Special Interest Group on Maritime Transport and Ports
a member of the WCTR Society
Genoa - June 8-10, 2000
THE FUTURE OF THE HUB-AND-SPOKE SYSTEM IN LINER SHIPPING
(The 2nd Scenario: From Land- to Sea-Based
by H.E. Haralambides, C. Cheung Tam He and
Faculty of Economics
Erasmus University Rotterdam
P.O. Box 1738
3000 DR Rotterdam - NL
The growth in liner shipping capacity, the degree of containerisation
of general cargo trades and the average and maximum size of containerships
have all been increasing at a remarkable rate during the past
20 years. Futurologists, naval architects but also a few economists
earning a living by extrapolating past trends occasionally talk
about mammoth containerships, as big as 18,000 TEU, calling at
fewer and fewer hub ports, increasingly at dedicated facilities.
This paper argues that although this is a possible scenario, it
is not likely to happen. On the contrary, it is believed here
that the maximum size of containerships is reaching its upper
(economic) limit and the future will see an increase in the market
share of smaller ships, directly calling at more ports that serve
a limited hinterland; a development similar to what has happened
in aviation after that market was liberalised.
There are nowadays 6 important and very distinguishable trends
that all, each reinforcing the other, point to this direction.
These are: 1. worldwide port development; 2. regionalisation of
trade; 3. infrastructure development in southern Europe; 4. road
pricing in Europe; 5. the future of liner shipping alliances;
and 6. the impact of information technology.
A cursory look at Statistic data 1 immediately shows
that the rate of increase in liner shipping capacity outstrips
by far the corresponding increases in world output and trade.
Indeed, in the period 1991-2000, container shipping capacity has
been increasing at a rate of 10.5%, vis a vis 2.5% of world
GDP; 6.5% of international trade; and 2.1% of world merchant fleet
by and large. To the uninitiated, this is an indication of overcapacity,
often the culprit responsible for the industry's notorious unprofitability.
Indeed, overcapacity is an intrinsic characteristic of the industry,
the combined result of regularity and frequency of service, and
east-west trade imbalances. Notwithstanding this, however, the
large divergence between demand and supply growth in liner shipping
is also attributable to the considerable feedering operations,
now the order of the day in the present organisational system
known as hub-and-spoke. Indeed, from origin to final destination,
goods may often have to be transhipped ( on various modes) 5 or
6 times. Recent statistics show that approximately one quarter
of containerised traffic in port relates to transhipment (Peters,
2000). Current research also shows that although sea-leg costs
may have been going down in real terms as a result of economies
of scale in liner shipping, door-to-door costs have been increasing.
And this without taking into account the external costs of road
transport as well as of the fact that the use of road capacity
is cheap in so far as it does not as yet allow the recovery of
infrastructure investment costs (this issue is further discussed
below). It thus becomes increasingly clear that economies of scale
in shipping are countered by increasing diseconomies in terms
of door-to-door costs.
General cargo goods are increasingly carried in containers. The
overall degree of containerisation, presently at about 60% (Peters,
2000), is expected to reach 70% by the year 2010 or indeed even
higher. Total container traffic now amounts to 200 million TEU
per year, 50% of which takes place within Asia.
The maximum size of containerships that carry this trade has increased
almost three times in the past 20 years, from 3000 TEU in 1980
to about 8000 TEU today. The fleet's average size has consequently
also increased from 990 TEU in 1980 to 1590 TEU in 1997. Economies
of scale have been important in reducing unit costs and although
the shipbuilding costs curve has virtually flattened out (Brooks,
2000), there are still savings to be had. In 1970, Hapag-Lloyd
was moving 6.8 million tonnes with 106 ships and 8,450 employees.
Twenty five years later, the company was moving three times that
amount with only 18 ships and 3,400 staff. A rough comparison
between a 6,000 and a 4,000 TEU ship shows that the former saves
30% on crew, 20% on fuel, 15% on port and canal dues and 10% on
insurance (Cheung Tam He et al, 2000). However, the relationships
between ship size and return on investment (RoI), as well as between
company size and profitability are far from being conclusive (Hoffmann,
1. WORLDWIDE PORT DEVELOPMENT
All over the world, ports are being spectacularly
developed in tandem with their countries' general economic growth,
development and trade requirements. Data shows that, in 1998,
more than 20 billion dollars were earmarked around the world for
port development projects (Drewry, 1999). Forty per cent of this,
i.e. 8 billion dollars, were in Asia alone, and this is a rather
conservative estimate. The Hirshman-Myrdall effect (see below)
is little taken into account, as countries are not convinced that
they should not develop their own ports just because they can
be equally well feedered by neighbouring hubs.
