Liner Shipping

Liner Shipping means liner services when a Shipping Company engage their fleet of ships to carry cargo between  predetermined ports at regular intervals, under publicly advertised schedule. The special features of this service can be highlighted as under :-

a) The service is offered at regular interval, say weekly or fortnightly basis.

b)  Obligation to accept cargo from all customers and to sail on the date fixed by a published   schedule even if ship is not fully loaded.

c)  A fixed port rotation or itinerary or schedule to follow.

d)  The service is comparatively cheaper and reliable.

For example: One of the leading container shipping line-CMA CGM Shipping Line has offered 10 Nos liner services routed through Japan>China to US East Coast ports on weekly fixed schedule. Ships engaged in this route will cover US ports viz New York, Norfolk, Savanna & is likely to complete outward voy within 39 days as per declared schedule.

On the other hand, in trump shipping or chartering, the service is not scheduled and the entire vessel is normally chartered for a given voyage or for a period of time. This arrangement of ship's employment is known as voyage charter or time charter. These two modes of transportation have also dissimilarity with regard to contractual terms which determines relationship between shipper & carrier. In case of liner shipping, shipper has to act as per terms and conditions contained in the Bill of Lading & similar printed documents. Carrier does not negotiate with shipper on this issue. But In tramp shipping, the trader normally charters and pays a negotiated rate for the whole ship, either for a voyage or for a period of time.

How Liner Shipping works

Upto the begining of 1960s, cargo carried by liner shipping was known as "general cargo" and the vessels used to carry those general cargo, were small general dry cargo ships(twin-decker & multi-decker ship). The cargo was stowed in small pre-packed consignments involving labor intensive & time consuming method for loading and unloading. Due to this negative factor, ships stay in port became longer and even more longer during congestion. All these factors contributed to increase cost of transport and other related cost & thereby hindered international trade. The situation started to change radically during late 1960s onwards with the introduction of "containerization" in the trade between United States and Europe. Subsequently this revolutionary changes in the mode of transportation was adopted speedily by rest of the world. General cargoes are now increasingly carried in containers of standard dimension i.e 8*8*20 feet unit known as - Twenty Feet Equivalent Unit (TEU ). This container penetration in general cargo noticed remarkable increase of cargo lifting by containers from 20% in1960s to more than 70% at present. At the same time traditional general cargo vessels were replaced by specialized cellular container ships of ever-increasing dimension which has resulted in higher productivity & low transport cost. Leading container shipping line like "MAERSK SEALAND" has taken bold steps to container ships in excess of 8000 TEU of carrying capacity. Interested readers will be happy to know that MAERSK LINE has ventured to build triple Es carrier of 18000 TEU capacity which is likely to be inducted in trade soon. From above facts & figure, we can safely conclude that liner shipping is now virtually turned into liner container shipping. World  fleet of liner vessels, primarily in the form of Container Ships and Roll-on / Roll-off Ships, are now capable to cater about 60% of the goods by value being transported internationally by sea each year.

How to start liner shipping

The pattern of liner services that has evolved over last century to meet  the changing requirements of world economy is very extensive. The largest volume of trade linking three major industrial centers of the world are, North America, Western Europe, and Far East Asia. The following three major liner trade routes are operating to cover these industrial centers.

•  The North Atlantic route covering the trade between north-west Europe, East Coast Canada and the United States.
•   North America to the Far East route covering trade between East and West Coast of North America & the Far East, stretching from Japan to Singapore.
•   Western Europe to the Far East route covering the trade between Western Europe and the Far East countries.

To start liner service, one of the above routes to be chosen. Then comprehensive study to be made to know the type & volume of cargo moving within the route per year and pattern of growth of trade. It is interesting to mention here that about 400 regularly scheduled liner services are operating round the world. To ensure regular sailing of vessel at declared schedule & earn stable freight on long term basis, Shipping Lines have developed Conference system. The first Conference was formed in August 1875 by the lines trading between the United Kingdom and Calcutta aiming to ensure charging similar rates, to limit the number of sailings, to grant no preferences to shippers and to sail on a given date whether ship is full load or not. Again Shipping Lines work under different types of Conferences as mentioned below:

•   Closed Conferences: The most common arrangement is the closed conference which restricts membership, sets freight rates for the conference and often fixes the trade share of each member of the Conference. This helps conference members to adjust capacity to demand & avoid unnecessary duplication of port calls. Inspite of many criticism against closed conference, it’s existence for more than a century proves that this arrangement still fulfill the prime need of transport industry.
• ·         Open Conference: Under this arrangement, membership is not restricted. Any shipping line can join in open conference and enjoy unit revenue set by the conference. Since there is no control on trade shares or number of ships to be employed in service by new member, there is always a risk of overtonnaging in open conference resulting in undercut of existing freight rate.
• ·         Outsiders: There are Shipping Companies that set up liner services on a route without joining the conference. Outsiders can attract shippers in a route by offering lower freight, if the rate set by  conference system is higher.

