
The first question is to define the relevant markets, and this in turn will
define the density of demand for a particular transport service. The model is
adapted in the first place to intercontinental liner shipping. This implies,
typically, that the trade between two opposite continental coasts, such as the
Pacific coast of North America and East Asia (including Japan) or the west
coast of Africa and the east coast of South America, constitutes the total
shipping demand of a particular market. The density of demand is then defined

as the trade volume per kilometre of coast. This affords an admittedly
imperfect demarcation of the system, unless clearcut geographical boundaries
happen to exist as they do for liner shipping between Australia and New
Zealand for example. In other cases some overlapping of markets is inevitable
in reality, but there is no better alternative than to regard the different liner
trades of the world as separate markets.
Another problem of system demarcation concerns the question of how far
'upstream' the cost analysis should be taken. In a narrow sense shipping
service can be defined as the carriage of cargo from the quay of port A to the
quay of port B. But more generally both the feeder transport costs (inland and
sea) and the waiting costs should be included in the cost analysis of scheduled
transport systems. In the present case this would mean that all the costs of
transport - door-to-door and storage costs at the premises of consignors and
consignees - should be taken into account. However, a departure from this
general rule will be made in the following model. The ports of loading and
discharge for each individual consignment will be treated as given. Under this
condition, inland feeder-transport costs (to the port of loading and from the
port of discharge) will be constant. Only feeder-transport operations under-
taken by the liners themselves in the form of coastal diversions will be taken
into account. Storage costs that are incurred either at the ports or at the
consignors/consignee place, will be included in the cost model.
A third problem is that it cannot be assumed that one shipping line only
serves each individual trade. However, in most trades the liner conferences act
as a coordinating body. In the model it is assumed that the design of the
shipping services fulfills the efficiency condition that each level of output is
produced at the least total social costs. This is a necessary condition both for
net social benefit maximization, and for total profit maximization. In other
words, it is assumed that the liner conference/price cartel acts in accordance
with the objective of maximizing the total profits of all members.
Given the above limitations and assumptions, the model is constructed as
follows: consider the trade in general (liner) cargo between two continents
separated by a sea; the problem is to design the liner-shipping services in such a
way as to minimize the total social costs of transporting - in the widest sense -
the total volume oftrade between a given number of ports - ml at one end, and
m2 at the other. *
*The number of ports to be included in the services, "'1

and "'2 will be treated as given in the
present model. Experiments with a more comprehensive model have shown that these design
variables are only slightly dependent on the density of trade. Fixing values for"" and "'2 will not
thus have much effect on the result regarding the magnitude of the economies of scale. The main
determinants of Iii! and "'2 are the inland transport costs, and the transitional time of ships per
call. There is little dependence only between"" and "'2 and the other design variables. The choice
regarding ports-of-call is thus restricted to the question of how many of the given ports should be
visited at each sailing. Needless to say, the different shipping lines should not call at the same sub-
set of ports, but should divide the total market between them so that the conference most
conveniently covers the whole trade.
A cost minimization model 207
The setting is homogenized in that the same quantity of cargo is assumed to

be generated between each pair of ports. The total demand for shipping
consists of the trade flows in both directions. Very few trades are well balanced.
It is therefore appropriate to allow for an export-import imbalance (in
measurement tons), and designate: total cargo flow, Q = X + M; 'export' (the
trade flow on the fat leg), X = Q/p,; 'import' M = (1 - 1/p,)Q.
The measure of trade balance, p" assumes values between 1 and 2. The value
ofthe lower limit indicates that the ships go in ballast in one direction, and the
value of the upper limit indicates that the trade is perfectly balanced.
In spite of the fact that the ports served by the conference liners are given, the
itineraries of the ships can be fixed in widely differing ways. At one extreme
each ship could call at every port on each round voyage, which would require
the maximum coastal diversion at each end, but which would also give the
highest possibly frequency of sailings between each pair of ports (given the ship
size). It is not necessary, of course, to call at every port on each round trip. Any
number of ports-of-call between ml + m2 and two per round trip is possible.
However, the fewer the ports-of-call, the lower will be the frequency of sailings
between each pair of ports.
The other trade-off is between size and number of ships: given the itinerary
of the ships, as the ships increase in size, so will the shipping cost per ton drop
and the shippers' storage costs rise. Consequently, the design variables to be
optimized are: number of round trips per year in the trade concerned, n; ship
size, S; number of ports-of-call at one end per round trip, m l ; number of ports-
of-call at the other end, m 2 ; frequency of sailings between each pair of ports, N.
Having discussed the shippers' costs of storage, and the feeder-transport
costs, i.e. the costs of shipload consolidation in time and space, we are now in a
better position to tackle the complete 'thin trade problem' of liner-service
design.
Consider now the trade between two continents. Each coastline is divided
into a number of ports generating an equal amount of cargo. The exports from
each port to any other port on the other side is X, and the corresponding
import volume is (p, - 1)X, when p, is the trade balance. (The ratio of total
cargo volume to that of the fat leg.) ml is the number of ports on one end of the
route, m 2 is the number of ports at the other end. The total intercontinental
trade is then = Xm l m 2 . The maximum number of separate liner services is
m l m2' implying shuttle services between each pair of ports. The trade density,
X, has obviously to be very great indeed to warrant this pattern. It is most
likely that each service should include a number of ports at each end. The
question is how many for an optimum? We will answer this with a model that
includes both producers' and users' costs.
9.2 TOTAL PRODUCER AND USER COSTS

The shipping costs directly borne by the shipowners are grouped into, (a) those
costs which are time-proportional and incurred all the time, i.e. crew and
capital costs, (b) fuel costs which are incurred only during hauling time, which
is proportional to the sailing distance, and (c) berth occupancy charges which
are assumed to be time-proportional, and which are, of course, incurred only
in port. The annual total costs of the first group are thus proportional to the
product of the total number of round voyages, n, and the round voyage time, T;
the total fuel costs are proportional to the total miles sailed by all ships, nD;
and the total port charges are proportional to the total port time of all ships,
which is equal to twice (loading and unloading) the total trade flow, Q, divided
by the handling capacity, H, which - given the port productivity - is a
function of the ship size.
The total costs of the shipping lines engaged in the trade can thus be written:
TC prod = nTUl(S) + fz(S)] + nDf3(S) + ;lZS/4(S) (9.1)

where the round trip time is
D 2Q
T = V(S) + (ml + mz)h + nH l(S)" (9.2)
The three components of the round-trip time are from left to right, the total
hauling time at sea, the total transitional time (h = transitional time per call),
and the total time in port.
The round-trip distance is made up of two sea-crossings and the coastal
cruising at each end, the length of which depends on the number of ports-of-
call. Assuming for simplicity that the ports at each end are equidistant, the
diversion necessary to call at another port is always equal to d. Designating the
coast-to-coast distance, D, we thus have:
D = 2Do + (ml + m z - 2)d. (9.3)
For the shippers the total costs appear in the form of liner freight rates,
certain port charges, inland transport costs, insurance and interest costs on
cargo in transit, and storage costs. None of these cost items can be disregarded
because they are relatively insignificant. However, given that for each
individual shipment, the port of loading and discharge is always the nearest
port served by liner shipping, the inland transport costs do not vary with the
design variables of the model and need not be considered. The direct cargo-
handling costs, i.e. stevedoring charges, and port charges on cargo, are also
constant, However, in this case the constancy represents an inherent
characteristic of the costs concerned, and is not due to any limitation of the
analysis; it would be a bit misleading to leave them out.
Bearing in mind that cargo-handling charges are paid for loading as well as
unloading, the total direct handling costs are written:
Total cargo-handling costs = 2CoQ. (9.4)
The interest cost on cargo in transit is a size-dependent cost which can

generally be written as the product of the total input of ship-days per year in
the trade multiplied by the interest cost of an average cargo per day.
Total interest costs on cargo in transit = nTJs(S).
The storage cost, finally, belongs to another category: this cost is a function
of the frequency of sailings between each pair of ports, N. As in the case of
cargo costs, it can be assumed that storage costs are incurred by both exporters
and importers.
Total storage cost = 2C I (N) Q.
Summing up the costs borne by the shippers, we get the total user costs:
(9.5)
Apart from the level offreight rates and cargo costs, the questions of greatest
concern to the shippers are apparently the frequency of sailings between each
particular pair of ports and the transit time. In a given trade, the average
frequency of sailings, N, is determined by the ship size and the number of ports-
of-call per round trip. The total number of ports at each end is mi and m2 ,
respectively. This means that there are mi m2 pairs of ports to be served. On
each round trip, m i m 2 pairs enjoy service. The average frequency of sailings is
therefore equal to the total number of round trips per annum, n, multiplied by
the ratio of m I m2 to mI m2 •
m I m2 Xm I m 2
N = n-~ = ----=---==--- (9.6)
m1 m2 cP SmI m2
where cP is the mean load factor (occupancy rate) on the export leg, and thus S
is the practical holding capacity. Adding total producer costs according to
equation (9.1) and total user costs according to equation (9.5), and dividing by
Q, gives us the following expression for the total social cost per ton:
_ nT nD 2
AC = 2C o + 2C I (F) + Q[fl (S) + f2(S) + fs(S)] + QJ3(S) + H I(S/4(S),
(9.7)
Inserting X/cPS for n, and the aforementioned expression (9.2) for T, and
rearranging the terms, yields the following result:
AC = 2C + 2C(N) D[fI(S) + f2(S) + f3(S)V(S) + Js(S)]

+ IlcPSV(S)
(mi + m 2)h[fl(S) + f2(S) + fs(S)]
(9.8)
+ IlcPS
2[f1 (S) + f2(S) + f4(S) + fs(S)]
+ HI (S) .
The five terms of equation (9.8) represent, from left to right, the cargo-
handling cost per ton, the storage cost per ton, the hauling cost per ton, the
transitional cost per ton, and the indirect handling cost (i.e. the cost of ship's
time in port) per ton.
9.2.1 Simplifying approximation

To allow quantification of the cost relationships involved, certain approxim-
ations have to be made regarding the combined size-elasticities ofthe costs per
ton.
Using the square-root approximation of the shipowners' costs (see p. 160),
we can write the indirect handling costs and the hauling costs per ton:
Indirect handling costs per ton = 2cx i .j(S)
·
Hau Img cxp
costs per ton = A. / .
J.1'f'y (S)
This approximation is particularly helpful in view of the fact that a 'square-
root law' seems to apply also to the relationship between storage costs and
frequency of service.
Our discussion of the importers' safety-stock requirements (section 7.1.3)
showed two separate determinants ofthe safety stock: the inverse of N, and the
square root of the sum of the inverse of N and the transit time. The numerical
example indicated that the influence of the latter is predominant. Therefore, a
compromise approximation is to assume that shippers' storage costs are
proportional to the square root of liN. This slightly overestimates the major
effect and substantially underestimates the minor effect (cf. Baumol and Vinod,
1970; pp.413-21, where the safety stock is proportional to the square root of
intervals between sailings. As we pointed out this will be the case where the
interval between sailings is not great and provided that the transit time is of
moderate length.)
Given that N = nm l m 2 /m l m2 , the complete approximate version of ex-
pression (9.8) for the social cost per ton can then be written as follows:
- (mlm2<PS)l/2 cx 2D cx3(ml + m2)h /
AC = 2C o + 2cx l m l m2 X + J.1<P.j(S) + J.1<P.j(S) + 2cx4y (S)
(9.9)
where D = 2Do + (ml + m 2 - 2)d.
The proportionality constants, CXl,CX2,CX3 and CX 4 are conglomerates of the
proportionality constants of the factor-cost functions (which in turn are
determined by the relevant factor prices), the proportionality constants of the
hauling and handling capacity functions and certain route characteristics such
as the cargo-handling productivity of the ports. The most interesting route
characteristics to consider explicitly are the total main-haul cargo volume, X,
the mean load factor on the main haul, ¢, the directional cargo balance, f.l, the
route distance (across the sea), Do, the required coastal cruising distance per
additional port-of-call, d, the transitional time per call, h, and the total number
of ports served by liner shipping at either end, ml and m2 •
The nature of the economic balance involved is very clear from this version
of AC. Ship size, S, is the primary balancing factor. There are apparently very
significant economies of ship size in the hauling cost as well as in the
transitional cost, * whereas there are equally important diseconomies of ship
size in both the indirect handling cost and the storage cost. The second
balancing factor is the extent of the diversion made at either end of each sailing,
represented by the number of ports-of-call, m l and m2. The coastal cruising
distance is proportional to m l + m 2 - 2, and the transitional time per round
trip is proportional to m l + m 2 , while the storage cost is inversely proportional
to the square root of m l m 2 .
9.3 OPTIMAL SHIP SIZE, MULTI-PORT DIVERSION, AND

FREQUENCY OF SAILINGS
The optimal economic balance is obtained by minimizing AC with respect to
S,m 1 and m2. Taking the partial derivatives concerned, and equating to zero
gives us:
o AC = IX ( ml m2 )1/2 _ 1X2(Do - d) _ (ml + m2)(IX2d + 1X3h) ~
as I mlm2XS f.l¢SJ(S) 2wPSJ(s) + J(S)
=0 (9.10)
oAC = _ ~(ml m2S )1/2 + 1X2d + 1X3h

om l ml m l m2 X f.l¢J(S)
=0 (9.11)
oAC = _ ~(ml m2S )1/2 + 1X2d + 1X3h

om 2 m2 m l m 2 X f.l¢J(S)
=0. (9.12)
The optimal ship size S* is solved by multiplying equation (9.10) by 2J(S),
equation (9.11) by md J(S), and equation (9.12) by m2/ J(S), and then adding
the resulting equations.
S* = 1X2(Do - d). (9.13)
1X4f.l¢
·At first it may seem to run counter to intuition to postulate that lengthy diversions involving
many ports-of-call favour large ships. Suppose that for every ship one day is lost in transitional
time per call. One would surely expect this to be very expensive for the very large ships. But we
have to remember that, counted per ton of cargo, the smaller the ship the greater the increase in
expense.
The optimal ship size is proportional to the coast-to-coast distance minus

'one diversion'. A positive relationship between Sand D was, of course,
expected from the analysis of chapter 5. Near proportionality is also suggested
by the chart in Fig. 5.2 on p. 143. That chart refers to conditions more than 15
years ago. However, it is also well known that today short-sea liners are far
smaller than deep-sea liners, and that in the latter category the ships operating
on the north Atlantic, for example, are considerably smaller than ships used on
routes between antipodes.
It is surprising that only the trade balance, jJ., and not the volume of trade, Q,
appears as a determinant of optimal ship size. The more balanced the trade,
the smaller will be the optimal ship size. This can be explained as follows: given
the export volume, X, which determines the total shipping capacity, we will
find that the greater the volume of imports, M, the higher will be the
incremental benefit of an additional sailing. This means that the ship size and
number combination should be increasingly 'number intensive'. On the other
hand, if X and M increase in parallel to one another, there will be no effect on
S*.
In an indirect way the trade volume can be said to influence S*: namely, as X
increases, the optimal round-trip distance decreases without causing any
reduction in ship size. From equations (9.11) and (9.12) it is clear, first, that
m 1 = m 2 are at optimum. Symmetrical itineraries including the same number
of ports of call at each end are optimal. The optimal number of ports of call on
each coast, m* = m! = m!, can be calculated by inserting the value found for
the optimal ship size in equations (9.11) or (9.12):
12
m* = [Ct Ct (D o - d) J1 /2[m1 m2J1 /4. (9.14)
Ct 4 (Ct 3d + !X3h) X
The most important determinant of m* is the distance between adjacent
ports, d. The greater this distance, the fewer ports will be visited on each round
trip.
It is an interesting fact that the sea-crossing distance, too, is an important
determinant ofm*. This relationship also holds in reality. A common feature of
liner trades is that, given the volume ofthe trade, the greater the coast-to-coast
distance, the more extensive will be the service range. The explanation is
roughly that a diversion of a given length, d, results in an increase in the mean
transit time and makes a further demand on shipping capacity, which will
increase relatively as the coast-to-coast distance, Do, diminishes.
The optimal frequency of sailings, F*, is obtained from equations (9.13) and
(9.14)
F* = ( 1
jJ.Ct
Ct 2 d+Ct3 h
)(~)1/2
m 1 m2
(9.15)
The optimal sailing frequency is proportional to the square root of the total
export volume. As the trade density increases, the frequency of sailings does
not increase commensurately; instead, the advantage of a greater trade volume

is partly exploited by reducing the diversions caused by multiple calls at ports.
9.4 THE MINIMUM TOTAL COST PER TON

By inserting the values for S* and m* in equation (9.9), we obtain the total cost
per ton at optimum. It is interesting coincidence that the total cost per ton is
found to comprise, apart from the direct handling cost, two pairs of equal
entities which can be identified as the storage cost (2C 1) and 'diversion cost'
(2C 3 ::: the cost of coastal cruising and transitional time), on the one hand, and
the sea-crossing cost (2C 2 ) and the indirect handling cost (2C 4 ) on the other.
(Note that each cost is incurred twice for each shipment.)
AC* = 2eo + 2CT + 2C! + 2C~ + 2C: (9.16)
and
(9.17)
and
C* C* = (D o- d)]1/4
[a 2a411¢ (9.18)
2 + 4 .
Looking at equation (9.17), we can see that Q is a determinant of the storage

and diversion costs. As we found previously, the frequency of sailings increase
with increases in Q, but not fully in proportion to the increase in Q. A parallel
effect is that the coastal diversions will be less extensive.
Looking at equation (9.18), we can observe that the trade volume is not a
determinant of the sea-crossing and indirect handling costs. The reason as we
have seen, is that the optimal ship size is independent of the trade volume. On
the other hand, the trade balance, 11, has the effect of reducing these costs. So
far as C! is concerned, a better trade balance does reduce costs, despite the fact
that the optimal ship size falls with increases in 11. The economy of a higher
overall load factor, however, is a stronger force.
What about the difference between the costs ofliner shipping in a thin trade
and the costs in a trade where the density is ten or twenty times greater or even
more? Equalizing the sea-crossing cost and diversion cost, letting this
represent the extreme thin trade case and Q = co, C! = C~ = 0 represent the
extreme dense trade case, the maximum ratio that can be expected of the cost
of a thin route to the cost of a dense route (all factors except trade density being
constant) appears to be about 5:3.
Needless to say, the factor prices contained in ai' a2' a 3 , and a 4 are not the
same all over the world. In reality we can therefore find many examples of
higher costs in dense trades than in thin trades. Above all, the direct handling
cost Co varies greatly from port to port. Cargo handling is particularly
expensive in American and Scandinavian ports. On the other hand, the

indirect handling cost, C 4 , is sometimes very high in many ports in low-wage
countries, due to long queues. But these inter-trade differences are irrelevant in
our present context. There is very little competition between liner shipping of
different trades. Where it is relevant to compare costs, however, is between
different forms of shipping in one and the same trade. Our purpose here has
been to examine whether a low density of trade is likely to put liner shipping at
any appreciable disadvantage in competition with tramp shipping and other
possible forms of bulk services in which costs are commonly held to be largely
independent of the trade density.
The conclusion is that a thin-route problem does exist in liner shipping, but
that its gravity is not severe. In comparison to thin-route problem in public
passenger transport, for example, it is quite minute.
9.4.1 Freight rates and distance

It is also interesting to note that the elasticity of C! with respect to coast to
coast distance, Do, is as little as about O.S. A four-fold increase in the route
J/
distance will only double the sea-crossing cost. The total cost per ton is written:
AC* = 2eo + 4[C(1 (C(2 d + C(3 h )J1/ 2 (:~~ y/4 + 4[ C(2C(4~; - d) 2
(9.19)
Since the total cost per ton, A C*, also contains the direct handling cost, the
storage cost, and the diversion cost, which are all independent of Do, it follows
that the elasticity of AC* with respect to Do is considerably less than the sea-
crossing cost elasticity. We can express the elasticity of AC* with respect to
Do - d in this simple way:
[ AC* ][(D o - d)] C! (9.20)

(Do-d) AC* =Co+C!+C!+C~+Cf
The distance elasticity of the total cost per ton is approximately equal to the
share of the sea-crossing cost in the total cost per ton. As only the sea-crossing
cost and indirect handling cost is increasing with distance, this elasticity is
slightly increasing with distance. We have found that at optimum values the
sea-crossing cost is equal to the indirect handling cost, and the storage cost is
equal to the diversion cost; therefore one can give an interval of 0.17-0.3 as a
likely range for the distance elasticity of the total cost per ton, where the lower
value is applicable to short-sea trade routes, and the higher to deep-sea trades.
The freight rate comprises all these cost items except the storage cost, C 1.
Therefore, it is expected that the distance elasticity of the level offreight rates is
to be found in the higher range. It is quite an interesting question, how liner
freight rates in different trades vary with respect to route distance. The
diagrammatic derivation of a 'freight curve' in Figs 5.2-5.5 is suggestive of a
digressively increasing relationship between freight rate and distance. That the
elasticity of freight rates with respect to distance could be as low as indicated
by the present model came as a surprise. The comprehensive freight rates data
of the US seaborne trade during 1979 collected by Captain Z. Idelstein (Effects
of Market Structure. Organization and Conduct on the Rate Making Process,
unpublished 1981; we would like to thank Captain Idelstein for generously
making this data available to us) made possible an empirical estimate of the
freight-rate distance elasticity. The original data collected listed freight rates
(per cubic ton) and annual quantities (in cubic tons), for 8100 pairs of ports
which covered 90% of the seaborne trade of the US in 1979. This data was
grouped by us into nine trading zones, each trading with the East Coast of the
USA (to and from the port of New York) and with the Center-West Coast of
the USA (the ports of Houston, Charleston and Los-Angeles). For each trade
zone a weighted average freight rate was calculated, the distance and the
density of trade. This data is summarized in Table 9.1. Distance was measured
by the inter-continental distance plus the coastal distance at each end of the
route. On the US West Coast we have taken the weighted average distance of
the three ports (the distance to each port weighed by the quantity
loaded/unloaded in each), as a single number representing distance to the West
Table 9.1 Freight rates. quantity. and trade density in the USA trade (1979)
Freight rate Round-trip Trade

per cubic ton distance density
($) (km)
East West East West East West

Trade Area Coast Coast Coast Coast Coast Coast
Australia/New Zealand 304.50 280.30 37050 29600 0.054 0.060

