transport management & theory practices (8)

Management of Transportation

Seventh Edition Coyle, Novack, Gibson & Bardi

© 2011 Cengage Learning

Chapter 8The Bulk Carrier

Industries

1© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Introduction• Domestic water and pipeline carriers

– Both account for substantial shares of intercity freight volume

• For some commodities, one or both are the dominant modes

– Most freight carried tends to be high volume, low value, and of limited variety

• Chapter includes– Types of carriers, market structure, competition– Operating and service characteristics, equipment

and cost structure– Current issues

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Brief History: Water Transport

• First principal form of long distance freight and people transport

• Important contributor to early U.S. economic and social development– Linked initial population/industrial concentrations

along coast and rivers

• Waterways are natural ways – Public expenditure for improvements occasionally

necessary


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Water Transport Industry OverviewSignificance of Water Transport

• A primary transporter of – dry bulk commodities– bulk petroleum, petroleum products and chemicals

• 13% of intercity freight ton-miles in 2005

• Market share decline since 1980s due to– Economy changing from manufacturing to service-

based– Supply chain orientation emphasizes faster modes


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Water Transport Industry Overview Types of Carriers

• Classification by legal form of carriage– Private carriers

• Own the freight transported

• Own or lease the vessels

• May transport exempt commodities on a for-hire basis

• Excluded from federal economic regulation

• Three or fewer commodities transported in the same barge unit also exempt from economic regulation


– For-hire water carriers are carriers that charge a fee for services. Includes

• Exempt carriers– Excluded from federal econ. regulation adm. by STB

– Carriers are exempt when transporting dry or liquid bulk commodities

– Most goods transported by water are bulk commodities, thus most for-hire carriers are exempt from economic regulations

• Regulated common carriers– Common carriers

– Contract carriers


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• Classification by waterway used– Internal or inland carriers

• Operate barges and towboats on principal U.S. rivers

• Most found on river systems flowing north to south through central U.S.

– Great Lakes carriers • Provide services between ports on Great Lakes

• Lake ships tend to remain on lakes

• Some lake ships access Atlantic and Gulf coast ports via St. Lawrence Seaway


– Coastal carriers • Operate ocean-going ships and barges along

Atlantic, Pacific and Gulf of Mexico coasts

• Moves large quantities of crude oil from Alaska ports to refineries along Pacific Coast

– Intercoastal carriers• Operate ocean going ships and barges between

coasts

• Moves large quantities of oil from Gulf to Atlantic ports


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Water Transport Industry Overview Number and Categories of Carriers

• Relatively small number of small firms– Approx. 680 domestic for-hire carriers in 2006

• Number of carriers rapidly declining since 2000

• Inland carriers earn highest share of revenues– Inland carrier revenues flat over last decade – Coastal carriers earn next highest share– Great Lakes carrier revenues are growing due to

increase in higher valued freight

Water Transport Industry Overview Competition

• Moderate intramodal competition – Small number of carriers on each waterway system

• Intense intermodal competition – With rail for dry bulk commodities (grain, ores, coal)

• Competition focused around central U.S. river system and the Great Lakes

– With pipelines for oil and petroleum products• Competition focused along coasts and Mississippi River

system


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Water Transport Industry Overview Operating and Service Characteristics

• Principal competitive advantages– Low cost transport service for large volumes over

medium to long distances• Average cost = $.72 per ton-mile

• Average shipment distances– 400 miles for inland carriers

– 1,500 miles for coastal carriers

– Relatively large carrying capacity• Barges: 1,500-3,000 tons per barge (50-100 truckloads)

• Lake vessels: 20,000 tons

– Fuel efficient


• Principal competitive disadvantages– Speed of service

• Slowest mode for dry cargoes

– Weather-related service disruptions• Vulnerable to ice, flood, and drought conditions

– Accessibility limitations– Packaging requirements for high-value goods

• Service disadvantages may add cost for user and create tradeoffs with low rate advantage


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• Commodities hauled– Water carriers well suited for low value-to-

weight cargoes where transport rates are significant part of total delivered cost

– Distribution of waterborne traffic (2007)• Coal and coke 29.3%• Petroleum 26.5%• Crude materials 17.6%• Food and farm products 12.5%• Chemicals 8.2%• Mfg. goods and equipment 5.7%


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Water Transport Industry Overview Equipment

• Vessels– Have large openings into cargo holds to facilitate

cargo loading and unloading– Watertight walls divide holds enabling carrying of

multiple types of commodities– Largest vessel: tanker 18K – 500K ton capacity

• Used largely to transport petroleum

– Barges – powerless vessel towed by towboat• Used largely on inland waterways• Low marginal cost to add barge to a tow•

Water Transport Industry Overview Terminals

• Functions– Facilitate intermodal transfers– Provide temporary storage in port area

• Require significant capital investment– Facilities include ship loading/unloading equipment,

land for storage, road and rail access – Most are publicly provided and operated– Some are owned by large bulk commodity shippers

