Journal of Transport Geography 8 (2000) 181±195

www.elsevier.com/locate/jtrangeo

Economies of scale in large containerships: optimal size and

geographical implications
Kevin Cullinane a,*, Mahim Khanna b
a
Department of Shipping and Transport Logistics, Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong
b
Maersk (Australia) Pty. Ltd., Australia

Abstract
In recent years, liner shipping has experienced an explosion in containership size. This is explained by the economies of scale in
utilising such ships. This paper presents a model which quanti®es the economies of scale in operating large containerships. A
sensitivity analysis is conducted to test the e€ect of various input scenarios and the results analysed to determine optimal contai-
nership size with respect to di€erent operational scenarios. Inferences are then drawn concerning the optimal deployment of the
existing ¯eet of large containerships, likely future trends in containership size and deployment and the impact these trends will have
upon container operations, logistical systems and ports. Ó 2000 Elsevier Science Ltd. All rights reserved.

Keywords: Containerisation; Shipping; Liner shipping; Economies of scale

1. Introduction particular attention on the ongoing rationalisation of

For a long time, ships involved in the carriage of bulk
liquid and dry cargoes have dwarfed containerships. By
transforming traditional heterogeneous liner cargoes
into homogeneous container cargoes, the adoption of
the container concept has created a revolution in ports
which has permitted liner shipping to bene®t greatly not
only from economies of scale in cargo handling but also
in ship size. Despite the availability of suitable tech-
nology, it is somewhat perplexing why the bene®ts ac-
cruing from this second source of economies have never
been reaped to the same extent as was the case with the
low value bulks.
The purpose of this paper is to develop a model which
quanti®es the economies of scale in operating large
containerships. This facilitates the evaluation of the
potential savings in unit cost which are derived from
increasing containership size. Section 2 of this paper
places the development of this model in context by
presenting a brief historical background to trends in
container shipping. This is followed in Section 3 by an
overview of more recent developments, especially in re-
lation to the size of ship employed. Section 4 focuses
*
Corresponding author. Tel.: +852-2766-7410; fax: +852-2334-
1765.
E-mail address: skcull@polyu.edu.hk (K. Cullinane).
the liner shipping sector. Because it is this restructuring
of the market that has made the deployment of large
containerships in recent years actually viable, this
special treatment is justi®ed. Section 5 presents the
conceptual form of the model and the assumptions
which underpin it. This is followed in Section 6 by a
presentation of the results of the model. Section 7 draws
some generic conclusions and presents a di€erentiated
analysis of the implications of these results for liner
shipping operators, for load centres and for ports and
terminals.
2. Historical background
Throughout the 1960s and 1970s, containerisation
made enormous inroads into the carriage of traditional
break bulk cargoes. Container penetration (de®ned as
total container cargo carried as a percentage of contai-
nerisable cargo) was estimated at 75% in 1984, with all
three major East±West routes (Trans-Paci®c, Trans-
Atlantic and Europe±Far East on which the greatest
volume of containers are carried) achieving levels of
over 95% (Graham and Hughes, 1985). The growth in
general cargo globally and the proportion which is
containerised is shown in Fig. 1. This ®gure illustrates
that virtually all of the growth in the carriage of general
cargo accrues to the container trades; as the result of

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182 K. Cullinane, M. Khanna / Journal of Transport Geography 8 (2000) 181±195

that container shipping plays an especially crucial role in

Fig. 1. Global general cargo and containerisation growth. Source:
Drewry Shipping Consultants (1995) and Containerisation Interna-
tional Yearbook (various issues).
either even greater levels of container penetration or the
development of more containerisable cargoes.
The commercial sensitivity of the liner shipping in-
dustry has led to a vacuum in the availability of pub-
lished data which allows the precise calculation of the
share and/or contribution of liner cargoes (now virtually
synonymous with containerised cargoes) to the overall
®nancial health of the shipping industry. Various esti-
mations have suggested that, for example, while liner
shipping accounts for only about 10% of total tonne±
miles at sea, it also earns 50% of the total freight revenue
which accrues to the shipping industry (Jansson and
Schneerson, 1987). It has also been calculated that
container shipping accounts for about 40% of total
world trade in value terms but barely 7% in volume
(CSR Consultants, 1989). A more recent estimate is
provided by Ma (1998) whose ®gures on world seaborne
trade and the extent of containerisation imply that
container shipping accounts for approximately 13% of
all seaborne trade by volume and 49% by value. Such
®gures provide de®nitive evidence, if any were needed,
the carriage of higher value cargoes.
If the pattern of container trac growth is analysed
using the product life cycle concept, the characteristic
phase of market initiation with slow growth in demand
is, as expected, followed by market acceptance and ex-
plosive growth. Expectations might then lead, at some
stage, to the tapering-o€ of the market associated with a
natural or maximum market penetration, demand and
sales volume once it has reached maturity (Gilman,
1983). Although this market saturation in global con-
tainer trac has been much anticipated for some time,
the maturity phase of the product life cycle, concomitant
with a slowing in the marketÕs growth rate, has not yet
materialised.
Hayuth (1987), in a well-known alternative analysis
of the evolution of the containerised shipping market,
segregates the era of containerisation into two discrete
phases, as described in Table 1.
3. Recent developments
It is widely acknowledged that since 1995, the con-
tainer shipping industry has entered a new phase where
the emphasis has once again shifted towards techno-
logical advancement and the associated importance of
reaping economies of scale in ship size (see Drewry
Shipping Consultants, 1996; McLellan, 1997; Cullinane
and Khanna, 1999; Wijnolst et al., 1999). Table 2 sum-
marises the history of growth in containership size as
embodied in the `generations' which are often applied to
explain the development of containership technology.
Despite the fact that maximum containership size
remained constant for the period 1984±1995, the size
pro®le had been gradually skewing to the right as time

