The Balancing Act: Security Versusglobal Commerce

Chapter 8

Global Transportation

THE BALANCING ACT: SECURITY VERSUSGLOBAL COMMERCE

Prior to 9/11, shipments could clear U.S. ports, gateways, and airports in a matter of hours. Today’s security measures require more cargo inspection, more paperwork, and longer time to clear the U.S. borders. Ships may be stopped and inspected by security personnel and cargo containers opened and the contents checked. Cargoes that might be used by terrorists, as well as shipments originating from suspected terrorist areas in the world are given close scrutiny.

A delicate balance exists between security and global commerce. That is, if security is too tight it could stop or seriously impede global commerce. Ports, gateways, and airports could become so congested with inspections that shipments could take months to clear customs.

Global shippers realize the tightened security measures are here to stay, and they are adjusting their shipping processes and inventories to allow for the added transit times.

EXTENT AND MAGNITUDE OF TRADE

Overview of the North American Free Trade Agreement (NAFTA)

NAFTA establishes free trade between Canada, America and Mexico. The Treaty states the objectives of the three Countries is based on the principles of an unimpeded flow of goods, most-favoured- nation (MFN) status, and a commitment to enhance the cross-border movement of goods and services. MFN status provides the lowest duties or customs fees, if any, and simplifies the paperwork required to move goods between the partner countries.

South Africa is part of the SADC (Southern African Development Community) and the African Free Trade Zone which is similar to NAFTA.

Example: A unique situation exists for truck movements to and from Mexico. Mexican trucks are permitted to operate in the United States within a 20-mile (36 km) border zone. U.S. trucks are likewise restricted to border zone operations in Mexico. These restrictions add additional delay and shipment hand-offs for U.S-Mexico trade. As Figure 8.1 depicts, southbound traffic moves from the U.S. shipper by a U.S. trucking company to a freight forwarder/Mexican Customs broker for inspection and document filing. The forwarder contacts a Mexican drayage carrier to haul the load across the border to the Mexico Customs for inspection and approval. The load is then transferred to a Mexican carrier, who hauls it to the Mexican consignee.

For northbound moves, the Mexican carrier moves the load to the border where a Mexican customs broker files the appropriate documentation for U.S. entry and arranges for a drayage carrier for the cross-border move. A U.S. Customs broker files the appropriate documentation with U.S. Customs for inspection and approval. A U.S. carrier then transports the load to the U.S. consignee.

GLOBAL TRANSPORTATION PROVIDERS

Ocean Transportation

The specific types of carriers that transport U.S. ocean-borne trade are liners, tramps, and private vessels. Each type provides specific service features to the international transportation user as discussed below.

LINERS

Liners are ships that ply fixed routes on published schedules. They typically charge according to published tariffs that are either unique to the ship line or are made by several lines in a particular trade route. Liner services are either container or break- bulk types.

Freight must be moved to the liner company’s terminal at the port after the shipper has arranged for the freight booking or reservation. This freight is loaded by machine if bulk, or crane if containerized, and stowed in accordance with ship weight and balance requirements.

Container movement is gaining over the traditional break-bulk (general cargo) method of ocean carriage. When goods have to be heavily crated and packaged for break-bulk movement, a container often provides much of that needed protection. Further, whereas a break-bulk ship might require many days to unload and load its cargo by small crane and manpower, an entire container ship can enter, unload, load, and clear a port in less than 12 hours. Such speed has brought about labor savings to both the shipper and the liner company, as well as increased ship (and capital) utilization. Because a ship is only earning revenue at sea, it is easy to see why containers have become a dominant form of packaged-goods shipping.

Container service, although saving port and ship time, has brought about different operating and management concerns for the ship company. For one, this service requires a large investment in containers because, while some are at sea, many others are being delivered inland or are being loaded there for movement to port. Although a ship might carry 1,000 containers, an investment of 1,500 to 2,500 containers is necessary to support that ship. Another concern is control over the containers. Previous shipping line managements were port-to-port-oriented. With inland movement of containers, control over this land movement becomes a necessity. The container itself is a large investment and is attractive to thieves in areas of warehouse or housing shortages.

Another type of ship found in liner services is a roll-on/roll-off ship, often referred to as a RORO ship. These ships carry trucks, trailers, and construction equipment much like a multilevel ferryboat. When in service with trailers, a RORO ship is like a container ship except that it has the wheel chassis attached to the trailer body en route. RORO ships are especially useful in carrying heavy construction equipment because they are unable to maintain an even keel while the equipment is being loaded and unloaded. This stability allows loading and unloading without the use of dockside cranes that may not even be available.