Far East/SE Asia 190.70 176.10 51700 35500 0.l70 0.960
West Africa 178.30 192.30 21855 24770 0.019 0.050
South and East Africa 242.50 227.40 31975 34825 0.020 0.025
North-West Europe/
Baltic/UK and
Ireland 207.90 179.70 22485 29710 0.568 0.326
Mediterranean/Black
Sea 226.64 207.80 25225 30820 0.255 0.156
Red Sea/Persian Gulf 244.27 233.13 32570 37120 0.058 0.056
East-coast
South America 223.50 196.30 25300 25570 0.130 0.170
West-coast
South America 172.00 182.80 17800 16555 0.110 0.110
Coast. The trade density was measured by dividing the volume of trade by the
coastal distance.
Given that the 'freight curve' tapers off, and the log relation was used in our
system liner optimization, the relation between freight rates as dependent
variable, distance and trade density as independent variables was estimated by
a regression line of a log form:
log y = 2.940 + 0.223 log Xl - 0.056 log X 2
(2.260) (1.7 59) ( - 1.728) and jp =0.2
(9.21)
(the figures in parentheses are the t statistics)
where: y = freight rate per cubic ton
Xl = distance in km
X 2 = trade density.
The regression results are in full support of the model's prediction. The
freight-rate distance elasticity of 0.22 is within the range of 0.17~0.3 that the
model predicted, just above the middle of this range. The freight-rate
elasticity with respect to trade density is negative. Thus, the required freight
rate declines with the intensity of demand, but very slightly so. The size
elasticity is - 0.05. We may conclude on the basis of our model and the US
evidence that distance as well as thin-trade routes are not very potent barriers
to trade.
PART ECONOMIC EVALUATION OF
THREE THE CONFERENCE SYSTEM
In this part we take up, at last, the controversial issue of the price-
cartel organization of the liner shipping industry - the conference
system. In the model of a liner trade in the previous chapter, we
assumed that the shipping lines forming the conference in the trade
could and should behave as a single unit when it comes to total
system cost minimization. There we did not take up the revenue
side. Now when it comes to pricing policy, an obvious question
following from the preceding analysis is: why do not liner
companies organized in liner conferences earn large monopoly
profits? One part of the answer is that conference lines face
competition from independent shipping lines in many trades, from
the airlines who erode their high-value cargo, and from the tramps
and neo-bulk services who compete for the minor bulk cargo. They
are further constrained by shippers' councils, which can represent a
significant countervailing power as compared to a large number of
unorganized customers. On the other hand, the absence of
supernormal profits should not necessarily be taken as a sign of
health of the liner shipping industry implying that market perfor-
mances are satisfactory. Our following discussion will show that
this interpretation is incorrect.
We argue that the freight-rate making of liner conferences are
obsolete. In the container age the continued practice of construct-
ing detailed tariffs of commodity freight rates seems particularly
archaic. More fundamentally, the more than lOO-year-old tradition
of 'charging what the traffic can bear' has led to a generally low cost
consciousness in the liner shipping industry: as will be demon-
strated, the freight-rate structure is grossly out of line with the
marginal cost of structure. The great disadvantage with the price-
fixing power of the liner conference is that individual shipping
companies, which, potentially, would like to pursue a more
adequate, and innovative pricing policy than the more or less
bureaucratic conferences, are easily tempted to adhere to es-
tablished practices in exchange for a more quiet life attained by
conference membership.
In line with our discussion in the previous chapter, we think that
there is an economic rationale for coordination of the services
provided by individual shipping lines. Schedules and frequency are
collective characteristics of liner markets. Shippers' costs depend
on the services of all the lines collectively. In the absence of
coordination of services, particularly in thin trades, the least-cost
solution of the transport system would be difficult to obtain. Thus
there is a raison d'etre for liner conferences. We envisage a new role
for the conferences. They are needed not to prevent price compe-
tition, but to facilitate the coordination of sailings, ports of call, and
possible sea-feeder transport services.
Before we make recommendations for change, it should be made
clear exactly what is wrong with the pricing policy and practice of
liner conferences.
10 The charging floor reconsidered
In chapters 3 and 4, it was shown that the freight-rate making by liner

conferences is exceedingly simple so far as the underlying costing is concerned.
It is basically a matter of establishing a 'charging floor' consisting of the direct
handling costs. On the other hand, the determination of the appropriate
contribution margin over and above the charging floor is a very elaborate
exercise in the art of charging what the traffic can bear. It is a matter of coming
as close as possible to the 'charging ceiling' of each commodity, without ever
exceeding it.
We mean, and have argued so far over a decade (Jansson, 1974), that this
pricing principle results in the freight-rate structure being grossly out of line
with the corresponding marginal-cost structure. The main failure is that no
shipping capacity limit is taken into account, and thereby a large volume of
low-rated cargo is not paying its way, and large-scale cross-subsidization
between commodities is taking place. This is not the only instance of cross-
subsidization in liner shipping, but probably the most far-reaching form. We
will take up other forms later on. To begin with we will concentrate on the
question whether many low-rated commodities are carried at freight rates
below their marginal costs. We mean that it is easily checked that this is so:
take almost any liner trade, where a reasonable rate of capacity utilization
obtains, and consider the withdrawal of, say one-third of the total number of
ships in the trade, as well as one-third of the least-paying commodities. The
result for the remaining ships would be a great rise in profitability.
This argument is not unchallenged (Gedda and Koch, 1966; Laing, 1975/76;
Evans, 1977; Australian Department of Transport, 1977; Zerby and Conlon
1982). There are two lines of counter argument: one is that the disadvantage for
the shippers of the remaining (high-rated) cargo of the lower frequency of
sailings, that the capacity reduction would necessarily bring with it, is
sufficiently great to offset the apparent gains ofthe shipowners, and another is
that from the point of view of an individual shipping line the capacity costs of
ships are common costs to all cargo carried, which cannot be allocated
between commodities, each one of which comes in quantities well below what
would be required to fill a ship. We take up these two arguments immediately
under the headings of Economies of scale? and Common costs and factor
indi visi bili ty.
10.1 ECONOMIES OF SCALE?

The former line of argument is an extension - which is entirely justified - of
the ordinary concept of economies of scale in production to a total-system-
220 Economic evaluation of the conference system
cost context, where the producer (shipping line) costs and user (shipper) costs
are treated as equal. If the sum of the costs of the shipping lines and the
shippers per ton of cargo carried, is increasing with decreases in the total cargo
volume, which is another way of saying that diseconomies of smaller-scale
operations (i.e. economies of scale) apply, it may be true that the pricing-
relevant marginal cost is as low as the current charging floor. This is not an
either/or issue, which can be settled just by logic, but a matter of estimation of
the cost relationship involved. Our model of a liner trade developed in the
preceding chapter makes it possible to get an idea of how the total-system
costs per ton are related to the total cargo volume in the trade, or 'trade
density'. The relevant concept of 'scale' in this connection is the density of
demand for shipping in the trade.
Before tackling the problem of economies of trade density, it is useful to
make a distinction, discussed in the theoretical literature concerning extern-
alities, and which is particularly relevant in the present context, namely, (a)
economies of scale of a firm (shipping line), and (b) economies of scale of an
industry (trade route). The former concept is relevant for questions of
industrial concentration, and viability of competition.
Even if the firms of an industry are facing seemingly constant costs, it may be
that the industry as a whole enjoys decreasing costs, as the total output of the
industry is expanding. (The opposite case can also exist, i.e. increasing-cost
industries consisting of constant-cost firms.) The economies of scale are then
said to be external to the firms.
10.1.1 Economies of firm size

The relevant question to ask when it comes to possible economies of scale on
the firm level is, what will happen to the unit cost of a representative firm if the
firm will secure a large market share?
Significant economies of firm size are mostly to be found in industries
consisting of single-plant firms. Economies of plant size and economies of firm
size are then obviously synonymous. Multi-plant firms are presumably
operating with plants of optimal size (at the time of construction of the plants),
and the economies of scale in the production can be expected to be exhausted.
Mergers of multi-plant firms can rarely be justified on production technolog-
ical grounds, but marketing considerations, or simply a wish to restrict
competition is the rationale. Shipping lines are multi-plant ( = ships) firms. A
merger oftwo lines ofthe same conference is unlikely to result in any savings in
shipping costs. The same number of ships will be plying the route concerned in
much the same way as before. Of course, there is a possibility that savings in
'costs ashore' - overheads including the costs of general management and
administration - can be achieved. A common experience is, however, that
beliefs that savings in administrative costs can arise from agglomeration are
largely illusory. That this is so also in liner shipping is supported by a cross-
section analysis of a large number of shipping lines undertaken by Ferguson
The charging floor reconsidered 221
et al. (1961), which showed that the administrative costs amounted to about 10%
of gross revenue regardless of the fleet size. A similar result is reported to have
been reached in an investigation of USA shipping lines 10 years later
(Devanney et al., 1972)
If there were unexploited economies offirms size in liner shipping one would
expect that the number of shipping lines per trade are steadily falling. An
attempt to examine whether a tendency towards concentration of lines on a
route exists, was made at the same time by Ferguson et al. (1961). The case
history studied by them failed to reveal any such tendency to concentration.
The conclusion was that for ships on a deep-sea route further cost advantages
of increasing the fleet size above four or five are doubtful. An upper limit of
fifteen to twenty ships employed by one line (on anyone route under study)
had been in existence for a long time.
The recent emergence of container service consortia in some trades is above
all a reflection of the need to pool financial resources in order to adjust to a
thoroughly changed technology. It may also imply that the smallest viable
carrying capacity of a line has increased. The fact that a container ship
normally replaces three or four conventional liners is important for the issue of
economies of scale. So far containerization is concentrated to the densest
routes of world trade. It is likely, however, that a tendency of ship sizes to grow
faster than the liner business will spread to many other routes in the future.
10.1.2 Economies of trade density

When we move on to the industry level the issue of economies of scale appears
in a somewhat different light. The relationship between the cost per ton - of
users and producers - and the trade density on the route, i.e. the cargo flow per
coastline kilometer at optimum in the previous model was (see p.213):
AC* = 2eo + 2CT + 2Ci + 2Cj + 2Ct
=
-
2Co + 4[1X 1(1X 2 d + 1X3h)]
+(mlm2)*
W/>Q + 4
[IXIIX 2(D o -
fl.</>
d)]+ (10.1)
where Q is the total trade density, Co is the direct handling costs,

ml , m2' Do, d, fl., </> and h are route characteristics, and lXI' 1X2' and 1X3 are
constants.
The extent of the economies of scale can be measured by the elasticity of
AC* with respect to Q. The first and third terms of AC* are apparently
independent of Q, while the elasticity of the second term with respect to Q is
equal to - 0.25. The overall elasticity thus depends on the ratio of the second
term to the total cost per ton. This ratio falls as Q increases.
8AC*)( Q ) ( CT + Cj )
E = ( ----aQ AC* = - 0.25 Co + q + Ci + Cj + ct (10.2)
A more revealing expression for this elasticity can be obtained with the help
of the equalities C! = C! and C! = Cl by considering the elasticity in terms of

the direct handling cost, (Co), the sea-crossing cost, (C 2), and the diversion cost,
(C 3 )·
2C! ) (10.3)
E= -0.25 ( C o +2C!+2C! .
A value of E almost as low as - 0.25 is clearly outside the realistic range. It

would mean the diversion cost completely dominating the sea-crossing cost
and the direct handling cost, which is never the case in reality. We can get a
good idea of a realistic range of values for E by taking levels for the individual
cost items which are typical of existing liner services. As has been mentioned,
the service range at each end can embrace the coastline of a whole continent.
Nevertheless, it is very unusual for the coastal diversion to be as long as the
sea-crossing leg of a round trip because the really extensive service ranges are
to be found only in connection with long-distance trade routes. It can also be
shown that greater diversions (in relation to the coast-to-coast distance) are
inefficient under most conditions. The increase in service frequency which will
be attained is insufficient compensation for the additional shipping capacity
required and the extending of the transit time.
In a short-sea trade the direct handling cost (stevedoring charges) is the
dominating item. This means that neither C! nor C! is of an order of
magnitude comparable to Co. In this case, the value of E barely differs from
zero. In a deep-sea trade the sea-crossing cost and indirect handling cost
(C! = Cl) can be on the level of the direct handling cost. A safe lower limit for
the value of E under these conditions is obtained by setting Co = C! = C!.
This gives us E = - 0.08.
The question is then how serious is the conflict between allocative efficiency
and equity in liner shipping, given the inherent decreasing-cost character of
this mode of transport. In other words: what level of freight rates can be
expected in relation to the shipowners' average cost as a result of the
application of the principle of (social) optimal pricing to liner shipping?
Setting freight rates equa~ to 'the average social cost of the marginal ship'
and observing the conditions of design efficiency, we find that the total freight
revenue falls short ofthe total shipping costs ( = shipowners' costs) by half the
diversion cost. In other words, the optimal freight rate per ton of cargo, PC, is
equal to the sum of the shipowners' costs per ton, except for the diversion cost
at one end.
PC= 2(C! + Cn + C!. (10.4)
The optimal freight rate would fall short of the shipping cost per ton by
about 0.2 at most. In relatively dense trades this fraction would be
considerably smaller. For example if the total diversion cost at optimum is 0.3
of the sea-crossing cost, the discrepancy between the shipping cost and the
optimal freight rate would only be 7% of the former.
10.2 COMMON COST AND FACTOR INDIVISIBILITY

In discussions of liner shipping economics and policy the question of the
optimal level of freight rates has not been much to the fore; nor should it be.
Full cost pricing and optimal pricing would not produce very different results.
However, in a multi-product enterprise like a shipping line another pseudo-
problem ('pseudo' in our view) often looms large: How are the capacity costs to
be allocated between different products using the capacity in common? To this
problem we now turn.
The 'common cost' argument is, taken literally, simply fallacious. The ideas
that the common capacity cost should be ignored in pricing disregards the
basic notion of 'opportunity cost'. The opportunity cost of shipping capacity
should not be zero on the fat leg in the normal case. When it happens to be
zero, it is a signal to reduce capacity, and not to reduce the charging floor down
to the level of the direct handling costs. After the appropriate capacity
reduction (ship withdrawal) is made, it is time to set prices, and then, in a
situation of supply and demand matching each other, the shadow price of
capacity is far from zero. In an appendix to this chapter a model of profit-
maximizing freight-rate making is presented, where the proper role of the
opportunity cost of shipping capacity in costing and pricing is developed at
some length.
When discussing the matter of the pricing-relevant marginal cost in
shipping, it often turns out that the real problem is not that the shipping
capacity cost is a common cost, but that a ship is an 'indivisible' factor of
production, and, therefore, the capacity cost should not be included in the
marginal cost. This is a general problem of 'part-load' transport markets, both
for passengers and freight. When the 'part-loads' are relatively small- e.g. a
single passenger on a busy bus carrying, say, sixty passengers, or a typical
general-cargo consignment on a deep-sea liner - a problem of capacity
indivisibility may appear. However, on routes where a reasonably large
number of vehicles are engaged in a regular service, it seems that this problem
has been exaggerated out of all proportion.
10.2.1 The average cost of a marginal vehicle

Where a marginal unit of capacity constitutes a relatively large capacity
addition, a problem offactor indivisibility can arise. What decides whether it is
a reasonable approximation to treat the number of least capacity units as a
continuous variable, is not whether five, twenty-five or seventy-five passengers
can be carried by an additional bus, or if 1000, 5000, or 25 000 tons of cargo can
be carried by an additional liner ship; the crucial factor is rather the number of
vehicles engaged on the route concerned. Treating this number as a
continuous variable when calculating the pricing-relevant cost, is the same
thing as approximating the marginal cost by the 'average cost of the marginal
plant'. If there is only one plant serving a particular market, the average cost of
an additional plant is certainly a poor marginal cost approximation in wide

output intervals. If there had originally been 100 plant, it could have been a
nearly perfect Me approximation. There is obviously no magic limit in this
respect below which it can be deemed illegitimate to disregard factor
indivisibility. Suffice it to say that, compared to other industries for which the
'average cost of the marginal plant' is a widely accepted approximation of the
marginal cost, the production of transport services, where each vehicle
corresponds to a separate plant, looks with few exceptions like quite a suitable
area of application. This opinion seems not, however, to be generally approved
of in the transport economics profession. There is a number of conceivable
reasons for this.
10.2.2 Confusion of short-run marginal cost and average variable cost

First, the idea that capacity is a variable input in the pricing-relevant run for
scheduled transport services of freight and passengers, is not - strangely
enough - generally accepted by leading economists. However, operators of
the services would be at a complete loss in the price-making, if they were to
follow the recommendation that prices should be based on the short-run
marginal costs, which, as illustrated in Fig. 10.1, are steeply rising as the
capacity limit corresponding to each individual curve is approached:* Which
short-run curve should be chosen as a match for the demand curve? Our
answer is that, since pricing and capacity adjustment should be carried out
simultaneously, a medium-run curve which, however, takes an entirely
different path than the short-run ones, is the natural match for the demand
curve. The failure by economists to point this out has led price-makers, in their
bewilderment, to resort to the only firm ground in sight - the basically
constant level ofthe direct handling costs. Therefore, low-value cargo thought
to be unable to bear anything but very low charges are accepted for freight
rates well below the pricing-relevant costs. The received costing principle,
unfortunately, is to set the charging floor at the level of the handling cost.
Referring to Fig. 10.1, the result is that the 'wrong' (far too large) output is
produced. As an interesting curiosity it can be mentioned that operators
seldom make the mistake of equalizing capacity and expected demand. They
are well aware of the fact that this would make the quality of service
unacceptably low. A reasonable amount of reserve capacity is provided. Then
a situation arises which seemingly justifies the chosen pricing policy; the ships
usually sail with spare capacity: so was it not right to accept also low-paying
cargo?
·In a realistic case where shipping demand shows substantial random variations from one sailing
to another, the short-run marginal cost takes the smooth, although rapidly rising shape of
Fig. 10.1, rather than the right-angled 'rigid capacity' shape that can be assumed in a deterministic
demand model. The model in the appendix assumes a deterministic setting, but one point of the
discussion there is that the basic conclusions will nevertheless be the same.
Demand
Average cost of
marginal ship
i
......
::l
a.
31::L"
o 0'1._
.- u
........... 0
.g,"O
._ c: C
a.
0: C u
Output
Figure 10.1 Illustrative example of short-run marginal cost curves for different
capacities, and a corresponding medium-run marginal cost curve smoothed out by the
approximate average cost of a marginal plant.
APPENDIX: MODEL OF PROFIT-MAXIMIZING

FREIGHT RATE MAKING
The purpose of this appendix is to show that profit-maximizing rate making
involves simultaneous consideration and adjustment of shipping capacity
supply and demand for shipping. The model presupposes knowledge of the
individual demands represented by individual commodities moving in the
trade in question, or more exactly of the freight-rate elasticity of the demand
for shipping of individual commodities.
Different approaches to modelling profit-maximizing freight-rate making
are conceivable. First, the question is whether continuously differentiable cost
functions should be assumed, or if linearity approximations including the
'rigid capacity' assumption are justified? We think that the main costing
problems involved are best addressed by cost-function linearization. To that
end we simplify further by considering a container service, and couch the
shipping demand of different commodities in terms of standard container
units. Thereby, we get rid of the notational problems posed in the case of
break-bulk liner shipping.
Secondly, there is the eternal question of whether a short-run perspective is
sufficient for discussing pricing, or if it is necessary to probe into a 'longer run'.
For pedagogical reasons we start by couching the model in conventional
short-run terms in order to make the eventual choice of a 'medium-run'
approach self-evident.
A.l Profit maximization in the short run

In concord with established conventions, the short run is defined to imply that
shipping capacity on the route is fixed. When it comes to scheduled liner
services, it should mean that the schedule is given, too. In other words, we
consider demand and supply of liner services with a planning horizon no
further ahead than the current schedule is announced to apply. This can
involve a period of time like the following 6, 9, or 12 months. For simplicity, let
us assume that the current schedule ofliner services in the trade under study is
fixed for exactly 1 year henceforth. This means in turn that we have to regard as
an unalterable precondition for the freight-rate making that in the coming
year: a given number of round voyages will be performed on the route; each
ship has a given holding capacity; each round voyage is scheduled to take no
more or no less than a given number of days. The freight rates to be fixed now
should apply during the whole of next year like the schedule. This can be
regarded as part of the service offered to shippers, but is also justified for
reasons of practicability, especially under the present conditions when all
freight-rate changes have to be approved by the liner conference. The
possibility of selling out shipping services just before departure time when the
cargo happens to fall well short of capacity is consequently conceivable only so
far as open-rated cargo is concerned. Similarly, the possibility to raise freight
rates to the market-clearing level each sailing when excess demand seems to
occur is ruled out. Under these circumstances it is ill-advised to aim at 100%
capacity utilization. Given that demand includes a significant stochastic
element, optimum is obtained when the cargo volume on the fat leg equals the
practical capacity, which is equal to the maximum capacity minus the spare
capacity buffer required to offer a reasonable quality of service.
One has also to check that the total loading and unloading time
requirement of the cargo one is planning to take on is not greater than is
allowed for in the present schedule. The round voyage time is divisible into
port time, cruising time at sea, and transition time between at-sea time and
port time proper. With the present approach cruising time and transition time
per round voyage is assumed to be given. Only port time is variable; port time
proper is assumed to be proportional to the cargo volume handled.
For the same reason that makes a certain holding capacity reserve
warranted, i.e. the stochastic element in demand, allowance should be made
for a certain amount of reserve time. On average, the ship sails loaded to its
practical capacity on the fat leg. Occasionally, however, a cargo larger than the
practical capacity is lifted. Then more time is required for loading and
unloading than the average port time requirement. This is taken into account
by not letting the expected port time per round voyage be quite equal to the
difference between the scheduled total round voyage time and the at-sea time
plus transition time, but allowing for a certain amount of reserve time.
Notionally we simply make the transition time constant A include also the
reserve time per round voyage considered necessary.
The rate-making can consequently start by laying down the following
constraints. We continue to adhere to the convention of naming the cargo on
the fat leg 'export cargo'. Therefore we have:
The total volume of export cargo must not exceed the practical capacity, i.e.
x ~ n4>B. (A.t)
The total volume of import cargo must not exceed the practical capacity, i.e.
M~n4>B. (A.2)
The total time required for loading and unloading containers must not
exceed the total scheduled round-voyage time minus total at-sea time and
transition time including reserve time, i.e.
t(Q) ~ n( R - ~ - A) (A.3)
where x = export cargo lifted per year

