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Today's Feature

 

To fill or not to fill: the dangers of raising load factors instead of freight rates

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LOWERING rates to fill vessels has long been an unfortunate trend that continues to plague the container shipping industry.

But by using a rate regression table, we hope to show lines how easy it can be for them to see when they are making a profit or a loss on a given route. 

Data compiled in Tables 1 and 2 (shown below) illustrate why carriers should not lower rates in an attempt to fill vessels. These tables also make it clear that even though lower rates may allow carriers to take on extra cargo, it will also reduce their profitability...

The first table assumes a shipping company, on a particular voyage, can break even with a freight rate of $1,000 per TEU and a load factor of 90 per cent.

From this break-even point we can see that if the carrier seeks to increase its freight rate by $50 while maintaining a 90 per cent load factor, then it would make more profit than if it lowered its rate to achieve a higher load factor.



By raising the rate from $1,000 per TEU to $1,050, the company would earn a $50 profit per TEU with a 90 per cent load factor. But by lowering the rate to $950 per TEU, the carrier would not even make half that profit per TEU with a full ship. Full utilisation and a $950 per TEU rate would give the company a profit per TEU of only $17.



The conclusion: it’s obvious that you earn more money with higher rates and lower utilisation than with lower rates and higher utilisation.

Some may argue this is not a fair conclusion since the carrier might see its load factor fall to a level lower than 90 per cent in order to raise its freight rate. However, even if the company was to reduce its load factor by four per cent to an 86 per cent load factor to introduce the rate hike, it would still make a marginally higher profit of $19 per TEU, according to the regression analysis shown in the table.

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