Given the existence of the significant economies of scale involved
in port development, once the need for port development is realised
it is usually also understood that the development of container-handling
facilities in excess of national requirements might have the positive
spin-off effects of an unbalanced growth approach to development.
According to this, basic infrastructural facilities (such as ports)
are built up far ahead of existing demand, on the part of the
industry, agriculture and commerce, in the hope that the latter
activities will expand by the wake of the former (Resenstein-Rodan,
1943) (a/o. see for example north American railways, particularly
those of Canada).
Thus, the more ports are developed, the more attractive and economical
it becomes for carriers to call there directly with smaller ships/cargo-loads,
instead of feedering from a neighbouring hub, particularly if
this development is accompanied by structural changes that enhance
the operational efficiency and productivity of ports. Finally,
countries have moved heaven and earth to develop and modernise
their ports -amidst environmental, population, land-use and budgetary
constraints- and many of them would thus feel very reluctant to
even consider new ideas to further expand port infrastructure
and superstructure in order to accommodate larger ships whose
benefits (to the consumer and society at large) have yet to be
2. REGIONALISATION OF TRADE
The trend towards smaller ships and direct calls/diversion will
also be facilitated by the growth of intra-regional trade in Asia.
As discussed above, fifty per cent of more that 200 million TEU
moves a year take place within this region. This means smaller
distances overall, and smaller distances in their turn mean smaller
optimum size of ships. The consequent development of Asian ports
and fleets to serve this trade, and the increased profitability
of these trades, will perhaps make it more economical for Asian
operators to deploy an increasing number of such ships to Europe-Far
East, instead of building dedicated large containerships to serve
Europe, as is currently the case under the hub-end-spoke system.
In addition, relative uniformity in ship size gives operators
increased flexibility in alliance operations that aim to provide
global coverage. This trend will become increasingly apparent
especially if peripheral ports around Europe are developed and
modernised, together with the rest of infrastructure, as discussed
3. INFRASTRUCTURE DEVELOPMENT IN SOUTHERN EUROPE
The high degree of efficiency and productivity of what has come
to be known as the Hamburg-Le Havre range of ports, coupled with
the existence, expansion and consolidation of sophisticated inland
transport networks, the completion of the internal market, and
a road transport pricing policy that favours long-distance haulage,
have allowed these ports to capture in full the benefits of the
new logistical developments in transport. Thus, approximately
50% of Europe's external trade is channelled through these ports.
This has been one of the reasons that, until recently, had blunted
the South's motivation to develop its own ports, being in a sense
adequately served by the North. This rather passive approach to
development, known in the literature of economic development as
the Hirshman-Myrdall effect, combined with lack of funds, restrictive
labour practices, high prices and low productivity had resulted
in a situation where Mediterranean ports were by-passed in the
Europe-Far East trades, with goods destined for the South being
transhipped in the North and then carried over land. South European
ports were (and many of them still are) thus lagging behind, despite
the comparatively higher growth of their respective economies
and the consequent port and transport requirements.
This example of inequitable regional development in Europe has
not passed unnoticed in the Union's Cohesion Policy. The latter,
together with the Treaty of the European Union, require the EU
to promote the interconnection and interoperability of national
networks and access to them, taking into account the need to link
island, landlocked and peripheral regions of the Union with its
more central areas. The aim is to enable citizens of the Union,
economic operators and regional and local communities to derive
full benefit from the internal market.