M =import cargo lifted per year
Q = total (export + import) cargo lifted per year
n = number of round voyages put in per year
B = 'bale' holding capacity of ships (maximum number of standard
container units per ship)
4> = practical rate of holding capacity utilization
t = gross loading and unloading time per container (including a
certain proportion of idle time)
R = scheduled round-voyage time
D = round-voyage distance
V = cruising speed
A = transition and reserve time.
Given these constraints the problem is now to maximize the net revenue by
charging every commodity moving on each leg of the route individual freight
rates. The cargo quantities (stuffed in containers) that will be forthcoming can,
in principle, be regarded as functions of the freight rates. On the fat leg we have,
Xl =XI(F I )
X 2 =X 2 (F 2 )
(AA)
and
IXi=X.
i
On the meagre leg we have:

MI = MdF I )
M2 = M 2 (F 2 )
(A.S)
and
The net revenue is obtained by deducting the applicable cargo costs from
the gross revenue. The cargo costs consist of two items: stevedoring charges
which are assumed to be Co per container, and port charges including cranage,
which likewise can be assumed to be proportional to the number of containers
handled, or which for practical purposes would come to the same, to be
proportional to total time along a berth. We make the latter assumption, i.e.
we assume that total port time (for all ships on the route) is equal to tQ, and
that a berth occupancy charge C I is levied on ships per unit of lay time. The
maximand, that is the net revenue, N R, which is equal to gross freight revenue
minus total cargo costs, is consequently written
NR = I
i
FiXi(F i) + I
j
FjMj(F) - (Co + Clt)Q. (A.6)
The first-order conditions for profit-maximizing freight-rate making in the

short run are found by Kuhn-Tucker analysis. Profit is maximized when net
freight revenue is maximized; the level of the short-run fixed cost does not
matter, and can be left out of consideration. Add to expression (A.6) for N R the
three aforementioned constraints, and the following expression to be
maximized is obtained:
n=NR+Ax(n4>B-X)+AM(n4>B-M)+/{n(R- ~-A )-tQ]

(A. 7)
where Ax, AM' and 11 are Lagrangian multipliers.
The first-order conditions for a maximum are:
(A.8)
on
p.-=O (A. 9)
'oF;
on dM· dM· dM· dM·
of. = F j dF ~ + Mj - (Co + C 1 t) dF ~ - AM d/ - I1t dF ~ ~ 0 (A. 10)
J J J J J
on
F·-=O (A.ll)
JoFj
(A.12)
an (A. 13)
Ax OA = 0
x
(A.14)
on
AM OA M = 0 (A.15)
an ( R---A
-=n D ) -t(X +M)~O (A.16)
all v
on
11 011 = O. (A.17)
Ruling out the possibility of F; or F j bein6 equal to zero, conditions (A.9)

and (A.1l) tell us that (A.8) and (A.1O) are equalities. Dividing through by
dXJdF; and dM/dF j , respectively, these conditions can be written:
F{l + :J-CO-C1t-AX-l1t=O (A.18)
Fj(l+ :J-CO-C1t-A M -l1 t =O (A.19)

where ei and ej stand for the freight-rate-elasticity of Xi and M j
ei=(Fi)(dXi)
Xi dF i
and
eJ. = (F
j )(dM j )
M·
J
dF.·
J
Expressions (A.18) and (A.l9) thus tell us that the marginal revenue of each
commodity should be equal to the cargo cost plus the 'shadow price' of holding
capacity, Ax, on the fat (export) leg, and AM on the meagre (import) leg, and the
'shadow price' of ship's time, Il, times the gross time requirement, t, for loading
and unloading a container.
The shadow prices have no predetermined values in the short run, but can
vary widely depending on the relation between supply and demand in each
particular case. From the system of equations (A. l2)-(A. 19) the m + n optimal
freight rates, Fi and Fj, sought can be solved, and in the process the applicable
values of Ax and AM will come out, too. Since the system includes a number of
inequalities, a certain amount of trial and error is required for the solution. The
procedure of solving for the m + n + 3 unknowns (Fi' Fj, Ax, AM and Il) can
start by trying out the alternative of all shadow prices being zero. The
remaining number of unknowns is then equal to the number of equations of
the system (m + n) and can consequently be found in principle. One has then, of
course, to check that the values found for Fi and Fj, and indirectly for Xi and
M j do not violate any of the constraints, or more exactly to check that
X( = LiXi) or M( = LjM) do not exceed the holding capacity constraint
n¢B, as well as that tQ[ = t(X + M)] does not amount to a greater port-time
requirement than is allowed for in the schedule. If it turns out that no
°
constraint is violated, the optimal solution was arrived at in the first go - the
initial guess AX = AM = Il = happened to be correct. In the more likely case
where one or more constraints will be violated when setting all shadow prices
equal to zero, one proceeds in the following way.
If one finds that Ax > 0, it follows from conditions (A.l2) and (A. 13) that the
equation n¢B = X can be added to the basic system of equations represented
by (A.l8) and (A.l9). Similarly, if one finds that also AM> 0, it is clear from
(A.l4) and (A.l5) that the equation n¢B = M can be added, and if one finds
that Il > 0, it follows from (A.l6) and (A.l7) that the equation
n[R - D/V - A] = t(X + M) can be added to the system of equations to make
the number of equations keep abreast with the number of unknowns.
Few general conclusions with respect to the values of the capacity shadow
prices can be drawn so long as the analysis is confined to the short run.
The scarcity value of holding capacity on the fat leg, Ax, is greater than the
scarcity value on the meagre leg, AM, unless they are both equal to zero. It can
be pointed out explicitly that it by no means follows from the fact that a
'meagre leg' can be identified that the associated capacity shadow price, AM, is
necessarily equal to zero, or, which is the reflected image thereof, as can be seen
from (A.14) and (A. IS), that the average load factor will be less than c/J on the
meagre leg. If shipping capacity happens to be on the low side in relation to
demand, and the difference in demand intensity between the two legs is not
very marked, it may well be that the load factors should be the same, i.e. equal
to ¢, implying full practical capacity utilization on both legs. The value of f.1. -
the scarcity value of ship's time - is equally indeterminate, a priori, as the
values of Ax and AM in the present short-run setting. Two main cases are
conceivable as is clear from (A.l7): either f.1. = 0 in which case the schedule
includes so much reserve time that it never happens that cargo has to be
rejected due to shortage of time, or f.1. > 0 in which case time is a scarce
resource. If the schedule happens to be very tight it would frequently be
necessary to decline to accept cargo in order to be able to keep the schedule.
This could justify quite a substantial contribution margin on time-consuming
articles in break-bulk cargo shipping - in a container service no freight-rate
differentiation can, of course, be justified, on account of differences in
handleability of individual articles inside the boxes. The main message is,
however, addressed to those responsible for fixing the schedule. A very high
value of f.1. is a sign that the schedule is too tight, and calls for a revision of the
timetable rather than the freight-rate tariff.
More than anything else the present discussion should convey the feeling
that the short run is not the right setting for freight-rate making. If an analysis
of the preceding kind leads to the conclusion that Ax = AM = 0, and that the
practical capacity will not be fully utilized in any direction, the right policy
would not be to fix the freight rates in accordance with these conditions,
bearing in mind that these freight rates have to apply at least for 1 year. The
right policy is instead immediately to start adjusting the shipping capacity
downwards, and then, or rather simultaneously, carry out the freight-rate
making.
Similarly, if a short-run Kuhn-Tucker analysis reveals that the scarcity
values Ax and AM are very high following a sudden jump in demand, let us say,
the right policy is to adjust to this situation both by capacity additions and
freight-rate adjustments. It seems clear that freight-rate making in liner
shipping is a medium-run affair, and we now turn to the problem of profit
maximization in the medium run.
A.2 Profit maximization in the medium run

In the medium run shipping capacity on the route concerned is variable. The
shipping company(ies) operating there can vary the number of round voyages
made on the route by re-allocating their ships between trade routes, by
chartering in and chartering out ships, or even buying and selling ships. In
addition to the cargo costs, the shipping costs proper, i.e. the costs of the ships
themselves and their operation are variable costs in the medium run. On the
assumption that ships of the same type and size are used, the shipping costs are
by and large proportional to the total number of round trips put in on the
route. A more detailed cost analysis calls for some modifications of that
approximative relationship: it should be taken into account that the
proportions of ships' time spent at sea and in port make a difference. The main
items - ship capital and crew costs - are proportional to ship-time irrespec-
tive of how the time is spent, while the fuel costs are proportional to the total
cruising distance (given the cruising speed) and the berth occupancy charges to
the total time spent alongside a berth in port. We thus have the total cargo
handling and shipping costs (TC) of the liners operating on the route as
follows:
TC=Q(CO+c1t)+n[ C z( A+ ~+t(;)+C3D ]
(A.20)
= Q[C o + t(C 1 + C z)] + n[ C 2 ( A + ~) + C3DJ
where Co = stevedoring charges per container

C 1 = port charges per unit of time of occupying a berth
C 2 = ship capital and crew cost per unit of time
C 3 = fuel cost per nautical mile.
The aforementioned three constraints change character when the medium
run is considered. When capacity is a control variable a necessary condition
for profit maximization is that full capacity utilization is obtained on the fat
leg.
x= n<jJB. (A.la)
compared to (A.t) the inequality sign has been dropped. Capacity constraint
(A.2), on the other hand, stands as it is, since it is not possible, a priori, to tell
whether or not the capacity constraint should be binding on the meagre leg.
M ~ n<jJB. (A.2)
The third constraint implying that each round voyage must not exceed the
scheduled time drops out, as the timetable determination is part of the
medium-run demand and supply adjustment. In other words the unknowns to
solve for now include the numbers of round trips put in per year, in addition to
the freight rates F; and F j •
The relevant maxim and for profit maximization in the medium run is the
difference between gross freight revenue and the total costs according to (A.20).
Adding side-condition (A.la) and capacity constraint (A.2), the following
expression to be maximized is obtained:
n = 'L'piXi(Fi) + 'LFjMj(F) - TC + Ax(ncpB - X) + AM(ncpB - M)

i j
(A.2I)
The first-order conditions for profit maximization can be written in the
following somewhat developed form
F{ 1 +~)- Co - t(C 1 +
C2)- Ax =0 (A.22)
F j (l+ :J-Co-t(Cl+C2)-AM~0 (A.23)
on
-=ncpB-X=O (A.24)
oA x
on
oA =ncpB-M~O (A.25)
M
(A.26)
(A.27)
So far as the freight-rate making is concerned the conditions for profit

maximization in the medium run look the same as in the short run except that
Jl.t in (A.18) and (A.19) is replaced by C 2 t in (A.22) and (A.23). The 'scarcity
value' of ship's time is no longer conditional on the intensity of demand
relative to supply. In the medium run Jl. takes the fixed value of C 2 , which
stands for ship capital and crew cost per unit of time.
The simultaneous optimization offreight rates and capacity also makes the
holding capacity shadow prices, Ax and AM, determinate to a greater extent
than in the short run. It is clear from (A.29) that the sum of the two shadow
prices equals the total shipping cost per bale capacity unit incurred outside
ports
A A _ C 2 [A + D/V] + C 3 D
x + M- cpB . (A.28)
However, as before the relative size of Ax and AM depends on the degree oftrade
imbalance. From (A.26) we see that two cases are applicable. Either AM = 0 in
which case the optimal total cargo quantity on the meagre leg falls short of the
practical capacity, and Ax alone equals the aforementioned shipping cost, or
AM> 0 and on/oAM = 0 in which case the ships are fully loaded on both legs.
(on/oA. M = 0 means that ncpB - M = 0.)
To check whether the former case is applicable one should solve for the m
export freight rates in question, (F i ), on the assumption that
AX=[C2(A+~)+C3D J/<fJB
and for the n import freight rates (F j ) on the assumption that = O. AM
These freight rates yield in turn a set of (may be) optimal export cargo
quantities X! ... xt .. . X:, and a set of (may be) optimal import cargo
quantities M! ... Mj ... M:. The check is then simply to add up all xt and all
Mj to see whether the (may be) optimal total import cargo really is less than
the (may be) optimal total export cargo. If one finds that M* > X* condition
(A.27) is violated, since X* is equal to total practical capacity. In this event the
second case is indicated, i.e. the case where AM
> 0, and the optimal total cargo
quantities on the two legs are equal. The optimal solution in the second case is
obtained by the addition of the equality M* = X*, which makes the number of
equations equal to the number of unknowns.
The basic character of the optimal solution in the second case is quite clear
as far as the values of the shadow prices are concerned. When the trade is
completely balanced
Ax=AM=t[ C2(A+~)+C3D J/<fJB.

The more unbalanced it is, the larger the difference between and Ax
will be. AM
At a certain point AM
becomes equal to zero, and the first case is applicable.
How unbalanced the trade has to be in order for that case to apply is not
possible to say in general. It depends on the freight-rate making elasticities of
the individual commodities moving in the trade concerned.
A.2.1 Diagrammatic illustration

A diagrammatic illustration of the main point concerning the 'allocation,t of
the n-proportional capacity costs between the fat and meagre legs is quite
instructive. For expository reasons we have then to speak in aggregate terms:
the curve designated NMRM in Fig. A.I represents the net marginal revenue
for import cargo as a function of the total import cargo volume, and the curve
designated NMR is the sum of the net marginal revenue of import and export
cargo as a function of the total export cargo volume. The addition of 'net'
before marginal revenue means that the cargo-proportional costs are
deducted. Offered shipping capacity should be equal to the total export cargo
volume. The optimal level of capacity is found where the marginal capacity
cost - the Me-curve of Fig. A.1 - and NMR intersect. At that capacity level
tThis is, of course, a misleading term. One does not start by allocating total capacity costs between
the two legs, but the profit maximization yields two capacity shadow prices, Ax and AM' the sum of
which equals the capacity unit cost. The relative size of Ax and AM' however, is not predetermined.
(a)
$ f - - 4 . : - - - - - - - - - Me
Number of containers
( b)
Figure A.I Illustration of how the relative size ofthe shipping capacity shadow prices
Ax and AM depends on the trade balance.
( = cargo volume) the net marginal revenue mayor may not include a positive
NMRM component. There cases have been illustrated in Fig. A.I. Graph (a)
represents a balanced trade, or more exactly, a trade where export shipping
demand and import shipping demand are identical. There the NMRM - and
the NMRx - component is exactly half of NMR, and the freight rates will be
the same in both directions, including, as it were, an equal capacity cost share.
Graph (b) represents a somewhat unbalanced trade. Still the ships are fully
loaded in both directions, but since NMRx > NMR M, it is likely (but not
absolutely necessaryt that the freight rate is higher for export cargo than for
import cargo. Graph (c), finally, represents a markedly unbalanced trade.
Ships are not fully loaded on the import leg, and AM = O.
A.2.2 The profit potential

The maximum net revenue in the medium run is easily calculated in the model.
Multiplying conditions (A.22) and (A.23) for profit maximization by Xi and
M j ' respectively, and rearranging terms, the following expressions are
obtained:
(A.29)
(A. 30)
Summing over all i and j and adding it all together, we get:

F,x. F·M·
'LFiXi + 'LFjMj - [Co + t(C! + C 2 )]Q - AxX - AMM = 'L-'-' + 'L_J_l.
i j i -e i j - ej
(A.31)
The third term on the left-hand side is recognized as the cargo-proportional
part of the total cost (TC) according to (A.20) above. It is easily shown that
AxX + AMM constitutes the remaining part of TC, which is proportional to the
number of round voyages, n. Two cases are to be distinguished: in the case
where AM = 0 it is clear from (A.28), remembering that n = X/<IJB, that AxX is
equal to the n-proportional part of TC, and in the case where A.M > 0 we have
that X = M, and consequently that AxX + AMM = (Ax + AM)X, and we see
again from (A.28) that this makes up the remaining n-proportional part of TC.
We can thus conclude that the difference between the total revenue and the
total cost is equal to the sum of the ratio of the total revenue to the absolute
value of the elasticity of each individual commodity. If we set the difference
tIf the elasticity of shipping demand is much higher on the export leg it may well be that the
optimal freight rate is lower for export cargo than for import cargo.
between TR and TC in relation to TR to obtain the profit margin, the

expression of the right-hand side becomes more intelligible.
~(FiXje;) + ~(FjM/ej)
TR-TC , }
TR
IJiXi
i
+L
j
FjMj
The profit margin is equal to the absolute value of the weighted average of the
inverse of the freight-rate elasticities of all individual commodities. The
weights are the individual total revenues, FiX i and F}.M j .
,
The idea of 'charging what the traffic can bear' is to exploit differences in
freight-rate elasticity between different commodities. Such large differences are
supposed to exist within the aggregate of liner-shipping demand, and total
profit should be greatly boosted by the possibility to apply commodity rates
rather than a flat rate per container (FAK-rate).
Let us examine how the profit margin would be if price discrimination were
ruled out, and a FAK-rate had to be charged, while all other assumptions of
the model remain the same. This exercise is carried out simply by substituting a
common F x for all Fi> and a common F M for all Fj, assuming that different
F AK-rates can be charged in different directions. It is then interesting to see
how they will deviate, as the individual elasticities are assumed to be more and
more spread. The simplest possible numerical example has been constructed: if
we assume that the weighted average elasticity of demand is - 6 in all five cases
given in Table A.l when FAK-rating is applied, the profit margin will always
be 16.7%. In the first case all elasticities are the same, in the second case three
equally large commodity groups with elasticites equal to - 5, - 6, and - 7 are
assumed, etc. As seen, where there are nine equally large commodity groups
with elasticities from - 2 to - 10, the profit margin has risen from 16.7 to 21.4.
Table A.1 Profit margins (%) with F AK-rating and price discrimination
Absolute values of
rate-elasticities
of equi-large Price
commodity groups FAK discrimination
I 6 16.7 16.7
II 5,6,7 16.7 17.0
III 4,5,6,7,8 16.7 17.5
IV 3,4,5,6,7,8,9 16.7 19.0
V 2,3,4,5,6,7,8,9,10 16.7 21.4
11 The freight rate structure is out of line
with the marg inal cost structu re
In this chapter we will show in what respects, and to what extent actual freight
rates deviate from the marginal costs. We start by outlining the costing
principles which should underlie a cost-based tariff of freight rates, which will
serve as the basis of comparison for the following examination of existing
tariffs.
11.1 PRINCIPLES OF MARGINAL COST-BASED TARIFFS

In the demonstrated absence of appreciable economies of trade density, and
excluding extremely thin and/or short-distance routes, a freight-rate tariff
based on the marginal costs is quite a straightforward matter.
The objects offreight rates should be different packages including containers
of specified sizes, or 'articles' which we use synonymously, rather than
commodities. The package type and size is, however, not a sufficient
specification of the articles of a marginal cost-based tariff.
The principal determinants of the marginal costs of shipping different
articles are, the article 'handle ability', the ports of loading/unloading, the
season when a shipment is sent, the shipment direction. For costing purposes
the marginal cost of the kth article can conveniently be divided into, (a) a direct
cargo-cost component, (b) an indirect handling-cost component, and (c) a
hauling-cost component. The direct cargo cost consists primarily of stevedor-
ing charges. The indirect handling costs are represented by lay time costs of
ships in port.
Our investigation of the structure of break-bulk cargo handling costs
(Jansson and Shneerson, 1982) indicates that a very substantial proportion of
the variations in both the direct and indirect handling costs are explained by
the package type, the package weight, and the stowage factor. The stowage
factor is the ratio of package measurement (including broken stowage) to
package weight. Alternatively the package measurement alone can be used (as
a substitute for the stowage factor) as an article characteristic without
reducing the explanatory power by much.
The applicable hauling costs can be regarded as the sum of, (a) the product
of the bale capacity and the shadow price per unit of bale capacity, and (b) the
product of the deadweight capacity requirement and the shadow price per unit
of deadweight capacity. In a markedly unbalanced trade both holding
capacity shadow prices are zero on the meagre leg, and on the fat leg the
shadow price of deadweight capacity is zero in a pronounced 'measurement
The freight rate and marginal cost structure 239
trade', However, in less-clearcut cases the two shadow prices can take non-
zero values on both legs on account of the possibilities that the normal
capacity constraint can occasionally be reversed, so that ships may sometimes
be loaded down before they are full.
11.2 CROSS-SUBSIDIZATION BETWEEN COMMODITIES

