mega vessels

54 Quarterly — 3rd Edition 2016 terminaloperator.com

MEgA-vEssELs, MEgA ALLIANcEs AND poRT pERfoRMANcE

Over recent years, the often uneasy relationship between lines and container terminal operators has been further strained by the introduction of ever larger ships. One side complains that the economies of scale promised by these ships are being lost because of terminal operators not making the necessary investments to deliver these benefits; the other side complains that the investment case is simply not there. In the midst of this, the aviation sector and the introduction of the A380 ‘super-jumbo’ has been cited as an enlightening comparison and example of what might be achieved.

Shipping lines are ordering seemingly ever larger vessels with the intention of reducing unit costs through economies of scale (and newer more efficient engines). As usual, Maersk has been the industry leader, its EEE class vessel at TEU

18,000 pushed the envelope further. With an almost herd like mentality, other lines followed suit and the EEE was rapidly overhauled by new vessels of TEU 19,000. Maersk has itself now trailed the idea of 20,000 TEU vessels having only 24 months earlier indicated that TEU 18,000 really was the upper limit.

From a terminal operator perspective the goal posts appear to keep moving. Only a few years ago, there was a need to invest in quay cranes, a piece of equipment that should have an asset life of 20-25 years, which could reach 21 boxes across. Barely a third into their asset life, they are becoming redundant for the largest vessels, which now require cranes with an outreach of 23 across. Will this change again in 4-5 years?

In addition, there are a range of other investments required to accommodate the largest vessels, especially at major gateway ports that must be able to evacuate large, lumpy volumes of boxes as efficiently as possible.

Delivering excellent quayside productivity is a noteworthy achievement, but counts for little if the road network immediately outside the terminal gate has inadequate capacity - a gateway port is only as good as its weakest link.

Having the right infrastructure is a pre-requisite to accommodating these behemoths, but on its own, does not guarantee success. Terminal operators must also deliver the necessary productivity and service KPIs.

With the introduction of the EEE, Maersk threw down the gauntlet of 6,000 moves per 24 hours during a port call. However, very few ports are close to delivering this Key Performance Indicator (KPI).

It requires 250 moves per berth hour over three shifts for 24 hours. An 18,000-TEU ship would require 8 cranes, each working at 31-32 moves per hour, generating berth productivity of 250 moves per hour (MPH) to reach this KPI.

However, whilst ship capacity and specifically ship beam has grown dramatically, vessel length has not. An 18,000-TEU vessel is only 25 per cent longer than a 7,500-TEU vessel yet has 140 per cent more capacity. Hence, cranes have to reach further, increasing the travelling distances per box by around 40% and thus impairing crane MPH. Moreover, without a concomitant increase in ship length, it is difficult to deploy more cranes, since the crane legs

BY Dr JONATHAN BEArD, HEAD Of TrANSPOrTATION & LOgISTICS, ArCADIS

mega vessels

55Quarterly — 3rd Edition 2016terminaloperator.com

dictate a minimum spacing of one bay between cranes.

There are some crane designs on the drawing board to alleviate this constraint, but the return on investment is far from clear. It’s all well and good deploying a slew of high spec cranes for a mega vessel call, but if those assets remain underutilized for the remainder of the week, terminal operators’ financial performance will head south.

Moreover, the holy grail of 6,000 moves over 24 hours, also pre-supposes there is enough cargo for such a call. This is key piece of the economies of scale jigsaw – and to date, it’s missing. Nowhere is this more evident, than in the rash of new mega alliances. Carriers have had to pool their cargo as they simply

terminal operations. For example, inter-terminal transfers (ITTs) are becoming more complicated and hence posing additional operational challenges especially at those ports where there are several terminal operators and / or fragmented facilities (Figure 1.2). Facilitating ITTs efficiently is becoming increasingly difficult for a number of ports, notably Korea’s Busan (even with a very pro-active Port Authority) and especially land-constrained Hong Kong (with several operators and no port authority).