Table 1
Phases in the development of the containerisation concept

Phase I As the result of technological innovation, massive increases in the size of both ships and terminals, continuing until the
mid-1980s. During this phase, the average size of containership increased in regular steps, with four generations of ship accepted
as comprising crucial developmental leaps in the market. Maximum ship size levelled-o€ at 4400 TEUa with the ®rst ship of this
size built by US lines in 1984 (Containerisation International Yearbook, 1996)
Phase II Rather than technological innovation, this phase was characterised by organisational and, in particular, logistical reorientation.
This revolutionary conceptual approach implied that the transportation function formed merely one element within the wider
concept of a totally integrated distribution system. This concept increasingly emerged amongst informed market-leading
operators to underpin the movement of freight. The Containerisation concept and the technology associated with it was pivotal
to the emergence and development of the intermodal distribution chains which exempli®ed such an approach (Hayuth, 1987).
This new approach became embodied in and synonymous with the implementation of logistical systems and the adoption of
such global business practices epitomised by ÔJust in timeÕ (JIT) production, greater ¯exibility in sourcing and manufacturing
and the outsourcing of business functions, all of which were facilitated by the industryÕs reorientation (Drewry Shipping
Consultants, 1996). As such, this phase necessitated a major upheaval in the attitudes and structure of all participants in liner
shipping and combined transport operators involved in maritime distribution (shipping companies, ports, shippers, agents,
freight forwarders, etc.)
a
Twenty-foot Equivalent Unit ± an imperial measure of a standard size of container which is used as the basis for measuring the container carrying
capacity of specialised containerships, irrespective of the mix of sizes of containers that may actually be carried on-board.
 K. Cullinane, M. Khanna / Journal of Transport Geography 8 (2000) 181±195
Table 2
Developments in containership design and sizea
Year Class/type Maximum
capacity (TEU)
1964 1st Generation 1000
1967±1972 2nd Generation 1500
3rd Generation 3000
1984 4th Generation 4500
1995/96 onwards 5th Generation Over 6000
a
Source: Derived mainly from Gilman (1983) and Pearson (1988).
progressed because of the average size increasing con-
sistently within this constraining maximum. In addition,
the ®rst post-Panamax ships were built for American
President Lines (APL) in 1988 and by 1994, four com-
panies (APL, Sealand, Hyundai and Evergreen) were all
operating post-Panamax tonnage (M uller, 1995).
In search for a competitive advantage, over the past
®ve years the market has experienced a spectacular in-
crease in the maximum size of containership as the de-
cade-long glass barrier to size increases has been
shattered with 21 ships over 6000 TEU now in the
market, including the 8700 TEU So®e Maersk. Indeed,
there are seven other ships of 8700 TEU currently
scheduled for delivery to the same company prior to the
end of 2001. In response, ports and terminals are also
having to respond to market demand by making large
and rapid investments in infrastructure to cope with
these new vessel sizes.
The scale of this revolution is illustrated by the fact
that at the start of 1995, only 9.6% of container slots
were in ships of over 3500 TEU, but that at the same
time, 58.5% of the slot capacity on order was in ships of
this size (Containerisation International, 1995). As of
April 1999, 21.8% of existing slot capacity now rests in
ships of over 3500 TEU and of the slot capacity on
order, 58.7% is in ships of 3500 TEU or larger. In
consequence, not only has there been a signi®cant shift
towards larger ships in the past ®ve years, it is inevitable
that it will continue into the future. A size breakdown of
the TEU capacity of the worldÕs containership ¯eet is
illustrated in Fig. 2.
The size limitations for the Panama Canal, (length
294 m and width 32.3 m) has strongly in¯uenced de-
velopments in containership size. Most ships over 1500
TEU and all ships of over 2500 TEU have a Panamax
width of 32.3 m (Pearson, 1988). In order to increase
capacity above 2500 TEU, naval architects have had to
increase the length of the ships disproportionately. This
is only practically possible up to a maximum size of 4500
TEU and has undoubtedly been the reason why this size
of ship has constituted the maximum containership size
for more than a decade. Such ships do, however, su€er
from poor performance compared to ships which have
not been designed to the dimensions of the Panama
183
100%
Percentage of Total Slot
90%
80%
70%
Capacity
60%
50%
40%
30%
Over 3,500 TEU
20% 2-3,500 TEU
1-2,000 TEU
10% Below 1000 TEU
0%
1982 1986 1990 1994 1995 1996 1997 1998 On
Year Order
Fig. 2. World container slot capacity by ship size 1982±98. Source:
Compiled from Containerisation International Yearbook (various is-
sues).
Canal. Increasingly, in the last ®ve years or so and even
prior to 1995 in the case of certain ships of less than
4500 TEU, the economics of the liner shipping trades
has resulted in a situation where ships larger than 2500
TEU are more usually built for optimal operational
performance, thereby reaping revenue bene®ts from an
ability to participate in certain trades, rather than for
their ability to transit the Panama Canal. In other
words, the economic bene®t of being able to transit the
Panama Canal has increasingly been mitigated and un-
dermined by the trade-o€ this has with the better eco-
nomic performance of more optimally proportioned
containerships.
The operational shortcomings of these `post-Pana-
max' vessels do have economic implications, especially
where revenue-earning is concerned. The main ones are:
1. their inability to transit the Panama Canal and the
consequent restriction this places on their trading
patterns;
2. for post-Panamax ships of greater than 4500 TEU,
port infrastructure limitations on berthing and the
handling of cargo restricts port selection. This situa-
tion is changing rapidly, however, as ports (especially
those in major trading areas) invest to respond to the
market demand of carriers.
These two major limitations over the deployment of
post-Panamax vessels reduce the ¯exibility of such ships
which, in turn, has a deleterious e€ect on their revenue-
earning potential through chartering-out (either through
hiring out space onboard ship or the whole ship). There
is also the potential of an adverse e€ect on the resale
value of the ship. The trade-o€ involved, of course, is
that there exist certain advantages in operating post-
Panamax vessels which again manifest themselves in
economic advantages which, this time, are usually re-
lated to cost savings. According to Fossey (1994), some
of these might include:
1. Capacities are greater than 4500 TEU, thus allowing
the carriage of higher cargo volumes per ship;
184 K. Cullinane, M. Khanna / Journal of Transport Geography 8 (2000) 181±195
2. The better hydro-dynamic design results in an im-
proved engine output±speed relationship;
3. Greater stability and more slots on deck provides
greater ¯exibility in the stowage of cargo; cited as an
important investment motivator by Hanjin and APL;
4. Better stability and a wider beam both also raise the
allowable weight per container slot (Lloyds Shipping
Economist, 1996a);
5. Lesser heeling motion in port makes loading faster;
6. Because post-Panamax container ships are designed
in proportion, there is potential for jumboisation,
whereby a new midship section is inserted into the
vessel to increase capacity (i.e. there is scope for rais-
ing the carrying capacity of the ship by increasing its
length such that it is disproportionate to its width).
Fig. 3 illustrates the recent rapid deployment of
containerships with capacity larger than 4500 TEU and
other post-Panamax designs and that a signi®cant
number are under construction today. One can see, for
example, that at the start of 1995 there was only one
ship larger than 4500 TEU but that by the end of 1998
there were 85. Given that an additional 60 ships of
greater than 4500 TEU are currently on order, it can be
expected that there will be 145 vessels of this size by the
middle of 2001.
Since available technology has not actually been the
overriding constraint on expanding containership size in
the past, the recent burgeoning of ships of this size may
have come as something of a surprise to observers of, as
well as certain practitioners within, the industry. The
results which emerged from interviews with representa-
tives from eight of the major container lines 1 suggested
that the following reasons have been instrumental in
motivating these investment decisions:
1. By reducing unit costs per TEU carried, economies of
scale in ship size provide a short-term competitive ad-
vantage. It is recognised that competitors have to as-
sess whether such an advantage exists and will react
by ordering similar tonnage if any sort of competitive
advantage is perceived.
2. The power and geographical scope of the alliances
which today exist between individual shipping lines
has allowed larger ships to become more operational-
ly viable.
3. It is expected that the size of the market will grow (i.e.
that maturity has not yet been reached) and that
more international trade in the future will increase
the demand for the carriage of containers.
4. The use of bigger ships is facilitated by better port in-
frastructure (especially in terms of the scale of ship
that a port can physically cope with) and attendant
improvements in port productivity.
1
Companies interviewed were Maersk, NYK, NOL, MOL, COSCO,
P&O, Hanjin and CSC.
Fig. 3. Post-Panamax containerships 1990±98. Source: Compiled from
Fairplay (1999) year end ®gures.
5. Coincidentally, many of the worldÕs older ships in the
containership ¯eet have become due for replacement
and all possible ship sizes have been assessed as part
of the investment decision process.
4. Liner shipping rationalisation
At any level, a large ®nancial investment in assets is
required in order to reap the bene®ts of economies of
scale yielded by Containerisation. The monetary outlay
involved in making such an investment means that in-
vestors in the industry face a high level of risk. In fact,
this risk is often deemed unacceptable by individual
companies in the industry and explains why liner ship-
ping companies have traditionally sought to manage this
high level of risk by spreading the burden through co-
operative agreements (e.g. conferences, consortia, alli-
ances, etc.) and holding a diversi®ed portfolio of trading
involvement (Keller, 1995; Cullinane, 1995; Berg-
Andreasson, 1998). The newbuilding price of a large
containership of 6500 TEU is approximately $80 million
as at the end of 1999. Investing in very large contai-
nerships and the mitigation of the very high risks asso-
ciated with this scale of investment is obviously
dependent upon the continuation of such risk-spreading
strategies. In fact, the industry has witnessed even more
pressure for greater rationalisation and risk-spreading as
the average size of asset investment rises in line with
increases in the maximum containership size.
The trend towards greater rationalisation is illus-
trated in Fig. 4 which shows that the percentage of TEU
slots controlled by the top 20 operators has increased
every year since 1985 when they controlled 36% of the
slot capacity. By the end of 1998, their share had in-
creased to 53%. These operators are also responsible for
approximately 55% of the slot capacity on order as at
the end of 1998.
 K. Cullinane, M. Khanna / Journal of Transport Geography 8 (2000) 181±195 185