How much out ofline with the marginal cost structure are existing freight-rate
structures? Immediately below we will give some examples of the degree of
cross-subsidization between commodities, which is the main anomaly of
present tariffs. In the next section we take up for discussion some other forms
of cross-subsidization which have quite the opposite cause. The practice of
'averaging' of freight rates, ignoring a number of cost-influencing factors,
implies too little differentiation with respect to port of loading and port of
unloading, for example, and main-haul and back-haul cargo imbalance.
In previous work it has been shown on the basis offreight rate and cost data
pertaining to US trades that 'intra-tariff cross-subsidization in liner shipping'
(Jansson, 1974) was a salient feature in the 1960s, i.e. that on one and the same
trade route, covered by one conference tariff, about half the cargo was
moving at rates above the corresponding marginal costs, and the remaining
cargo was moving at rates below the marginal costs. The rate-cost disparities
were generally appreciable, and many examples of very substantial
differences - both positive and negative - were found.
We have followed up this work, and here we will present some material
which applies to a number of trade routes to and from Israel in the years of
1971-72. The level of freight rates and costs has doubled since those days. The
freight-rate inflation has by and large been brought about by across-the-
board rises, and there is nothing to suggest that freight rates of general cargo
have become more in line with the marginal costs during this time.
The routes studied were in the Mediterranean trade on one hand, and in the
trade with the USA, on the other. The latter trade includes two routes: the East
Coast route, and the Gulf route. Comparisons of freight rates and costs were
made for both conventional ships and container ships. The container ships
were operating in the Mediterranean trade. The sample of commodities was
taken from the applicable rate books. Commodities were selected on the basis
of two criteria, (a) the importance in terms of their shares in the trade, and (b)
for container ship - whether or not they were easily containerizable. Alto-
gether, in consultation with the shipping lines operating on these routes,
473 freight rates of commodities being moved were compared to their costs.
The cost data were obtained from the accounts of the shipping companies.
The data of the Mediterranean trade are from 1972; the data of the US trade
are from 1971. The cost allocation has been greatly simplified by the fact that
all trade routes under study are measurement trades, and that all two-leg
routes are either markedly unbalanced, or, in some cases, nearly perfectly
300
(a)
250
200
150
100
50
50
100
(b)
500
400
300
200
100
50
50
(c)
450
400
300
200
100
50
50
100
Figure 11.1 (a) Percentage deviations of freight rates and marginal costs of Israeli
imports in the US Atlantic trade. (b) Percentage deviations of freight rates and marginal
175 (d)
150
125
100
75
50
25
25
50
(el
70
60
50
40
30
20
10
~~~~~~~~~~~-
10
20
30
40
50
60
70
80
(f)
150
100
50
50
100
costs of Israeli exports in the US Atlantic trade. (c) Percentage deviations of freight
rates and marginal costs of Israeli imports in the Mediterranean trade by conventional
liners. (d) Israeli exports in the Mediterranean trade by conventional liners. (e) Israeli
imports. in the Mediteranean trade by container ships. (f) Israeli exports in the
Mediterranean trade by container-ships.
balanced. In the US trade there was a marked excess of imports to Israel over
exports. All at-sea costs, therefore, were allocated to the 'fat' inbound leg. In
the Mediterranean trade the volume of export was approximately equal to the
volume of import. In this case the hauling costs were divided equally between
the two legs.
Direct handling costs were obtained from the tariffs of stevedoring charges.
For the allocation of indirect handling costs we have used our results from
previous studies of the influence on the handling performance of articles of
different characteristics in American ports (Jansson and Shneerson, 1982). The
use of these results for allocating indirect handling costs incurred also in
Mediterranean ports, including Israeli ports, is, an approximation. We think
that this is preferable to the alternative of not differentiating the indirect
handling costs at all.
(a) The results

Lists of freight rates and marginal costs of commodities included in the
sample are given as an appendix to this chapter. The charts below summarize
the result of comparing the freight rates and the marginal costs. The six charts
of Fig. l1.1(aHt) illustrate the percentage deviations of freight rates from the
marginal costs. Each stem in the charts represents a percentage ratio of the
difference between each freight rate and the applicable marginal cost to the
marginal cost. For each particular route the values of these percentages are
arranged in falling order (from left to right). Negative differences between
freight rates and marginal costs are given by stems directed downwards.
The impression of widely disparate freight rates and marginal costs is very
strong. As can be seen a general tendency is that the upwards disparities are on
average larger than the downward disparities. (The negative difference
between a freight rate and the marginal cost can, of course, not exceed 100% of
the marginal cost, while no upper limit exists for positive differences.) This
must not be interpreted to mean that the trades are necessarily very profitable.
Each freight rate is represented by one stem irrespective of the volume of cargo
carried. It can be safely guessed that the average quantity of commodities of
the loss-making category is greater than the average quantity of commodities
of the profit-making category.
11.3 EXCESSIVE AVERAGING OF FREIGHT RATES: SOME

SUGGESTIONS FOR REFORMING THE TARIFF
CONSTRUCTION
When looking at commodity freight rates the conclusion is that far too much
differentiation is practiced. 'Commodity' is not a very valid cost factor.
Examining existing freight-rate structures from other aspects, one finds too
little freight-rate differentiation. Excessive averaging of freight rates is another
The freight rate and marginal cost structures 243
shortcoming in liner conference rate-making.

We will now make some suggestions for adjusting freight rates more closely
to the marginal costs in a number of respects. We want to stress that this
should not mean that tariffs become very complicated. One must be prepared
to compromise between the desideratum of strict cost adherence and the
desideratum of simplicity and lucidity of tariffs. To show this we start by
discussing the more technical aspects of tariff construction, first for break-bulk
cargo, and then for containers.
11.3.1 A cost-based tariff for break-bulk cargo

A linear form of the basic relationship between the shipping marginal costs of
different articles and the article characteristics is:
(12.1)
where M C ijk = the marginal cost of shipping from the ith port to the jth port
an article of the kth package type
rn = package measurement
w = package weight
aijkrn = measurement-proportional cost component
bijkW = weight-proportional cost component
C ijk = fixed cost per package unit (independent of package size).
In the common case where more than one port is called at in each service
range the tariff construction will be somewhat involved in view of the likely
possibility that some of the coefficients, aijk , and bijb and C ijk take different
values for different ports for each given package type.
The technically most suitable tariff format would be a number of 'article
matrices' of the kind shown by Fig. 11.2 with three entries for each pair of
ports. One entry gives the charge per rn 3, a second entry gives the charge per
ton (1000 kg), and a third entry gives the fixed charge per package unit, which
consequently is independent of the package size.
There have to be as many article matrices as there are package types. The
most insignificant package types could perhaps be grouped together under a
heading like 'general cargo, not otherwise specified'. In the example above we
have suggested that a range of package weights is specified. An additional
charge could be levied on exceptional units, both on unusually small and
unusually big units, if there are good cost reasons for this.
More important is a peak and off-peak differential. The basic freight rates
should be specified to apply to a period of time, e.g. the slack season. Outside
this period one or more extra peak charges should be levied on top of the basic
freight rates. Needless to say, the periods given in the example of Fig. 11.2 are
entirely fictive. Finally, a quantity rebate may be justified. If this is the case, a
simple way of making the freight rate of a given article taper off with increases
Basicfreight rates during May-October for packages of the k'h type within the WI - w2
weight range (US dollars)
Port of
loading Firsr porr Second porr
Port of
unloading
0 21 per m 3
First porr b 21 per ron
C21
0 12 per m 3
Second port b 12 per ron
c 12
Additional charges (1) X% on the basic charges for packages lighter than
WI kg and heavier than
W2 kg. (2) Y% on the basic charge per m 3 during November-January. (3) Z% on the basic charge
per m 3 during February-April.
Figure 11.2 Layout of 'article matrix' of a cost-based tariff of freight rates.
in the size of shipments is to levy a fixed charge per shipment. This may also be
justified on account of clerical work required in connection with the
documentation, etc. which is largely independent of the size of the shipment.
Would such a tariff be complicated? The rate book may include up to
twenty sheets (where one article matrix is presented on one sheet). We do not
think that the tariff would seem complicated to the shippers. It is not the size of
the rate book that matters, but the ease of finding the applicable freight rates,
and comparing freight rates of substitutable services. In spite of the fact that
the commodity type (and sometimes the package type) is the sole ground for
freight-rate differentiation, current tariffs are both more extensive and more
difficult to comprehend than the proposed cost-based tariff would be.
Conferences have no self-interest of making tariffs very lucid. On the contrary,
charging what the traffic will bear is facilitated by keeping each shipper in the
dark as much as possible as to the freight rates charged to fellow-shippers.
11.3.2 F AK and through charges for containers

The logical extension of our pricing principles to containers is immediate.
Containers represent one class of package type. Only one 'article matrix' of the
kind described in the previous paragraph may be required. Freight rates for
modules other than 20-foot containers should either be a multiple of the basic
freight rates for 20 footers, or the other modules could be defined as separate
articles.
In fact, the tariff might be further simplified, without great loss in efficiency.
The fixed charge, cij ' and even the charge per ton, b ij , could be superfluous; the
former because it would practically be identical to all containers, and the latter
because for containerizable cargo, the effect of weight will be nil in most cases.
The tariff would then have a single charge per cubic metre that will vary
according to the ports of loading and unloading. And if a full container load is
shipped, a single tariff per container that again will vary according to
productivity in ports.
This is in fact the so called F AK rate ('freight of all kinds'). It has been
contemplated as a substitute to the discriminatory structure of rates at the
introductory stages of containerization, but has gained little ground since.
Recently there has been a tendency for the shipping lines to offer container
space to forwarding agents or other 'Non-vessel-operators' (NVOs) at F AK
terms. The forwarding agents in their turn sell this space to individual shippers
at a discriminatory structure of rates. This intermediate step is unnecessary
and harmful. The shipping line can offer both a full-container load and a part-
container load at F AK principles according to the scheme proposed here.
The appearance of containers in general-cargo shipping has raised some
other tariff technical problems. Shipping lines have been anxious to keep the
commodity rates (to make it possible to charge what the tariff can bear). This is
obviously an aim which is in some conflict with the encouragement - on
transport technical grounds - of 'through' container transports. If a container
can be stuffed already at the premises of the consignor, and not stripped until it
has reached its final destination, the maximum economy can be achieved.
The idea to match the door-to-door transport concept in the pricing policy
was soon brought up. Whereas break-bulk freight rates have always applied to
port-to-port (usually quay-to-quay, to be more exact) transports, an innov-
ation in the wake of containerization was to offer all-inclusive, door-to-door
freight rates. It would seem very natural to levy the 'through charges' per
container. This would be the ultimate solution with regard to simplicity and
efficiency. However, this has not happened. The wide freight-rate differenti-
ation by commodities remains. Moreover, 'through charges' are difficult to
apply with the present conference system, because inclusion of the feeder
transport service in the freight rates gives individual conference members an
opportunity to concede 'secret rebates' to shippers of the most coveted high-
rated cargo by subsidizing the feeder transport. This problem would disappear
after the introduction of cost-based freight rates. Until recently another
problem of liner conference through charges was that they were disallowed by
US anti-trust laws. The inland part ofthe through transport was carried out by
carriers not enjoying anti-trust immunity like the shipping lines, and therefore
conferences were not permitted to fix through charges. This problem is now
eliminated by the US Shipping Act, 1984. The new law clearly provided that
conferences may lawfully receive authority from the Federal Maritime
Commission (thereby receiving anti-trust immunity) for collective setting of
intermodal through rates.
In a cost-based tariff of door-to-door container rates, points offreight origin
and destination should replace the ports of loading and unloading. An

accurately differentiated tariff could, however, be quite vast. The snag of a
system ofthrough charges is that either the reflection of costs will be imperfect
as to the inland transport costs, or the number of cargo generation and
destination areas has to be quite large, which will make the tariff less handy.
This snag can be avoided by giving up the idea of a single all-inclusive freight
rate per container. The basic rate can instead cover just the port-to-port, or
when applicable, the groupage depot-to-groupage depot transport. Such
charges would anyway be required for container shippers who prefer to attend
to the land transports themselves. A through charge would then consist of two
components: the port-to-port rate and a charge which depends on the inland
transport distance. Charges applicable to less-than-container-Ioad shippers
who prefer to use possible pick-up/delivery services offered by the shipping
lines would, similarly, consist of two components: a depot-to-depot basic
charge and a distance-dependent additional charge. These charges can, of
course, not be on a per-container basis but should apply to packages like
break-bulk freight rates.
It is often held up as a disadvantage from a marketing point of view not to be
able to quote a specific all-inclusive price for a specific through transport.
Some proponents of door-to-door through charges seem prepared to
disregard differences in inland location completely, and advocate the charging
of just one single freight rate per container irrespective of the freight origin and
destination as well as the ports ofloading and unloading. We can see no point
in going to such an extreme for the sake of 'streamlining' freight-rate tariffs.
11.3.3 Abandonment of commodity freight rates and adoption

of service classes
One radical difference between the type of our proposed freight-rate tariff
and existing tariffs, which is worth emphasizing again, is that the type of
commodity, which is the chief current freight-rate determinant is virtually
irrelevant in our proposal. It is mainly in cases where commodities are handled
in loose form that the commodity type is a principal cost factor. Packaged
cargo is very dominating so far as liner shipping is concerned. Indirectly the
type of commodity will playa role for the freight rates in so far that the
measurement and weight of packages are influenced by the content. There may
be some other intrinsic commodity qualities affecting the freight-rate
structure.
Fragile commodities are more damage-prone and cause higher costs of
claims than other commodities. If this fact is not reflected in the tariff, a source
of controversy between shipper and shipowner emerges. Who should stand
the risk of damage of fragile commodities? A fundamental principle is that, if
the packing is inadequate the shipper should blame himself in case damages
occur, and if the packing is adequate the carrier should regard it as his
responsibility to bring the shipment concerned safely to its destination. The
problem is that it is very difficult to determine in every case what is adequate
packing. The carrier can, of course, simply refuse to take on shipments of
fragile commodities, which are clearly inadequately packaged. Borderline
cases can, however, cause a lot of trouble. The goodwill of the shipping lines
which frequently refuse shipments on account of inadequate packing will be
damaged. A way out of this dilemma could be to introduce a class for 'fragile
articles' in the tariff. Borderline cases (as to the packing of potentially fragile
articles) need then not be refused, but classified as fragile articles. A freight-rate
addition would compensate the carrier for the extra care that has to be devoted
to fragile articles.
Other 'classes' can be envisaged, which on strict cost grounds would involve
some degree of freight-rate differentiation between commodities. High-value
commodities, and urgent (e.g. perishable) commodities would incur relatively
high hauling costs. The idea of liner shipping is certainly to guarantee that
space will be offered regularly, at pre-determined dates; but, as this guarantee
cannot be regarded as absolute, some cargo will, from time to time, be left
behind. At present, shipping lines apply a kind of implicit quality differenti-
ation by a bookings policy which always gives priority to high-rated cargo on
the occasions when demand exceeds supply. This is better done openly. A class
for 'express shipments' could be established. Express shipments would never
need to queue. A freight-rate addition is justified for express shipments,
because such cargo causes extra capacity costs. At the other end of the scale a
low 'stand-by rate' could be charged to shippers who are prepared to let their
cargo always take the end position in the queue. Such cargo imposes obviously
no queuing cost on other cargo, and causes little or no capacity costs.
11.4 FURTHER ASPECTS OF A COST-BASED FREIGHT RATE

STRUCTURE
The cost-based tariff outlined above will look very different from the present
liner conference tariffs. The question is, if the radical changes in the structure of
freight rates will have any significant positive effects, i.e. if the pattern of
seaborne trade and/or the allocation of resources for general-cargo transport
will be significantly improved. It may well be that the seaborne trade that flows
between each pair of trading areas will undergo only minor changes. The
important effects will be on the arrangements of the transports of a by-and-
large given trade volume. The shipper's choice of type and size of break-bulk
cargo packages and unit loads, and the seasonal timing of the shipments will
be changed for the better. The distribution between the ports of call of the
given volume of cargo in each particular trade will likewise be more efficient.
Also the shipowners' choice of type and size of ships can be improved. Below
we will develop in some more detail these effects of introducing a cost-based
tariff of liner freight rates.
11.4.1 Peak/off-peak redistribution of cargo

Given the annual trade volume on a particular route, there is, as a rule,
considerable scope for redistribution in time of the trade flows, if only an
incentive to do so is provided. In case there is a large difference between the
average cargo flow per week during the peak season and that during off-peak,
a redistribution of the cargo flow results in a seasonal levelling of the demand
for shipping space would be very beneficial. The fleet size could be reduced
proportionally to the decrease in peak demand. This will not be balanced by
any need for additional ships during off-peak, because ships are then sailing
with low load factors. The cost saving will not equal the whole of the possible
reduction in shipping cost. The adjustment of the timing of trade flows is not
costless. The main means of achieving a peak/off-peak redistribution of cargo
flows is through additional storage. To arrive at the system cost savings of a
peak/off-peak freight-rate differential the additional storage costs have to be
deducted from the shipping-cost saving.
In liner shipping peak-load pricing has been very unusual on deep-sea
routes, where the conference system is particularly well established. In short-
sea shipping, at least so far as passenger services are concerned, price
differentiation according to season is not unusual. A good example is the
services between Gothenburg and Felixstowe, and Gothenburg and Amster-
dam, which used to be run by Tor Lines, where the addition to the off-peak
level of prices during the peak season is about 60%.
11.4.2 Optimal choice of type and size of break-bulk packages

and unit loads
We have found in earlier investigations (Jansson and Shneerson, 1982) that
tariffs of stevedoring charges for break-bulk cargo in the port of Rotterdam
faithfully reflect the handling costs. This seems to be the case also in many
other important ports. It is common that shipowners are major shareholders
in stevedoring companies - Sweden is one example - and this tends to remove
the temptation of charging what the traffic can bear on the part of stevedoring
companies. To base the stevedoring tariffs on the handling costs seem to be
regarded as the most equitable principle.
However, in order for cost-reflecting stevedoring charges to have any
positive effects on the shipper's choice of package type and size a necessary
condition is that the shipping lines pass on 'the message' from the stevedoring
companies in an undistorted form. It is doubtful that this condition is generally
fulfilled at the present time. Bearing in mind that the indirect handling costs
are equally sensitive to the type and size of packages as the direct handling
costs, a significant improvement in total efficiency could be made in the break-
bulk cargo sector with regard to the packaging by introducing truly cost-based
liner freight rates.
In the unit load sector the choice for the ware owners is highly restricted by
definition. The idea of unitization is, of course, that standardized loads are to
be formed. So far the pattern has been that the ships that are employed in a
particular liner service are either specialized unit-load carriers of a given type,
or conventional liners. As was mentioned briefly in chapter 1 of current
tendencies in general-cargo shipping, 'multi-purpose services' may well be an
important part of the picture in the future. 'Flexibility' in the sense of ability to
combine containers, trailers, and other unit loads as well as odd-shaped
articles is a more-and-more common word of honour in liner shipping
nowadays. Especially in the thin-trade sector it is a great advantage to offer a
service which makes use of the whole potential cargo base rather than
specializes on one category of cargo. The price mechanism has an important
role to play in the evolution of multi-purpose services.
At present the most difficult aspect of introducing a container service into a
certain trade is to evaluate the effects on shippers' costs of packaging, storage
and feeder transport in a case where it is a matter of either/or. By adhering to
the traditional principles of freight-rate making, operators of multi-purpose
