Liner networks: why ports need to pay close attention now

For ports and terminals – especially those relying on transshipment – the coming years are critical in terms of securing a long-term future. Understanding and facilitating carriers’ network design drivers will be key to navigating the new world of super alliances and hubs, argue Charles Moret and Lars Jensen in this guest editorial ahead of TOC Europe 2017

As the new alliance landscape begins to firm up, it’s clear we are witnessing only the first stages of a deeper transformation of the main liner networks that will unfold over the coming few years.

The design complexity of liner shipping networks has grown exponentially over the past decade due to the ever-increasing size of alliances. However, with the reduction to just three main alliances on the backbone east-west trades, we have seen the logical end-point of this type of consolidation. We might well see further consolidation at the individual carrier level, but it is unlikely that competition authorities would ever allow a reduction from three to just two alliances.

And, with global trade growth set to remain at lower levels than the industry has previously been accustomed to, the cost savings that can be derived from “simply” upgrading the network and vessel sizes are reaching their limits.

“The next logical development in network design, we contend, will be for the carriers to turn their attention to the optimisation of their network configuration within the confines of existing alliances and fleet compositions”

At a fundamental level, the design of a liner network must take three key parameters into account.

• It needs to be cost-efficient in terms of vessel usage and vessel speed
• It needs to be able to cater for the anticipated flow of full containers to maximise revenues while minimising handling cost
• It must be able to cater for the repositioning of empty equipment

The LinerGrid model was developed specifically to assist carriers in optimising networks across all these parameters simultaneously, and modelling shows that even relatively simple networks can be optimised. In a whitepaper in 2016, we used the model to show how the G6 Transpacific network (at the time) could potentially save USD 200 million annually simply by changing the network configuration.

But carriers – and alliances – do not develop their network free from other constraints. These constraints create opposing forces in terms of optimization, and it becomes critical to balance these forces in the best possible way.

To shed light on this, let’s look at two cases of such balancing.

The first trade-off is between the effective use of the new generation of mega-vessels above 18.000 TEU and the introduction of more direct port-port services. On one hand, mega-vessels clearly have a unit cost advantage compared to other vessel types – provided they can be fully utilized. On the other hand, increasing the amount of direct port-port services will reduce the costs associated with feeders and transhipment.

Finding the right balance between these two forces is to some degree determined by fuel costs. When fuel prices are low, terminal costs become the dominant cost factor, favouring more direct services. In the case of high fuel prices, terminal costs become less relevant in the context of optimizing total network costs. Notwithstanding this fuel impact, in general the pull is towards more direct port-port services, an effect which will be further accentuated in the coming years as supply chains become even more dispersed globally.

The reality is that by 2018 carriers will have 100 mega-vessels in operation as well as some 170 New-Post-Panamax vessels, representing an investment of approximately USD 30 billion. This makes it imperative for the carriers to utilize these assets. The design of a network will therefore be subject to the fundamental fact that these vessels must, under almost any circumstances, be used. This will pull in the opposite direction to the increase in direct services. For a carrier, and alliance, to be financially and operationally successful it will be critical to analyze where the optimal network design lies between these two forces.

The second case is the balance between the optimal number of hubs to be used and the carriers’ financial interests in specific terminals. LinerGrid issued a whitepaper in March 2017, using the network design tool to analyse the optimal number of hubs in a region. The analysis clearly favoured a very low number of hubs for optimal economic performance. So, pure economic metrics tend strongly toward pushing increased volumes through fewer nodes.

But this strategy is again opposed, in this case by two other forces. The first is the carriers’ ownership in terminals, which in some cases comprise multiple transhipment gateways in a single region. The need to provide volumes to such terminals might for some carriers outweigh the need to fully optimize the network. This balancing act is made even more difficult in an alliance setting where carrier partners do not have aligned terminal interests. And then there is the challenge within individual carriers of balancing the KPIs for the trade and network teams against the KPIs for the teams responsible for terminal investments.

The second opposing force is the terminals’ ability to handle sharp growth in transhipment volumes and the associated increase in feeder vessel traffic. For terminal operators, this scenario is a high-stakes gamble. Investing in upgrades to compete for such “super-hub” status is necessary to be a contender, but only a few can win this game. Thus, while some ports and terminals may be able to significantly increase volumes by positioning themselves as one of these key hubs, for others there is a very real risk of losing transhipment volumes if they are not among the chosen top tier players.    

For ports and terminals – especially those relying on transhipment – the coming years are critical in terms of securing a long-term future as new super-hubs continue to emerge. And the key to positioning a hub in this game is the ability to understand and facilitate carriers’ network design drivers.

Charles Moret and Lars Jensen are CEO and CCO respectively of LinerGrid, a cloud-based tool aimed at optimising networks in liner shipping. Charles is also founder of CTI Consultancy and OCEO Talent&Leadership. Lars is founder of Seaintel Maritime Analysis, SeaIntelligence Consulting, CyberKeel and LinerGame and Board member at New York Shipping Exchange. Both are past TOC contributors and return this year to speak on 27 June in the Container Supply Chain conference session on The New Global Economy – Scenarios and Strategies for the Future of World Container Trade

TOC Europe 2017 takes place 27-29 June at the Amsterdam Rai