How to rethink pricing at container terminals

12 January 2016 06:25 am

An innovative approach that creates incentives for efficiency could generate up to US$ 3 billion in value for operators and their customers


By Timo Glave and Steve Saxon
Companies in many industries have long charged different customers different prices. For example, metro transit operators offer lower off-peak fares to balance loads across the day; cinemas charge more for 3-D movies; airports let you pay for a fast track to jump the line; theme parks sell family tickets; and a two-hour massage costs you less than two times what a one-hour massage does.

Yet most container terminals charge customers as they have since the 1960s—a flat rate per container moved. To be sure, there are a couple of variables; operators charge more for laden boxes than for empties, and many charge less for transshipment than for import and export cargoes. By and large, however, terminal pricing is fairly simple: “a hundred bucks a lift.”

Does one size fit all? In the examples above, we see two kinds of differences. Certain industries capitalize on their customers’ different levels of price sensitivity; for a variety of reasons, some people or businesses will pay more for a given good or service than others will. Companies also reward customers for efficient performance by offering benefits such as volume discounts.

This second kind of variable pricing interests us most, because it benefits both terminal operators and their customers, the container lines—the proverbial win-win. The dominant trend in shipping today, behemoth vessels, is putting strains on terminals and exposing the defects of uniform pricing. Here we propose an innovative pricing system. It is untested and surely not yet right in every detail, but represents a thesis that operators and lines (and alliances too) can debate.Much remains to be worked out, but we estimate that if the industry instituted variable pricing, the improvement in productivity would be worth $2 billion to $3 billion annually.



Bigger is not always better
Container lines continue to invest in ever-larger and better-designed vessels, which offer unmatched economies of scale and fuel savings. Lines are also forming bigger alliances, which make filling these large vessels easier. As a result, ship sizes are increasing on the main Asia–Europe trade route, causing other, slightly smaller vessels to “cascade” across other trades. Terminals are now seeing larger vessels than ever before. In 2010, the biggest container ship in the world had a capacity of 14,000 20-foot-equivalent units (TEUs). Today, the largest is almost 20,000 TEUs. By 2020, more than 100 vessels in service will have a capacity of over 18,000 TEUs. The current drop in fuel prices will not break this trend, since larger vessels are more economical even at today’s levels.

These big ships confront terminals with new challenges. As vessel sizes increase, terminals need to invest in new cranes, additional yard space and equipment, dredging, and strengthened quay walls. Larger ships also take up more space, naturally. When they’re delayed, the knock-on effect is bigger. Their boxes also take longer to unload because the crane trolley must move farther to reach the opposite side of wider vessels, reducing efficiency.
All that might be worthwhile if the big ships brought in new business or more business. But the number of containers loaded and unloaded onto each vessel hasn’t increased much (Exhibit 1). Terminals are not receiving more income per ship, and their investments are not generating a sufficient return. It’s no surprise that some terminals, in their frustration, have gone so far as to push for regulatory oversight of vessel sizes. In their view, container lines are demanding more without paying more.



Pricing to the rescue
To bridge the gap, terminals should price to encourage productive behavior by their customers. Crucially, productivity also creates value for the lines, as it helps them reduce port times and thus cuts costs and makes schedules more reliable. The scope for mutually beneficial improvements is significant. As a terminal operator notes, “We can achieve 150 moves per hour off a vessel from one leading line but only 100 per hour off a same-size vessel from one of the alliances.” The reason: “better stowage and fewer errors” in the former.

Terminals can in fact develop a new pricing system (Exhibit 2). Critically, the proposed model is revenue neutral; increases in some areas offset decreases in others.




Key elements include:

• Berthing fees based on a vessel’s length—and lower charges per box. If terminals want more moves per call, they should provide an incentive. Ships occupy berth space unproductively for several hours per call, on arrival and before departure. The line should pay for this time. Airports successfully levy a fixed charge based on aircraft size and an additional per-passenger fee; this encourages larger aircraft and better use of limited slots and gates. Terminals can do the same through a fixed berthing fee and additional charges for boxes moved. Lines would pay about as much as they do now if they didn’t change their ways—but if they did redesign their networks to unload more boxes from each vessel, they would wind up paying less.

 

• Extra payments for popular berthing slots. In many terminals, all of the lines want to arrive at the same time—for example, Friday and Saturday, to catch China’s weekly exports. Terminals could charge more for berthing slots in peak times.

 

• Discounts for efficient stowage. The stowage of a vessel (the placement of each container that needs loading or unloading at a given port) is a critical driver of efficiency. Yet today, terminals charge as much for an efficient stow (with the result that several cranes load or unload boxes from locations across the vessel at the same time) as they do for an inefficient one (with many boxes to load or unload from adjacent bays, all in one part of a vessel, causing what the industry calls a “long crane”). Similarly, terminals charge the same for a box that needs only a short crane move (for example, from an above-deck location close to the quay) as for a long move (say, from below deck on the far side of the vessel). Yet the latter can take twice as long. Quicker handling thanks to more efficient stowage creates value for lines too, as turnaround times go down. Lines can depart from ports at the scheduled times more often.

 

• Charges for delays and inaccuracies. Providing an accurate and timely stowage plan is important to help a terminal plan its crane deployment and yard work. Yet stowage plans generally contain errors (boxes that are not where they ought to be), often arrive late, and are amended at the last minute. Why shouldn’t terminals levy moderate charges for errors and late information if they create inefficiencies?

 

• Rebates when terminals are at fault. Obviously, accountability should not be all on one side. Suppose a terminal underdelivers—for example, a berthing slot isn’t available as promised, crane productivity is lower than agreed, or a vessel isn’t stowed to a line’s requirements. The terminal should offer the line a rebate to recompense it for delays and, more important, to get the reliability that both lines and terminals crave.

We have run simulations of this model, using the assumptions outlined in Exhibit 3. In a scenario in which lines follow their incentives, the cost per vessel call would drop. If lines allow their productivity to slip even further, their costs would rise. The new pricing model is not and must not be a disguised price increase.

(Timo Glave is an associate principal in McKinsey’s Copenhagen office, and Steve Saxon is a principal in the Beijing office)