operation among operators. In one manifestation or

Percentage of Global Slot

60
another, this has provided the basis of the economic
50
structure of the container shipping industry since the
40 1960s (Boyes, 1996). The running of joint ¯eets under
Capacity

30
20
10
0
1985 1990 1992 1993 1994 1995 1996 1997 1998
Year
Fig. 4. The control of slot capacity by leading operators 1985±98.
Source: Compiled from Containerisation International (various is-
sues).
Most importantly, as Fig. 5 shows, the top 20 oper-
ators own and/or control about 98% of all ships over
3500 TEU and, hence, hold a virtual monopoly over the
larger size containership ¯eet.
Rationalisation in the container shipping industry has
taken a number of forms. The number of operators has
obviously been reduced through the natural business
processes of competitive failure, merger and acquisition,
all of which have been a frequent occurrence in liner
shipping. Companies such as Hapag±Lloyd, Nedlloyd,
CGM and MOCL have, in the past, bene®tted from and
expanded through merger. More recently, large scale
mergers (such as those between P&O and Nedlloyd and
between NOL and APL) and acquisitions (such as the
purchase of 70% of DSR-Senator by Hanjin) have again
come into vogue in the sector, with even greater con-
centration in the industry an inevitable corollary of such
moves.
Another form of industrial rationalisation related
directly to the high level of risk associated with investing
in containerisation technology and increasing contai-
nership size is that of greater understanding and co-
100
Percentage of Global Fleet
the umbrella of a consortium allows members to,
together, achieve critical mass in the scale of their
operation so that a frequent service can be provided in a
cost-e€ective way. Risk-sharing is facilitated and, as a
result, such agreements have provided a viable means of
On meeting the market demand for a large number of ships
Order to engage in high frequency liner operations, while
simultaneously allowing individual operators to partic-
ipate in the bene®ts of economies of scale (Hayuth,
1987).
Four important new world-wide alliances emerged at
the end of 1995, representing a massive concentration of
power in the container shipping industry into the hands
of:
1. The Global Alliance comprised American President
Lines (APL), Mitsui-OSK Lines (MOL), Orient
Overseas Container Lines (OOCL), Nedlloyd and
Malaysia International Shipping Corporation.
2. The Grand Alliance made up of Hapag±Lloyd, Nep-
tune Orient Lines (NOL) Nippon Yusen Kaisha
(NYK) and P&O.
3. Maersk and Sea-Land.
4. Hanjin Senator Lines and Cho Yang Shipping.
Following a succession of mergers and acquisitions in
1996 and after, many of which crossed the boundaries
of the existing alliances, a new pattern of world-wide
strategic alliances in liner shipping has emerged as
follows:
1. The Grand Alliance made up of Hapag-Lloyd, MISC,
NYK, OOCL and P&O Nedlloyd.
2. The New World Alliance comprising HMM, MOL
and NOL/APL.
3. Maersk and Sea-Land.
4. The Hanjin Group (United Alliance) of Hanjin/DSR
Senator and Cho Yang.
5. The K-Line/Cosco Group made up of Cosco, K-Line
and Yangming.
These alliances di€er from their predecessors in that a

90 long-term commitment exists, they provide global cov-

80
erage and they extend to land-side integration (Damas,
70
1995). In fact, the members of these alliances collectively
Capacity