Once route is selected, then decision to be taken by shipping line whether to join in closed conference or open conference considering which conference can benefit them most. One of the important job of shipping line / conference system is to set up a reasonably workable tariff rate for all the commodities moving between the ports of a particular route where the Line serves. This is the most debatable area where conference system / member lines failed to evolve a unique pricing mechanism acceptable to all  the shipping lines without any controversy. Experts on liner shipping have been working over a century on this issue, but no unique system could be developed as yet, as there are lot of economic & non-economic factors which are vulnerable to change in response to market conditions. Moreover the list of cargoes transported by liner companies are immensely diverse in nature, which makes the task of freight setting more difficult. We can have a look about the diverse nature of general cargo transported by liner vessel from the table below:

Commodities commonly shipped by liner service,
SL No,	Commodity,	Remark
1	Metal manufactures	Important Liner cargo
2	Rubber	Important Liner cargo
3	Coffee & Tea	Important Liner cargo
4	Textiles	Important Liner cargo
5	Textile Fibres	Important Liner cargo
6	Beverage & Tobacco	Important Liner cargo
7	Machinery	Important Liner cargo
8	Sugar(raw & refined)	Mainly refined sugar/liner
9	Simple manufactures	Plywood,buildingmaterials/ liner
10	Cement	Mainly bulk but some liner
11	Timber(logs &lumber)	Mainly bulk but some liner
12	Steel products	Mainly bulk but some liner
13	Metal scrap	Mainly bulk but some liner
14	Oils & fats	Mainly bulk but some liner
15	Gypsum & pluster	Mainly bulk but some liner
16	Non-ferrous metal	Mainly bulk but some liner

Above table shows that liner cargo includes wide range of commodities & the list is ever increasing. So liner company has to formulate pricing policy considering features of each and every commodity separately & also different variable and constant factors linked with the services rendered. The following basic items to be considered in general by liner company to set up freight tariff:

• ·         Freight charges is the first important item to consider which will cover cost of transporting the consignment from port A to port B. This charge is listed item wise in the conference ‘rate book’ which provides information regarding rate per freight ton(charged by weight or volume whichever is higher) for each commodity between ports or regions served by liner company. For some commodities, particularly those shipped in large volume, shipping line may negotiate with the shipper to fix up a separate price. 
• ·         Port charges. This includes expenses payable to the port authority when a vessel calls in port for cargo loading and unloading operation. This are generally separate because freight charges in the rate book are often quoted on a regional basis. Within a region, ports may have different charges. Some conferences absorb port charges into the ocean freight.
• ·         Service additionals. If the shipper undertakes additional services for the customer – for example, storage of goods, customs clearance or trans-shipment, then there would be additional charge for this.
• ·         Cargo additionals. Some cargoes attract additional charges because they are difficult or expensive to transport – steel pipe over a certain length, heavy lift, or liquids that involve tank cleaning for example.
• ·         Banker Adjustment Factor(BAF). It is difficult for shipping line to maintain a stable freight rate as per declared ‘rate book’, when sudden & unexpected increase occurs in the cost of bunker price in the international market. This leads to proportionate increase in the operating cost on long routes. To avoid revising the ‘rate book’, this is generally dealt with by a bunker adjustment factor, which is added to the freight.
• ·         Port congestion surcharges. In a situation of prolong port congestion, liner company faces unscheduled delays in port for loading & discharging and it increases operating cost in terms of higher port charges & fixed operating cost to the vessel account. To compensate this financial loss, shipping line has to impose a congestion surcharge for cargo destined for congested port.
• ·         Currency Adjustment Factor. The shipping line within the conference may face a problem that they submit freight invoice to the shipper in one currency but incur all their cost in another currency. If the rate of exchange of the currency through which shipping line is to settle their expenses, abnormally falls down compared to the currency rate of freight payment, then the line is subjected to great losses. Currency Adjustment Factor takes care of this adverse situation. It is based on an agreed basket of costs which keeps tariff revenue same, regardless of fluctuation in the tariff currency rate of exchange.
• ·         Discount or loyalty rabate. A discount allowed by the conference for the genuine customers who are loyal to the conference for supporting.
• ·         General rate increase. Due to cost inflation in the economy, sometimes shipping line has to raise or adjust freight tariff for each commodity proportionately which is known as General rate increase and is notified to the trade accordingly. This kind of general rate increase is sometimes negotiated with shippers / shippers council before implementation.
• ·         Commodity box rate. In case of container freight, commodity box rate applies in general which means shippers to pay fixed amount per box irrespective of weight of its contents. This criteria can not be applied to a special type of container which requires special treatment on board the vessel and thereby need to fix up higher freight. FAK(Freight of all kinds) is also used as fixed rate per box but this can not differentiate between high value commodities with low value commodities. Here  pre and post shipment charges viz terminal handing charges, container service charges, LCL charges, port levies, container demurrage charges etc to be considered for freight calculation of a container. In case Inland transport services is required on carriers haulage, then cost to be included in the freight.

