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Transport Management & Theory Practices (8)

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  • 1. Management of Transportation Seventh Edition Coyle, Novack, Gibson & Bardi © 2011 Cengage Learning Chapter 8 The 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.
  • 2. 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. 2
  • 3. © 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. 3 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
  • 4. © 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. 4 Water Transport Industry Overview Significance 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
  • 5. © 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. 5 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
  • 6. Water Transport Industry Overview Types of Carriers – 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 © 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. 6
  • 7. © 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. 7 Water Transport Industry Overview Types of Carriers • 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
  • 8. Water Transport Industry Overview Types of Carriers – 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 © 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. 8
  • 9. © 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. 9 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
  • 10. 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 © 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. 10
  • 11. © 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. 11 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
  • 12. Water Transport Industry Overview Operating and Service Characteristics • 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 © 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. 12
  • 13. © 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. 13 Water Transport Industry Overview Operating and Service Characteristics • 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%
  • 14. © 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. 14 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 •
  • 15. 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. 15
  • 16. © 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. 16 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
  • 17. © 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. 17 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
  • 18. © 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. 18 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
  • 19. © 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. 19 Pipelines Industry Overview Significance 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
  • 20. © 2011Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20
  • 21. © 2011Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21
  • 22. © 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. 22 Pipelines Industry Overview Types 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
  • 23. © 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. 23 Pipelines Industry Overview Number 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.
  • 24. 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. 24
  • 25. © 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. 25 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
  • 26. © 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. 26 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
  • 27. © 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. 27 Pipeline Equipment Oil 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
  • 28. © 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. 28 Pipeline Equipment Oil Pipeline Network • 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
  • 29. © 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. 29 Pipeline Equipment Oil Pipeline Network • 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
  • 30. © 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. 30 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
  • 31. 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 © 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. 31