60
control about 37% of the worldÕs TEU capacity.
50
40
Amongst other things, alliances provide members
30 with the unique opportunity to justify investing in new
20 and larger ships which, in turn, allows them to reap the
10 economies of scale associated with such vessels (Lloyds
0 Shipping Economist, 1996b). It is only to be expected,
Below 1000 1000-2000 2000-3000 3000-3499 Above 3500
therefore, that since the formation of these alliances,
Ship Size in TEUs newbuilding orders for larger containerships have grown
Fig. 5. Size pro®le of ¯eet owned and/or controlled by leading oper- exponentially. The source of these orders, however, has
ators as at the end of 1998. Source: Compiled from Containerisation not been solely from alliance members. In an attempt to
International (various issues) maintain their market share by keeping pace with this
186 K. Cullinane, M. Khanna / Journal of Transport Geography 8 (2000) 181±195
level and type of investment, some of the major inde-
pendent competitors have also placed orders for such
vessels (Boyes, 1996). Such companies have included not
only Evergreen but also COSCO and Hyundai Mer-
chant Marine at a time when they remained independent
from strategic global alliances. Because the strategy of
increased co-operation between liner companies and
investment in this new, larger tonnage are so interde-
pendent, with each having further reinforced the other,
it is not logical to isolate these individual causes in
analysing the ultimate e€ect they might have upon the
market.
Since not all companies have followed the trend to-
wards participation in an alliance, it may be deduced
that they are not without their drawbacks. In the initial
stages of the trend towards strategic global alliances,
COSCO, Evergreen and K-Lines, for example, opted for
splendid isolation as independent operators competing
world-wide on an individual basis against the four major
alliances established at that time as well as against other
consortia. There exists some justi®cation for this strat-
egy. One of the most obvious disadvantages of alliance
membership is that service di€erentiation between liner
companies is already dicult to achieve in an industry
which revolves around the carriage of a standard unit
(the container), but with all members of the alliance
sharing common port-to-port transit times and schedule
integrity, establishing a market image and a loyal cus-
tomer base are extremely dicult. In such circum-
stances, it is likely that individual members of an
alliance will resort to rate incentives to help achieve such
objectives (Lloyds Shipping Economist, 1996b). An-
other problem lies with the fact that having entered into
an alliance and become immersed in the rationalisation
process, there is then no easy way out. Should a member
seek to leave the alliance and return to independent
operation, they then face the grim prospect of having to
reverse the rationalisation process by building or char-
tering a whole new set of ships to supply a complete
service and then attract greater volumes of cargo away
from the competition to ®ll those ships. As is evidenced
by the participation of COSCO and Hyundai Merchant
Marine in the more recent manifestation of the global
strategic alliances, a continuation of the trend towards
further integration and rationalisation is clearly inevi-
table in such an environment.
5. Modelling economies of scale in containership size
It is widely recognised that costs at sea per tonne or
per TEU will decrease as ship size increases (Pearson,
1988). Potentially, therefore, there are signi®cant econ-
omies of scale to be earned from operating larger ships
as opposed to small.
On any given voyage, however, the overall eciency
of a ship depends ultimately on the total time the ship
takes to complete the voyage. Why this is important is
because the time spent in port during a voyage is un-
avoidable in the sense that cargo will need to be loaded
and unloaded. This unavoidable amount of time which
is spent in port is a function of a portÕs cargo handling
rate and, when considering containership technology,
this does not improve in direct response to, or propor-
tionally with, increases in ship size. As Jansson and
Shneerson (1987) point out, therefore, the aggregate
economic position vis a vis economies of scale in the
containership sector represents a trade-o€ between the
positive returns earned at sea (during the line-haul op-
eration) and the negative returns accruing while in port
(during the handling operation). Current investment
practice, as exempli®ed over the last ®ve years in this
new phase of containerisation, would tend to suggest
that, at least in the size range between 6000 and 7000
TEU, there are net positive returns to scale such that the
cost savings while at sea outweigh the additional costs in
port.
An attempt has been made to quantify this trade-o€
by developing a costing model of containership opera-
tion and using the output from the model to assess the
net private economic bene®ts of large containerships
and to compare the unit costs of operating di€erent sizes
of containership under a wide range of input conditions
or scenarios. Clearly, this objective for the model implies
that it is necessary to include in the model and collect
information on only those costs which are a function of
ship size. This focus on di€erential costs greatly facili-
tates what is otherwise an extremely onerous task.
In specifying the model, it has been necessary to
identify the causal factors which lead to the e€ect of
either costs being incurred in the ®rst place or to changes
from what they would otherwise be. The underlying
mathematical relationship between cause and e€ect has
then been identi®ed and included in the model. In
shipping, the time taken on a voyage and the distance
travelled on that voyage are the two causal factors which
have the strongest e€ect on costs. By analysing the
variability of costs with respect to these speci®c causal
factors, it becomes possible to highlight the behaviour of
ship-related costs over a range of ship sizes.
Given the size of the investment and associated risk,
the treatment of capital cost in the model is critically
important. The approach which is adopted herein con-
trasts sharply with that of Talley (1990) who, in devel-
oping a capital cost component, applies the mean
contract price (capital cost) per DWT of two vessels, one
large and one small. By so doing, however, the size
elasticity of capital cost is ignored and the vital e€ect of
economies of scale in capital costs is lost.
For the purposes of ensuring that economies of scale
relative to building cost are captured in this analysis, a
 K. Cullinane, M. Khanna / Journal of Transport Geography 8 (2000) 181±195 187

submodel of newbuilding prices is developed which is
functionally dependent on ship size. The resulting esti-
mated value of the ship size elasticity of capital costs is
validated by comparison to those of other studies (Haldi
and Whitcomb, 1967; Thorburn, 1960; Jansson and
Schneerson, 1987). It is found to be relatively consistent
across time and over an ever-expanding range of ship
sizes. Modelled newbuilding contract prices are con-
verted into an annual capital charge by applying a
capital recovery factor which assumes that the life of the
vessel is 20 years, the interest rate is 10% and the re-
sidual value is 0. Dividing the annuity value by 360 days
gives a shipÕs daily capital cost. Variation in these as-
sumptions will obviously a€ect model outcomes. A
sensitivity analysis would seem, therefore, to provide an
appropriate avenue for further research. For the pur-
poses of this study, however, these assumptions appear
reasonable enough to allow a basic unit cost comparison
across ship sizes under various scenarios and the enu-
meration of the geographic implications of the results
obtained. In any case, these latter are expected to be
rather robust irrespective of the results produced by a
sensitivity analysis.
Although there have been a number of di€erent ap-
proaches to the calculation or modelling of container-
ship costs (Ryder and Chappell, 1979), the approach
adopted herein involves the speci®cation and calibration
of three submodels which yield the following outputs:
1. Daily Fixed Cost per TEU.
2. Cost per TEU-Mile.
3. Total Shipping Cost per TEU.
The linkages between these cost submodels, their
position within the grander scheme of the overall model
and the measures taken to test the validity of submodel
output can be seen in Fig. 6. For a comprehensive model
speci®cation, refer to Cullinane and Khanna (1999).
The ®rst submodel analyses cost variability in re-
sponse to changes in time to derive a standard cost per
TEU per unit time. This then constitutes an input to the
second submodel which assesses cost variability in re-
lation to distance travelled. The third submodel com-
bines the output from both the previous submodels,

Fig. 6. Conceptualisation of the aggregate model. Notes: (y) is the cost component. (x) is the ship size in NTEU. This is a measure of a containershipÕs
carrying capacity based on the standard assumption of 14 DWT per TEU; a standard supported by the fact that the average payload per TEU is
about 10 tons (Drewry Shipping Consultants, 1995), the tare weight of each container is about 2.3 tons and that some part of the vesselÕs total
deadweight is allocated to bunkers, fresh water, spares and supplies, etc. (e) is the elasticity. (k) is a constant.
188 K. Cullinane, M. Khanna / Journal of Transport Geography 8 (2000) 181±195

yielding a composite picture of the total cost of a voy- DESIGNED SERVICE SPEED
30 8
age. While it is theoretically possible to extend the model Costs in US cents per TEU mile

US$ cents per TEU mile

Designed Service speed
25 7
to cater for `door to door' costs, this would greatly 20
6
5
complicate the form and structure of the model, increase