However, interconnection, interoperability of transport networks
in general cannot be achieved if ports are not included in the
equation as the crucial links of a closed (i.e. total) European
transport system. Considering European ports as a whole and as
the international interface of the European logistical network
is consistent with the approach taken by the Commission in its
white book on the Future Development of the Common Transport
Policy. In fact, while taking note of existing inefficiencies
and discordances, the white book provides for a global
approach to the problem. It aims at a more balanced modal development
of transport, allowing users a greater freedom of choice; at a
more balanced distribution among regions of benefits resulting
from infrastructural development; at improving the efficiency
of companies operating in this sector; at increased safety and
attention to the problems of environmental protection. All this,
while taking social problems related to the sector's employment
levels into account.
Today, south European ports are still important instruments of
regional development, and crucial links that connect the periphery
with the centre, both with regard to cargo and passengers.
They thus contribute to the economic and social cohesion of Europe
and many of them are developing as southern gateways to the continent
for the increasing far-eastern traffic. Ports in Italy, Spain
and Greece have gone to great lengths towards development and
restructuring, increased efficiency and competitive pricing. As
a result, they have been able to strike lucrative deals with major
carriers and an ever increasing part of European trade enters
now the continent from the South. That, incidentally, was one
of the main findings of the EU ATENCO project and explains, for
example, the interest that Bremen and Hamburg have recently taken
in Contship, and consequently in the port of Goia Tauro.
South European ports are expected to expand and modernise
at even higher rates in the future. An additional incentive for
that is the rapid growth of north Africa, the Middle East and
the Black Sea, and the Union's intention to create a customs union
and eventually a free trade area with the non-member Mediterranean
countries (European Commission, 1995; Haralambides, 1998). All
in all, a population equal in size to that of the EU, with 80%
of it leaving at a distance of less than 100 Km from the coast.
Again, the more ports are developed and modernised, the more economical
a direct call by a (smaller) mother-ship becomes.
4. ROAD PRICING IN EUROPE
The heavy demand on road use in Europe, compounded
by the underpriced, fixed-cost-based, supply of road infrastructure,
and the increasing unwillingness of many governments to invest
in new road capacity (0.8% of Community GDP in 1995, compared
to 1.5% twenty years ago) create a number of significant problems,
particularly with regard to congestion, safety and environment.
Some often quoted illustrative figures could further highlight
this point. Thus:
- The death toll in road transport amounts to 55,000
people per year (1.5 million injured);
- Every day, 4,000 km of Community motorway are
- Yearly congestion costs amount to 120 billion
ECU, or 2% of Community GDP;
- The external costs of accidents, air (excluding
global warming) and noise pollution have escalated to 130 billion
- In total, transport externalities represent roughly
4% of Community GDP.
Externalities such as these, however, are rarely internalised
in the pricing of road infrastructure, the more so when the latter
has lost most of its "public interest" character and
is increasingly becoming a private consumption good. Thus, the
anticipated emphasis towards a "variable cost" approach
in the pricing of road use (user pays principle) by many European
governments (European Commission, 1996) is expected to make competition
among ports and transport systems fairer and more efficient. To
quote the EU: '
as a general rule, all transport users
pay the full cost, internal and external, of the transport
services they consume, even if these costs are in some cases paid
by society to assist those in need
Such a pricing policy, if ever implemented, will make long-haul
road transport considerably more expensive. This is bound to limit
the hinterland of hub ports and, correspondingly, boost not only
alternative modes, but also extend the hinterland of south European
ports that could equally well target Asian cargoes destined for
France, southern Germany, Switzerland, Austria, the countries
facing the Black Sea and a considerable part of Central and Eastern
Europe. As discussed above, the competitive position of South-European
ports and short-sea-shipping in this region will further improve
along with progress in the integration of non-member Mediterranean
countries and the eventual formation of a Customs Union and a
Free Trade Area with them.
Incidentally, the development of Trans-European Transport Networks
(TENs) coupled with a different road pricing policy will also
have an effect on the price equalisation policies of most
maritime conferences; policies that, however well justified under
the present circumstances, affect both port competition and encourage
long-haul road transport.
Liner shipping companies incur substantial fixed costs due to
their need to provide regular and frequent services to their customers.
