ORGANIZATION AND ECONOMICS OF SHIPPING COMPANY Marina Zanne Marina.Zanne@fpp.uni-lj.si

Introduction Development: ship owner = ship operator = trader = captain ship owner = ship operator = trader ship owner is not necessarily a ship operator Ship operator = shipping company = a company that provides maritime transport of goods or passengers = the most important component in seaborne trade provision

Introduction The company is formed to fulfill the needs that are recognized in our living environment. Shipping company faces a challenging environment  market cycles Key variables that shipowner/shipoperators must monitor: the revenue received from chartering/operating the ship, the costs of running the ship, the method of financing the business.

Shipping company Shipping company is an open, dynamic, complex, partially autonomous, goals driven social system that tries to combine the limited resources in a best possible way in order to achieve the most rational production and in this way to use the given possibilities to the max. Production is measured for example in transported tons of cargo per ship‘s deadweight capacity.

Main elements in managing ships Drewry; Ship management (2006), p. 2

Shipping company A bigger organization will normally consist of the head office, the ships, offices abroad and a network of business connections such as shipbrokers, agents, stevedores, etc. These companies are usually independent companies with whom the big company has fixed contracts.

Functional organization Unstable crews, lack of communication (or too slow communication), poor overall efficiency

Matrix type organization Decentralisation of management  higher motivation and initiative aboard the ships  free and interactive relations, fleet leader on shore-side Better control of expenses

Shipping company Smaller companies usually outsource majority of “common” activities (that are present in big companies), such as crewing, accounting, technical issues or even fleet development. Liner shipping companies are much more demanding than the tramp shipping companies.

Ship’s costs Fixed costs capital costs loan repayment depreciation operating costs crew costs stores repair & maintenance insurance administration Fixed costs

Ship’s costs voyage costs (variable costs) fuel costs port / canal charges service charges (tugging, pilotage,cargo handling etc)

Capital costs: Cost of loan Capital costs (depend on how the ship is financed): Financed by a loan: size of loan source of loan interest rate terms of loan

Capital costs: Cost of loan (Example) Question: What is cheaper for a company buying a ship? Cash price = 45.000.000 $. Terms of loan: a) down payment: 1/3 of cash price interest rate: 8% (per year) paying period: 6 years, repayments once per year, fixed instalment b) down payment 12.000.000 $ paying period: 5 years, repayments twice per year, fixed instalment

Capital costs: Cost of loan (Formulas) where r – interest rate (for adeqaute period of time) n – number of instalments

Capital costs: Cost of loan (Example) a) r = 8%, n = 6 CRF = 0,216315386 Instalment = 6.489.461,59$ Final price = 53.936.769,52$ Interests = 8.936.769,52$

Capital costs: Cost of loan (Example) Repayment scheme: No. Principal Instalment Interests Partial principal 30.000.000,00   1 25.910.538,41 6.489.461,59 2.400.000,00 4.089.461,59 2 21.493.919,90 2.072.843,07 4.416.618,51 3 16.723.971,90 1.719.513,59 4.769.947,99 4 11.572.428,07 1.337.917,75 5.151.543,83 5 6.008.760,73 925.794,25 5.563.667,34 6 0,00 480.700,86 38.936.769,52 8.936.769,52

Capital costs: Cost of loan (Example) b) r = 4%, n = 10 CRF = 0,123290944 Instalment = 4.068.601,16$ Final price = 52.686.011,63 $ Interests = 7.686.011,63 $

Capital costs: Cost of loan (Example) No. Principal Instalment Interests Partial principal 33.000.000,00   1 30.251.398,84 4.068.601,16 1.320.000,00 2.748.601,16 2 27.392.853,63 1.210.055,95 2.858.545,21 3 24.419.966,61 1.095.714,15 2.972.887,02 4 21.328.164,11 976.798,66 3.091.802,50 5 18.112.689,51 853.126,56 3.215.474,60 6 14.768.595,93 724.507,58 3.344.093,58 7 11.290.738,60 590.743,84 3.477.857,33 8 7.673.766,99 451.629,54 3.616.971,62 9 3.912.116,50 306.950,68 3.761.650,48 10 0,00 156.484,66 40.686.011,63 7.686.011,63

Capital costs: Cost of loan (Example) Answer: Second option is cheaper.

Capital costs: Depreciation Depreciation refers to two very different but related concepts: decline in value of assets, and allocation of the cost of tangible assets to periods in which the assets are used. Depreciation costs depend on: cost of the asset, expected salvage value of the asset, estimated useful life of the asset, and a method of apportioning the cost over such life.

