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Operating Costs

Discuss about the Maritime Economics for Production and Service.

The shipping companies across the globe, in their operations, production and service providing activities, incur different costs, which generally are of the following types:

Among the above-mentioned costs, the operating costs of a shipping fleet include those expenses which are incurred in the process of day-to-day running of the vessels (Stopford 2013). The operating costs of running ships are, again, divided into the following general and broad components:

  • Crew costs (C)
  • Store costs (ST)
  • Maintenance and routine repair costs (MN)
  • Insurance costs (I)
  • Costs of administration (AD) (Grammenos 2013)

Thus, the formula of operating costs can be stated to be as follows:

OC = C + ST + MN + I + AD

Each of these costs includes several sub-costs which are as follows:

  1. Crew costs-These are the costs (direct as well as indirect) which are incurred for crewing the vessels. The direct crew costs include the following components:
  • Wage costs
  • Training of the employees
  • Union fee
  • Costs of travelling
  • On-board victualing (Ducruet and Notteboom 2012)  

On the other hand, the indirect costs include the components as follows:

  • Recruitment process
  • Medical tests
  • Accident insurance payment
  • Port expenses
  • Sick pay
  • Agency fees

In general, the crew costs depend on the crew size, the policy of recruitments and others and the same contribute significantly contribute to the total costs of shipping fleets and generally tend to increase with the increase in size of the companies and the expansion of their operational domains (Karakitsos and Varnavides 2014).

  1. Store costs-These costs usually include the expenses on the consumable supplies and can be generally be categorised into three types:
  • General stores- equipment of engine-room and deck, spare parts, etc.
  • Cabin stores- domestic components required on the ship
  • Lubricant oil- This is the biggest component of store costs of any ship
  1. Maintenance and repairing costs-The vessels need to be regularly maintained and repaired in order to maintain the standard of service of the company and to avoid abrupt and extensive wear and tear of the ships. These costs including the following components:
  • Routine maintenance- Maintaining equipment, engine, paintings and others
  • Break down costs- Costs to repair mechanical failures
  • Costs of replacement of parts and spares
  • Periodic maintenance costs to maintain the sea-worthiness of the ships (Couper 2015)

In general, these costs increase with the increase in the age of the ships and consists usually 14% of the total operating costs of shipping companies.

  1. Insurances-The range of this cost varies from ship to ship. However, in general this cost can be divided into two sub-types, with different weightages:
  • Hull and Machinery Insurance- This has a 2/3 weightage and is usually obtained from the marine insurance companies
  • Protection and Indemnity Insurance- With 1/3 weightage it is usually obtained from the P&I clubs and indicates towards the third-party liabilities (Meng et al.2013)
  1. Administrative costs-These are the costs which are incurred by the shipping fleets for the overall maintenance and monitoring of the service delivering process and operations of the ships and in general consist of the following costs:
  • Costs of communication
  • Shore based management costs
  • Costs of agents in the ports
  • Fee of shipping flag state


All these components and sub-components of operating costs contribute significantly in the overall cost of service provision of the shipping companies as the operating cost along in general constitute of a quarter of the total cost of the shipping companies.

Much of the profitability, prospects, popularity as well as the long-term sustainability of the shipping companies depend on the operational framework and the cost of operating in the market. Thus, for increasing the prospects of the same, it is of immense importance to keep on increasing the operational efficiencies of the ships and the companies overall. Several strategies can be taken by the concerned companies for the purpose of increasing the operational efficiencies of the same, the primary ones of which are discussed as follows:

  1. Reduction of turnaround time in the port-Reduction of the turnaround time in the ports help in decreasing the speed of the vessels in the sea, thereby benefitting in scheduling the operations. This can be done by improvement of the manoeuvring performances and by innovations in the designing and arrangements of the ships (Banks et al.2013).
  2. Training the employees-Better trained employees can be more productive and cost saving. For increasing the operational efficiencies fuel consumption also needs to be reduced for which culture of fuel savings need to be imparted among the employees of the companies. For this purpose, strategy of introduction of schemes of bonus or incentive for fuel saving can be implemented for the employees.

Example: Competition among the different ships of the company in the aspect of fuel saving.

  1. Timely maintenance-The efficiency and profitability of the shipping companies depend considerably on the cost efficiencies of the working of the ships, for which proper and timely maintenance of the ships are required. A strategic and proper routine for the maintenance and cleaning of the ships and its parts can be implemented to increase the operation efficiencies of the same (Banks et al.2013).

Example: Cleaning of the hull of the ships at regular intervals help in reducing growth of algae, which in turn can reduce drag and also the consumption of fuel considerably.

These strategies, along with similar ones, can help in increasing the operational efficiencies of the shipping companies.

In the contemporary period, with the increasing problem of higher pollution and environmental deterioration, the conservation and protection of the environmental aspects have been gaining huge global attention and the population across the world has been becoming increasingly aware and concerned about the same. As the shipping industry contributes hugely in increasing pollution (affecting air, water and natural marine resources), thus to combat the same various policy frameworks and bodies have been developed, which work in the aspects of reducing the maritime pollution (David, Gollasch and Hewitt 2015).