Some industry stakeholders, most notably Mearsk’s CEO Søren Skou, have looked longingly at the aviation sector where the A380 introduction was accommodated by upgrades at major airports to ensure that the larger aircraft could be processed efficiently. However, the comparison serves more to highlight how the airlines, aircraft manufacturers and airports work more co-operatively than the liners, port authorities

there are some Crane designs on the drawing board to serViCe mega Vessels but the return on inVestment is far from Clear. it’s all well and good deploying a slew of high speC Cranes for a mega Vessel Call, but if those assets remain underutilized for the remainder of the week, terminal operators’ finanCial performanCe will head south.

do not have enough boxes on their own account to fill up the mega vessels they keep ordering. This has been a key factor driving the formation of the Ocean Three, 2M and other mega-alliances.

For major terminal operators, the lack of cargo also generates problems. Mega vessels that do not deliver high box exchanges per call, are detrimental to terminal productivity (and profitability). Figure 1.1 illustrates this challenge for vessels longer than 300m calling at 5 (undisclosed) terminals in China and SE Asia. Whilst the average length of vessels in this category has increased, the average number of moves per call actually flat-lined or even declined 2006-2011. The good news is that as the market recovered from the collapse in trade induced by the global financial crisis, and volumes picked up, so have the moves per call. It is hoped that this upward trend continues.

If the carriers are now delivering larger volumes of cargo per call, the onus is on the terminal operators to deliver the necessary performance needed to turn these larger vessels around quickly. Information from the Journal of Commerce’s productivity database indicates improvements between 2012 and 2013 across most vessel sizes in terms of moves per ship hour at berth. However, during the latter half of 2014 our data from select terminals indicates that the mega-vessels and mega-alliances were struggling to obtain the necessary increases in berth productivity.

Whilst the mega-alliances offer the promise of greater cargo volumes, they also bring more complexity to

Figure 1.1 Economies of Scale Require High Moves per Call

Moves per call for vessels LoA 300m+

Figure 1.2 Inter-terminal Transfers (ITTs) Become More Complex with Mega Alliances

Notes: Data is a weighted average of 5 terminals in China and SE AsiaSource: ICF; Arcadis

Notes: Data is a weighted average of 5 terminals in China and SE AsiaSource: ICF; Arcadis

mega vessels

56 Quarterly — 3rd Edition 2016 terminaloperator.com

There is not space in this article to highlight the many differences between the aviation and maritime industries, save to say that there are several practices that the liner industry could adopt to its commercial benefit, not least proper yield management tools for sales’ staff – now finally being introduced by the more advanced lines.

Meanwhile, terminal operators continue to deliver healthy EBITDA margins, in stark contrast to their customers - Figure 1.3. Might the introduction of mega-vessels and mega-alliances deliver greater bargaining power to the carries and shift the financial balance in their favour? On past evidence this seems unlikely and the stability of the liner sector looks far from assured. The shale oil ‘buffer’ should help dampen any large rises in bunker price, nonetheless the fortunes of the industry will, as ever, be driven by supply and demand, and a failure of the market - both in terms of ship yards and shipping lines - to clear, thus giving little incentive to those players trying to inculcate commercial discipline. In the meantime, mega vessels and mega alliances look an unlikely workaround to save the industry. l

there is not enough spaCe in this artiCle to highlight the many differenCes between the aViation and maritime industries, saVe to say that there are seVeral praCtiCes that the liner industry Could adopt to its CommerCial benefit, not least proper yield management tools for sales’ staff – now finally being introduCed by the more adVanCed lines.

and terminal operators; not least the strenuous efforts by Airbus to fit within a specific size envelope and hence minimize the plane’s impact. The plane’s design was only finalized after it was clear that the key airports could handle it without prohibitive investment or redesigns. This is in stark contrast to the maritime sector.

Tellingly, the A380 was not superseded a few years’ later by yet another bigger aircraft demanding yet more changes in ground handling equipment, operations and airport infrastructure. Not least, as it has been a generally unsuccessful aircraft, garnering only Emirates as a large volume customer. Perhaps a salutary message for the maritime industry.

MEgA vESSELS