Capital costs: Depreciation There are plenty ofdepreciation methods, e.g.: straight-line depreciation declining-balance method sum-of-years' digits method activity depreciation

Straight line depreciation Book value at beginning of year Depreciation expense Accumulated depreciation Book value at end of year Original value Scrap value

Straight line depreciation (Example 1) Using the straight line depreciation check the competitiveness of shipping company buying the ship for cash (45.000.000$) comparing to the compnay buying it with the loan (52.686.011,63$). The ship’s displacement is 12.500 tons and the scrap metal value is 150 $/t. According to accounting standards, the useful life of ship is 20 years, with 350 days of exploitation per year. If a company buys an used ship, the amortization period (utilization life) is shorter for this ship’s age. 25 years in latest publications. It used to be 16 years some decades ago.

Straight line depreciation (Formulas)

Straight line depreciation (Example 1) Salvable value is in both cases the same: Final price = Cash price = 45.000.000$ Final price = 52.686.011,63$

Straight line depreciation (Example 2) What is the annual and daily depreciation expense for a newly bought 15 years old ship at the price of 11.000.000$. The ship’s displacement is 9.600 tons and the scrap metal value is 150 $/t. Prepare the depreciation plan!

Straight line depreciation (Example 2) Utilization life = 5 years

Straight line depreciation (Example 2) Book value at beginning of year Depreciation expense Accumulated depreciation Book value at end of year 11.000.000 1.912.000 9.088.000 3.824.000 7.176.000 5.736.000 5.264.000 7.648.000 3.352.000 9.560.000 1.440.000

Operating costs crew costs stores repairs maintenance insurance administration

Operating costs: Crew costs There are several direct and indirect costs incurring when crewing of the vessel: wage costs travel costs on board victualling training (union fees) recruitment/selection and processing medical examinations social dues communication/bank charges crew accident insurance payment sick pay (standby pay) port expenses agency fees

Operating costs: Crew costs Depend on: size of the crew, employment policy of the owner/operator, ship’s flag  Flag of convenience  ITF  minimal wages for ranks on board

Chief officer, 2nd (1st asst) engineer Crew costs: Wages Bulk carriers Master Cheif engineer Chief officer, 2nd (1st asst) engineer 2nd officer, 3rd (2nd asst) engineer UK 9.000-13.000 7.000-10.000 5.500-7.000 Italy 7.000-9.000 6.500-8.500 6.000-8.000 4.500-6.000 Croatia 4.900-5.500 4.800-5.400 3.400-3.800 2.150-2.350 Poland 4.600-8.000 4.400-7.000 3.470-5.000 2.750-4.000 Romania 3.800-4.120 3.600-3.910 2.880-3.180 2.060-2.340 Ukraine 3.500-5.000 3.300-4.500 2.560-3.700 1.850-2.400 India 4.300-6.000 4.000-5.700 3.200-4.200 2.000-2.400 Philipines 3.700-6.000 3.300-4.800 2.300-3.700 1.950-2.600 Drewry; Ship management (2006), p. 112

Chief officer, 2nd (1st asst) engineer Crew costs: Wages Tankers Master Cheif engineer Chief officer, 2nd (1st asst) engineer 2nd officer, 3rd (2nd asst) engineer UK 11.000-16.000 10.000-15.000 8.000-11.000 6.000-8.000 Italy 8.000-10.000 7.500-9.500 6.500-8.500 5.000-6.500 Croatia 7.500-8.900 7.400-8.800 6.000-6.500 2.500-2.800 Poland 7.000-10.000 7.000-9.000 3.900-4.900 3.200-3.800 Romania 5.500-7.500 5.500-7.200 4.200-5.700 2.500-3.100 Ukraine 5.000-7.000 4.300-6.900 3.500-5.500 2.450-2.850 India 6.000-7.800 4.800-5.800 2.400-3.000 Philipines 4.500-6.500 3.700-4.800 2.580-3.700 2.250-2.600 Drewry; Ship management (2006), p. 113

Crew costs – depending on nationality Indian crew (8+10) Filipino crew(8+10) Wages 43.000 $/month 38.300 $/month Victualling 3.720 $/month Miscellaneous 4.300 $/month 3.830 $/month SKUPAJ 51.020 $/month 45.850 $/month Tours of duty – Officers 4-6 8-10 Tours of duty – Ratings 9-10 9-12 Normal working week - Ratings 40-44 44 Guaranteed overtime per month – Ratings 103-109 85 Leave per month served - Officers 15-22 6-10 7 Drewry; Ship management (2006), p. 118

Crew costs – depending on ship’s age Stopford M. (2009): Maritime economics, p. 228

Operating costs: Repairs & maintenance routine maintenance; maintenance of engine and equipment, painting jobs, renewal at the hold… while the ship is at sea breakdowns; mecanical failures resolved in repair yards  loss of trading time! spares; replacement parts periodic maintenance; regular maintenance at repair yards in order to maintain sea worthiness (class) and obtain certifications (necessary for insurance) classifcation societies (dry dock every 2 year, special survey every 4 years)

Repairs & maintenance  regular maintenance  less breakdowns  these costs increase with ships’s age and in average accumulate for 14% of operating costs

