Costs, Revenue and

Cashflow
Maritime Economics
Cashflow & the art of Survival
Every company faces the challenge of navigating its way
through the succession of booms, recessions and depressions
which characterize the shipping market.

During prosperous periods, it must meet the challenge of

investing wisely for future growth.
In recessions the challenge is to keep control of the business
when the market is trying to force surplus capacity out of the
system by squeezing cashflow and take advantage of the
opportunities.
What sorts out the winners from the losers is financial
performance.
Crucial factors
Economies of scale
Operational planning (increased productivity)
Reducing backhauls
Minimize time off hire
Deadweight tonnage utilization
Cutting cargo-handling time
IMPORTANT: Choice of ship, ship operation,
financial strategy
Financial performance & investment
strategy
The three key variables with which shipowners can
survive in the shipping market are:

The revenue received from chartering/operating the

ship
The cost of running the ship
The method of financing the business
Financial performance &
investment strategy
The way shipping companies manage these cost & revenue variables
significantly influence the financial performance of the business:
The choice of ship influences the running cost: Day to day costs are
higher for old ships with ageing machinery requiring constant
maintenance.
Running a successful shipping operation is not just a matter of costs:
it also involves squeezing as much revenue as possible out of the ship.
Revenue may be steady on a long-time charter or irregular on the spot
market.
It may be increased by careful management, clever chartering and
flexible ship design to minimize time ballast and ensure that the vessel
is earning revenue for a high proportion of its time at sea.
Financial performance & investment
strategy
Financing strategy is crucial: if the vessel is financed
with debt, the company is committed to a schedule of
capital repayments, regardless of market conditions. If
the ship is financed from the owners’ cash revenues or
outside equity finance there are no fixed payments to
capital.
In practice if a shipping company has only limited equity
capital, the choice is often between an old vessel with
high running costs but no debt or a new vessel with low
running costs and a mortgage.
The classification of costs
Three broad categories
1. Vessel’s cost
 Fuel consumption, number of crew, physical condition

2. The cost of bought in items

 Bunkers, consumables, crew wages, ship repairs,
interest rates
3. Management efficiency
 Administrative overheads, operational efficiency
The classification of costs
Operating Costs, which constitute the expenses involved in
the day to day running of the ship- essentially those costs
such as crew, stores and maintenance.
Periodic maintenance costs are incurred when the ship is dry-
docked for major repairs, usually at the time of its special
survey.
Voyage costs are variable costs associated with a specific
voyage and include items as fuel, port charges and canal dues.
Capital costs depend on the way the ship has been financed.
Cargo handling costs represent the expense of loading,
stowing and discharging cargo (especially in liner trades).
Ship age and the supply price of freight
Ship age and the supply price of freight
In market recessions ship-owners with old vessels
have to strangle with how long they can keep their
vessels lay-up
In market recessions ship-owners with newbuilt
vessels have to strangle with how long they can keep
paying the capital cost (sometimes exceeds
operational cost)
In this way market filters out the substandard owners
as well as the substandard vessels
Unit costs and economies of scale
Another economic relationship which dominates shipping
economic is the relationship between cost and ship size,
referred as economies of scale.

Where C is the cost per dwt p.a, OC the operating cost p.a,
PM the periodic maintenance p.a, VC the voyage cost p.a,
CHC the cargo-handling costs p.a, K the capital cost p.a,
DWT the vessel’s deadweight, t is the year and m stands for
the ship.
Unit costs and economies of scale
The cost of running ships
Operating costs
Operating costs, are the ongoing expenses connected
with the day to day running of the vessel, repairs and
maintenance.

They account for about 46% of total costs.

Operating costs
The principal components of operating costs are:

Where M is manning cost, ST represents stores, MN is

routine repair and maintenance, I is insurance and AD
administration.
Operating costs of a Capesize by age
Operating Costs components
Crew costs: include all direct & indirect charges incurred by the crewing of
the vessel including basic salaries and wages, social insurance, pensions,
victuals and repatriation expenses.
Affected by size of the Crew, Vessel’s Flag State, Automation of mechanical
operations (engine & cargo handling)
Early 1950: 40-50 members of crew per vessel – 1980: 28 members, 2014: 22-25
Stores & Consumables: Domestic items used aboard the vessel, lubricating
oil.
Repairs and maintenance:
Routine maintenance needed to maintain the vessel to the standard required
by company policy & Classification Society.(engine, auxiliary equipment,
painting)
 mechanical failures: may result to additional costs
 spares: replacement parts for the engine or on –board machinery
Operating Costs components
Insurance: Typically insurance accounts for 14% of operating costs,
though this is a cost item which is likely to vary from ship to ship.
Two-thirds of the cost is to insure the hull and machinery, which
protects the owner of the vessel against physical loss or damage, and
the other third is third party insurance, which provides insurance
against third party liabilities( e.g collision damage, pollution)
 Hull & Machinery: Insurance Company
 Third party insurance: P&I Club (investigate claims on behalf of ship-

owners, provide legal advice on negotiation /claims, holds reserve funds to

settle claims on behalf of their members.
 General Costs:
 Costs such as registration fee to the flag state.
 Administrative cost (low to dry bulk – higher for liner companies)
Voyage costs