Next important job for newly established shipping line is to plan an ideal sailing schedule for the company which will ensure optimum utilization of the fleet in the selected route. Line has to collect following relevant information / data to plan a workable schedule.

-  Who are competitors ? What is their fleet capacity – type of vessel / age. Is the service overtonnaged or undertonnaged ?

-  Cargo flow – type & volume of cargo moving both in inbound and outbound leg. Seasonality of cargo.

-  What is amount of cargo share among the competing lines. Is there any scope of slot sharing with existing operators ?

-  Freight set by the conference is good enough to earn reasonable profit to survive.

With above information feedback, following criteria / factors to be considered for workable 

realistic schedule:

• ·         The sailing schedule need to be realistic & reliable. Neither too tight nor too generous set-up give desired results.
• ·         The most ideal set-up is to follow a fixed day and even a fixed hour departure / arrival of the vessel during a week. This may not be achievable, as cargo flows are not always sufficient to support a weekly sailing schedule.
• ·         The tonnage to be used has to be suitable to carry all types of cargo offered by valued customers. If any cargo is refused on technical ground, it affects the image of the company. For example, some specific volume of ‘Reefer cargo’ is offered in the trade for some specific destination port at regular intervals. To ensure loading this cargo, identical ship having required reefer capacity need to be deployed.
• ·         The speed of the vessel plays a vital role to obtain customers support in favour of the line because higher speed reduces transit time and helps shipper to fulfill contractual obligation to the buyer earlier & get the payment. For example, an outward voyage of 4000 nautical miles shall have following transit- time at different speed :    

                   22 knots                7 days 14 hours

                   21 knots                7 days  23 hours

                   20 knots                8 days  8 hours

                   19 knots                8 days  18 hours

                   18 knots                9 days   6 hours

• ·         Cargo offerings for both inbound & outbound, are of paramount importance. So schedule need to be designed in such a way so that ship’s capacity can be fully utilized keeping minimum port calls. In the port rotation, there may be occasions when cargo offering from some particular port will be poor. In that case, it would be wiser to skip the port in that voyage & serve same port in alternate sailing.
• ·         Since working on weekend i.e Saturdays & Sundays in port involves extra cost on overtime account, so ships to be at sea during weekends.
• ·         It is normal that trade has seasonal peaks & troughs. At the end of the year, general cargo offerings from developed countries of the world, increases in volume compared to other months due to Christmas. Moreover commodities like coffee, cocoa, wool and fruits are seasonal in nature. So lines need to plan their schedule ahead in order to meet this increased seasonal demand of trade by placing more tonnage if necessary.
• ·         There are some ports which have draught restriction & some are tidal ports  where vessels entry & departure depend on tide. Placement of right size of vessel in the ports having draught problem and  hassle free arrival / sailing in tidal ports should get top priority in schedule planning.

We can have detail idea about how ships are employed under liner schedule in different trade routes from the information / data of  “CMA CGM Shipping Line”-- a world leader in the container shipping business.Learn More

Shipping Line has to develop sound Agency networks in all the ports where the liner vessels will call for loading and discharging. This arrangement can be done either by opening their own local/regional office or through appointment of Agents. Since opening overseas office increases overhead cost of the company, so most of the companies now follow the principle of appointing agents. The agents virtually represent the shipping line in a particular port or region and is responsible to do all the functions related to husbanding of ships calling at port as per instructions of Principal/Shipping line.

