A new course developed in conjunction with Rutgers University in New Jersey aimed at rising executives in the industry will examine the necessary components for an intermodal carrier to ensure a sustained profit.
Profit for an intermodal carrier is often difficult to achieve, but for all companies it is life or death. It is profit that drives investment and growth. This is the main focus of an industry course recently developed in conjunction with Rutgers University.
My background as an engineer and consultant in the industry for 50 years culminated in my becoming the CEO of Navieras de Puerto Rico (NPR), where all my years of experience came together. NPR was a true intermodal company serving the U.S. to Puerto Rico (Jones Act) and East Coast South America trade.
Over 80 percent of NPR’s costs were on land. Operations used rail and truck to collect and distribute cargo. Vessels had to operate on time, and customers service and an operating profit were essential.
After retiring from NPR, the U.S. Merchant Marine Academy (Kings Point, N.Y.) selected me to be the Crowley Chair for Logistics. I was asked to develop a course the purpose of which was to teach students what made an intermodal company profitable.
In addition to NPR, I had worked closely my entire career with Malcom McLean, the founder of containerization. At Sea-Land, McLean’s pioneering company, I was VP of Engineering and later for his United States Lines, a consultant overseeing over 200 projects worldwide.
To start my course at Kings Point, I relied on my engineering background and developed a simple formula to define the purpose and goal. This formula for operating profit is as follows: Profit = Volume x Rate – Fixed costs – (Volume x Variable costs).
During the course, each of the elements of the formula were expanded and studied in depth.
McLean had always said that in the freight business you sell, price and operate, in that order of importance. He was fond of saying that everything starts with a sale. But the largest challenge in a sale is making it at a proper price. Sea-Land, being the pioneer container carrier, had great sales and rates that were priced against break bulk carriage.
Over 20 years later at United States Lines—and in a more mature and competitive container market—McLean’s executives found problems setting rates such that even with full ships they failed to produce a profit. Sea-Land was eventually sold at a profit to Maersk Line of Denmark, whereas US Lines, in part due to rate pressures, went bankrupt.
Rates should be related to the costs of operations per the formula so as to result in a profit. But more often than not, rates are tied to competition in the market place.
Too often, carriers move cargo below cost. In many cases, costs are unknown or based on estimates rather than actual data. This is especially true when variable inland modes are factored into ocean carrier operations.
The carrier with the lowest costs sets the rates. That is what is happening in the market today.
When our team took over at NPR, it was operating five vessels serving multiple ports in the U.S. To reduce operating costs, a number of ports were closed and the number of active vessels reduced to four.
Thus, referring to the basic formula, by laying up fixed cost vessels and handling intermodal moves by the use of variable cost trucking and rail, a profit resulted without any loss of ocean volume. The company then went from a loss in year one to a profit the following year.
In the Kings Point course, along with studying operating cost, we also considered factors such as depreciation, regulatory needs, debt service, and taxes, as well as cash flows and reinvestment needed for asset replacement or service improvements.
NPR, for example, competed with several carriers that had little or no debt service. I retired after NPR was sold to a strategic buyer at a premium price, but the buyer’s resulting large debt service was the principal reason that several years later NPR went bankrupt.
The carriers with low debt service are still in the trade and have made substantial reinvestments in ships, facilities and equipment.
Students at Kings Point were also asked to develop strategies to address specific cost areas and present on subjects like air cargo, container standards, worldwide rail and truck operations, and the newly expanded Panama Canal.
Recently, I joined Rutgers University to duplicate the Kings Point course in a shorter form aimed at rising executives in the intermodal industry. The purpose, however, remains the same: to understand the necessary components for an intermodal carrier to ensure a sustained profit.
A full description of the course can be found here and any questions can be directed to katims@aol.com or sarmad@ soe.rutgers.edu.
Ronald Katims
Instructor, Rutgers Center for Advance Infrastructure and Transportation
New York, N.Y.