As a result, they require increased port reliability and quick
turnaround times, sometimes achieved through the use of their
own dedicated terminals. Furthermore, the inherent overcapacity
in liner shipping, again as a result of the need for regular and
frequent services, oblige liner companies to try and extend their
catchment areas far beyond the immediate hinterland of their port(s)
of call. This need explains their price equalisation policy according
to which short-haul cargoes cross-subsidise long-haul ones. Long-haul
cargo may, thus, pay less than its full direct costs of transportation,
the difference accounted for by either the relatively higher price
of short distance haul, and/or lower sea-leg tariffs. Arrangements
such as these encourage haulage over long distances and, from
a EU Common Transport Policy (CTP) point of view, cannot be unquestionably
acceptable, especially when shorter distances and other modes
are available and under-utilised.
Having said that, however, this policy of liner shipping companies
is not necessarily the result of the particular market structure
of liner shipping. Even with higher competition prevailing, a
liner company/conference would still have the incentive to cross-subsidise
long-hauls as long as the marginal costs incurred are less than
the costs of having to sail with less than optimal load factors.
The latter costs have of course to do with the economies of scale
of large vessels that are, however, only realised if high capacity
utilisation is achieved.
5. THE FUTURE OF LINER SHIPPING ALLIANCES
Up to now, developments in ports (hub-and-spoke) have been dictated
by developments in shipping rather than the other way around.
As already said, developments in liner shipping in particular
have been necessitated by the drive to cut unit costs through
increases in the size of ships. The capital-intensity of modern
containerships, however, requires very fast turnaround times and
thus appropriate investments in ports. At the same time, shippers
require a certain frequency of service that befits their just-in-time
and flexible-production technologies. The combination of
"large ship size" and "adequate frequency of service"
can easily lead to low load factors and under-utilisation of capacity,
for operators intending to "go it alone" without a secure
cargo basis. One could argue that the industry has fallen into
some sort of vicious circle where the need to cut costs leads
to the construction of larger ships creating overcapacity that
depresses rates thus leading to a stronger need to cut costs and
so on and so forth.
Global shipping alliances have thus emerged in order to exploit
'economies of scope' among otherwise competing operators, through
strategies such as the dovetailing of individual service networks;
vessel sharing; slot-chartering; joint ownership and/or utilisation
of equipment and terminals and similar endeavours on better harmonisation
of operations (Cariou and Haralambides, 1999; Haralambides and
Veenstra, 2000). All these have as their ultimate objective to
increase capacity utilisation of very large containerships.
However, liner shipping alliances have proven to be unstable coalitions
and this fact alone does not entice individual carriers to undertake
the required long term commitments; something that defeats the
very same rationale of alliances. Mergers and acquisitions
are thus becoming more appealing to carriers and industry observers
note that it won't be long before we see liner trade carried by
a handful of mega-carriers. Such consolidation, in an industry
that is already highly concentrated, will take place, if at all,
under the increasing scrutiny of the regulator, at both ends of
the Atlantic, who, with the final consumer in mind, is likely
to encourage more competition rather than further consolidation.
If the liner shipping market thus becomes more open and competitive
in the future, ship sizes are bound to decrease together with
an increase in the number of ports of call. Low prices would then
be achieved through higher competition rather than big ship sizes.
In such a scenario, shipping companies will be forced to provide
the services their customers want, rather than the ones they find
it convenient to offer. Reduction in ship size and more direct
calls could follow the example of the air-transport industry.
The most common jet flying across the Atlantic is not the 420-seat
747 jumbo but the 200 plus-seat Boeing 767. Eight out of 10 transatlantic
planes are twin-engined craft such as the 767, its bigger brother
the 777, or the various airbuses. This taste for smaller international
jets reflects the fact that travellers now like to shun big international
hubs such as London and New York and fly directly to their destinations.
This is changing the international market into a web of direct
intercontinental flights rather than one big air-bridge between
London and New York.
6. CONCLUDING NOTES ON INFORMATION TECHNOLOGY
The impact of information technology on transport, as well as
on all aspects of our lives, has yet to be fathomed. One thing
however is for certain. Information makes markets more efficient,
reducing the need for middlemen, may they be brokers, forwarders,
consolidators or NVOCCs (Pettersen-Strandenes, 2000). The supply
chain thus becomes shorter and the future may see more direct
international transactions between buyer and seller, for smaller
quantities, expediently delivered. Unavoidably this will have
to be done by smaller ships and direct port calls, through a system
of ocean transportation that I have often called 'the transition
from land- to sea-based logistics'.
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