(knots)
15 4
exponentially the number of assumptions implicit within 10
3
2
the model, undermine the usefulness of the output and, 5 1

in consequence, compromise achieving the main objec- 0 0

200
500

800
1000

1500
2000

2500

3000
3500

4000
4500

5000

5500
6000

6500
7000

7500
8000
tive of the analysis.
N TE U
A great variety of modelling techniques have been
utilised to precisely de®ne the relationship between Fig. 7. Containership size vs. design speed and cost per TEU-mile.
containership size and these individual cost components
with veri®cation of the modelled relationship coming
exists which not only leads to greater market share and
from a comparison with the results of past research,
revenue earning (see Brooks, 1990), but also creates the
statistical evidence or independent sources. The general
demand and load factors necessary to allow the reaping
underpinning methodology is, however, attributable to
of the lower unit costs associated with economies of
Thorburn (1960) who suggests adopting an approach
scale.
whereby the foundations of a quantitative model are
Gauging the e€ect of varying port times on the cost of
built with what limited empirical data is available and
a shipÕs time in port is especially important. The fol-
then supplemented with some more generalised data
lowing ®ve variations of time in port have been used in a
which is based on the output from previous research.
sensitivity analysis aimed at assessing the impact on the
Several studies have opted for this approach in one
cost of time in port:
form or another, some of them focussing primarily on
1. As modelled.
liner shipping (see McKinsey and Co. Inc., 1967; Goss
2. 50% less time than modelled.
and Mann, 1974; Ryder and Chappell, 1979; Gilman,
3. 50% more time than modelled.
1980; Jansson and Shneerson, 1987; Pearson, 1988;
4. 100% more time than modelled.
Talley, 1990; Lim, 1994). Indeed, in applying this
5. Time is calculated with maximum crane density per
methodology, the results from this previous body of
ship ®xed at only three for all ships larger than
research have, in several instances, been incorporated
2500 TEU. To re¯ect operational practice, this crane
directly into the developed model to supplement the
density is applied to 85% of the cargo per voyage,
available data. Of course, because the latest generation
with the balance of the cargo assumed to be worked
of post-Panamax vessels surpass the maximum ship size
by only one crane.
considered in these previous studies, certain cost ele-
Under each of these scenarios, the cost of time in port
ments have had to be derived by extrapolating and re-
expressed in US$ per TEU per voyage is given in Fig. 8.
validating the results of previous research.
This has been calculated as the product of the estimated
The major source of vessel data for the calibration of
number of days spent in port during each of the voyage
the model was Fairplay (1996). This database totalled
scenarios and the daily cost of shipÕs time. Within the
370 vessels classi®ed as containerships, having a capacity
model, estimated port time is derived from a complex
of more than 200 TEU and which were delivered or
function of various in¯uential voyage factors such as
under construction in the period between January 1995
total cargo exchange, crane density, average crane pro-
and April 1996. One major advantage of using this
ductivity, non-productive time in port, working time in
database was that by analysing only vessels of a similar
port, etc. The daily cost of shipÕs time varies with factors
age, a comparable basis for cost evaluation was pro-
such as capital cost, repairs and maintenance, insurance,
vided. A comprehensive exposition of model assump-
crew, diesel oil consumption and price, etc.
tions, speci®cation and estimation are detailed in
Cullinane and Khanna (1999).
As expected, on analysing the output from the model, 120
US$ PER TEU PER VOYAGE

the bene®ts of scale economies while a ship is at sea 100 Port time is assumed as
follows the shape of a negative exponential curve, where 80 50% less than modell ed
marginal savings in unit costs reduce progressively with 60
As modelled

increasing ship size. Cost per TEU-Mile and ship speeds 50% more than modelled
100% more than modell ed
40
for di€erent ship sizes are shown in Fig. 7 which illus-
trates that, besides being more economical, larger ships 20

are also faster and capable, therefore, of providing a 0

better service and better utilisation of assets. This is 0 1000 2000 3000 4000 5000 6000 7000 8000

important since it suggests that, through the provision

NTEU

of a better quality of service, a competitive advantage Fig. 8. Containership cost of time in port per voyage (US$ per TEU).
 K. Cullinane, M. Khanna / Journal of Transport Geography 8 (2000) 181±195
6. Results
In developing the model presented within this paper,
many of the estimates of the ship size elasticities of
various component costs have largely concurred with
those of previous studies. This is a necessary condition
for justifying the methodology adopted and is a helpful
contribution to the validation of the ®nal model. This is
especially so since the input data for this study is inde-
pendent of that used in previous research.
Past research in this area (for example, Gilman, 1983)
has suggested, however, that containerships su€er sig-
ni®cant diseconomies of size in port, although it is
sometimes admitted that the empirical evidence is in-
conclusive (Jansson and Schneerson, 1987). Based on
the output from our model, Fig. 8 reveals that under all
scenarios, there are no diseconomies in port for ship
sizes up to about 1500 TEU. This ®nding totally con-
tradicts those of earlier studies. Similarly, although our
model ®nds that for ships larger than 1500 TEU there
are indeed diseconomies of ship size in port, the mag-
nitude of these diseconomies is not as large as has been
estimated in the past.
There are two possible reasons for the disparity in
results between this and earlier research. Firstly, there
has been a signi®cant improvement in average crane
productivity in recent years. Secondly, as ship size in-
creases, there is now a greater propensity for a simul-
taneous increase in the average number of cranes
employed on the ship, though this greater crane density
is not proportional to the increase in ship size. Most
signi®cantly, greater crane density is particularly perti-
nent for ships of less than 1500 TEU where the average
number of cranes employed on a ship increases rapidly
from an average of 1.1 for a ship of 200 TEU up to 2.6
for a ship of 1500 TEU.
In the study by Gilman (1983), the results pointed to
signi®cant diseconomies of size in port. The handling
rate, however, was assumed to be the same for di€erent
ship sizes and the maximum handling rate considered
was just 1000 TEU/day. Not only are terminal produc-
tivities much higher in todayÕs operating environment,
but also crane density de®nitely increases with ship size.
Similarly, the study by Jansson and Shneerson (1987)
assumed two cranes will have a productivity of 350 ton/h
or just 25 TEU/h.
Today, two cranes are likely to achieve 66 TEU/h
(assuming a box mix of 67% TEU and the rest FEU). It
is, in fact, the dramatic improvements in port produc-
tivity over recent years which fundamentally explains
the disparity in ®ndings between this and previous
studies of economies of scale in liner shipping. This may
also serve to explain the recent explosion in large ton-
nage. As Jansson and Shneerson (1987) themselves ac-
knowledged, the tremendous increase in containership
size at that time was, by and large, explained by higher
189
productivity in ports. They also suggested that APL's
deployment of a 4400 TEU ship in 1987 is explained by
the fact that these ships employ six cranes for cargo
operations instead of two as assumed in their model.
In our model, the cost of time in port and the cost of
time at sea are combined to yield the total shipping cost
(excluding port and cargo handling charges which do
not vary on a `per TEU' basis). Since port and terminal
infrastructure can vary considerably, a detailed sensi-
tivity analysis of the Total Shipping Cost per TEU was
undertaken by varying the input port time per voyage
away from that modelled by `best estimates'.
In order to assess the robustness of the model, the
extreme deviations previously described were deliber-
ately selected as the basis for evaluating Total Shipping
Cost per TEU for each of three sample voyage lengths
which conform approximately to the three main East±
West routes (i.e. Europe±Far East, trans-Paci®c and
trans-Atlantic).
The resulting Total Shipping Cost per TEU for each
of these three sample routes are shown in Tables 3±5. As
expected, higher levels of port productivity (i.e. with
consequently less time spent in port) mean greater
economies of ship size in total shipping cost. Conversely,
declining port productivity means fewer bene®ts can be
reaped from economies of scale.
Fig. 9 graphically illustrates the Total Shipping Cost
per TEU for the three selected route lengths under the
input condition of `as modelled' time in port (the best
estimates). For all three sample route lengths, the results
suggest that economies of ship size are enjoyed until
about 8000 TEU.
By comparing Figs. 8 and 9 it can be seen that, for these
three voyage lengths, the diseconomies of ship size in port
are outweighed by economies of size at sea. More specif-
ically, under all input port productivity scenarios, the
results of the sensitivity analysis show that for the
Europe±Far East and trans-Paci®c liner routes, econo-
mies of scale are enjoyed at ship sizes beyond 8000 TEU.
In contrast, for the shorter trans-Atlantic route, when
port times are 100% more than initially modelled or if
ships are serviced by a maximum of only three cranes, then
the optimal size for a containership is only somewhere
between 5000 and 6000 TEU (taking into consideration
only the total shipping cost associated with the voyage).
Clearly, on routes where expected time in port is
greater than the best estimate inputs applied in this
study (which are based on the average productivity of a
set of large, mainline ports), diseconomies of scale in
port will have a relatively greater signi®cance, thus re-
ducing the optimum ship size for the route. Equally,
continued general world-wide improvements in port
productivity will so fundamentally alter the container
shipping cost environment that, in the absence of any
technological constraint, ship size optima for all routes
will continue to increase as they have done in the past.
190 K. Cullinane, M. Khanna / Journal of Transport Geography 8 (2000) 181±195