services will forfeit a golden opportunity to get valuable information about the
shippers' costs and benefits of different general-cargo transport systems.
11.4.3 Premiums for efficient ports and outport surcharges

It is customary that liner conferences do not differentiate the freight rates of
their tariffs with respect to ports within the service range. This practice has
been rightly criticized. It fails to give an inducement to shippers to choose the
most efficient port: with respect to the ports of loading and unloading, a
differentiation of freight rates should be made not only on account of
stevedoring charges that differ between ports, but also to reflect differences in
the indirect handling costs, and expected waiting times.
There is another possible ground for differentiation offreight rates between
ports, which is more complicated. If a particular port is awkwardly situated in
relation to the rest of the ports, and, in addition, generates just a small quantity
of cargo, it is a costly port to serve for the shipping lines regardless of
stevedoring productivity and charges. The question is whether this is a
rational ground for a freight-rate differential?
This type of question is a long-lived source of controversy between, on one
hand, average cost-pricing proponents who think along 'cost responsibility'
lines, and, on the other, marginal cost-pricing proponents. The recommend-
ations ofthe two schools go widely apart. The total cost per ton, i.e. the average
cost of the 'outport' is very high, whereas the marginal cost, i.e. the cost of
another ton may seem rather low. The key point ofthe argument of economists
of the marginal cost-pricing school is that this issue is by nature an investment
problem in the first place. The question whether or not a particular port is to
be included in the service should be answered by weighing the total separable
cost against the total separable benefits. Once a decision is taken to include the
port in question, it is pointless and even detrimental to discourage traffic

through the port by a price exceeding the marginal cost. This argument is
sound. In a deterministic setting its implication for the pricing policy is that no
freight-rate addition on cargo through this kind of outport is justified. In a
stochastic setting, on the other hand, this is not necessarily so. This is
something which seems to have been overlooked in the debate.
We will develop the argument from the point of departure of the analysis of
the problem of the 'marginal port' in chapter 6. There we have discussed the
possibility for the shipping lines to haul cargo by means of inland transport to
and from a nearby port instead of making a direct call when the quantity of
cargo going to and coming from the jth port is usually small. The conference
lines guarantee that all ports that are included in the service will be served at
predetermined dates irrespective ofthe actual forthcoming quantities of cargo.
The shipping lines are, however, under no obligation to carry out the whole
transport to and from each port by sea. On occasions when little cargo to and
from a particular port is forthcoming, the ship can omit to call at the outport.
In Fig. 6.2 on p. 168 we have shown how, given the probability distribution
of demand, the shape of the expected cost of cargo through the jth port is
determined by (a) the incremental cost of a call at the jth port, and (b) the total
costs of feeder transport between the jth port and a nearby port of call. The
slope of the expected total cost curve gives the marginal expected cost of
another ton through thejth port. The marginal expected cost will, in principle
look like M EC in Fig. 11.3. This cost forms the basis for the aforementioned
second type of freight rate differentiation between ports - according to
differences in the cargo volume generated in different ports. The marginal
port(s) in a service range is (are) characterized by a comparatively low share in
a'2
A~ I------~--~~----~~
Q, *
Q3 Q3 Q2 Q*
2
Expected demand
Figure 11.3 Freight-rate differentials between ports according to the volume of cargo
generated.
the total cargo volume of the trade. In Fig. 11.3 we show how differences in the
shares of the trade should be reflected in the freight-rate structure, on the
neutral assumption that all ports in the service range concerned are equal with
regard to capacity and costs. Suppose that there are three ports in the range:
one base port and one outport on either side. The marginal expected cost
curve is the same for all ports, but each port has an individual demand curve.
The base port generates the greatest demand. The intersection of the base-port
demand curve and the marginal expected cost curve occurs at a level very close
to zero.
In a situation without freight-rate differentiation between the ports the base
port cargo volume is Q2 and the outport cargo volumes are Ql and Q3' When
proper freight-rate differentials are introduced, the outport volumes decrease
to Q! and Q!. The introduction of the freight-rate differentials I1F 1 and I1F 3
causes a shift to the right of the demand curve of the base port. (No shifts ofthe
outport demand curves occur, because F 2 = 0.) The base-port cargo volume
will increase to Q2' The sums of Ql + Q2 + Q3 and Q! + Q! + Q! may well be
the same. What has happened is in the first place a redistribution of the cargo
flows toward a concentration to the base port. It is also seen that the smaller
the demand for a particular port is (the more to the left the demand curve is
situated) the higher the freight rate differential will be.
lt is possible that a 'very marginal' port will be entirely excluded from the
services after the introduction of this type of freight-rate differentiation. This
can, however, not be established on the basis of the short-run cost picture of
Fig. 11.3. Given the new sets of expected demands for different ports, the entire
routing and scheduling should be reconsidered from scratch.
On the condition that the same ports will be served 'before and after', the
efficiency gain from introducing outport freight-rate differentials can, in
principle, be measured for each outport by the area between the marginal
expected cost curve and the demand curve in the trade volume interval
corresponding to the volumes generated with and without a proper freight-rate
differential. In Fig. 11.3 the relevant areas are shaded. The gain in efficiency
takes the form of a reduction in the number of calls at each outport. To obtain
the net gain the consequent increase in land feeder-transport costs has to be
subtracted from the savings for the shipowners.
11.4.4 Effects on optimal ship size of introducing a fat-Ieg/mea~e-Ieg

freight rate differential
The failure of present freight rates to reflect trade imbalances may at first sight
not seem very harmful from an allocative point of view. There is no reason to
suppose anything but a very low freight-rate cross elasticity of the demands for
shipping space in opposite directions. The rise of fat-leg levels of freight rates
and the lowering of meagre-leg levels of freight rates will in general not
influence the pattern of trade flows very much.
If the directional balance, }1, is changed this will, in turn, affect the optimal
ship size. In chapter 5 we have shown that the more balanced a trade is, the
smaller will, ceteris paribus, the optimal ship size be.
Even if }1 stays unchanged, it is possible that a ship-size effect of a fat-
leg/meagre-leg differential will arise. An interesting fact is that not one but two
substantially different ship sizes are optimal in unbalanced trades, provided
that the levels of freight rates in opposite directions truly reflect the marginal
costs. Thorburn (1960) has found cases in tramp shipping where two distinct
size classes were co-existing in the same trade. The large ships were carrying
cargo only on the fat leg, and returning in ballast on the meagre leg. The
smaller ships were fully loaded on both legs. The reason why such a division of
labour can arise is that the freight rates on the meagre leg are bid down to a level
which makes it unprofitable for the big ships to seek a return cargo. Owners of
smaller ships, on the other hand, which have a comparative advantage in the
handling operation, are willing to take on the low-rated cargo on the meagre
leg. In equilibrium the levels of freight rates would be so related that normal
profits are made both by owners of big ships which sail in ballast in one
direction, and owners of small ships which are fully loaded in both directions.
The appearance of two ship sizes can also be expected in liner trades,
provided that a proper fat-Ieg/meagre-Ieg freight-rate differential is intro-
duced. It can be shown that this would lower the total shipping cost per ton in
the trade concerned.
The shipping cost model based on the 'square root approximation' (see
section 6.2.1(a)) is I.seful for this purpose. For simplicity we will assume that the
trade density is sufficiently high for leaving the sailings frequency aspect out of
consideration (because the sailings frequency will be adequate under all
circumstances).
The trade under study is unbalanced. The ratio of the total trade flow (in
both directions) to the fat leg flow is }1. Where this ratio takes a value of 2 the
trade is perfectly balanced, and where it is unity there is a zero flow of cargo on
the meagre leg.
We will calculate the cost per ton in the two situations:
Where all ships are of the same size, S l ' and sail with an average load factor
}1/2.
2 Where t~o ship sizes are used; a small size, S 21' sailing with an average load
factor =i, and a bigger size, S22 sailing with an average load factor = 0.5.
First we can give the optimal ship size in the two cases. In the liner trade
model of chapter 9, where the square-root approximation was used, this
expression for the optimal ship size, S*, was derived:
S* = 2a 2 D. (11.2)
}1a 1
The optimal ship size is apparently inversely proportional to the average

load factor f-l/2. We thus have:
( 11.3)
and
The three sizes are as seen ranked in this order:

< Sl < S22·
S2l
The corresponding costs per ton are directly obtained from equation (9.19) by
inserting the respective average load factors in the right-hand term, and
ignoring the left-hand term (which stands for feeder transport and storage
costs) of the equation.
(11.4)
and
The three costs are as seen ranked in this order:
C 2l < C l < C 22 ·
The relevant comparison is between C l and the weighed average of C 2l and
C 22 , which is designated C 2 . The relevant weights are 2(f-l- 1) and 2 - f-l. (The
ratio of the total cargo carried by the smaller ships to the total cargo carried by
the bigger ships is equal to 2(f-l- 1)/(2 - f-l)).
C2 __ 2(f-l- I)C 2l + (2 - f-l)C 22

(11.5)
f-l
4(f-l- l)a l a 2 D + 2(2 - f-l)2a l a2 D
f-l
After some rearrangements C 2 can be written as a product of C 1 and a factor
which is solely determined by f-l.
C -C [J(2)+f-l][J(2)-I] (11.6)
2- 1 Jf-l .
The question is, whether the right-hand factor is smaller or greater than unity?
For both extreme values of f-l, 1 and 2, respectively, the factor is equal to unity
as expected. Both in a perfectly balanced trade, and in a trade where zero cargo
moves on the meagre leg, a single ship size is optimal for obvious reasons.
For all in-between values of f-l the right-hand factor takes values which are
less than unity. It can be concluded that in unbalanced trades the total costs
per ton, C 2, obtained by using two ship sizes is lower than the costs per ton, C 1,
obtained by using a single ship size.
APPENDIX: FREIGHT RATES AND SHIPPING MARGINAL COSTS

OF ISRAELI IMPORTS AND EXPORTS
Key:
Column 1 lists the freight rate and the base of freighting as it appears in the tariff.
Column 2 lists the stowage factor.
Column 3a lists the marginal costs according to an equal distribution between the 'fat'
and 'meagre' legs.
Column 3b lists marginal costs according to the method that allocates all at-sea costs
to the 'fat' leg.
Column 4a lists the difference between freight rates and marginal costs according to
(3a)
Column 4b lists the difference between freight rates and marginal costs according to
(3b).
Israeli imports in the US Atlantic trade
Commodities Unit (1) (2) (3a) (3b) (4b)
Pulp (wood) w- 44.25 60 88.59 104.37 - 60.12

Glassware
(laboratory bottles) w- 66.00 85 106.68 129.23 - 63.23
Tyres (rubber) w- 102.75 140 142.45 179.72 -76.90
Cocoa beans w- 65.50 78 101.83 122.51 - 57.01
Aluminium
(ingots and plates) w- 37.23 37 70.43 80.13 -42.90
Building
materials (bricks) w- 26.25 25 59.04 65.48 - 39.23
Petroleum lubricants w- 53.00 55 84.60 98.98 -45.98
Railways W- 50.50 50 81.12 94.33
Barley (flour) W- 58.00 60 88.59 104.37 -46.37
Fertilizers W- 50.50 45 76.92 88.72 - 38.22
Corn flour W- 58.00 55 84.60 98.98 -40.98
Oil seeds W- 59.50 60 88.59 104.37 -44.87
Coffee ground W- 82.75 70 95.63 113.96 - 31.21
Paper (rolls) W- 88.25 90 110.38 134.28 -46.03
110 123.71 153.04 -64.72
Cement W- 50.50 40 72.62 83.02 - 32.52
Synthetic rubber WjM- 74.81 70 95.63 113.96 - 39.15
Caustic soda, potash w- 44.75 30 64.07 71.39 - 27.14
Animal feeds w- 65.50 55 84.60 98.98 - 33.48
Insecticides W- 71.75 62 89.99 106.22 - 34.47
Ammoniacal gas liquors W- 63.13 50 81.12 94.33 - 31.20
Light drinks
(mineral water) W- 78.00 70 95.63 113.96 - 35.96
Automobile parts WjM- 86.25 75 94.48 119.23 - 32.98
(Contd.)
Nuts W- 95.25 70 110.32 134.28 - 39.03

Starches w- 97.75 80 103.16 124.30 - 26.55
Paperboard w- 81.75 70 95.62 113.96 - 32.21
Asbestos sheets w- 68.13 50 81.12 94.33 - 25.90
Honey W- 67.00 48 79.19 91.70 -24.70
Pitch petroleum W- 66.00 45 76.92 88.72 - 22.72
Copper wire WjM- 57.31 35 68.11 77.11 -19.80
Sugar W 69.00 47 78.47 90.74 - 21.70
Raw wool W- 116.50 100 123.29 143.25 - 26.50
200 182.31 232.19 - 115.69
Pigments and paints WjM- 49.74 23 56.39 62.13 - 12.39
Fruit and vegetable
juices W- 78.00 55 84.60 98.98 - 20.98
Milk powder W- 89.25 68 94.42 112.28 -29.03
Steel (tubes, bars) W- 50.50 20 53.96 58.73 -8.23
40 72.62 83.02 - 32.52
Wood blocks W- 73.00 45 76.92 88.72 - 15.72
Rails (steel) W- 44.00 15 47.63 51.28 -7.28
Copper mate and copper
waste W- 49.50 18 51.76 56.33 -6.83
Hydrocarbons (gas) W- 65.25 33 66.46 75.00 -9.75
Vegetables, fruits
(fresh) W- 68.00 50 31.12 94.33 - 16.33
90 110.32 134.28 - 56.88
Fruits (dried) W- 78.00 50 81.18 74.33 - 16.33
Metal cuttings WjM- 72.56 45 76.92 88.72 - 16.16
Nickel ingots W- 61.50 12 44.26 47.21 14.29
Printed matter (books) WjM- 105.88 55 84.60 98.98 6.90
Fish, fish products W- 132.00 50 81.12 94.33 -2.28
90 110.32 134.28 37.57
Agricultural (p) W 172.50 125 148.92 189.Q1 - 16.51
machinery (v) 222.18 33.17
Jute fibres W- 123.19 73 98.15 117.42 5.77
Sporting ammunition WjM- 114.61 53 83.24 97.14 17.47
Military equipment WjM- 81.25 (50) 81.12 94.33 -13.08
138.13 (85) 106.68 129.23 8.90
Meat extract, juices W- 116.75 55 84.60 98.98 17.77
Chocolate WjM- 126.25 65 92.55 109.73 16.52
Stainless steel W- 78.00 10-12 43.04 45.76 32.24
Photographic mats WjM- 127.50 60 88.59 104.37 23.13
Soups WjM- 129.75 60 88.59 104.37 25.38
Yarn (synthetic) W- 173.25 120 76.11 161.77 11.48
Leather goods Ft- 164.00 105 120.30 148.82 15.18
Animal oil, fat W- 118.50 39 71.90 82.06 36.44
(Contd.)
(Contd.)
Engines and motors W/M- 146.25 75 99.48 119.23 27.02

Silk yarn W/M- 173.25 120 129.86 161.77 11.48
Instant coffee W- 151.38 70 95.63 113.96 37.42
Alcoholic beverages
(casks) W- 151.37 70 95.63 113.96 37.42
Automobiles
(unpacked) W/M- 204.38 150 148.92 189.01 15.37
408.75 300 235.62 315.92 92.84
Wine (barrels) W/M- 151.38 65 92.55 109.73 41.65
Vegetable fibres W- 185.63 110 123.71 153.04 22.59
Refrigerators W/M- 249.94 215 187.37 244.76 5.22
Tea W/M- 186.37 105 120.31 148.24 38.13
Cotton fabrics W- 177.33 82 104.33 125.94 51.39
Crude rubber W/M- 168.19 65 92.55 109.73 58.46
Footwear (leather) W/M- 194.63 95 113.27 134.28 60.35
Electric machinery W/M- 261.38 170 161.17 206.62 54.76
294.31 87.69
Calculating machines W/M- 235.46 95 113.27 138.38 97.08
Synthetic fibre goods W- 259.50 120 129.86 161.77 98.33
Clothing W/M- 259.50 120 129.86 161.77 97.73
Pharmaceuticals W/M- 252.26 93 112.12 136.79 115.47
Knitted fabrics
and articles W/M 281.13 130 80.31 171.27 109.86
Cigarettes W/M- 281.13 130 136.57 171.27 109.86
Automobiles (packed) W/M- 460.00 400 290.07 397.27 62.73
Leather (bales) W/M- 285.00 95 113.27 138.38 146.62
Tobacco W/M- 324.38 150 148.92 189.01 145.37
Furs and skins W/M- 557.03 125 177.66 166.53 390.50
Wood (flooring) W/M- 35 99.48
Feathers W- 65 92.55
Israeli exports in the US Atlantic trade
Commodities (1) (2) (3a) (3b) (4b)
Cotton uncarded (raw) W- 47.75 155 126.48 74.20 - 26.45

Paper (rolls) W- 36.25 90 110.38 69.03 - 32.78
110 123.71 73.40 - 37.15
Bicycles (parts) W- 93.50 200 161.17 83.83 9.67
178.79 88.10 5.34
Cocoa beans W- 35.75 78 101.83 66.05 - 30.30
Glassware (un worked) W- 39.75 80 103.16 66.60 - 26.85
100 116.73 71.12 - 31.37
Tyres W- 88.25 140 142.45 78.81 9.44
(Contd.)
Light drinks (mineral

water) w- 45.25 70 95.63 63.77 - 18.52
Chemicals (harmless) w- 46.75 70 95.63 63.77 -17.02
Glues w- 48.50 70 95.63 63.77 -15.27
Pharmaceuticals
(medicines) w- 65.75 93 112.12 69.67 -3.92
Glassware (bottles) W- 61.25 85 106.38 67.75 -6.50
Milk powder w- 49.50 68 94.42 63.36 - 13.86
Glass (plates, sheets) w- 33.00 43 74.77 55.15 - 12.15
Oil seeds w- 48.00 60 28.59 61.18 - 13.08
Asbestos sheets w- 41.00 50 81.12 57.96 -16.96
Fertilizers w- 41.75 45 76.92 56.11 - 14.36
Wood blocks W- 13.00 45 76.92 56.11 - 13.11
Tea W/M- 86.63 105 120.31 72.36 14.27
Honey w- 47.25 48 79.90 57.30 -10.05
Garden and field seeds w- 50.00 50 81.12 57.96 -7.96
100 116.73 71.12 - 21.12
Metal scrap w- 50.00 30 64.07 50.00 0
81.12 57.96 -7.96
Printer matter (books) W/M- 54.66 55 84.60 59.47 -4.81
Steel (tubes, bars) w- 43.25 20 53.96 54.19 - 1.16
40 72.62 44.41 -10.94
Preserves w- 55.25 55 84.60 59.47 -4.22
Chocolate w- 63.25 65 92.55 62.67 0.58
Ammoniacal liquors w- 81.25 50 81.12 69.03 12.22
Nuts w- 53.75 90 110.32 57.96 -4.23
Alcoholic beverages
(casks) w- 72.25 70 95.63 63.77 8.48
Linoleum, floor covers w- 75.00 70 95.62 56.11 18.89
Sporting ammunition w- 63.25 53 83.24 58.89 4.36
Wine (barrels) w- 72.75 65 92.55 62.67 10.08
Automobile parts W/M- 82.50 75 99.48 65.28 17.22
Fruit and vegetable
juices w- 88.75 55 84.60 59.47 8.32
Starches w- 88.75 80 103.10 66.60 22.15
Building materials (bricks) W- 44.75 25 59.04 47.37 -2.62
Pigments, paints W/M- 42.26 23 56.39 45.92 -3.66
Soups w- 76.50 60 88.59 61.08 15.42
Jams, jellies w- 80.50 45 91.50 56.11 24.39
Tractor parts W/M- 88.59 75 99.48 65.28 23.31
Raw wool w- 63.00 100 123.29 71.12 - 8.12
200 182.31 88.16 - 25.16
Aluminium (ingots
and plates) W- 63.00 37 70.43 53.21 9.79
Fruits (dried) w- 77.00 50 81.12 57.96 19.04
(Contd.)
(Contd.)
Veneer and plywood Ft- 143.06 75 120.30 65.28 77.78

Leather goods Ft- 143.06 105 120.30 72.36 70.70
Polyethylene sheets W/M- 121.19 70 95.62 63.77 57.42
Nickel ingots W- 76.00 12 44.26 38.60 37.40
Meat extract, juices W- 131.50 55 84.60 59.47 72.03
Clothing W/M- 189.75 120 129.86 75.24 114.51
Fish, fish products W- 144.00 50 81.12 57.96 86.04
90 110.32 69.03 74.97
Refrigerators W/M- 255.31 215 187.37 90.11 165.20
Plastic articles W- 161.75 65 92.55 62.67 99.03
Footwear (leather) W/M- 194.25 95 113.27 69.03 125.22
Agricultural machinery (p)W- 200.63 125 148.92 80.59 120.04
(v) 233.44 152.85
Instant coffee W- 212.50 70 95.63 63.77 148.73
Synthetic fibre goods W- 50.25 120 129.86 75.24 175.01
Knitted fabrics articles W/M- 221.81 130 80.31 72.24 149.57
Automobiles W/M- 191.25 150 148.92 80.59 110.66
(unpacked) 382.50 300 235.62 100.14 282.36
Automobiles (packed) W/M- 445.00 400 290.07 109.81 335.19
Electric Mechinery W/M- 333.63 170 161.17 83.83 249.80
Feathers W- 354.25 65.90 92.55 62.67 285.22
69.03 291.58
Israeli exports in the Mediterranean trade by conventional liners
Commodities (1) (2) (3b) (4b)
Bricks W- 12.01 25 31.28 -14.20

Paper W- 17.02 96 27.33 - 10.31
Tyres W/M- 36.14 85 26.19 -9.95
Vipla W- 20.57 110 29.70 - 9.45
Urea W- 17.02 75 24.68 -7.66
Seeds W- 17.02 55-70 21.49 -6.99
24.01 -4.47
Carbon black W- 25.91 115 30.24 -5.03
Copper plates W/M- 8.39 16 13.20 -4.31
Greasy wool W- 27.39 122 31.39 -3.70
Metal ingots W- 16.49 35 14.43 -3.02
15.49 40 18.51 1.06
Light drinks
(soda water) W- 21.08 70 24.01 -2.93
Cement W- 17.02 40 18.84 -1.82
Coffee (ground) bags W- 22.35 70 24.01 -1.66
tins W/M- 42.90 18.39
Beans, peas W- 20.07 56 21.11 -1.07
(Contd.)
Paints W/M- 14.08 23 15.08 -1.00

Milk powder bags W- 22.35 55 21.48 -0.87
tins W/M- 33.66 12.18
Plastics W- 22.35 65 23.21 -0.86
Talcum W- 18.03 40 18.84 -0.81
Bleaching powder W- 21.69 60 22.36 -0.77
Bentonite W- 18.03 36-40 18.51 -0.48
Marble chips W- 15.24 25 15.70 -0.46
Juices W- 21.08 50-60 21.49 -0.41
Cardboard W/M- 25.48 80-85 25.84 -0.36
Vegetable oil W- 22.35 62-64 22.36 -0.01
Beer W- 22.35 58 22.05 0.30
Jam, jellies W/M- 27.50 45 19.79 7.71
Tobacco W- 43.75 140 33.44 10.31
Mirrors W/M- 33.82 64 23.07 10.75
Synthetic yarn W/M- 39.76 100 30.94 11.50
47.60 120 28.26 16.66
Sanitary ware W/M- 37.10 70-75 24.40 12.70
Liquors (brandy) W/M- 34.98 57 21.90 13.08
Typewriters W/M- 37.35 65 24.01 13.34
75
Furniture W/M- 43.61 110 29.70 13.91
51.59 130 32.29 19.30
Books W/M- 35.44 50-60 21.48 13.96
38.41 16.93
Tyres W/M- 49.26 140 33.44 15.84
Printing ink W/M- 42.07 85 25.19 15.88
Preserves W/M- 42.90 60 22.36 20.54
Chewing gum W/M- 46.16 65 23.22 22.94
Machinery parts W/M- 56.39 80 25.45 31.42
Machinery (NOS) W/M- 61.38 100 28.51 32.87
Trucks W/M- 72.11 150 34.53 37.58
144.21 300 48.23 95.98
Agricultural W/M- 92.56 150 34.53 48.03
equipment 165.11 130.58
Cars W/M- 115.05 280 61.21 53.84
49.13 56.92
Clothes W/M- 85.17 120 30.94 54.23
Leather shoes W/M- 91.90 150 34.53 57.37
29.70 62.20
Cigarettes W/M- 92.12 130 32.29 59.83
Scooters W/M- 130.90 400 61.21 69.69
Refrigerators W/M- 186.60 400 42.17 127.89
58.71 144.43
Bicycles W/M- 82.58 150 34.53 69.47
(unpacked) 110.00 200 40.53 48.03
Israeli imports in the Mediterranean trade by conventional liners
Cotton W- 24.13 150 34.53 -10.40

Tyres W- 23.37 140 33.44 -10.07
Ground nuts W- 22.35 120 30.93 -8.58
Printing ink W- 18.03 85 26.19 - 8.16
Onion W- 17.53 80 25.37 -7.84
Brass W- 20.07 40 22.36 -4.62
45 24.69 -2.29
Coffee (instant) W/M- 22.91 70 24.01 -1.10
Polyethylene W- 17.02 55 21.48 -4.46
Plywood W- 20.07 80 24.01 -3.94
Preserves W- 19.30 60 22.36 -3.06
Paints W/M- 12.80 23 15.08 -2.29
Bicycles (unpacked) W- 38.35 150 34.53 - 2.18
200 40.53 3.82
Chemicals (harmless) W- 22.35 70 24.01 -1.66
Cotton yam W/M- 22.91 70 24.40 -1.49
24.56 79 0.16
Beer W- 21.08 58 22.05 -0.97
Potassium nitrate W- 17.02 35 17.41 -0.39
Carbon black W- 19.30 115 30.24 -10.94
Seeds W- 17.02 55 21.49 -6.99
70 24.01 -4.47
Coffee (ground) W- 19.05 70 24.01 -4.96
Juices W- 18.03 50-60 21.49 -3.46
Pipes (iron, steel) W- 17.02 55 22.05 -5.03
Metal ingots W- 19.75 20 14.43 1.24
18.51 5.32
W/M- 27.97 60 22.36 5.61
Metal scrap W- 24.13 30 16.87 7.26
50 20.72 3.41
Insecticides W- 29.97 62 22.51 7.46
Urea W- 15.75 75 24.68 -8.98
Flower bulbs W/M- 34.96 80 25.84 9.12
85
Dehydrated vegetables W- 33.78 70 24.40 9.38
75
Synthetic yam W/M- 42.59 120 30.94 11.65
28.26 14.33
Clothes W/M- 42.62 120 30.94 11.68
Woollen cloth W/M- 46.16 130 32.29 13.87
Furniture W/M- 43.61 110 29.70 13.91
51.59 130 32.29 19.30
Chewing gum W/M- 39.80 65 23.22 16.58
Paper W/M- 44.55 90 27.33 17.22
(Contd.)
Greasy wool W- 49.28 125 31.39 17.89

Books W/M- 39.67 50 21.48 18.19
60
Leather shoes W/M- 57.38 110 34.53 22.85
29.70 27.68
Machinery parts W/M- 50.18 80 25.45 24.73
Biscuits W/M- 44.26 120 30.93 29.91
Machinery (NOS) W/M- 61.38 100 28.51 32.87
Refrigerators W/M- 92.85 215 42.17 34.14
58.71 50.68
Agricultural equipment W/M- 70.01 150 34.53 35.48
Cars W/M- 164.32 400 61.21 103.11
49.13 115.19
Israeli imports in the Mediterranean trade by container ship
Commodities (1) (2) (3a) (4a)
Empty barrels W- 25.91 300 126.34 - 121.48

350 147.39 -100.43
Plastics W/M- 22.35 150 63.17 -40.82
Cotton (raw) W- 24.13 130 55.80 - 31.67
135
Carbon black W- 25.91 110 47.38 - 21.47
115
Tobacco W- 40.00 95 44.45 -18.72
63.17 150 4.45
Wool W- 27.69 95 43.16 -15.20
110
Empty bottles W/M- 25.10 90 37.90 -12.80
Glassware W/M- 23.90 80 42.30 -12.30
30.00 100 33.69 -9.72
Tea W/M- 55.10 100 42.00 - 11.26
Plastics W/M- 19.90 150 28.70 -10.30
27.60 33.90 -7.80
Tyres W- 49.28 140 58.83 -9.55
Rubber W- 20.07 70 29.49 -9.42
Jute bags W- 17.02 60 26.32 -9.30
65
Chemicals W- 22.35 70 29.49 -7.14
Cocoa beans W- 22.35 70 29.48 -7.13
Caustic soda W- 22.35 70 29.48 -7.13
Coffee (raw) W- 22.35 60 27.37 -5.02
70
(Contd.)
(Contd.)
Starch W/M- 17.80 50 21.10 -4.59

24.90 70 29.49 -3.30
Yarn (wool and cotton) W/M- 39.76 100 42.11 -2.94
47.59 120 50.53 -2.35
Synthetic fibres W/M- 39.70 100 42.11 - 2.41
49.60 120 50.53 -0.93
Aluminium sheets W- 18.54 35 70.00 -1.46