• Recent improvements focus on mechanization© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Water Transport Industry Overview Cost Structure

• Relatively high variable, low fixed costs– Fixed costs: about 15% of total operating costs

• Nature provides ways

• Governments provide for improvements to rivers, canals, channels, locks, dams, terminals and ports

– Variable costs: about 85% of total• Water transport is not labor intensive

– In 1997, 2.72 million ton-miles per water carrier employee (note – rail and pipelines are even less labor intensive)

• Carriers pay user charges for portion of publicly provided improvements


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Water Transport Industry Overview Current Issues

• Drug and alcohol abuse– Random and pre-certification testing

• Port development challenges– Economic vs. environmental tradeoffs– Appropriation of port revenues– Inter-port competition– Impact of “mega-ship” emergence


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Brief History of Pipelines (Focus on Oil Pipelines)

• Highly specialized mode, hauling small variety of products

• Initial role, late 1800’s – move crude oil from wells to other modes

• Early 1900s – pipelines owned, operated by large oil companies

• After WWII – Chaplin Oil Case: pipelines ordered to operate as common carriers


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Pipelines Industry OverviewSignificance of Pipelines

• Carry 20% of intercity ton-miles (2005)– Crude oil and petroleum products represent

66% of ton-miles, natural gas 33%

• Earn 4% of total intercity transportation revenues– Reflects efficiency of pipeline transport and

low value per ton of products transported

• About 160,000 miles in oil pipeline network– 1,478,000 in natural gas pipeline network

© 2011Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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© 2011Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Pipelines Industry OverviewTypes of Carriers and Ownership

• 90% of carriers operate as common carriers

• Individual, vertically integrated oil companies own and operate most oil pipelines

• Some lines are joint ventures of two or more oil pipeline companies

• Other types of ownership– Railroads– Independent oil companies– Other types of industrial companies


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Pipelines Industry OverviewNumber of Carriers (Market Structure)

• Small number of large carriers: 2,297 (2006)• Industry tends toward oligopoly

– 20 integrated oil companies control 66% of crude oil mileage

– Entry costs are high: capital intensity, obtaining rights-of-way

– Significant economies of scale in investment and operation

• Capacity rises more than proportionally with increase in line diameter. Thus, investment cost per ton-mile and operating cost per barrel both decline as size increases.

Pipeline Operating and Service Characteristics

• Commodities carried – 4 principal products– Oil and oil products– Natural gas– Coal and coal products

• Moves in pulverized form as slurry

• Requires large quantities of water – very few such lines

– Chemicals• Primarily anhydrous ammonia (used in fertilizer)

• Propylene (used to manufacturer detergents)

• Ethylene (used to make antifreeze) © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Pipeline Operating and Service Characteristics

• Relative advantages– Low rates– Low loss and damage rates– Warehousing function (3-5 mph)– High delivery dependability

• Relative disadvantages– Slow speed limits responsiveness– Limited geographic flexibility– Limited variety of products carried


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Pipeline Competitive Conditions

• Very little intramodal competition– Small number of carriers– High capital costs and scale economies– Procedural requirements for entry– Ownership by large oil companies

• Limited intermodal competition – Difficult for other modes to match rates– Water carriers are principal competitors


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Pipeline EquipmentOil Pipeline Network

• Includes system of– Gathering lines and stations– Crude oil and product trunk lines– Pumping stations, refineries, and terminals

• Gathering lines– Move oil from wells to gathering stations– Relatively short distance movement– Small diameter, laid on ground surface


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• Crude oil trunk lines– Move crude oil from gathering stations to

refineries– Long distance movement

• Shipments average 800 miles, may move 1,000s of miles

– Large diameter lines laid underground– Pumping stations provide power– Capacity determined by line diameter and

pumping station power


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• Finished product trunk lines– Move product from refineries to market area

terminals– Long distance movement

• Shipments average 400 miles, may move 1,000s of miles

– Large diameter lines laid underground– 15 grades of finished product, including

kerosene, jet fuel and gasoline– Final delivery to customer usually by truck


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Pipeline Cost Structure

• High % of fixed costs – Pipeline owners provide right-of-way– Capital invested in

• Rights-of-way, pumping stations, terminal facilities

– Significant economies of scale• Helps explain joint ownership

• Very low labor costs– Pipeline industry employs 8,000 – Motor carriers employ 10 million to move

comparable ton-miles

Pipeline Cost Structure

• Rates– Freight classification is not necessary due to

small number of products– Conditions are not conducive to differential

pricing• One-way movement, limited geographic coverage,

limited variety of products

– Rates quoted on a per barrel basis• Typically point-to-point or zone-to-zone

• Minimum shipment sizes (tenders) required


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transport management & theory practices (8)

Business

water carriers

exempt carriers

inland carriers

categories of carriers

pipeline carriers

stb carriers

great lakes carriers

decade coastal carriers