Contract Guidelines


Interim Revenue Recovery: The Emergency Revenue Charge

TSA member lines have announced an emergency revenue program for the first half of 2010, in an effort to obtain critically needed revenue prior to the usual service contracting season that begins for most carriers and their customers in May 2010. Effective January 15, 2010, the lines have adopted a voluntary guideline Emergency Revenue Charge, in the amount of:

- US$320 per 20-foot container (TEU)

- US$400 per standard 40-foot container (FEU)

- US$450 per high-cube FEU; and

- US$505 per 45-foot container

The ERC is an interim charge that is distinct from the previously announced general rate increase (GRI) decribed below. The ERC is intended to expire upon execution of new contracts in 2010.

TSA lines will engage with customers in various ways depending on how their contracts are structured, applying the ERC where contract terms allow, and seeking to negotiate reopening of contracts that do not provide for interim adjustments. The TSA guideline recommends that early bids or new contracts with early start dates prior to May 1 be quoted with the full, previously announced GRI.

The 2010-11 Revenue Improvement/Cost Recovery Program

On October 6, 2009 TSA lines announced their guideline program of rates and charges reflecting a severely depressed market environment in which cargo demand is down nearly 20%, rates are down by $1,000-1,200 and operating costs are up relative to a year ago.

Specific elements of the TSA revenue program, to take effect with renewal of current contracts – most of those over May and June 2010 – include:

- A general rate increase (GRI) of US$800 per 40-foot container (FEU) for local West Coast and Group 4 Western coastal states cargo, and US$1,000 per FEU for intermodal and U.S. East and Gulf Coast all-water cargo, with per formula increases for other equipment sizes.

- A US$400 peak season surcharge (PSS), effective from August 1, 2010, to address higher cargo handling, equipment positioning and contingency planning costs during periods of peak cargo volume.

- Full collection of fuel and other accessorial charges.

While the scheduled increases are significant, when viewed in the context of volume and rate declines seen in early 2009, they will at best return base freight rate levels to where they were in late 2008. Rates at that time were barely compensatory, if at all, for most carriers in the trade, let alone profitable. Container lines have increasinglty consolidated capacity and services in vessel-sharing alliances and reconfigured routes and schedules. Many have delayed or canceled new vessel orders, returned chartered ships early and, where necessary, laid up ships in ports worldwide.

Independent analysts at AXS-Alphaliner estimate that the top 17 global container lines lost a cumulative $6 billion in the first half of 2009 alone, with many forced to seek fresh capital in financial markets or in some cases government aid in order to stay afloat. Drewry Shipping Consultants estimates carriers will lose at least $20 billion for the full year in 2009, due to reduced demand and severely depressed rates.

At the same time, the basic Asia-US market characteristics are unchanged - a two-to-one cargo and equipment imbalance; continued fuel price volatility now on an upward swing; rising shoreside infrastructure and environmental costs; and sustained rail pricing power in the intermodal segment. Slow demand, tariff and contract rates that hit near-record lows in early 2009, and rising costs have together constrained carrier cash flows. In turn, lines have been forced to respond with internal cost-cutting in areas such as customer service, documentation or equipment management.

TSA lines voiced cautious optimism about the hopes for an improving Asia-U.S. freight market in 2010-11, but stressed that it will remain a year of significant uncertainty, in which carriers must concentrate their efforts on conserving cash, building a stronger balance sheet, and establishing a sustainable rate environment.

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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