TRAMPS

The tramp ship is one that is hired like a taxi or leased auto. That is, it is a bulk or tank ship that is hired on a voyage or time basis. On a voyage basis, a U.S. exporter of grain will seek a tramp ship that will become empty at a desired U.S. port. It will then be hired for one-way movement to a foreign port. Port fees, a daily operating rate and demurrage

(a charge payable to the owner of a chartered ship in respect of failure to load or discharge the ship within the time agreed.), will be part of the charter contract. Time charters are usually longer-term charters in which the shipper will make or arrange for more than a one-way move. Such charters are made with or without crews being provided by the shipowner.

PRIVATE VESSELS

Private ships are owned or leased on a long-term basis by the firm moving the goods.

Many oil ships fit this category, as do automotive and lumber vessels. The economics of this form of ship movement are similar to those of private motor trucks.

Another element of interest in ocean shipping is that of ship registry. Although a ship might be U.S.-owned and ply a route between the United States and the Persian Gulf, it might be registered in and fly the flag of Liberia or Panama. These nations represent what are called flags of convenience. That is, the owners derive certain benefits of taxes, manning, and some relaxed safety requirements by being registered in those countries, rather than in the United States, Canada, or wherever. The top flags of convenience nations include Panama, Liberia, the Bahamas, Greece, and Malta.

Air Carriers

Just as with domestic moves, air transportation offers the global transportation user speed. The fastest method of movement for the non-North American international shipment is air carriage. Four types of air carriers are available for international shippers: air parcel post, express or expedited service, passenger, and cargo.

AIR PARCEL POST

Air parcel post service is provided by the postal service of a country and is designed to handle small packages. The postal service contracts with an air carrier to pick up and deliver the item from one country to another. There are restrictions as to the size and weight of the shipment handled by air parcel post, and these restrictions vary by country. In the United States, the maximum size permitted is 274cm of length and girth (measurement around the middle of something) and no more than 32 kg of weight.

EXPRESS OR EXPEDITED SERVICE

Express or courier service is provided by air carriers and is generally restricted to small shipments weighing less than 32 kg. Speed is the essential characteristic of this service, with next-day or second-day delivery a standard service level. Examples of major carriers providing this service include Federal Express, United Parcel Service (UPS), and DHL.

PASSENGER CARRIERS

Regularly scheduled international passenger flights haul freight in the “belly” of the plane. These carriers focus on the movement of passengers, but the excess capacity in the nonpassenger compartment permits the transporting of cargo along with passengers. Cargo capacity and cargo size are limited by the size of each plane, but the regular schedules afford the use of numerous flights between origin and destination. Examples of U.S. international passenger carriers that transport cargo are American, Delta, Northwest, and United.

ALLCARGO CARRIERS

All-cargo carriers specialize in the movement of freight, not passengers. The air planes are outfitted with larger hatch openings, cargo compartments, and floor- bearing ratings. Many air cargo planes have mechanized materials-handling devices on board to permit the movement of heavier cargo inside the plane. Some of the larger planes are capable of transporting a 40-foot container (FEU), trucks, and other motor vehicles. Generally, these carriers haul heavier shipments weighing more than 32 kg. BAX Global, Federal Express, and UPS Air are examples of U.S. all- cargo carriers.

Ancillary Services

Other service firms exist in addition to the basic modes that are available to the international transportation user. These ancillary service companies provide a variety of functions that offer the user lower costs, improved service, and/or technical expertise.

AIR FREIGHT FORWARDERS

International air freight forwarding firms operate in a manner similar to domestic air freight forwarders. The air freight forwarder books space on an air carrier’s plane and solicits freight from numerous shippers to fill the booked space. The air freight forwarder offers the shipper of small shipments a rate savings resulting from the advanced purchase of space. In addition, the air freight forwarder offers convenience to the shipper, especially when more than one airline must be used in an interline setting, or when ground transportation is necessary at one or both ends of the air move.

INTERNATIONAL FREIGHT FORWARDERS

These firms arrange movement for the shipper. They do not necessarily act as consolidators or earn their revenues in the manner like domestic forwarders. International freight forwarders act as agents for shippers by applying familiarity and expertise with ocean shipping to facilitate through movement. They represent the shipper in arranging such activities as inland transportation, packaging, documentation, booking, and legal fees. They charge a percent of the costs incurred for arranging these services. They play an invaluable role for shippers who are not familiar with the intricacies of shipping or those who do not have the scale or volume to warrant having in-house expertise in this area.