40
Window glass W- 19.25 40 18.95 0.30
50
Fruit (dried) W- 29.97 70 29.49 0.48
Urea W- 38.57 90 37.90 0.61
Wine W- 25.27 60 25.91 0.64
Rice W- 22.35 50 21.10 1.25
Paper W/M- 44.55 90 37.90 6.65
Jam, jellies W/M- 30.58 50 21.10 9.48
Dyes W/M- 42.90 70 29.49 13.41
Instant coffee W/M- 42.90 70 29.49 13.41
Machinery, tools W/M- 61.28 100 42.11 19.17
Cosmetics, perfumery W/M- 56.87 75 33.84 23.03
85
General cargo W/M- 71.03 100 42.11 28.92
Leather articles W/M- 71.14 100 42.39 28.75
Electric household W/M- 245.10 400 168.15 76.65
appliances 306.40 500 210.50 95.90
Israeli exports in the Mediterranean trade by container ship
Tyres W- 24.13 140 58.83 - 34.70

Cotton (raw) W- 24.13 130 55.80 - 31.67
135
Carbon black W- 19.30 110 47.38 -28.08
115
Tobacco W- 40.64 95 40.00 -22.53
150 63.17 -0.64
Urea W- 15.75 90 37.90 - 22.15
Paper W/M- 18.03 90 37.90 -19.87
Caustic soda W- 17.78 70 29.48 - 11.70
Starch W/M- 19.81 50 21.10 -9.68
70 29.49 -1.29
Fruit (dried) W- 20.07 70 29.49 -9.42
(Contd.)
Jute (bags) W- 17.02 60 26.32 -9.30

65
Coffee (raw) W- 19.05 60 27.37 - 8.32
70
Synthetic fibre W/M- 35.51 100 42.11 -7.93
42.60 120 50.53 -6.60
Yarn (wool) W/M- 42.75 100 42.11 -7.78
120 50.53 -0.64
Rubber W- 22.35 70 29.49 -7.14
Chemicals W- 22.35 70 29.49 -7.14
Glassware W/M- 28.43 80 33.69 -6.73
35.57 100 42.30 -5.26
Plastics W/M- 58.50 150 69.17 -4.67
Jam, jellies W/M- 19.56 50 21.10 -1.54
Wine W- 24.13 60 25.20 - 1.14
Window (glass) W- 18.03 40 20.00 -0.92
50
Aluminium sheets W- 19.30 40 28.95 -0.70
35
Honey W- 22.35 48 20.21 2.14
Fertilizers W- 21.50 40 17.90 3.60
45
Feathers W/M- 43.00 65 28.70 5.10
90 37.90 14.30
Wool W- 49.28 95 43.16 6.12
110
Machinery W/M- 61.28 100 42.11 19.17
Tea W/M- 63.37 100 42.00 21.37
General cargo W/M- 64.07 100 42.11 21.96
Empty bottles W/M- 14.38 90 37.90 23.52
Leather articles W/M- 69.75 100 42.39 27.36
Cosmetics, perfumery W/M- 68.57 75 33.84 34.73
85
Instant coffee W/M- 69.22 70 29.49 39.73
Electric household W/M- 245.13 400 168.45 95.90
appliances 306.40 500 210.56 140.05
12 Potential cartel profits become social costs
The divergences between existing freight-rate structures and the marginal cost
structure discussed in the previous chapter are bad. Even worse, we think is
another source of inefficiency, namely: the price-rigging power itself of liner-
shipping conferences easily causes both excess capacity and excessive service
competition between conference members. It has puzzled many observers that
in the thoroughly cartelized liner-shipping industry, supernormal profits are
generally absent. Some commentators have suggested that liner-shipping
companies do not want to maximize profits. A more plausible explanation, in
our view, is that the potential monopoly profits are turned into costs - costs of
inputs into the fight for the expected reward. Compare Posner (1975),
who summarizes the general phenomenon thus: 'Competition to obtain
a monopoly results in the transformation of expected monopoly profits into
social costs.'
The transformation of potential monopoly profits into social costs can take
somewhat different forms. A basic common feature is that, in the first place,
rigged freight rates will induce individual lines to compete by putting in more
ships on the route, in order to increase their share in the trade. Given a level of
freight rates well above the level of marginal costs, it is profitable (from a
private point of view) for an individual line to increase its sailings. The trouble
is, of course, that every shipping line tries the same thing, with the end result of
high costs and low profits for everybody. The exertion of the price-fixing
power of liner conferences, tends to raise the level of costs to practically any
level of freight rates that is initially established.
In the second stage, given low load factors and the absence of super-normal
profits, two things can happen: first individual lines are now willing to carry
relatively low-rated minor bulk cargo for filling up space, and secondly each
individual shipping line will try to overbid its competitors for high-rated cargo
in respect of various qualities of service, with the end result of a too high
quality of service from a welfare economic point of view, and a further increase
in costs.
12.1 EMPIRICAL EVIDENCE OF LOW LOAD FACTORS

IN LINER SHIPPING
In spite of the fact that liners are filling up empty space by tramp cargo as far as
possible, rather low load factors can be observed. In the 1980s the main
explanation for this is the over-supply of container ships ordered in the boom
period of the 1970s. But even in the year of 1979, for which we have very
Cartel profits and social costs 263
carefully compiled statistics, it seems that load factors were rather low, at least
in trades to and from the USA.
The calculation of capacity utilization was made possible by the carefully
compiled statistics of the USA trade in 1979, compiled by Captain Zvi
Idelstein (Effects of Marketing Structure. Organization and Conduct on the Rate
Making Process, unpublished 1981). It was done by dividing the total trade
measured in cubic meters, carried between USA East and West Coasts and all
foreign trade areas, by the total annual capacity offered, measured in TEUs.
Cargo quantities measured comprised all liner trade to and from all foreign
ports in the countries trading with the USA, to and from the following USA
ports:
North Atlantic: Boston, New York, Philadelphia, Baltimore,

Norfolk, Newport News.
South Atlantic: Savannah, Charleston, Jacksonville, Miami.
Pacific: Portland, Seattle, Stockton, Oakland, San Francisco,
Los Angeles, Long Beach, San Diego.
Gulf: Tampa, New Orleans, Houston, Galveston.
Capacity offered was calculated on the basis of actual sizes of vessels sailing
on these routes and their actual frequencies. This was done for each of the nine
trading areas listed in Table 12.1. In cases where the same ships were used for
trading to Canada, the available capacity offered to the USA trade was
reduced accordingly. All trade examined was containerized cargo. Therefore,
shipping capacity was expressed in standard container units, where a ship of
15000 dwt is equivalent to 1000 TEUs.
The capacity utilization was calculated by us for the fat leg only. It was
calculated by dividing the actual volume carried per container, by the
maximum volume capacity per container which was taken to be 1060 cubic
feet, or 30.23 cubic metres. The resulting load factors are very low (column 4.1).
The average container capacity utilization in 1979 in USA seaborne trade was
equal to 0.326. Even after allowance for 50% broken stowage of commodities,
load factors on all trade routes except the Far East and South East Asia
remained low. The average capacity utilization in this case amounted to 0.49.
12.2 MODEL OF SUPPLY AND DEMAND EQUILIBRIUM

IN A LINER TRADE
We will here present a model of how supply and demand equilibrium is
brought about in a liner-shipping cartel. Rather than drawing on one of the
existing approaches to cartel and oligopoly theory our model is based on a
feature which is the key to understanding why liner shipping is so prone to
excess capacity, and which is exclusively associated with the provision of
Table 12.1 Capacity utilization of container services in the USA trade (1979)
Utilization
Utilization rate
(in volume)
Supply of shipping (4)
Trade Volume capacity Cubic
(1) (2) metric No allowance 50%
tons per for broken allowance
US Import Export 1000 1000 TEU stowage for broken
Trade area region ( 1000 c.m. tons) dwt TEUs (3) (4.1 ) stowage (4.2)
Australia and New Zealand EC 1417 1293 1657 110.46 12.83 0.42 0.64
WC 451 614 979 65.25 9.41 0.31 0.47
Far East and South- EC 7701 5792 7689 512.51 15.03 0.50 0.75
East Asia WC 13024 16421 16732 1115.47 14.72 0.49 0.73
West Africa EC 245 1444 2716 118.05 7.98 0.26 0.40
WC
South and East Africa EC 628 904 1629 108.62 8.32 0.27 0.41
WC 29 97 6.50 4.46 0.15 0.22
Northwest Europe Baltic EC 9807 10056 16479 1098.61 9.15 0.30 0.45
UK and Ireland WC 1504 1111 1939 129.29 11.63 0.38 0.58
Mediterranian and EC 4763 5577 8010 534.03 10.44 0.34 0.52
Black Sea WC 645 257 826 55.08 11.71 0.39 0.58
Red Sea and EC 95 3744 6592 439.47 8.52 0.28 0.42
Persian Gulf WC 161 205 13.68 11.77 0.39 0.58
East coast South America EC 2433 4803 6242 416.12 11.54 0.38 0.57
WC 294 222 465 37.00 7.94 0.26 0.39
West coast South America EC 1795 1592 3331 222.09 8.08 0.27 0.40
WC 202 198 660 44.02 4.59 0.15 0.23
Column (1) lists the trade volume to (imports) and from (exports) the USA; trade volume is measured in cubic metric tons.
Column (2) lists the supply of shipping capacity on the trade routes, measured in dwt and TEUs (20 foot container equivalent).
Column (3) is calculated by dividing the volume of trade (1) by the number of TEUs (3) of the 'fat' leg of each trade route.
Column (4) the utilization rate is calculated by dividing the actual volume of cargo carried per container (3) by the maximum volume that can be carried - 1060
cubic feet, or 30.23 cubic meters.
EC, East Coast; WC, West Coast.
scheduled transport services. The feature referred to can be summarized by the

phrase 'demand follows supply'.
It should be emphasized that our rather schematic description of the
mechanism that generates excess capacity does not apply to the same extent to
all conferences. It applies to conferences that regulate freight rates but do not
regulate supply. As far as conferences that have market sharing agreements are
concerned, the future share of each line is often determined by the current
capacity of its fleet on the route. Adjustments in market shares are made from
time to time on the basis of the capacity offered by each line and the amount of
cargo that it actually carries, so the incentive to compete by adding capacity
still exists.
12.2.1 'Demand follows supply' and excess capacity

A goods manufacturer who is a price-taker can adjust to a fall in demand by
reducing production capacity, without fear of losing customers. Take, for
example, a manufacturer of wireless sets who is a member of a price cartel, and
who produces 1000 sets per week. If demand for his products falls by 50% he can
(after a while) get rid of the resulting excess capacity by making a comparable
reduction in productive capacity. His previous level of capacity utilization can
be maintained.
The situation is different for a shipping line. A shipowner is employing, for
example, four ships on a route, but each ship is sailing half empty every voyage.
At first sight, the obvious thing for the shipowner to do, in order to secure full-
capacity utilization, is to take two of his ships out of service. The trouble is,
however, that business might well drop at more or less the same rate as offered
capacity, and the remaining two ships would still sail half empty!
'Demand follows supply' rather than the other way round is a feature of
liner-shipping services offered at a 'rigged' price. Unless rate concessions are
made to the shippers originally catered for, a contracting liner has great
difficulty in keeping its customers and maintaining its market share so that an
appreciably higher load factor can be achieved. Shippers would have to
postpone some shipments or dispatch them earlier to adjust to the sparser
schedule of this shipowner, and why should they do something for nothing?
Alternatively, the shipowner in the above example may substitute four half-
as-big ships for the original ships. This will raise the load factors but it will also
raise the cost per unit of capacity, assuming that the original size of the ships is
the optimal size for the route. Such a radical change of the fleet is, to be sure,
not made in ajiffy, and, moreover, shipowners are naturally reluctant to invest
in 'plant' well below best-practice size. If the competitors continue to use ships
ofthe optimal size, and eventually manage to raise load factors, the shipowner
stuck with the small ships will be at a serious disadvantage. It can be observed
that a multi-plant goods manufacturing firm, which is reducing its total
capacity, will as a matter of course, lessen the number of plants, and not the
capacity per plant.
In the following model we assume that shipping lines act in the same way,
i.e. expand and contract the carrying capacity by adding and withdrawing
ships, or sailings by ships of the optimal size. It seems that basically similar
results would be obtained in a model where the possibility to go down in size
when the load factor is unsatisfactory is allowed for, because this will also
increase the cost per ton as a result of a decrease in demand.
We will assume the following setting of the model.
The flow of demand for shipping space on a particular route is uniform over
time and shippers are indifferent as to which ship or shipping line takes their
cargo, as long as it is the nearest in time. The first ship that offers space gets
the business.
2 There is no 'flocking' of ships on the route. Equal intervals between all
sailings are maintained. If a particular line wants to increase its sailing by
putting an additional ship, other carriers - out of self interest - will adjust
their schedule accordingly.
3 The freight rates are fixed according to the principle of charging what the
traffic can bear. The average level of freight rates is thus determined by, on
the one hand, the composition of cargo as to high-value and low-value
commodities, and, on the other, by possible outside competition. This
means that the potential monopoly profits of the conference members is
exogenously given. The basic idea of the model is, however, that in
equilibrium only normal profits will be earned on average. The potential
profits are turned into social costs.
The following notations will be used in the model.
S = ship size; the same for all ships of all lines.
F = level of freight rates, i.e. the weighted average of the freight rates of all
commodities quoted in the tariff.
Q = total cargo volume on the route associated with the fixed freight rates.
We assume that the sailings frequency does not affect the total demand
for shipping space.
Qi = total cargo volume carried by the ith shipping line; i = 1, ... , k.
N = total number of sailings by all lines on the route.
Ni = total number of sailings by the ith line.
The basic property of our model is expressed by the equality:
Qi Ni
(12.1)
Q N
The market share of the ith company equals the ratio of the number of
sailings of the ith company to the total number of sailings.
Equilibrium on the model route is reached when no shipping line will find it
profitable to add or substract from the carrying capacity provided. This is to
say, that the marginal revenue product (MRP) of a sailing of each line shall
equal the incremental cost of a sailing.
The MRP of a sailing of the ith company, MRP i is equal to the marginal
product in terms of tons of cargo resulting from an additional sailing times the
marginal revenue of a ton of cargo. The marginal product of the ith company
can be expressed as the derivative ofQi with respect to N i • On the assumptions
of fixed (collectively by the conference) freight rates, and of a uniform expected
demand for shipping of each particular commodity, the marginal revenue
equals the weighted average freight rate, F. We can thus write:
dQi-
MRPi=-d F.
Ni
From equation (12.1) the total carrying per year of the ith company is given:
N·
Qi=Q;. (12.2)
The derivative of Qi with respect to Ni is:

dQi Q(N -N i)
(12.3)
dN i N2
We further denote: b = the load factor, which by assumption is identical for
all sailings in the trade and thus equal to the ratio of the total volume of trade,
Q, to the total carrying capacity, SN. (It is interesting to note that an empirical
investigation of annual average load factors of airlines supports this assump-
tion. According to Vance (1972), 'there is little variation in the jet average load
factor among airlines'.)
Si = the market share of the ith company, which by definition is equal to the
ratio of Qi to Q, which in its turn equals the ratio of Ni to N.
The change in quantity carried as a result of an additional sailing of the ith
company can be written in terms of band Si:
dQi
-dN = bS(1-s.), . (12.4)
i
The net cost of an additional sailing of the ith company, i.e. the total
incremental cost minus the costs which are proportional to the volume of
cargo handled, can, on the assumption of constant returns to scale of a firm, be
expressed as the product of the ship size, S, and the shipping cost per unit of
capacity (ton) of the ith company, C i • The equilibrium condition that MRP i
should be equal to the cost of an additional sailing can consequently be
written:
bS(1 - s;)F = SCi' (12.5)
This equilibrium represents a system of k equations. There are k + 1
endogenous variables: the market shares of k companies and the common load
factor. By adding the identity that the sum of all market shares is unity to the
system, we can, however, solve for band Si.
k
LSi = 1. (12.6)
i= 1
Summing the cost per unit of capacity obtained from equation (12.5) over all k
we have
k k
L1 C
i=
i = bF L (1 - S;).
i= 1
(12.7)
Using equation (12.6) it is clear that the right-hand sum can be written
k
L (1 -
i= 1
Si) = k - 1. (12.8)
From equations (12.7) and (12.8) the load factor b can be calculated:
b L7= 1 C i (12.9)
= F(k-1)"
Inserting this value of b in (5) makes it possible to solve for Si.
Ci(k - 1)
Si = 1-,,~ C .. (12.10)
L.,1=1 I
Concerning the common load factor b it is seen from equation (12.9) that b is
inversely proportional to the level of freight rates, F. Given the costs of
shipping capacity, the higher F is, i.e. the larger the potential monopoly profit
is, the lower the load factor will be. In addition, the number of shipping lines on
the route playa role for the load factor. However, except where k is initially
very small the numerator and the denominator will increase almost at the
same rate with increases in k. A small effect implying that, ceteris paribus, the
larger the number of lines on the route the higher will the load factor be, is,
however, generally operative. Concerning the individual market shares, Si' it is
clear from equation (12.10) that, as expected, the lower the cost of shipping
capacity of a particular line is, the larger the market share will be. It is
interesting to note that equilibrium in the model is consistent with widely
different values of C i • The explanation for the possibility of equilibrium in spite
of different Ci is that a line that has a large share ofthe market is more aware of
the fact that the addition of one sailing will reduce overall load factors, because
the big line already makes a considerable number of sailings on the route.
From equation (12.10) we see that a line cannot be much less efficient than
the average line on the route, to be able to make profits. On the other hand, a
line can be much more efficient than the average, and still not monopolize the
route.
Some examples are given below of different values ofthe ratio ofthe capacity
cost of the ith line to the average capacity cost of all lines on the route,
kCiL~= 1 Ci ( = Ci/C) together with the associated market shares.
When
Ci k
it follows that Si =0
C k-l
C.
~-1
C- it follows that Si =~
k . ~ 1
2(k _ 1) It 0 lows that Si = 21
k . 3
4(k _ 1) It follows that Si =4
As can be seen the least efficient line can only have slightly higher costs than
the average level of costs before it will go out of business, in particular when the
number oflines on the route is high. On the other hand a very substantial cost
advantage does not imply that the line in equation will dominate the route
completely.
It is interesting to consider the dynamic consequences of the fact that
shipping lines in the same trade have different levels of costs. Initially a
considerable number of lines may exist in a particular trade. However, given
the level of freight rates, the low-cost lines will put in more ships to maximize
their profits. The common load factor will decrease. The highest cost carriers
have to leave the conference. An equilibrium position will eventually be
reached, which is characterized by:
1 The span of differences in C i has been narrowed.
2 The low-cost line(s) will have gained a substantial market share. The low-
cost big lines earn super-normal profits, while the 'marginal' small high-cost
lines probably earn 'sub-normal' profits in the hope that the market
situation will improve or just to maintain an old tradition in serving the
trade.
The main conclusion of the model is that the absence of monopoly profits in
general in liner shipping should not be regarded as a sign of health. A direct
negative relationship can be expected between the potential monoply profits
and the load factor.
Finally, it can be pointed out that the excess capacity is not always 'visible'
but exists all the same either in the form of inoptimally small ships, or by the
filling of empty space by so called 'supplementary', or 'filling' cargo. Where a
lot of excess capacity exists, there is a great temptation to move into other
markets. 'Other markets' can be the tramp shipping market. Lines will take
tramp cargo as filling cargo, which will typically be carried at open rates, or
rates freely negotiated by each individual line. These rates exceed the direct
handling cost but are well below the total average cost. (A similar tendency
exists in the airline industry. There 'other markets' are group flights and the
like. It is common that regular airlines carry a mixture of high-paying

businessmen and groups of tourists which pay much less than the 'normal
fare'.) By such 'cross-subsidization' load factors can be increased. In a sense,
however, the excess capacity problem is aggravated, because the load factor of
proper liner cargo will go down still further. This can be shown by extending
the model to include filling cargo, which can be obtained at the given
(competitive tramp market) freight rate, F, in any amount that is desired by
the shipping lines (F is net after deduction of the handling costs). We assume
that all excess capacity is eliminated by filling cargo. The load factor of proper
liner cargo is now denoted 0, and the load factor of filling cargo is denoted b.
By assumption we consequently have:
(12.11)
The equilibrium condition corresponding to equation (12.5) above is now
written:
oS(1 - sJF + (1 - o)F = SCi' (12.12)
We can solve for Ei by summing equation (12.12) over all k, and using the
identity (12.6).
(12.13)
This expression can be compared with equation (12.9), which gives the load
factor, b, in the case where no filling cargo is available.
b= L~=l C i . (12.14)
(k - 1)F
As can be seen Ei < b since F > L~ = 1 C i/( k - 1). The load factor of proper liner
cargo becomes still lower when the possibility to take filling cargo exists.
12.3 SOME EVIDENCE OF A NEGATIVE RELATIONSHIP

BETWEEN THE LOAD FACTOR AND
THE PROFIT POTENTIAL
The principal implication of the simple model where 'demand follows supply'
is that the load factors ofliners can be expected to be inversely proportional to
the profit potentials in different trades. The profit potential can be defined as
the ratio of the level of freight rate 'which the traffic can bear' on average to the
cost per shipping capacity unit. This ratio seems to be quite high in many
trades. Therefore it can be expected that a low load factor is a common feature
of liner shipping.
Our hypothesis is, as mentioned, that the load factor will be negatively
correlated with the profit potential on the route.
This hypothesis has been tested on cross-section data pertaining to Israeli
Table 12.2 A comparison of load factors and potential profits on different routes (Israeli
trade, 1972)
Trade route No. of ships Average load Weighted Ranking of

in the sample factor on fat average routes by
leg commodity the shipping
values lines
(%) ($) per weight ton
USA 76 40 1668 1
Western Europe 154 62 844 2
Mediterranean 205 76 653 3
Eilat/Far
East and Africa 85 79 541 4
West Africa 34 59 250' 5
a An estimate given by the shipping line.
trade during 1972, by comparing load factors ofthe six trade routes to an index
of potential profits of these routes. The load factors were calculated for the
main trade routes by the following method. The relevant load factor is given by
the ratio of the cargo volume on the fat leg of each route in cubic feet to the bale
capacity of the fleet on each route. It was calculated by sampling all ships at
each route at 0800 h on the eleventh day* of each month during 1972. The
cargo in weight tons carried by all ships in the sample was measured as well as
the deadweight of the ships. This information and the ports of origin and
destination was obtained from the voyage accounts of the shipping lines. The
weight load factors were converted into volume load factors by multiplying