Table 3
Total shipping cost per TEU for trans-Atlantic voyage of 4000 miles (US$)

NTEU Port time used

50% less than modelled As modelled 50% more than 100% more than With only a maximum
modelled modelled of three cranes

1000 164 181 197 214 181

2000 124 142 160 178 142
3000 109 129 149 168 131
4000 100 121 142 162 128
5000 95 117 139 161 127
6000 91 114 138 161 128
7000 89 113 138 162 131
8000 87 113 139 165 133

Table 4
Total shipping cost per TEU for trans-Paci®c voyage of 8000 miles (US$)

NTEU Port time used

50% less than As modelled 50% more than 100% more than With only a maximum
modelled modelled modelled of three cranes

1000 312 328 345 361 328

2000 231 249 267 285 249
3000 199 219 238 258 221
4000 180 201 221 242 207
5000 168 190 212 234 200
6000 159 182 206 229 196
7000 152 177 202 226 195
8000 148 174 200 226 194

Table 5
Total shipping cost per TEU for Europe-far east voyage of 11500 miles (US$)

NTEU Port time used

50% less than As modelled 50% more than 100% more than With only a maximum
modelled modelled modelled of thee cranes

1000 441 457 474 490 457

2000 325 342 360 378 342
3000 277 297 317 336 299
4000 250 270 291 312 277
5000 232 254 276 298 264
6000 218 242 265 288 256
7000 208 233 258 282 250
8000 201 227 253 279 247

Tables 3±5 also demonstrate that the bene®ts from
scale economies in ship size decline as route lengths
shorten. Fig. 9 also shows that the shorter the route
length, the ¯atter is the line graph showing Total Ship-
ping Cost per TEU. As one would expect, this implies
that the economies of ship size are of greater bene®t on
longer routes.
The parametric relationship between economies of
scale and route length is shown in Fig. 10 which
graphically illustrates the decline in positive returns to
scale as ship size and route length increase.
Currently and in the future the results of this study
suggest, not unsurprisingly, that the deployment of large
containerships is likely to depend most crucially on
voyage distance. The actual deployment of vessels on
these three routes by the major operators validates the
®ndings of the model and this assertion. The biggest
ships are employed on the longest route (i.e. Europe±
Far East). This is despite the fact that by far the largest
route in terms of volume of trac is the trans-Paci®c
route. The objective of such deployment patterns is
clearly to maximise time at sea reaping economies of
 K. Cullinane, M. Khanna / Journal of Transport Geography 8 (2000) 181±195 191

companies that are capable of it will quickly imitate the

VOYAGE COSTS PER TEU IN

1200
4000 MILES (TRANS ATLANTIC)
1000
8000 MILES (TRANS PACIFIC)
strategies of their competitors in reaping the available
800
11500 MILES (EUROPE-FAREAST) economies of ship size. Providing testimony for this
US$

600
assertion is the fact that at the end of 1998, 12.3% of
global slot capacity was on order and that in 1998 alone,
400

200

0
world slot capacity increased by 11.6% (Containerisa-
tion International Yearbook, 1999). These ®gures rep-
200

