Contract Guidelines


Managing Market Uncertainty

Sustained volatility in the Asia-US cargo market has delayed development of TSA's annual service contracting program for 2012-13. As U.S. economic and retail indicators remain inconclusive, TSA lines are focusing in the short-term on recovering rising costs and reversing rate erosion seen in past months.

In November 2011 TSA member carriers announced a guideline recommended increase in revenues of a minimum US$400 per 40-foot container, effective January 1, 2012, as an interim step prior to rolling out an annual service contracting program. The guideline applies to all shipments moving under individual carrier tariffs, as well as service contract cargo in all commodity segments where contract provisions permit.

Rather than adopting a single formal guideline increase, lines will individually pursue various approaches to interim cost recovery and revenue restoration, whether in the form of across-the-board general rate increases, peak season surcharges or other mechanisms, depending on each carrier’s unique situation.

In all cases, the objective is to meet expected cargo demand growth and begin reversing 2011 revenue losses resulting from slower than expected demand; ongoing market uncertainty; rising inland transport, cargo handling, equipment and other costs; and a downward spiral of tariff rates in Q1 2011 that spilled over into current 12-month service contracts.

Lines will additionally review current rates and contracts to identify opportunities for raising the hardest-hit rates prior to January 1, 2012. A TSA 2012-13 service contract program is expected to be finalized at yearend or early in 2012.

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 have 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).

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 has typically announced its annual rate programs for upcoming May 1 contract renewals during the previous October or thereabouts, 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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