by the weighted average stowage factor of the commodities carried on each
route, and dividing by the ratio of bale capacity to deadweight capacity of the
fleet. The calculation of the weighted average stowage factor was based on a
random sample of commodities on each route. .
The results of the computation are summarized in Tabk 12.2. Again low
load factors seem to be the rule.
Two indices were used as measures of the potential profits of each route: one
is the average value per ton of commodities (calculated from a random sample
of commodities on each route). It can be assumed that the higher the average
commodity value is, the higher the potential profit will be. Another measure
was obtained by asking the management of the shipping lines concerned to
rank the routes according to their perception of 'the ability of cargo to pay'.
*Altogether 1300 data sheets, especially designed for this purpose were collected and processed.
The eleventh day of each month was selected because it gave a good representation of the
distribution of days in a week. The work was designed and carried out by D. Ronen at the Israeli
Shipping Research Institute.
The ranking of the routes by the shipping lines (column (5» was identical to the
ranking according to the average unit value of commodities.
The comparison of the load factor with 'potential profits' of the routes
generally proves the point. With the exception of the West African trade route,
the load factor increases as trade becomes poorer. Capacity utilization is
particularly low on the potentially most rewarding USA route. The West
African route has not the highest load factor, in spite of being the potentially
least rewarding trade. This route is, however, somewhat exceptional. Most
cargo on this route consists oflogs and wood, which are carried under a special
contract.
12.4 EXCESSIVE SERVICE COMPETITION

Our model shows that given the price-fixing power of conferences, the
expected monopoly profits attract new entrants as well as induces existing
firms to expand capacity. The hope of an individual line for a high reward will
be frustrated for the very reason that all nourish the same hope. The expected
monopoly profits will be wiped out in the end.
In equilibrium when only normal profits are made, and excess capacity
exists, a second stage of wasteful competition may take place. Now, every line
wants to increase the capacity utilization. Differentiation of services will take
place. Each line will offer special qualities to increase its market share, and fill
up the empty space. The service competition that follows the creation of excess
capacity will tend to raise freight rates still further to compensate for losses
made by the least successful of the service-competing conference members.
Such competition can rightly be called 'excessive service competition'. The
absence of price competition gives shippers no chance of deciding on how
much quality of service they are prepared to pay for.
The aspect of excessive service competition that has been paid most
attention to is the in optimally high speed of many liner ships. Devanney et al.
(1972) for example, have found that the liners on the route between the USA
Atlantic coast and the South American Pacific coast have excessive speed - by
some 5 knots - from the point of view of shippers' cost minimization. This has
contributed to a 25% increase in the freight rates: 'as compared to an efficient
system, the present system utilizes 2t times too many ships, which average
about a factor of 2 too small and 40% too fast' (Devanney et al., 1972). This
figure was obtained by comparing the actual fleet to a simulated efficient one.
This estimate may contain an upwards bias of the degree of excess capacity
because the load factor of the efficient fleet was unrealistically assumed to be
100%. It is also pointed out that 'similar and indeed greater amounts of
overcapacity have been observed in another study on shipping in Latin
America' (ECLA, 1968).
13 Conclusion: price competition in liner
shipping should be encouraged
In the preceding chapters of this part we have pointed out two sources of
economic inefficiency in liner shipping.
The freight-rate structure is grossly out of line with the marginal cost
structure.
2 The potential cartel profits of liner conference members are rarely realized,
but are absorbed in excessive service competition.
The question is now, whether the effects of these divergencies from an ideal
state of affairs are significant enough to justify more radical changes in long-
established practices in the liner-shipping industry?
13.1 THE TWO TYPES OF ILL EFFECTS

To begin with we can illustrate the two types of ill effects, by reference to
Fig. 13.1 showing the welfare loss from monopoly pricing. In Fig. 13.1 the
shaded area, B, represents the loss in consumers' surplus caused by monopol-
istic pricing, which is not compensated by a gain in the producer's surplus. The
established fact that liner-shipping freight rates are out of line with the
Monopoly
price level
Competitive Marginal cost

price level t-------t=""'~"""-"La~-------.:~--.:......:..:~
Monopoly Competitive
output output
Quantity
Figure 13.1 The welfare losses from monopolistic pricing.

Conclusion 277
applicable marginal costs will give rise to this sort of welfare loss on each
particular sub-market of the industry. It is well known, and easily checked in
the diagram that the less elastic the demand curve is, the less significant will be
this welfare loss from monopolistic pricing. With some notable exceptions, the
freight-rate elasticity of the demand for liner shipping is generally quite low so
far as downwards movements of freight rates are concerned, unless compe-
tition from other modes of transport - tramp shipping, and so-called neo-bulk
services in the first place - exists. The welfare losses due to the price-fixing
power of liner conferences of the 'B type' are, therefore, not expected to be
generally very high. In the preceding chapter we have drawn the attention to
another possible source of welfare loss. The kind of monopoly profit
represented by A in Fig. 13.1 is apparently absent in liner shipping in spite of
the far-reaching cartelization of the industry. However, in price cartels and
otherwise monopolized industries a general feature is that long-term mono-
poly profits will only be made in exceptional cases. The striving to achieve a
monopoly position and reap the fruits of barriers to competition tends to use
up resources of a comparable value to the potential monopoly profit. In the
end the potential monopoly profit is turned into social cost. With reference to
Fig. 13.1 this outcome means that area A will also represent a welfare loss to be
added to area B.
Is it possible to say something about the relative size of these effects, i.e. the
relative gravity of the problems? The effects with a direct bearing on allocative
efficiency are, in principle, more easily measurable - but therefore not
necessarily more significant - provided that the relevant demand elasticities
can be estimated.
13.2 ALLOCA TIVE INEFFICIENCY EFFECTS

The idea of abolishment of the cross-subsidization between high-value and
low-value commodities is usually met by great scepticism on the part of the
liner-shipping industry. The general attitude is that this could result in a
substantial loss of business for shipping lines, because many low-value
commodities can simply not bear higher freight rates. A compensating
increase in trade in high-value goods is not excepted to occur. This issue has
both a positive and a normative angle. First, which effects on trade and
shipping will an equalization of freight rates of high-value and low-value
commodities actually have? Second, are the effects beneficial or adverse for the
world economy?
13.2.1 The world trade volume effect

Will total world seaborne trade increase, decrease, or remain roughly
unchanged as a result of an equalization offreight rates of high-value and low-
value commodities? The conjecture that substantial rises in freight rates of
low-value commodities will 'kill' the trade in many cases is typically formed
from the point of view of just one trade covered by a particular liner
conference. In the present context the relevant point of view is that of the whole
liner-shipping industry. The most interesting question is: What would happen
to trade and shipping if the cross-subsidization were eliminated from all
conference tariffs? In chapter 4 it was concluded that a main source of
competition to the shipping lines serving the trade between two trading areas,
Al and A 2 , are shipping lines of other trades which include one of the trading
areas, Al or A2. For example, if the freight rate of ,urea' from Al to A2 is raised,
importers of urea in A2 may turn to 'supply from other sources', or exporters of
urea in Al may find other markets than A2 more profitable. If the freight rates
of urea in all liner trades are raised together, no such trade reallocation effects
will result. On the other hand, a general increase in freight rates of urea may
have modest contracting effect on total world trade in urea.
In this connection the point which is frequently overlooked is that the total-
price elasticity of world trade in raw materials and industrial input goods is
generally many times lower than the price elasticity of world trade in finished
manufactures and consumer goods. In recent times we have been reminded
about this general feature by the effects of some dramatic price rises in world
commodity markets. It is true that the high-price policy of OPEC has halted
the rapid expansion of the demand for crude oil. The effect on the demand of
the quadrupling of the price of crude oil indicates, however, a very low price
elasticity. On the other hand, the high rise in the price of coffee - a near
consumer good - is reported to have led to a considerable decrease in the
consumption of coffee. In chapter 4, we gave some suggestive figures
indicating the order of magnitude of price elasticities of different categories of
goods in world trade. For instance, Houthakker and Magee (1969) have found
that the price elasticity of 'finished manufactures' is some forty times, and the
price elasticity of 'semi-manufactures' is some twenty times higher than the
price elasticity of 'crude materials' and 'crude foods'.
The main explanation for this great difference is provided by 'Marshall's
Rule' (see chapter 4), which states that the elasticity of demand for input goods
or factors is equal to the product of the share of the input in the total cost and
the elasticity of demand for the final goods. Although raw materials are
'essential' for the production of final goods, the share of the raw materials in
the total costs ofthe final goods is normally rather small except for some high-
value minerals. The price elasticity of the aggregate world demand for raw
material is correspondingly small relative to the price elasticity of the final
goods for which the raw materials are factors of production. The application of
Marshall's Rule to the freight-rate elasticity of demand for shipping can be
very misleading if the great systematic differences in the price elasticity of
different categories of traded goods are not taken into due account. In spite of
the fact that the share of the shipping freight rates in the prices of low-value
primary goods can be up to 30%, and that this share is typically less than 5%
Conclusion 279
for manufactured goods, it is, in our view, not possible to say that the freight-
rate elasticity of the aggregate demand for shipping is generally higher for the
former category of goods than for the latter. The systematic difference between
these categories of goods in the price elasticity of the demand for the goods
themselves is of a comparable offsetting order of magnitude.
On routes where there is a sufficient tramp-cargo base the effect of a general
increase in liner freight rates of commodities of the 'minor bulk' category will
result in an increase ofthe share in tramp shipping, and a corresponding decrease
in liner shipping of the total shipping market. This is the modal split effect.
13.2.2 The modal split effect

Whereas the world trade volume effect of eliminating the cross-subsidization
between commodities will be insignificant, the effects on the modal split of
international cargo transport can be expected to be significant in some trades.
The freight-rate decrease of currently high-rated goods will probably win
back some cargo from air transport. The freight-rate increases of currently
low-rated raw material and similar commodities are likely to change the
modal split on routes where there is a sufficient potential tramp cargo base.
The question, then, is whether this outcome - an increase in the tramp-
shipping share and a corresponding decrease in the liner-shipping share of the
market - is desirable from a welfare economic point of view. On the basis of
the schematic model of a liner trade presented in chapter 9, we have concluded
that the economies of trade density are not very pronounced, not even where
the trade density is very low. In dense trades where approximately constant
returns to scale exist, currently low-rated liner cargo, clearly, does not cover
the marginal costs. The taking over of such cargo by tramps is desirable from a
welfare economic point of view.
In thin trades it is possible that the level of freight rates based on fully
distributed costs could slightly exceed the marginal costs. However, this is not
significant enough to change the conclusion that the modal split in sea
transport would improve as a result oflevelling out liner shipping freight-rate
structures.
13.2.3 Other allocative inefficiency effects

In chapter 11 we have also discussed some other examples of freight rates
failing to reflect relative marginal costs. Here we just list them without any
attempt to say something about the relative severity of the resulting allocative
inefficiency.
Differences in cargo handling productivity in different ports are far from
fully reflected in the freight-rate structure.
2 Seasonal differences in demand and corresponding shipping capacity
shadow prices are ignored in the freight-rate structure.
3 The differences in demand intensity on the main haul and back haul,
respectively, are likewise not taken into account in the rate-making.
4 In break-bulk shipping package type and size are, like stevedoring charges,
only moderately reflected in the freight-rate structure.
13.3 'SLACK' EFFECTS

We have found several indications that 'A type' welfare losses, i.e. 'slack' effects
can be a serious problem in liner shipping. In the simple model based on the
'demand follow supply' parable - the main result of which has been at least
partially borne out by empirical evidence - a certain mechanism has been
revealed which tends to transform potential profits to social costs of excess
capacity. Figs 13.2 and 13.3 give the essence of this mechanism.
Consider a situation where a given trade volume, Q is carried by conference
members at an average net freight rate, F (net handling charges), which exceeds
the marginal capacity cost, C. Equilibrium will eventually be reached when all
shipping lines earn normal profits. This occurs when total net freight revenue
equals total capacity cost. This applies as areas I and II are equal in Fig. 13.2.
Total carrying capacity on the route is the product of the number of sailings,
N, and the ship size, S, which is equal to the ratio of Q to the load factor, b. Area
II represents the cost of the excess capacity. Consequently, in equilibrium the
total potential monopoly profit (I) has turned into cost of excess capacity. The
social loss may be somewhat exaggerated, however, so long as the higher
quality of service of the excess capacity situation as compared to the optimal
situation is not taken into account. A certain deduction has to be made from I
on account of this to get the social net loss. There are, on the other hand, other
circumstances that may further increase the social loss (above the cost of excess
F ~----------------~
$ I
c ~-----------------+----------------~
II
a
Figure 13.2 The total capacity cost, C( (JIb), as determined by the total net revenue, FQ,
according to the 'demand follow supply' parable.
Conclusion 281
F ~ ________..,
I
$
C~------------r------------r----,
II I I
I I
"
F ~-------------~!
l
-------.-.I----t,I
Q+Q
~i~ure 1~.3 The total capacity cost, C(Q + Q), as determined by the total net revenue,
FQ + PQ, according to the 'demand follow supply' parable incorporating the
possibility to lift filling cargo.
capacity). If the capacity costs of the conference members are different, the level
offreight rates will be such that the high-cost lines think it isjust worthwhile to
continue operating in the trade. In this case the cost of the excess capacity
underrates the possible shipping-cost savings. An additional possibility to
reduce costs is that the most efficient lines outcompete (in price) the inefficient
ones with the result that the mean level of capacity costs is lowered.
Expansion into the tramp market will not reduce these losses. The average
level of tramp rates, ft, is typically well below C, but of course, positive
(otherwise filling cargo would not interest liners). Assuming that all sailings on
the route are now filled up, the total net revenue area takes the shape shown in
Fig. 13.3.
A 'tail' of thickness ft is added to the total net revenue area. The length ofthe
tail is determined by the additional quantity of filling cargo, Q, which is
obtained in the tramp-shipping market. The total sailings is now No which
exceeds sailings in the original situation, where no filling cargo was available.
The areas I and II are the same as those of Fig. 13.2. In equilibrium (where no
more than normal profits are made) area II has to equal area I. This condition
determines the value of Q. The end result is apparently that the magnitude of
the social loss remains the same as in the original situation.
13.4 ENCOURAGE PRICE COMPETITION AND SERVICE

COORDINA TION
What can be done about the wasteful practices? If the freight-rate structure
were brought in line with the marginal-cost structure, an important precon-
dition for the elimination of the problem would be present. Not only would
allocative efficiency in world trade and shipping be enhanced, but also the
wasteful rivalry for the coveted high-rated commodities would disappear.
Is it likely that conferences would voluntarily adopt a fully cost-based tariff,
and give up the possibility to charge what the traffic can bear? No, to believe
that is wishful thinking. Freight-rate discrimination is a means of more than
100 years standing to increase revenue, and, furthermore, liner conference rate-
makers are under the 'common-costs illusion'; all freight rates which exceed
the direct handling costs are considered to be profitable. This means that there
is no incentive even to raise the freight rates ofloss-making cargo to the level of
the true marginal costs.
The only sure policy for elimination of the freight-rate discrimination would
be the abolishment of liner conferences as price cartels. This has to be done
both by enforcement of new laws, and by encouragement of competition. It is
not enough that a regulatory authority tells cartels how to set prices; it has also
to ensure that conference members do not prevent individual members
pursuing their own pricing policy, i.e. that they do not behave as a price cartel.
If that is achieved, price competition within the conference will be introduced.
Only real price competition would make the structure of freight rates fully in
line with the marginal cost structure.
13.4.1 Exposure of the common-cost illusion

We predicted that price competition would expose the common-cost illusion.
With the present conference system the existence of high-rated commodities
invites the belief that low-rated commodities (with freight rates below the
marginal costs but above the direct handling costs) are profitable, too.
Operators tend to think in terms of full shiploads. If a particular commodity
moves in a quantity which is insufficient to fill a ship - very few commodities
carried by liners move in such large quantities - no capacity costs should be
attributed to the commodity in question according to the current thinking. If
the freight rates of low-rated commodities exceed the direct handling costs,
low-rated commodities will not be rejected, because together with the high-
rated commodities which will be included in the same shipload, they will
contribute to the net profit.
Suppose, however, that the price cartels are dissolved. Competition for the
high-rated cargo will then be fierce. The high rates will soon be bid down, and
the result would be an equalization of the net marginal revenue of all
commodities. Different shipping lines serving the same trade are generally very
close substitutes. This means that the freight-rate elasticity of demand of
different articles will from the point of view of an individual shipping line
appear by and large the same, i.e. very high for all commodities. (This is, of
course, not inconsistent with the conference, as a collective body, viewing some
commodities as possessing a low elasticity of demand and some commodities
as possessing a high elasticity of demand.) This in turn means that the
Conclusion 283
'contribution margin', to talk in cost accounting terms, will be more or less the
same for all commodities.
In this situation every article which does not bear its share of the capacity
costs will be considered to be loss making since there are no articles
to be obtained with compensating, disproportionately high contribution
margins.
13.4.2 Will the liner freight rate stability come to an end?

Wide fluctuations of freight rates, even in the short term, are feared by defenders
of the conference system to occur if price competition is set free. Many vivid
examples of this are to be found in bulk shipping markets. It is unlikely,
however, that the short-term ups and downs of tramp freight rates will be
copied in liner shipping.
One quality ofliner-shipping services is that the freight rates that will apply
at future dates are known by shippers fairly well in advance. The idea of a tariff
is that reliable freight-rate information should be available for everybody
concerned to facilitate shipment planning for the shippers. This quality of
service should be maintained also after setting price-competition free. The
service of a shipping line that cannot say in advance what the freight rates will
be, would be considered inferior to the services of shipping lines that issue
tariffs valid for a considerable period of time ahead. The prevailing period of
notice of freight-rate changes should continue to be applied after the
introduction of price competition.
A tariff ofthis kind has necessarily to be based on expected costs for a future
period of time of some duration. The actual cost of taking on additional cargo
on a particular sailing is widely fluctuating. It is frequently almost as low as the
direct handling costs, but occasionally it can be very high. The expected cost of
additional cargo is an entirely different matter. Over a longer period of time
the short-run expected marginal cost will be nearly equal to the total average
cost, provided that the liner-service operators make rational decisions about
ship and service design. The relevant expected cost when it comes to freight-
rate making is in the first place determined by the total demand relative to
offered capacity of the period of time during which the freight rates ofthe tariff
are given. This means that notwithstanding short-term fluctuations in demand
(from one sailing to another) reasonable price stability is likely to characterize
liner shipping also in the absence of the price cartels. Liner conferences may
well continue to produce freight-rate tariffs as 'guidelines' for individual
members also in a situation where individual shipping lines/conference
members are at liberty to charge their own rates. This may have a stabilizing
influence on freight rates. Finally, it should be remembered that even under the
current conference umbrella rates do fluctuate in the face of outside
competition (section 3.1), certainly more than is apparent by the publicly
announced rate changes.
13.4.3 A new role for liner conferences

If liner conference tariffs were to be regarded just as lists of 'recommended
prices', what would then be the real raison d'etre of the conferences? Would
they then be largely superfluous? The answer is definitely in the negative. Liner
conferences have a very important task to fulfil in the coordination of