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

5500

6000

6500

7000

7500

8000
CAPACITY IN NTEU resent only a very slight slowing of the growth rates
Fig. 9. Distance comparison of total shipping costs per TEU.
prevailing at the end of 1995.
In the past, one of the reasons for severe competition
and poor pro®tability in the liner shipping industry was
the combined e€ect of low entry barriers and high exit
barriers. Increasing economies of scale and scope, to-
gether with growing rationalisation, mean that barriers
to market entry are rising so rapidly that small and
medium-sized lines will soon have no opportunity for
moving up into the major league (Lloyds List, 1996a).
This is so because increasingly it is the attainment of a
critical mass in operations that makes feasible the ap-
propriate quality of service which guarantees market
Fig. 10. Comparison of economies of scale and route length. share.
The increasing cargo concentration which naturally
scale and minimising time in port su€ering disecono- results from increasing ship size also implies that part-
mies. This will be the case even if port productivities ners in an alliance will be much more interdependent as
continue to improve in the future. they seek to procure suciently high load factors to
fully reap the bene®ts that come from economies of
scale. As already mentioned, the recent introduction of
large size tonnage has provided a catalyst for the pro-
7. Implications and conclusions liferation of more agreements and the broadening of the
power base of liner companies through alliances,
In drawing conclusions from this analysis, it is vitally mergers and acquisitions.
important to emphasise that they relate to the combined An important corollary of increasing ship size,
e€ect of the continuing trends towards greater ratio- therefore, will be the further concentration of power into
nalisation of the sector and towards greater investment the hands of fewer main players so that only mega-
in ever-larger containerships. The fundamental nature of carriers will be in a position to e€ectively compete for
the two strategies is that they are implicitly interdepen- mainstream liner business. Smaller operators certainly
dent and that, in consequence, their individual impact and perhaps even some of the big names will be forced
upon the container shipping market is very dicult to to retrench to niche markets.
isolate. Instead, for ease of analysis, they must be con- At the same time, however, rising entry barriers will
sidered as a single causal market development, which still not lead to higher returns in the industry since the
together impact upon di€erent aspects of the container competition laws of the European Commission and the
shipping and related markets. The e€ects of the com- Federal Maritime Commission, together with the power
bined strategies may be identi®ed and related speci®cally exercised by the shippers councils, will not allow ship-
to di€erent areas of interest to and within the container ping lines to have a ®eld day in the future.
shipping sector. In this respect, the conclusions drawn The saving grace in this regard may perhaps be pro-
from the analysis relate to liner shipping operators, their vided by the optimism which exists over the prospects
increasing inclination towards the adoption of the load for future growth in trade volumes. Irrespective of the
centre concept and the subsequent impact of this on ongoing ®nancial crisis in Asia, analysts suggest that
ports and terminals. maritime containerised trade will grow at around 6.5%
per annum over the next two years or so. This compares
7.1. Liner shipping operators to growth in the last few years which averages only 7.7%
per annum (Containerisation International Yearbook,
Economies of scale can only o€er the potential for 1999).
short-term cost leadership. A sustained competitive ad- The president of K-Lines, Isao Shintani (1996) has
vantage on a global basis is not feasible because, if the suggested that container operators have placed orders
post-Panamax strategy proves successful, those liner for larger containerships in anticipation of double digit
192 K. Cullinane, M. Khanna / Journal of Transport Geography 8 (2000) 181±195
growth which is unlikely to be ful®lled. The point being,
of course, that economies of scale from operating larger
tonnage, however, can only be achieved if vessels are
full. In addition, despite optimistic forecasts on the de-
mand side, the recent capacity explosion associated with
the development of the latest generation of container-
ships still presents a dismal picture. Against a back-
ground of a market where only marginal returns have
been enjoyed over recent years, the expected major ®-
nancial deterioration is likely to lead to a serious shake-
out of the most inecient carriers. Since the growth in
the container market will one day reach saturation, the
longer term outlook could be even bleaker (Grey, 1996).
7.2. Load centres
As has already been pointed out, while containerisa-
tion began life as a purely technological innovation, it
has in recent years had a more fundamental impact on
distribution. The main bene®ts of containerisation are
reaped when there is maximum penetration into the
transport chain. Recognition of this fact rapidly in-
creased the degree of co-operation and mutual com-
mitment between di€erent modes of transport; an idea
that became embodied in the concept of intermodalism
(Hayuth, 1988). The application of this concept has al-
tered the pattern of land-based ¯ows between ports and
the regions they serve. In essence, it has undermined,
and forced a reassessment of, the traditional hinterland
concept (Slack, 1994).
Intermodal developments, together with the growth
in container vessel size, point to the obvious potential of
rationalisation in terms of the number of port calls and
the adoption of the load centre concept where, from a
particular carrierÕs perspective, certain ports become the
foci of their operations within a region such that a dis-
proportionate share of a carrierÕs containerised cargoes
¯ow through a particular port (Hayuth, 1988; Slack and
Starr, 1994).
The rationale behind the load centre concept is that it
allows economies of scale, in the inland as well as the
maritime transport system (Hayuth, 1988). It also allows
shipping lines to increase the utilisation of ships and
reduce port time and charges. Simultaneously, increas-
ing port volumes mean a better distribution of the high
®xed costs of the port. For all these reasons, in tandem
with other coincidental in¯uences such as the eciency
gains that might be derived from policies of transport
deregulation and/or from advances in intermodal tech-
nology, it is likely that the cost of accessing the hinter-
land of a container terminal will fall if it emerges as a
load centre with greater container trac ¯owing
through it.
The choice of a particular port as a load centre is
highly likely to be conditional upon the eciency of
onward or inland distribution (see Oram and Baker,
1971). Indeed, the pursuit of this is so critical to the
implementation of the load centre concept that many
shipping companies have actually sought to horizontally
integrate under single ownership their existing shipping
operations with intermodal inland distribution networks
and port operations.
As Vickerman (1998) points out, this then becomes a
self-reinforcing scenario where the concentration of
cargo volumes in load centres leads to an expanded
hinterland which, in turn, allows the reaping of econo-
mies of scale associated with longer distances in inland
distribution (especially where an intermodal rail system
exists). This improvement in the eciency of landside
distribution could provide the load centre port with yet
another self-reinforcing competitive advantage and will
eventually mean that the proximity of ports to zones of
consumption (i.e. markets) in urban areas will no longer
be important. If properly controlled and encouraged by
appropriate regulatory authorities, this sort of market
development can translate directly into environmental
bene®ts.
The corollary is clear, therefore, that the main ad-
vocates of the load centre concept are likely to be those
carriers who deploy large containerships (Talley, 1988).
The likely impact of the recent escalation in ship
size on the pattern of port calls and the future appli-
cation of the load centre concept is perhaps dicult to
estimate. In the past, there has been considerable
controversy and debate over the nature of the rela-
tionship between load centres and containership size.
According to Gilman (1983), in the early days of
containerisation it was accepted that the deep-sea trade
would, as the least cost solution, use large sized con-
tainerships on concentrated itineraries with the re-
quired feeder connection provided by rail, road or sea,
depending on the circumstances. For a long time, this
view seemed to contradict the practice of shipping
lines. There are three reasons proposed for why this
should be so:
· Basic demand characteristics in liner shipping suggest
that cargo distributions are dispersed and not suscep-
tible to aggregation in the same way as industrial
processing.
· There are considerable secondary distribution costs.
Feedership and inland transport costs are much high-
er per TEU-mile than the cost of mainline ships.
· The scale economies of liner shipping are not quite as
powerful as expected and are not totally lost by mul-
ti-port calling, especially if the ports are geographi-
cally concentrated.
It would seem that the point of balance between a
transhipment solution and traditional multi-port calling
has, in the past, been further to the advantage of the
latter than had been expected. With the recent escalation
in ship size and the proposed developments of mega
ports and terminals, however, the original idea and its
 K. Cullinane, M. Khanna / Journal of Transport Geography 8 (2000) 181±195
advocates have again gained credence with observers of
the shipping industry.
Since 1980, transhipment trac has been growing
consistently and there is plenty of industrial optimism
about the future of this niche business. Although the