Strategies for Increasing Operational Efficiencies

In this context, the Marine Environment Protection Committee (MEPC) is one of the bodies working in the aspects of protection of marine environment and in reducing the damages which occur in these aspects. The MEPC has announced to designate the Baltic Sea and the North Sea as emission control areas (ECAs) in order to reduce the nitrogen oxide reduction and the same is expected to come to action on 1st January, 2021 (Imo.org 2018).

In this context, different strategies can be designed and implemented by the shipping operators in order to comply to the stricter emission norms and for reducing the emission levels of NOx, some which can be as follows:


  • Reduction of speed-The emission of NOx can be reduced by the ships by reducing their ships (by 15%), especially when sailing through the ECAs. This can be done by route optimisation which in turn can help the ships in reducing their fuel consumption and thus decreasing the levels of emissions (Meyer, Stahlbock and Voß 2012).
  • Renewable energy usage-The ships can use renewable energy like that of wind power for propulsion, which can help in reducing the fuel consumption and NOx emission of the ships.

Example- This method can be seen to be already implemented by those of the Wessels and Cargill (who tried the kite systems) and also by the Norsepower and Enercon (who have installed different types of rotor designs in their ships).

  • Energy storage-Energy storing techniques and combustion modification methods like those of exhaust gas recirculation and water usage methods can also be used to reduce the emission of greenhouse gases and NOx by the ships.
  • Choice of fuel-The choice of fuel to be used by the ships play a crucial role in reducing the emission of any kind of harmful greenhouse gases and NOx. The ship operators can thus, shift from the usage of marine fuels to that of liquefied natural gas as well as methanol, which can contribute significantly in reducing their emissions and helping them to abide by the stricter restrictions put forward by the MEPC, in the aspects of operating in the ECAs (Doudnikoff and Lacoste 2014).

Example-  The exhaust gas recirculation as well as usage of the LNG can be seen to reduce the emission of NOx to the Tier 3 levels and the LNG can be seen to be increasingly used by many of the ship companies in place of marine fuels in the contemporary period.

  • Efficient route choice-The choice of optimal and short as well as efficient routes can also help in decreasing the fuel usage and thus the emissions of NOx, which makes this policy an efficient one for the company.

These strategies, along with other similar ones can be implemented by the shipping companies in order to reduce the emission of NOx by their ships, especially in the announce ECAs like the North Sea and Baltic Sea which are expected to come into operation as ECAs by January, 2021.

The Port of Melbourne, located in Melbourne, Victoria in Australia can be considered as one of the largest containerised and general cargo port in the country of Australia, which holds immense importance not only for the marine traffic dynamics in the country, but also has considerable importance in the commercial, business aspects as well as the overall prosperity of the economy and the consumption welfare of the population of the country over the years. Covering the mouth of the Yarra River, the port has been known for being one of the primary ports for commercial and cargo transports inside as well as outside the country over the years (Thedcn.com.au 2018).

However, in the recent period, the Port of Melbourne has been facing several crucial challenges in their operational framework, which is discussed in the following section: 

One of the major challenges which the Port of Melbourne has been facing in the current period is that of capacity constraints. In the recent years, with the increase in the trade and commerce activities and also due to the increasing innovations in the technological and infrastructural aspects, larger and more capable container vessels have been developed and many of the shipping lines have been bringing such vessels in operations (Onlymelbourne.com.au 2018). The main advantages of using these big ships is the fact that the import and export of commodities by using such ships help in carriage of considerably bigger amount of commodities, thereby decreasing the per-unit cost of transfer of such commodities which in turn helps in decreasing the overall price of the products and also increased the cost efficiencies of the vessels, thereby benefiting both the shipping corporations as well as the consumers who are directly benefitted by the fall in the price of the commodities imported, attributed to the decline in per unit costs of the commodities.

Environmental Protection

This upscaling in the size of the global container fleet, post the Global Financial Crisis, has led to an increase in the pressure on Australian ports, especially on the Port of Melbourne, which is till date the largest container ship catering port in the country. However, the Port of Melbourne, currently does not have the capacity to accommodate ships of capacities excess that of 8,000 TEU (Thedcn.com.au 2018). The ships of 48 metre beam cannot have access to the Port of Melbourne, as not many of them can get up to the mouth of the Yarra River, where the concerned port is situated. This indicates towards a highly crucial issue of import dynamics as with time and higher prosperity of the economy of Australia, the import and export quantities have been increasing. In such a situation, if the Port of Melbourne cannot accommodate bigger container ships, then the efficiencies of large ships in terms of economies of scale, cannot be enjoyed by the industry (Gourlay et al. 2015).

This is turn poses a credible threat for Port of Melbourne to lose its status of the largest container port in the country as given this situation, the larger ships can target Sydney or can go to New Zealand and can make connection to these regions through rail roads, which in turn may increase the costs of products, thereby decreasing the economic welfare of the customers of the region and the economy as a whole. The exporters are also suffering as the ships cannot be loaded to full capacity, thereby hampering their cost effectiveness in the global scenario.

