Contract Guidelines


TSA 2008-09 Cost Recovery Program

TSA member lines announced in November 2007 their recommended rate program for the 2008-09 service contract season.

Carriers anticipate continued increases in inland transport and container equipment positioning costs, and a continued cargo and equipment imbalance of more than 2:1 in the transpacific market despite slowing eastbound traffic and increased export traffic. A number of carriers and alliances have individually reallocated ship capacity and container equipment to other trade lanes where cargo demand and revenues are greater, in order to optimize supply/demand levels in light of high operating costs. Fuel-related costs in particular jumped by more than 65% in 2007 alone, while container lines have lagged in collecting full, floating bunker fuel surcharges over time.

Based on an internal analysis and forecast of carrier operating and network costs in the coming contract year, lines are recommending the following:

- Freight rate increases of US$400 per 40-foot container (FEU) for U.S. West Coast port-to-port and door cargo, and US$600 for all other traffic, including intermodal and U.S. East Coast all-water shipments.

- Restoration of a floating bunker fuel surcharge – broken out from base rates and adjusted on a regular basis to reflect bunker fuel price fluctuations – in all contracts that have had bunker surcharges mitigated, capped or folded into base rates.

- A US$400 per FEU peak season surcharge will be applied to ashipments on TSA member line vessels during the period of June 1 through October 31, 2008, subject to adjustments relating to the timing, duration and strength of the 2008 peak.

TSA lines also intend to modify the timing of service contract extending 2008-09 contracts by an additional two months, to expire on June 30, 2009. This will give shippers the benefits of two additional months at 2008 contract rates, and will also mean that future 12-month contracts will have July 1 start dates.

Finally, carriers plan to include provisions in upcoming contracts that will enable them to recover increased West Coast trucking costs which may arise from legislative and/or regulatory changes, such as implementation of the transport worker identification card (TWIC) and the proposed Los Angeles-Long Beach harbor truck plan.

How Rate and Contract Guidelines are Developed

Throughout the year, TSA member shipping lines conduct an ongoing review of the Asia-U.S. freight market. They study a broad range of economic indicators on both sides of the Pacific (GDP growth, manufacturing and retail inventory levels, wholesale prices, retail sales, consumer confidence and spending, exchange rates, trade and manufacturing investment patterns, and so on), along with specific trends in the movement of major commodities in the various country markets. Lines next take into account the anticipated relationship between available vessel/equipment supply and cargo demand for the coming year — whether space and equipment availability will be tight or not, especially during peak shipping periods.

Carriers also conduct individual, internal analyses of their end-to-end operating costs, from the time a container is provided to the customer for loading or received at the port, to the point of delivery. This can involve the minimum basic port-to-port ocean transportation, or it can be part of an ongoing, full-service supply chain partnership covering value-added shipment planning, tracking, consolidation and distribution services.

Terms and price for these services have typically been set out in 12-month service contracts, which run from May 1 through April 30 of each year (although some contracts are timed to calendar or fiscal years, and may run for shorter or longer time periods, depending on terms, and a new start date is planned beginning with 2009 contracts - see above). More than 90% of total Asia-U.S. container traffic moves under such service contracts, although a small number of contracts may have different start dates and longer or shorter durations. Cargo that does not move under contract is covered under the publicly posted tariffs of the individual shipping lines. Most contracts involve a specified volume commitment in exchange for favorable service terms and price.

All rates and service contracts are negotiated individually by container lines and their customers. Some contracts, in addition, are confidential by mutual agreement of the parties. TSA provides guidance for its member lines through its research capability and the limited authority for members to meet and exchange information. Specifically, TSA adopts an annual program of voluntary, non-binding guideline rates and contract terms which members and carriers outside the agreement may follow or not as they see fit according to their needs.

TSA announces its annual rate programs for upcoming May 1 contract renewals during the previous October or thereabout, in order to provide ample time for negotiation and shipment planning, even with the few contracts that have earlier renewal dates. Most contract negotiations begin in February and March, after carriers and their customers have had an opportunity to reassess market prospects following the traditional December-February “slack” season. A brief peak period appears in March and April, with “back-to-school” merchandise that will be sold during the summer. The primary peak season runs approximately from July through October, when holiday inventory is shipped, with carriers beginning to ramp up service levels during June.

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