For their services, agents receive a commission from Principal for exports and imports which is generally calculated as a percentage of the freight or more specifically net freight including CAF (but often excluding bunker surcharges, less deferred rebate etc if any). Commission for exports is generally higher than imports because agents has to undertake extra marketing efforts to procure export cargo. In case of import, their function is restricted to delivery of cargo only and no canvassing is required. The normal percentages of commission are :

                5% for export cargo

             2.5% for import cargo

A  Standard Liner Agency Agreement is normally signed between the Principal and Agency house. This agreement provides modalities of functions & responsibilities in detail that agent is to perform and remuneration payable to them. The efficiency and image of liner service depend on how agents at different ports, are performing their assigned functions with professionalism, sincerity and dedication. An aggressive marketing strategy is to be adopted by shipping line with a view to grab volume cargo from global major buyers/exporters/ importers to ensure optimum use of tonnage capacity & upgrade market share of the trade.

Cost classification in liner trade business : A shipping line when involves in trade by deploying their fleet of vessels in a particular route, then expenditure in different heads is incurred. Expenditures are broadly classified into two categories :

·         Fixed operating cost(FOC) : This cost is fixed in nature and the shipping line has to bear the burden of cost irrespective of the fact whether ship is in employment or not. That means line has to incur this cost even if vessel remains idle or goes without employment. FOC includes following cost components.

·         Manning cost(crew cost)- This includes basic salaries/other financial benefits payable as per contract, crew travel, repatriation cost, medical expenses etc.

·         Stores & lubricants : It includes spare parts, deck & engine stores and lub oil which is require to keep the vessel always fit for commercial employment.

·         Repairs & Maintenance : This cost is a recurring one & this is necessary to meet routine maintenance and repairs of the vessel as per recommendation made by Classification society through survey.

·         Insurance cost covers risks related to hull and machinery of the ship, war risks etc. P & I Club to cover cargo claim & third party claims.

·         Administration or Overhead cost includes expenditure of head office & other regional offices of the company. This constitutes a big amount in the fixed cost structure of a shipping line.

·         Capital cost/Depreciation : The owner of the shipping line makes massive investment for purchase/procurement of ships which is the capital cost of the company. If owner purchases ships from his own fund, he is directly contributing “Equity” to his own company. Ship like other fixed assets, depreciates in value on yearly basis. To replace the ship at the end of its economic life, sufficient fund from revenue earnings has to raise and to be kept in separate account. Otherwise replacement of ship would be uncertain. In the shipping trade depreciation cost is calculated by historical cost or straight line method. Let us assume purchase price of a new built container ship with 3-4000TEU capacity is around US$25m and economic life of such tonnage is 20 years. The depreciation cost per year would be $ 25milliion - $6million(estimated scrap value of the ship) / 20year = US$950,000. If ship is procured under bank finance or yard credit, depreciation cost per year would be on higher side.

              

b)    Voyage cost : This cost is variable in nature. It is directly related with a round voyage/trip of a ship in a particular route. Following variable cost components are included.

·         Port charges: It includes expenditures on docking & warfage charges, mooring/unmooring, port dues, light dues, pilotage, tugs, garbage disposal etc. Since ship calls good number of ports in liner trade, port charges account for significant amount in the total voy cost.

·         Bunker charges: It is also an important item of voyage costing. Ship has a standard fuel consumption rate per day at given speed in the sea. Based on this data, it is possible to calculate how much fuel will be required on the basis of distance in knots mile to cover from starting to the end of passage. It also includes cost of water purchased & used by ship’s crew during voyage.

·         Cargo handling cost: It is the loading & discharging cost paid to the independent agency or port authority who renders the service. Generally cargo handling cost is paid on per ton basis for general cargo and per tue basis for container as per declared tariff or mutual agreement.

·         Canal dues are levied for the passage of Panama and Suez canal. The cost of transit is substantial.

·         Agency commission: Amount payable to the appointed agents for rendering husbanding services to ship.

·         Taxes on freight: Tax amount to be paid to the concern authority on freight earning as per law of the land.   

Hope above description shall attract the attention of inquisitive readers to share the views that “Liner Shipping” acts as the Global Engine to connect countries and people all over the world for establishing an efficient, safe, low cost and above all environment friendly transportation network, which never exists before.

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