Operating costs: Insurance vary from ship to ship 2/3 insurance of the hull and machinery  obtained from marine insurance company 1/3 thirs party insurance  obtained from P&I club 2/3 insurance of the hull and machinery  protection of owner against physical loss or damage  depend on claimed value of the vessel and previous claim records  obtained from marine insurance company 1/3 thirs party insurance  covers against third party liabilities (injury of death of crew members or passengers, damage to cargo, collision damage, pollution etc.)  obtained from P&I club

Operating costs: General costs / Administration shore-based administrative and management costs communication costs agents in ports flag state fee

Voyage costs fuel costs port charges port dues service charges (e.g. tugs, pilotage, cargo handling) canal charges

Voyage costs: Fuel costs Depend on: fuel price engine power and efficiency design and state of the hull  hydrodynamics ship’s speed  only cca 23% of energy consumed is applied to propelling the vessel (the rest is lost for cooling the engine, lost as exhaust emissions, lost at the propeller and hull friction)

Voyage costs: Fuel costs Consumption for a Panamax bulk carrier Speed [knots] Main engine consumption [t/day] 16 44 55 15 36 45 14 30 37 13 24 29 12 19 23 11 18 Stopford M. (2009): Maritime economics, p. 235 IFO380 IFO180 MDO MGO Singapore 468.50 477.50 681.00 689.50 Rotterdam 453.50 471.50 - 706.50 Houston 460.50 473.50 738.50 Fujairah 474.50 493.00 732.50 Los Angeles 476.50 493.50 757.50 http://www.bunkerworld.com/prices, 30.10.2010

Voyage costs: Port charges Fees for the use of facilities and services provided by the port port dues service charges (pilotage, towage, cargo handling) general use of port facilities (e.g. docking, wharfage for provision of the basic infrastructure), based on: volume of cargo weight of cargo gross tonnage fo the vessel net tonnage fo the vessel What tonnage stays for?

Voyage costs: Canal charges Suez & Panama canal Suez; charges are calculated in terms of the Suez Canal net ton  charges vary for different types and sizes of ships Panama; flat rate per Panama Canal net ton is used

Port charges: Cargo handling costs costs of loading and discharging cargo CMC – cargo-handling costs L – loading charges DIS – cargo discharge costs CL – cargo claims Shipowners are concerned about this costs especially in liner service operations, in tramp market these costs are usually paid by shipper.

Bulk carrier’s costs depending on ship’s age Stopford M. (2009): Maritime economics, p. 222

Revenues Shiponwers earn revenues in several different ways  different distribution of risk and apportionment of costs between shipowner and charterer.

Revenues: Voyage charter Shipowner pays all costs (except maybe cargo handling) and is responsable for managing and running the ship, as well as of planning and execution of voyage. Calculation involves: determining how much cargo the vessel can carry establishing what price of freight rate can be charged per unit transported

Revenues: Time charter fixed daily or monthly payment for hiring the vessel The owner still takes the operational risk and the charterer takes the market risk; The charterer pays the fuel, port charges, stevadoring and other cargo related costs

Revenues: Bare boat charter the owner (e.g. a bank) finances (interests, depreciation) the ship and receives a charter payment to cover the expenses (and desired profits) charterer covers all operating costs, voyage costs and cargo related costs charterer takes operational and market risk

The freight market – Dry bulk market Costs included in the charter fee/freight rate $/day $/t Stopford M. (2009): Maritime economics, p. 182

Stopford M. (2009): Maritime economics, Profit / loss account Profit / loss: revenues – costs Stopford M. (2009): Maritime economics, p. 248

Example: Optimizing the ship’s speed Calculate the optimal ships’s speed for the following voyage: Distance: 7.200 miles Bunker costs (IFO): 475 $/t Bunker costs (MDO): 740 $/t Consumption (MDO) at sea and in ports: 1,5 t/day Port days: 5 days Penalities (per day): 27.000 $/day if cargo is not delivered within 26 days Fixed daily costs: 14.500 $ DWT: 60.000 t Freight rate: 17 $/t Port charges: 74.000 $ (cargo handling costs excluded)

Example: Optimizing the ship’s speed Consumption at sea is as follows: What is the profit at optimal speed? Speed [knots] Main engine consumption [t/day] 16 44 15 36 14 30 13 24 12 19 11

Costs & revenues: Summary Stopford M. (2009): Maritime economics, p. 220

Distinction between profit and cash Profit is a concept used to measure financial return from business. The cashflow of a company represents the difference between cash payments and receipts. Some costs are not paid in cash at the time of occurance (for example the purchase of the ship; cash transaction takes place when the ship is built, whilst the ship loses a proportion of its value by the each passing year – this is represented as depreciation in a profit / loss account).

Sources & further reading Stopford M.: Maritime economics, London, Routledge (2009), Chapter 6 Bielic - Influence of shipping company organization on ship's team work effectiveness The organisation of a shipping company, Charter parties, General average by Galvagnon/Pearson ENMM Marseille 2002