Given the issues of capacity constraint and lack of cost efficiencies faced by the Port of Melbourne in the recent period, it becomes immensely important for the same to address these issues in order to stay in operation and be useful and effective for export and import purposes, contributing to the economic welfare of the population and that of the region as a whole. Some of the steps which the concerned port can take are discussed as follows:

  1. Channel Deepening-As discussed above, for the concerned discussion, the Port of Melbourne needs to increase its capacity so as to accommodate bigger container ships. For this purpose, the Port needs to take Channel Deepening actions which needs to include the landside improvements, enhanced navigational aspects for the ship, the development of channels for accommodating and facilitating movements of bigger container ships in these regions (Korbee Mol and Van Tatenhove 2014).
  2. Environmental concerns-Deepening of channels by the Port of Melbourne can lead to environmental hazards like those of oil spills, sufferings of penguins, murky water, increase in the pollutants like DDT, lead and Mercury in the water. Thus, while seriously considering the channel deepening actions, the port also needs to take into consideration the aspects of protection of the environment and animal lives and therefore needs to implement safer and sustainable methods in doing the same.
  3. Inland Port Project-The business efficiency of the port can be improved by reducing the huge congestion of export and import traffic which is faced in the city of Melbourne. This can be eradicated to a considerable extent by building highly productive road and rail connections of the port with the rest of the city, which may decrease the cost of transport of the commodities and the traffic congestion, thereby increasing the cost efficiency and business efficiency of the concerned port.
  4. Privatisation-The privatisation of the operations of the ports can lead to a more efficient, cost-effective operational framework which may help the same to achieve business efficiencies in the coming years.

References 

Banks, C., Turan, O., Incecik, A., Theotokatos, G., Izkan, S., Shewell, C. and Tian, X., 2013, September. Understanding ship operating profiles with an aim to improve energy efficient ship operations. In Proceedings of the Low Carbon Shipping Conference, London (Vol. 9).

Couper, A.D., 2015. The geography of sea transport. Routledge.

David, M., Gollasch, S. and Hewitt, C., 2015. Global Maritime Transport and Ballast Water Management. Springer Science, in preparation.

Doudnikoff, M. and Lacoste, R., 2014. Effect of a speed reduction of containerships in response to higher energy costs in Sulphur Emission Control Areas. Transportation Research Part D: Transport and Environment, 28, pp.51-61.

Ducruet, C. and Notteboom, T., 2012. The worldwide maritime network of container shipping: spatial structure and regional dynamics. Global networks, 12(3), pp.395-423.

Gourlay, T.P., Ha, J.H., Mucha, P. and Uliczka, K., 2015. Sinkage and trim of modern container ships in shallow water. In Australasian Coasts & Ports Conference 2015: 22nd Australasian Coastal and Ocean Engineering Conference and the 15th Australasian Port and Harbour Conference (p. 344). Engineers Australia and IPENZ.

Grammenos, C. ed., 2013. The handbook of maritime economics and business. Taylor & Francis.

Imo.org (2018). Marine Environment Protection Committee (MEPC), 71st session – Media information. [online] Imo.org. Available at: https://www.imo.org/en/MediaCentre/IMOMediaAccreditation/Pages/MEPC71PREVIEW.aspx [Accessed 9 Jun. 2018].

Karakitsos, E. and Varnavides, L., 2014. The Theoretical Foundations of the Freight Market. In Maritime Economics (pp. 11-40). Palgrave Macmillan, London.

Korbee, D., Mol, A.P. and Van Tatenhove, J.P., 2014. Building with Nature in marine infrastructure: toward an innovative project arrangement in the melbourne channel deepening project. Coastal Management, 42(1), pp.1-16.

Meng, Q., Wang, S., Andersson, H. and Thun, K., 2013. Containership routing and scheduling in liner shipping: overview and future research directions. Transportation Science, 48(2), pp.265-280.

Meyer, J., Stahlbock, R. and Voß, S., 2012, January. Slow steaming in container shipping. In System Science (HICSS), 2012 45th Hawaii International Conference on (pp. 1306-1314). IEEE.

Onlymelbourne.com.au (2018). Channel Deepening Project. [online] Onlymelbourne.com.au. Available at: https://www.onlymelbourne.com.au/channel-deepening-project#.WxuUlIozbIU [Accessed 9 Jun. 2018].

Sexton, D. (2018). Challenge to accommodate larger ships at Melbourne – DCN – Daily Cargo News. [online] Thedcn.com.au. Available at: https://www.thedcn.com.au/challenge-to-accommodate-larger-ships-at-melbourne/ [Accessed 9 Jun. 2018].

Stopford, M., 2013. Maritime economics. Routledge.

Thedcn.com.au (2018). INDUSTRY OPINION: Blame it on the Panama Canal; ships size growth costly for Port of Melbourne – DCN – Daily Cargo News. [online] Thedcn.com.au. Available at: https://www.thedcn.com.au/industry-opinion-blame-it-on-the-panama-canal-ships-size-growth-costly-for-port-of-melbourne/ [Accessed 9 Jun. 2018].

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