schedules and sailings in each particular trade. As has been argued in a number
of previous places, the quality of service in liner trade is to a high degree a
collective characteristic of the supply of all shipping lines taken together. The
frequency of sailings is the most important aspect, but also the ports of call at
each end of the route in question, and the organization of feeder services are
matters of great concern for shippers, which are difficult to settle in a
satisfactory way without coordination of the actions of individual shipping
lines. The schematic liner-trade model of chapter 9 is an illustration of how
both user (shippers') costs and the producer costs of the total supply of liner
shipping on a particular route should be taken into account in order to carry
out the liner service optimization necessary for overall economic efficiency. It
is difficult to imagine that this could be obtained even very approximately
without fairly close coordination of schedules and itineraries of individual
shipping lines. The liner conferences seem to be the natural bodies for this
coordination.
At first, it may appear incompatible that the conference members coordi-
nate their sailings etc. for social-cost minimization on the one hand, and enter
into price competition with each other, on the other. On second thoughts,
however, such seemingly inconsistent behaviour may not be unrealistic at all.
Price competition basically means that individual producers/sellers are not
prevented from changing their prices, when they consider it profitable, not that
very frequent price changes actually take place. Oligopolistic markets similar
to a typical liner trade are not characterized by widely dispersed inter-firm price
structures, or frequent price changes. On the contrary, equality of prices and
price stability are the salient features. So in these respects everything would
most likely look pretty much the same after as before the abolishment of
restrictions on the pricing policy of individual shipping lines. However, the
very fact that any individual line which has obtained a cost advantage over its
competitors/fellow conference members, can lower (or, more likely in these
days raise by a smaller amount) the price would have a healthy influence on
incentives and behaviours of liner-shipping companies.
13.4.4 Assisting the 'invisible hand'

In this connection we want to stress again how important it is for the success of
such a new competitive regime that the grossly discriminatory structure of
freight rates in present tariffs is eliminated. As long as there remains very
profitable cargo as well as moderately profitable and unprofitable cargo, the
system would be exposed to strains, which may be too strong for its survival.
Conclusion 285
We have said before that price competition would tend to equalize contri-
bution margins, making all cargo equally (moderately) profitable. However,
given the extremely large disparities in contribution margins in the initial
position, it may be too much to ask offree price competition to expect that an
orderly approaching of the freight rates to the corresponding marginal costs
would occur automatically. A helping hand may be needed (in addition to the
'invisible' one) in the form of guidelines issued by an independent (presumably)
governmental regulatory body. These guidelines could take the form of the
principles outlined in chapter 11 of cost-based freight-rate tariffs.
13.5 RECENT ATTEMPTS OF REFORMING LINER

CONFERENCE PRACTICES
Just as we have argued above the report of the British inquiry into shipping
(the Rochdale Report, 1970) concluded that economic efficiency requires
coordination of services, which cannot be obtained otherwise than by
collective decisions by liner conferences. To safeguard against the risk that the
'closed conferences' approved of per se results in too quiet a life for individual
members/shipping lines and consequent slackness and inadequate cost
consciousness, the committee sensibly pointed out that the admission of new
members should not be decided just by the existing conference members:
'Applications from liner operators to become members of a conference
... which cannot be settled by negotiation between existing members and the
applicant, should be referred, if the applicant so requested, for adjudication
to a panel with an independent chairman on which shippers have
representation' (Rochdale Report, 1970; p. 135).
As to the pricing policy of liner conferences, the committee did not go into
the details of the freight-rate structure versus the marginal cost structure, but
seemed to be concerned mainly with the total cost and revenue ofliner services
on different routes; however, it strongly recommended that tariffs 'should be
published and available to anybody on request at reasonable cost' (Rochdale
Report, 1970; p. 135).On the crucial matter of whether or not the price cartels
are a desirable aspect of liner conferences, the committee nowhere explicitly
takes a clear stand. Indirectly it can be inferred that the committee took for
granted that if conference members are to coordinate sailings, they should also
be allowed to agree on freight rates, iffor no other reason, because it may seem
impractical to stop them from doing so under this condition.
The USA Shipping Act, 1984 makes a definite exemption of liner shipping
from anti-trust laws. On the other hand, a completely new provision is that
individual shipping lines are legally sanctioned to charge freight rates which
are different from those 'recommended' by the conference. In our view this
represents a modern approach to competition policy. It has always been
difficult to enforce price-cartel prohibitions. Secret agreements between the
producers of a particular product to charge the same price is hard to detect,
especially if the agreement has the character of a mutual 'understanding' that a

common pricing policy is to be followed. If potential competitors do not want
to compete on price, no government or regulatory authority can force them to
do so. Legislation can be much more effective by directing itself to the
protection of those who want and dare to pursue an individual pricing policy.
At the time of writing it is difficult to predict how important this change of
direction in USA regulatory policy will be in practice in the future. Will it turn
out to be true that, as the president of Farrell Lines put it in a recent
symposium on new challenges for shipping and ports, 'ocean carriers now
move into an era of less government but more marketplace regulation'?
(Parks, 1984; p. 147).
13.6 PROBLEMS OF REGULATING INTERNATIONAL

LINER SHIPPING
The code ofliner-conference practice in the Rochdale Report was produced to
'safeguard our (British) immediate national interest' (p. 135). It was at the same
time recognized that the whole issue had very wide international implications.
Since few major trades are served by ships of just one nation if other
governments were to impose markedly different and conflicting codes, liner
conferences could be faced with a very complicated situation. Therefore the
Rochdale committee came up with the interesting idea, with a clear address to
shipowners all over the world, that since it is very likely that other
governments sooner or later will seek to impose codes of conduct on shipping
companies in liner conferences, the wisest step that shipowners could take,
would be to agree among themselves on a code of conduct, which (hopefully)
would be based on the Rochdale proposals.
According to a later account (UWIST, 1982) by Professor R. Goss,
economic adviser to the Rochdale committee, of what followed after the report
had been submitted, numerous and lengthy discussions took place on the
implementation ofthe code of conduct proposed by the committee. Eventually
the Committee of European National Shipowners' Association (including
Japanese shipowners) drew up a sort of code of liner conference practice (the
'CENSA Code' of 1972). However, in relation to the Rochdale proposal, it was,
in the words of Richard Goss, considerably watered down, in that, for
example:
Admission arrangements were weaker, being subject only to the control of
shipowners.
2 Tariffs were to be made available to shippers' organizations but not
published.
3 Governments were not to be involved.
As a matter of fact the CENSA Code was basically an endorsement of the
Conclusion 287
status quo, and, in particular, it failed to adopt any of the reforms suggested by
the Rochdale Committee. 'There must, of course, be some understandable
suspicion that a voluntary code produced by the proponents of cartels may
tend to be less effective than such a Committee as that chaired by Lord
Rochdale would have wished' to quote a typical understatement by Richard
Goss.
The main stumbling block is, of course, the notorious problem of regulating
an international industry like the liner-shipping industry. Is it at all likely that
a code ofliner conference practice, which is designed from the point of view of
one particular nation, could be acceptable from a global point of view, or, at
least to the other nations concerned involved in the liner shipping, either as
exporters/importers of liner cargo, or as suppliers of liner-shipping services?
The approach of the Rochdale Committee seemed to begin with rather
promising thoughts in this regard thanks to its objectivity and independence.
The timing was unfortunate, the report came too late. At that time other forces
were gaining momentum in the liner-shipping world. The problems of
international agreement on a code of liner-conference practice obviously
become aggravated when nations attempt to further other interests than
economic efficiency by means ofliner-shipping regulation. This is exactly what
happened, and it has caused much controversy and confusion. Certain
developing countries have been pressing forward through UNCT AD a code of
conduct for liner shipping, which obviously has promotion of their national
fleets rather than an economical division of labour in international liner
shipping as its primary aim.
13.7 HOPES FOR THE FUTURE

It is, of course, pointless to regret that not just economic efficiency is a goal of
national shipping policy. In the present circumstances the only thing one can
hope for is that the different issues do not become too blurred and confused.
Our recommendation has 'global economic efficiency' as its guiding star, and
we mean that it need not be in very serious conflict with various other national
ambitions. After all, the liner-trade volume affected by the cargo-sharing
guidelines of the UNCT AD code is no more than about 7% of the total trade
carried by international liner shipping.
A potentially more interesting event on the international liner shipping
scene from an economic point of view is the many new entries of shipping
companies from emerging shipping nations, as well as the beginning
disintegration of many liner conferences. In recent years a number of major
liner-trade routes have to an increasing extent been served by independent
shipping lines operating outside the conferences. This has worked without
very dramatic upheavals. Profits have been low in liner shipping, but this is
mainly due to the over-tonnaging created by the over-optimistic container ship
investments in the 1970s (in the prolonged period of shipyard 'sale'). Freight
rates should be low in such a situation, in order to help a new equilibrium
emerge as quickly as possible.
We are witnessing the last phases of both a technological transformation of
traditional break-bulk cargo shipping, and a change of roles on the scenes of
international shipping between old shipping lines of the traditional shipping
nations, and new entries, which now have learnt the technique of unit-load sea
transport, and still have wages at levels far below the USA and the European
countries. Conference resistance to freer price competition may retard these
changes, but this is not worth endorsing by governments of the declining
shipping nations. The best division of labour in international sea transport is
obtained when the most efficient operators become price leaders. The USA
Shipping Act, 1984 is the first important governmental step towards price
competition in liner shipping. Let us hope that other shipping nations will
follow suit.
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Author index
Abrahamsson, B.J. 70, 219 Johnson, E.R. 37

Ahle, T. 113 Johnson, K.M. 158
Allen, R.G.D. 55
Kendall, M.G. 52
Balassa, B. 98 Kendall, P.M. 113
Baumol, W.S. 210 Koike, Y. 28,39
Benford, H. 113, 130
Bennathan, E. ix, 78, 95, 202 Laing, E.T. 31, 70, 113,219
Bryan, A.I. 72 Lawrence, S.A. 21, 31, 32, 33
Buss, G. 78 Locklin, D.P. 70
Buxton, I.L. 113
McLachlan, D.I. 38,49,51,66
Chapman, K.R. 130 Magee, S. 98, 278
Chinitz, B. 72 Matthews, SJ. 54
Meusen, P. I99~200
Deakin, B.M. ix, 1,42, 49, 50~51, 66
Devanney, III, J.W. 221, 275 Parks, R.V. 286
Posner, R.A. 264
ECLA, Economic Commission for
Latin America 72 Rath, E. 199-200
Erichsen, S. 113, 130, 131 Robinson, R. 126
Evans, 70, 219 Rochdale, V. 37, 44, 285, 287
Ronen, R. 275
Ferguson, A.R. 220~21 Ross- Bell, I. 46
Foster, CD. 70
Friedman, P.A. 44 Shear, Admiral 15
Shneerson, D. 72~ 73, 78, 80, 203, 238,
Gardner, B. 70, 219 242
Gedda, S. 70, 219 Sletmo, G.K. ix, 95
Gilman, S. 70, 113, 219 Stromme-Svendsen, A. ix
Goss, R.D. ix, 113, 131, 135, 137~38, Sturmly, S.G. ix, 70, 219
202,286
Heaver, T. 70, 72~73, 113, 135,219 Thorburn, T. ix, 123-24, 127, 128, 135,
Heggie, I. 201 144,252
Houthakker, H.S. 98, 278
UNCTAD, United Nations Conference
Jansson, J.O. 78, 80, 203, 219, 238, 242 for Trade and Development 72, 78,
Johanson, L. 151 133
294 Author index
Walters, A.A. ix, 78, 95, 202 Williams, E.W. ix, 95

Waters, W.G. 70
Wei, V. 52, 53 Vance, J.V. 270
Whitcomb, D. 115
Zerby, J.A. 70, 219
Subject index
Ad-valorem charging 97, 99 between trades 214

Air transport 39, 71 bulk 19,38
Alexander Committee 44 other sources of supply 100
Anti-trust law 41, 245, 285 liner, independents 19, 55, 57, 81,
283,284
Back-up area 195, 196, 197-99 neo-bulk 39, 108, 109
Baltic Exchange 18 perfect 100
Berth price 281-82, 288
break -bulk 196 service 275
container 25, 196 tramp 18,38,78-79,81, 108, 109,217
finger pier 197 within conference 56-57
Brussel Package 46 see also Conferences
Conferences
Capacity closed 41, 55, 285
excess 272, 281 competition 39
handling 113, 117-18, 121, 138, 142 CONISCON 54-59
hauling 113, 117-18, 121 Far Eastern Freight Conference 42
holding 113, 117-18, 121 open 41, 44
Cargo policing devices 41
break-bulk 23, 24 tariffs 37, 38, 45, 49
bulk 7, 18-21, 23, 27 UK-Calcutta 43
containers 19 WINAC 54
containerized 31 Consolidation shipload III
general 20-22 Container
liner 7, 21 berth 25, 196
packaged 19, 21, 23 berth throughput 196-97, 199-200
unitized 21-24 cranes 25, 127, 196
Cargo catchment area Ill, 112, 157 full 29-31
Cargo dispersion index 165 part 29-31
CENSA, Committee of European VLCC, Very Large Container Carrier
National Shipowners' Association 25, 154, 171-72, 187, 199-200
38,45 Containerization 24-26, 30, 120
shipping code 286 Contribution margin 80, 83, 283, 285
Charging floor 219, 224-25 Costs
Charging what the traffic can bear 1, at sea 118, 119, 120, 123, 155
83,94, 219 average 224-25
Charter market 18,21 based tariff 285
Competition billing 175, 182
air lines 39, 108 building 129-31
29& Subject index
Costs (Contd.) CSG, Consultative Shipping Group 45

capital 107, 109, 129, 130, 148, 151
cargo 118, 121, 123 Decreasing returns to scale 106
common 79, 217, 223, 282 Deferred rebates 40, 41
direct handling 79, 81, 83, 160-61, Demand
213-12,242,249 derived 1, 95, 98
engineering 115, 122, 130, 139 elasticity 41, 70
expected 169-70, 283 factor demand 95
expected, marginal 250 final product demand 95
feeder 206 follows supply 268-73
fuel 129, 132, 148, 151-52, 156 imports 96-103, 106
handling 119, 120, 123-27, 208-14, kinked 107
238 ports, expected 250-51
see also Handling, costs seasonality index 34
hauling 119, 120, 160-61,210-14 shipping 17, 73, 96
indirect handling 160-61,210,214, shipping geography 30
242, 249 variability 32, 34, 167, 178
in ports 118, 119, 120, 123, 155, 193- Discrimination, price 70, 71, 94, 282,
94 284
interest 209 Diseconomies, ship size 116, 123, 135
maintenance 131 Door-to-door service 157, 206
marginal 48, 217, 224-25, 279, 281,
283
marginal commodities 242-43, 254- Economies
63 density 220-22
marginal port 166-70 firm 220-21
marginal production 103-04, 106 industry size 220
minimization 112, 162-63, 284 plant size 115, 116, 220
operating 129, 131-32, 148, 156 ship size 111, 116, 123, 130, 135, 138,
opportunity 129, 223 166, 211
port charges 148, 151 social 219-20
producers (line) 207-16, 284 Economies of scale 205
repairs and insurance 131 Efficiency
safety 176-81, 182, 183 allocative 277, 282
shipowners 112 modal split 279
shippers (users) 112, 174-75, 184-92, slack 276-77
207-16,284 Elasticity
shipping marginal 238-44 costs
storage 112, 129, 173, 206, 209, 253 ship 116, 122-23, 127-28, 130-32,
system 209 135-37, 136-37, 140, 148, 150-53
system minimization 205 system 221-22
time proportional 118, 122 freight rates 80-83
Crew shipping demand 95-101, 108,237,
size 131 278,282
US wages 12 European Container Terminal
wages 11, 16, 131, 153 Rotterdam 196 '
Critical stock level 177-81 Externalities 220
Cross-subsidization 239-42, 254-63,
272-73, 277, 278 FAK, Freight all kinds 237,245
Subject index 297
Federal Maritime Commission 94 106 Handling (Contd.)
245 ' , costs 23, 24, 72, 137, 139, 143, 144
Feeder services 157-66, 171-72,253 see also Costs, handling
FOC, Flags of convenience 7, 8, 9, 10, productivity 23, 24, 78
11, 12
Fleet
conventional general cargo 10 lATA 37,42
ICC, International Chamber of
developed countries 7-9
Commerce 45
developing countries 7-9
Index
Eastern block 5
cargo dispersion 165
France 12
Holland 12 seasonality 34
Indices, freight rates
liner to, 12
Bremen 51, 52, 53, 66
Sweden 7, 12
Canadian Transport Commission 52
Tanker 18 66 '
UK 7,10,12
chain 55
USA 7,10, 11, 12, 13, 16
commodity 59-64
world 4
CONISCON 55-59, 63-64, 84-87
Freight curve 144, 145, 216
Deakin's liner 49, 50, 51, 66
Freight rates
FRG, Federal Republic of Germany
across the board changes 54, 59, 66
88
ad valorem rates 68
individual line 58-59, 64-65, 89-93
base rates 67
Laspeyeres 51, 55
class rates 67
McLachlan's liner 49, 50, 66
cost-based 238-53
Paasche 55
discrimination 70, 71, 282, 284
spot grain 64
door-to-door 245-46
UK tramp 49-50
indices 49-66, 84-93
UNCTAD (United Nations
open 108, 272
Conference for Trade and
optimal 222
Development) liner 52
peak and off-peak charges 243, 248
Indivisibility 223-24
rigged 264, 268
Inefficiency, see Efficiency
stability 53, 66, 283
ITF, International Transport Worker's
surcharges 68
Federation 11, 12
Freight-ton thinking 69
Froude Number 127
Fuel Lines
consumption 127 ABC, Belgian 19, 71
saving engines 6 APL, American President Line 154
saving technologies 6 BROCHARD, UK 57
surcharges 55 CIS, Germany 57
Danish Barbar Blue Line 171
East India Company 18
Growth, see Economies, ship size;
Evergreen 39
Diseconomies, ship size
Farrell 286
ISCONT, Israel 57
Handling Lykes Brothers 27
break-bulk 24, 26 NYK 28
container 26, 27, 30, 31, 126 Orient Overseas Container 172
298 Subject index
Round the World Container Services Product function, engineering 149

171 Productivity
Sanko 6 ports, see Ports
Scan Dutch 197-98 ship 28, 150, 153
Singaporian Neptune 171 Profit
TFL, Trans Freight Line 39 margin 107-09
Tor 248 maximization 99, 101, 103-04, 106,
Yangming 39 112, 206, 225-36
Load factors 265-75 potential 236-37,273, 275
Loyalty rebates 40 super normal 107, 217
Marshall's rule 95, 98, 278 Quantity rebate 243

Monopoly
conferences 38 Regulation, shipping 286-88
product markets 105, 106 Revenue
profits 48, 276-77, 280 freight 22
Multi-port calling 112, 159-66, 170-72 marginal 252
marginal product 269-71
Non vessel operators 245 Rochdale Report 22,37,44, 285, 287
Royal Commission on Shipping Rings
Oligopoly 106, 284 43,44
Palletization 24 Sailings frequency 111-12, 178-81,183,

Peak and ofT-peak charges 243, 248 207, 210-13, 218
Perishable goods 184 Safety stock 174-81,185-92,180-81
Pivot unit system 68-69 Shippers' councils 217
Pooling arrangements 41, 42, 44, 55, 56, Shuttle services 158-66
57 Social benefit maximization 206
Port Stevedoring charges 121, 248
Amsterdam 78 Stowage
Ashdod 124-27 factor 69-70, 73-83, 238
Dar-es-Salaam 26 planning 171
Elisabeth 197 Substitution factors 99-100, 151
Haifa 124-27, 147 Supply
Kobi 197 exports 96-103
London 144, 196 shipping 17
Marseilles 147 shipping,geography 30
Mombasa 26 through charges 246
Newark 25
Oakland 197 Trade
Rotterdam 78, 200 balance 32, 140-41, 150-51,207,
San Francisco 197 212-13,238,242,251
base 159, 165, 250-51 deep-sea 223
charges 132-34,200-04 dense Ill, 113, 116, 187, 213, 223,
marginal 159, 167, 169-70,250 232-33, 279
outports 249 density 215
productivity 140, 154-56 international 3, 18, 20
water depth 116 potential 100
Subject index 299
Trade (Contd.) UNCTAD, United Nations Conference

routes for Trade and Development 7, 11,
Australia-Europe 19 38, 45-46, 52, 78, 133
Far East-Europe 4 shipping code 46-47, 287
FRG, Federal Republic of Unit value of commodity 73-83, 96, 98,
Germany-Israel 54 109
France-Morocco 73, 78 USA
Israel 73, 274 exports and imports 108
Italy-North Atlantic 54 major trade routes 265-67
Japan-US 154 shipping act, 1984 38, 44, 47-48, 245,
Mediterranean 239 285,288
South East Asia 73 see also Anti-trust law
USA 4, 19,40,215,239,274-75
short-sea 222 Value of service pricing 70, 72
Tramp market 273, 277, 281
Transit storage 195 Wilson square route formula 182

Liner Shipping Economics

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Liner Shipping Economics

Liner Shipping Economics

London New York

All rights reserved. No part of this book may

British Library Cataloguing in Publication Data

Jansson, Jan Owen

Library of Congress Cataloging in Publication Data

Jansson, Jan Owen.

ISBN-13: 978-94-010-7914-3 e-ISBN-13: 978-94-009-3147-3

PART I THE LINER SHIPPING INDUSTRY 1

1 Characteristics of demand and supply of liner shipping 3

PART II LINER SERVICE OPTIMIZATION 111

5 Ship size and shipping costs 113

5.2 Plant-size economies in general 115

PART III ECONOMIC EVALUATION OF THE

10.2 Common cost and factor indivisibility 223

The importance of international liner shipping needs little emphasizing. A

has left costing principles in liner shipping lagging. We suggest various

In this part we describe the liner shipping industry from different

The pattern of seaborne trade and shipping is determined by a multitude of

1.1 AN AGGREGATE PICTURE OF SEABORNE TRADE

·Information disclosed by shipping lines operating on this route.

subsidize shipyards. Second, international intervention - in the form of the

1.2 THE DEVELOPMENT OF THE SHARES OF THE

1963 1965 1970 1975 19801982 1983

1963 1965 1970 1975 19BO 19B2 19B3

Table 1.2 Development oj the fleets oj Sweden, the UK

Year Sweden UK USA

1963 4176.3 21565.2 23132.8

at the least-cost combination of factors. The growth of flags of convenience

1963 1965 1970 1975 19801982 1983

1950 1956 1960 1965 1970 1975 1980 1981 1982"

Total Import Export

US/Far East 1980 17866 7413 10453

1.3 LINER SHIPPING, SHIPPING FOR HIRE

Number DWT Number DWT Number DWT Number DWT

1960 562 6041 16 91 39 392 617 6524

Table 1.6 A comparison of the costs of different crews

Panamax 26 1050000 700000 580000

Source: Various accounts of shipping companies and published ITF tariff.

Figure 1.4 Shipping demand and supply aspects.

1.3.1 Shipping activities and ship types

__________ Full container

1.3.2 The wide definition of general cargo

exhaustive definition of liner cargo. Exceptions certainly exist. On one hand,

1.4 THE RELATIVE SIZE OF THE LINER SHIPPING INDUSTRY

1.5 RECENT DEVELOPMENT IN GENERAL CARGO SHIPPING

1.5.1 Unitization of break-bulk cargo

Table 1.7 Break-bulk loading and unloading capacity

Port Tons per gang-hour

Antwerp and Rotterdam 18-25

Sources: A Battelle report pertaining to 1970 and the UNCTAD report

container cranes of very-high capacity could achieve sufficiently high degree of

1.5.2 Composition of the fleet of general cargo ships,

The productivity in terms of ton-miles performed per ton of deadweight has

,Fleet composition (000 GRT)

Conventional Full Part

1970 72396 96.8 1908 2.6 484 0.6 74788 100

1.6 GEOGRAPHICAL ASPECTS OF LINER SHIPPING

Table 1.9 The geographical distribution of the world full-container ship

Asia (excluding Japan

Source: Shigeya Golo (1983). Asian Liner Shipping. in International symposium on

1.6.1 The dominance of intercontinental trade

1.6.2 The dense-route and thin-route sectors