NONVESSEL OPERATING COMMON CARRIERS (NVOCC)

Nonvessel operating carriers assemble and disperse less-than-container shipments and move them as full-container shipments. They serve much the same role as the domestic freight forwarders. A shipper moving a small item would otherwise have to move it via break-bulk ocean carrier or air freight. The NVOCC consolidates this shipment with many others and gains the economies of container movement. Some NVOCCs operate from inland cities, where they unload inbound containers and distribute the goods to consignees. They in turn solicit outbound freight, consolidate shipments into the containers, and move them back to a seaport for outbound movement. The steamship line gains opportunities from broadened territorial traffic, and it gains services and control over containers from the NVOCC solicitations. Shippers and receivers gain from the shipping expertise and processes of the NVOCC, as well as from expanded and simplified import and export opportunities.

SHIP BROKERS

These firms act as middlemen between the tramp shipowner and a chartering shipper or receiver. The brokers’ extensive exposure, contacts, and knowledge of the overall ship market make them valuable parties in these arrangements. They are compensated on the basis of a percentage of the chartering fees.

SHIP AGENTS

Ship agents act on behalf of a liner company or tramp ship operator (either owner or charter company) to represent their interests in facilitating ship arrival, clearance, loading, unloading, and fee payment while at a specific port. Liner firms will use agents when the frequency of sailings are so sparse that it is not economical for them to invest in their own terminals or to have management personnel on site.

LAND BRIDGES

These services have become significant parts of global shipping over the past decade. Their development is largely due to the carrier efficiencies they provide that also benefit the shippers.

The land bridge system consists of containers moving between Japan and Europe by rail and ship. That is, originally, containers were moved entirely by ship between Asia and Europe across the Pacific and AtlanticOceans and through the Panama Canal. Ship fuel and capital costs, as well as trouble in Panama, created economies in moving the containers by water to a U.S. Pacific Coast port, then by entire trainload across the United States to another ship for transatlantic crossing to Europe. This system reduces transit time and liner company ship investment.

RATE MAKING IN GLOBAL TRANSPORTATION

Rate making is presented from the standpoint of three major transportation

supply sources available to shippers: air, liners, and chartered tramp ships.

Shipping Conferences

A steamship conference is a voluntary organization of vessel-operating carriers whose main function is to set acceptable rates for steamships and shippers. The goal of the conference is to maintain a stable market and fair competition among carriers. Another important element of the steamship conference is to administer operating rules that guarantee the shipper a consistent level of service from participating lines.

Global Air

AIR CARGO RATE

Air cargo rates are based on the value of service or the cost of service. The value of service, as discussed in Chapter 2, “Transportation Regulation and Public Policy,” is demand based and considers the sensitivity of the cargo being shipped to freight rates. The less sensitive cargo is to rates, the higher the rate will be. On traffic lanes where demand is strong and plane capacity is limited, the air rates will be high, and vice versa for traffic lanes where supply exceeds demand. Also, products with high prices or emergency conditions surrounding the move will be charged high rates because the freight rate is a small portion (less than 1 percent) of the landed selling price.

Cost factors enter into air carrier pricing of cargo. Given the limited cargo- carrying capacity of a plane, space is a premium. The utilization of this space is related to the density of the cargo, with low-density cargo requiring more space per weight unit than high-density cargo. Rates are based on a product density of 164 kg/m^3. For shipments with lower densities, the air carrier calculates the weight based on the shipment’s number of cubic feet times the standard density of 10.4 pounds per cubic foot. For shipments with densities greater then 164kg/m^3, the actual weight is used.

Container rates are also available for cargo shipped in a container. The rate is cost based, rather than value of service or commodity based. The rate applies to a minimum weight in the container. Some carriers offer a container rate discount per container shipped over any route of the individual carrier. The discount is deducted from the tariff rate applicable to the commodity being moved in noncontainerized form and a charge is assessed for returning the empty container.

LINER RATE MAKING

Liner operation, as with most ship operation, is largely fixed and common in nature.Approximately 80 to 90 percent of total cost is fixed and 10 to 20 percent is variable.Liner companies tend to have large overhead costs in the form of managements thatare necessary for solicitation purposes.

A majority of the total costs of operating a ship are fixed. Because cargo loading, unloading, and fuel are the only primary variable costs, the ship’s operation cost is roughly the same regardless of the commodity hauled. The problem of determining a cost per kilogram entails a difficult fixed-cost allocation process, which can be arbitrary at best. Ship operators will often determine unit costs in terms of cost per cubic metre of ship space so as to better evaluate and price for the range of commodities handled.