John McCown from Blue Alpha Capital, who worked with container shipping pioneer Malcom McLean for 20 years, is calling for the creation of a dedicated American carrier shifting 53 foot boxes from China. Here he explains how it could work.
Container shipping is reporting exceptional results with record profits in each of the last four quarters. In the third quarter, it had total net income of $48.1bn for a profit to revenue margin of 42.7%. Indications are that the sector’s future financial performance will be well ahead of results it has reported in the past. These remarkable profits will be a catalyst for potential new entrants to look into entering the industry. Indeed, there has never been a time where such inquiry was so warranted by the facts.
While the macro facts provide a strong tailwind, any firm looking at entering the container shipping business would do well to focus on how it would differentiate itself. A container shipping service that delivers greater value to customers should be a top of mind in analysis and planning. I have a service in mind that does just that by taking steps out of the process. It won’t necessarily work well in all lanes, but it would work exceptionally well in the China-US west coast lane that moves one-quarter of US container imports.
The service involves five ULCVs in a weekly express US flag service moving only 53’ containers in the China-USWC lane. The relatively modest additional cost of a US crew will be more than offset by cost advantages flowing from using the equipment size that fits best with the US transport system. Let me walk you through the numbers that support this bold claim.
The crewing cost differential of a US flag vessel is $13,689 per day. With the largest vessels in the China-USWC lane (19,273 teu) and using 90% utilisation eastbound and 30% westbound, that crewing cost differential works out to $20.72 per loaded teu. Compared to a recent Drewry spot rate in that lane of $5,587 per teu, that cost is equivalent to 0.37% of carrier revenue. Going back to Drewry’s year-ago spot rate of $2,031 per teu, the cost differential is equivalent to 1.02% of revenue. No attempt is made to say the incremental US flag cost is inconsequential. The use of 53’ equipment translates into absolute cost differences well above the additional crewing costs that are sustainable in all markets.
The first process difference is reduced cargo handling costs on both ends. A ship configured for 53’ containers would involve 33% fewer moves and time to handle the same amount of teus compared to a ship moving typical 40’ containers. The lower cargo handling cost alone is more than the crewing cost differential. The second process difference occurs in California and is the disappearance of any need to transload cargo into 53’ containers for later inland moves. With cargo in 53’s already, the expense and time to unload three 40’ containers and put the contents into two 53’ containers for efficient domestic moves goes away. Taken together the cost savings from these differences in processes are many times the incremental US flag crewing cost.
The ideal candidate to start such a new service is JB Hunt, one of the largest transportation providers in the US.
Pioneers in moving domestic freight on doublestack trains, they are eminently familiar with outbound freight from California moving in 53’ containers where they are the largest provider. As the biggest owner of 53’ containers in the world, they also buy thousands of 53’s each year from China for their domestic freight business. They are uniquely positioned to gain an economic benefit from such one-way boxes whose cost and time of reloading as empties on the weak backhaul goes away.
With out of the 40’ box thinking backed by analysis and planning, such a US flag service would have competitive cost advantages. Those cost advantages come from a system adapted to what works best with the US domestic freight network and the first mover advantages to JB Hunt or another US company going down this path will be sizeable. Cost should be the prime focus and driver, but the emissions and congestion benefits of such a service are also considerable.
The idea of a new US carrier formed the lead story for this month’s Splash Extra – subscribers can read expert opinion on the hurdles such a venture would encounter by clicking here.