VCtm = FCtm+PDtm+TPtm+CDtm

Where VC represents the voyage cost, FC the fuel costs,

PD port light dues, TP tugs and Pilotage and CD canal
dues.
Fuel Costs

Where F is the actual fuel consumption (tons/day), S

is the actual speed, F* is the designed fuel
consumption and S* is the designed speed. The
component α has a value 3 for diesel engines and 2 for
steam turbines.
Fuel Costs
Port Charges
Represent major component in voyage costs
Fees levied against Vessel & Cargo for the use of
facilities and services
Volume of Cargo
Weight of Cargo
Gross dwt of vessel
Net dwt of vessel
Charging practices vary considerably from one area to
another
Canal dues
The main canal dues payable are:
Suez Canal
Panama Canal
Suez canal fee:
Calculated by the classification society
Suez canal special tonnage certificate
((Gross dwt+Net dwt)/2)+10%
Panama canal fee:
A flat rate charge per net tonne
Cargo handling costs
CHCtm + Ltm+DIStm+CLtm

Where CHC is cargo-handling costs, L is cargo loading

charges, DIS is cargo discharge costs, and CL is cargo
claims.

The level of these costs maybe reduced by investment

in improved ship design to facilitate rapid cargo
handling, along with advanced shipboard cargo
handling gear.
The capital Cost of the Ship
These obligations take three forms
1. There is the initial purchase and the obligation to
pay the shipyard.
2. The periodic cash payments to banks or equity
investors who put their money to purchase the vessel
3. Cash received from the sale of the vessel (?)
Profit
Profit is a concept to measure the financial returns from a
business.
It is calculated by taking the total revenue earned by the
business during an accounting period and deducting the
costs which the accounting authorities consider were
incurred in generating that revenue.
The difference between Cashflow represents the
difference between cash payments and receipts in the
accounting period.
Vessel (payments on construction-loss of value through
time). Known as depreciation
Estimating depreciation
Investing in vessels means long term by nature.
Investors need to estimate how much profit the
company is making and that depends on how much
depreciation is deducted.
The ship is written off in equal proportions over its
expected life ‘straight line’ depreciation.
Estimating depreciation
Estimating depreciation
Between 1995-2000 (weak market conditions)
Bulk carriers were on average scrapped at 25.2 years
Tankers were on average scrapped at 24.7 years
In 2006 (strong market conditions)
Bulk carriers were on average scrapped at 30 years
Tankers were on average scrapped at 28 years
Specialized vessels have longer lives
Cruise ships 43.8 years
Live stock 33.9 years
Passenger ferries 30 years.
Steel ships over 50 years
The classification of revenue
Voyage charter
The freight is paid per unit of cargo transported (e.g
$12/ton)
Under this arrangement the ship owner pays all costs,
except cargo handling
Ship owner takes both the operational and market risk
The classification of revenue
Time charter
The hire is specified as a fixed daily or monthly payment
for the hire of the vessel ($10,000/d)
Operational risk is undertaken by the shipowner
Market risk by the charterer along with the majority of
the OPEXs
 Fuel, Port Charges, Stevedoring etc
The classification of revenue
Bareboat
Essentially a financial arrangement, in which the
charterer hire only covers the financing cost of the ship.
The owner finances the vessel and receives a charter
payment to cover expenses.
OpEx, voyage cost, cargo handling are paid by the
charterer
Charterer undertakes operational and market risk.
Freight revenue
The basic revenue calculation
1. Determining how much cargo the vessel can curry in
the financial period measured in tons, tonmiles etc
2. Establishing what price or freight rate the ship owner
will receive per unit transported.
The revenue per dwt can be viewed as the product of
the vessel’s productivity
Vessel’s productivity
Vessel’s productivity (cont)
R = Revenue per dwt/p.a
P = the productivity in ton miles of cargo p.a
FR = Freight per ton mile of cargo transported
t = time period
m = ship type
Optimizing the Operating Speed
When a vessel is earning unit freight revenue, the mean
operating speed of the vessel is important
It determines the amount of cargo delivered during a fixed
period and hence the revenue earned.
According to the levels of bunker costs and freight rates the
ship-owner must decide the operating speed of his vessel.
It’s a trade off:
 High speed – low freights = losses
 High speed – High freight = gains

 Low speed – Low freights = gains

 Low speed – High freights = losses

Optimizing the Operating Speed
Now, with freights.
Cobweb theorem