average growth in annual transhipment volume until
2001 has been predicted at only 1.2% for North Amer-
ica, the equivalent ®gure for Europe is 8.3%, for Asia
9.0%, for Middle East/S. Asia 11.6% for Carribean/C.
America 24.6% and for other parts of the world to av-
erage 11.4% (Drewry Shipping Consultants, 1997). Of
course, growing transhipment volumes also mean that
there is scope for reaping economies of ship size in the
feeder business.
Direct calls at port by mainline vessels are being ra-
tionalised as carriers seek higher levels of productivity
from their assets. In Europe, talk is of wholesale port
cutbacks with several carriers evaluating networks based
on calling directly at just two ports in Europe (Rotter-
dam and Hamburg) compared with four to ®ve direct
calls at present. Other commentators have visualised
giant ships on global routes calling at one or two hub
ports on each continent (Adcock, 1995).
There is some merit in both perspectives. The degree
of load centring which provides a least cost solution is
route speci®c and, as such, it is dicult to generalise. It
is determined by the trade-o€ between the costs associ-
ated with the level of cargo dispersion from the load
centre and the extra cost of calling at an additional port.
As alluded to in the discussion on economies of scale in
inland distribution, this will depend on a complex in-
teraction of factors including the size of the mainline
ship, the amount of cargo at the diversion port, diver-
sion distance, transhipment/distribution cost, port ac-
cess time, handling cost, productivity of the port, etc.
At the same time as carriers have adopted the load
centre concept, container trac has, in fact, become
decentralised indicating a trend towards a more evenly
distributed cargo concentration between ports. This
implies that the advantages of the load centre concept
appear at the carrier level, but not at the port level.
Thus, while shipping lines can gain by concentrating
their operations in a limited number of ports and by
reducing the number of calls which they make, partic-
ularly by big ships, this does not necessarily imply that
all shipping lines will use the same port.
The results of the analysis contained herein suggest
that the economics of large containerships are such that
the adoption of the load centre concept by containership
operators and the continued proliferation of hub ports as
the foci for container operations is a trend which is un-
likely to cease in the short to medium term. Indeed, given
the highly positive correlation between the operation of
post-Panamax vessels, company size and membership in
a world-wide container shipping alliance, both industrial
and hub concentration is likely to be self-perpetuating.
193
7.3. Ports and terminals
There is an interdependent relationship between ship
size and port design; improvements in cargo handling
techniques in ports have made new types of ships and
bigger ships more pro®table while, on the other hand,
profound changes in ship design have induced ports to
develop.
The latest generation of containerships make con-
siderable demands on terminals and ports in the form
of additional infrastructure, cranes, depth in port,
productivity, etc. The results from the model point to
the fundamental conclusion, in fact, that the economics
of containership operation are crucially dependent on
port productivity. This is indicated not only, as previ-
ously mentioned, by the comprehensive impact of re-
cent general improvements in port productivity on
containership economies of scale but also, as revealed
through the sensitivity analysis, by the e€ect on opti-
mum ship size when time in port deviates from the
original best estimate input into the model. The addi-
tional required capital expenditure has signi®cant im-
plications as does the fact that high throughput and
adequate utilisation of resources are vital, not only for
a container terminal to remain competitive in the long
run, but also if it is to achieve a reasonable return on
investment.
There is a proven relationship between the through-
put of a terminal and crane productivity. To quantify
this relationship, one study has shown that a terminal
with a throughput of 11 million container moves per
annum is expected to unload a vessel in 88% of the time
taken by a port with only 5 million moves (Tabernacle,
1995). In consequence, a high throughput of containers
for a terminal means better productivity for ships which,
in turn, will attract still more ships to call at the termi-
nal. Conversely, poor productivity at a port can prove
detrimental to the attraction of trac. For instance, in
1996, as the result of a considerable deterioration in the
productivity levels at the port of Jeddah, numerous
shipping lines either suspended or reduced services to
the port (Lloyds List, 1996b).
With increasing ship size it is inevitable that the
bargaining power of the large ship operators will in-
crease. This trend has been very much enhanced by the
formation of the large, world-wide alliances and the
greater industrial concentration within the sector. The
major alliances are set to wield enormous purchasing
power over ports and terminals. For example, Leo
Berndsen (1996), the Chairman of NedlloydÕs Executive
Board, has predicted that cost savings from exercising
joint purchasing power are signi®cant and suggests that
collective bargaining on terminal contracts will result in
a 10±15% rate reduction in the future. Clearly, this
ability will further erode the competitive status of small
and medium size operators in liner shipping.
194 K. Cullinane, M. Khanna / Journal of Transport Geography 8 (2000) 181±195
Because ports will require sucient infrastructure in
terms of berths, depth of water and craneage, fewer
ports will be in a position to compete for these larger
and larger ships. As a result, additional casualties will be
added to the existing list of redundant liner ports.
Faced with fewer shipping lines (due to the combined
e€ect of continued industrial concentration, market
domination by a small number of large alliances and the
deployment of larger vessels) mega-terminals become
not merely a luxury but, rather, a necessity. Investment
in the ports sector re¯ects this tendency. For instance,
Rotterdam is pursuing this strategy aggressively, with its
earmarking of US$ 1.28 billion for the Delta 2000-8
development plan for the Massvlakte area (Fossey,
1995). Similarly, there has been and continues to be
signi®cant investment in mega-terminals on the west
coast of the US. It seems inevitable that in the current
business environment of liner shipping, increasingly
characterised by major global alliances and the deploy-
ment of ever-larger containerships operating between
major load centres, these development plans for mega-
terminals constitute an important pre-cursor to the ul-
timate elimination of medium sized mainline container
ports.
All is not lost, however, for such smaller and medium
sized ports since opportunities exist for a second tier of
ports which do not target ultra large containerships.
These ports can feed-o€ their larger counterparts rather
than competing with them, thus removing much of the
need for investment in the most expensive infrastructure.
To succeed, this set of ports will have to streamline their
activities to target niche shipping markets, especially in
feedering. As Baird (1996) points out, there are likely to
be a few surprises as to which ports will be most directly
a€ected and it may well be the case that certain ports
currently considered mainline will ®nd themselves hav-
ing to reposition themselves to the market as specialist
feeder ports.
Although the implications for ports are contentious
(Baird, 1997; Notteboom et al., 1997), in the absence of
appropriate ®nancial incentives, the results of this study
imply that the economics of containership operation are
such that operator and port specialisation is likely to
become more common. Ports which are blessed with a
favourable geographical location with respect to a trade
route can probably expect to continue to enjoy direct
calls by mainline vessels. They can also aggressively
pursue transhipment business, a strategy which is facil-
itated by the fact that transhipment cargo and the hub
factor have a generative e€ect on a portÕs overall volume
of business; a high volume of transhipment trac at-
tracts feeder services and a high frequency of feeders
further reinforces calls made by other mainline vessels
(Port Development International, 1995).
Ports which are geographically removed from main
trade lanes will, on the other hand, become increasingly
unable to attract larger size mainline vessels. This is
already evident in the case of the Scandinavian ports
and in the Baltic where, just a few years ago, ports in
these regions had at least one direct service on main
trade routes. This situation has now totally changed as
all except three large container lines omit Scandinavian
calls from their mainline schedules. In place of direct
calls, a busy feeder market has developed (Lloyds
Shipping Economist, 1996c). As their margins decline,
however, feeder service providers are also feeling the
pinch brought about by the concentration of power in
the hands of alliances.
There can be no doubt that recent developments in
the container shipping industry have radically altered
the market position of ports and terminals. No longer
can ports and terminals be regarded as a safe business,
with protagonists operating under the market protection
of a regional monopoly with a highly de®ned hinterland
and guaranteed trac. To survive in todayÕs market-
place, ports will have to be highly competitive and in-
novative. The development by ports and terminals of
EDI systems, the leasing of berths, volume discounts,
productivity agreements, in-house feeder services, duty
free parks etc. are all examples of sensitivity to their
changing role.
Acknowledgements
The authors are very grateful to the editor, Dr.
Richard Knowles, and two anonymous referees for
some very astute observations, constructive criticism
and helpful suggestions which, we consider, have sig-
ni®cantly improved this paper.
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