COVID-19 and The Economics of Blank Sailings

 

2020, the year of COVID-19, will be remembered for years to come by future generations. Production, trade, employment and economic activity by and large, all saw significant and very worrisome declines; apart from one industrial sector which, to the contrary, realized handsome profits: Liner Shipping. This was made possible by the ‘withdrawal’ of shipping capacity (20-30%) from the main trade lanes (something that has come to be known as ‘blank sailings’), which allowed carriers to maintain tariffs at profitable levels, assisted at the same time by low fuel prices.

The withdrawal of capacity from OQc to OQm, and the consequent maintenance of tariffs at the higher level Pm, rather than Pc (above graph),  does not only deprive shippers (and consumers) of a substantial part of their consumer surplus/welfare (equal to PmPcGB) but, for society too, it results in a substantial misallocation of resources equal to QmQcEG (returning ships to their quasi-bankrupt beneficial owners or anchoring them at a layup berth represent a cost and a waste).

In Industrial Economics, the distance AB is known as Lerner’s Degree of Market Power. That is, the ability of the carrier to keep tariffs above marginal costs and thus appropriate part of consumer surplus. In free competition, this distance would be zero.

The above ramifications of blank sailings would not have been possible with a more pro-active and less lenient Regulator, especially in Europe. 

The comments made above should not be taken as an attack to this most useful of institutions in shipping -global shipping alliances- but only as a criticism to the Regulator whose role is to ensure that  the whatever privileges are rightfully afforded to shipping (conference price-setting or alliance capacity coordination) are not abused by inadmissible concerted business practices, even when such practices are deemed necessary for the ‘survival’ of a sector crucial to our trade and prosperity.

HH

Port management and governance in a post-COVID-19 era: quo vadis?

 

With the emergence of port economics as a distinct academic discipline some 30 years ago, researchers have invariably perceived and analyzed ports as some sort of hybrid organizations which, although institutionally anchored in public administration and governance structures, are often desperately striving for more managerial autonomy that would enable them to compete in a landscape of increasing regional port competition. 

This rather awkward public-private symbiotic model has persisted over the years, assisted in no small measure by the interest of academics and funding agencies to classify ports in well-structured definitions of port ‘models’, such as landlord, tool and service ports. 

In this, admittedly long, editorial, Theo and I have tried to show, through many examples from real-life day-to-day port management experiences, that a new approach to port management and governance is needed going forward: without diverting much from a port’s institutional ‘ecosystem’, port stakeholders, together with an enlightened port management team, can develop flexible strategies to cope efficiently and resiliently with major disruptions, such as those introduced by the impact of COVID-19 on port- and supply chain operations by and large. 

The COVID-19 pandemic couldn’t provide us with a better example, highlighting the disruptions caused to port and supply chain operations by the blank sailings of mega-carriers, their consequently larger call sizes, and the challenges these developments pose on quay-side and stacking-yard operations; gate congestion; and congestion on connecting infrastructure and city traffic. 

As it is common to MEL editorials, we advise our readers not to skip our many footnotes which, at times, furnish more interesting, if not ‘entertaining’, information than the main text that invoked them.

https://doi.org/10.1057/s41278-020-00162-7