Contract Guidelines


Focus on Revenue Improvement, Cost Recovery

In November 2010 TSA lines announced their program of recommended adjustments to rates and charges, to take effect May 1, 2011 for tariff rates and for most new service contracts renewing at that time. Voluntary guidelines included:

- Rate increases of US$400 per 40-foot container (FEU) to the U.S. West Coast, and US$600 per FEU for all other U.S. destinations and routings, from all Asian origin points.

- Full recovery of floating bunker and inland fuel charges, and of other fixed accessorial charges such as the Alameda Corridor, Panama Canal Suez Canal charges.

- A US$400 per FEU peak season surcharge (PSS) to cover contingent peak season costs, effective for the period of August 15 through November 30, 2011.

The 2011-12 program reflected a strong upturn in cargo demand throughout 2010, ultimately resulting in 16.3% volume growth for the full year. Carriers initially anticipated a further 6-9% growth for 2011.

Demand for the first five months of 2011 was 5.5% above the same period a year earlier, in part due to slower Q2 growth than anticipated. This in turn has also led some carriers to individually revise PSS effective in expectation of an improved second half but a somewhat more compressed peak season.

How Rate and Contract Guidelines are Developed

Throughout the year, TSA member shipping lines conduct an ongoing review of the Asia-U.S. freight market. They study a broad range of economic indicators on both sides of the Pacific (GDP growth, manufacturing and retail inventory levels, wholesale prices, retail sales, consumer confidence and spending, exchange rates, trade and manufacturing investment patterns, and so on), along with specific trends in the movement of major commodities in the various country markets.

Lines next take into account the anticipated relationship between available vessel/equipment supply and cargo demand for the coming year — whether space and equipment availability will be tight or not, especially during peak shipping periods.

Carriers also conduct individual, internal analyses of their end-to-end operating costs, from the time a container is provided to the customer for loading or received at the port, to the point of delivery. This can involve the minimum basic port-to-port ocean transportation, or it can be part of an ongoing, full-service supply chain partnership covering value-added shipment planning, tracking, consolidation and distribution services.

Terms and price for these services have typically been set out in 12-month service contracts, which have run from May 1 through April 30 of each year (although some contracts are timed to calendar or fiscal years, and may run for shorter or longer time periods, depending on terms).

More than 90% of total Asia-U.S. container traffic moves under such service contracts, although a small number of contracts may have different start dates and longer or shorter durations. Cargo that does not move under contract is covered under the publicly posted tariffs of the individual shipping lines. Most contracts involve a specified volume commitment in exchange for favorable service terms and price.

All rates and service contracts are negotiated individually by container lines and their customers. Some contracts, in addition, are confidential by mutual agreement of the parties. TSA provides guidance for its member lines through its research capability and the limited authority for members to meet and exchange information. Specifically, TSA adopts an annual program of voluntary, non-binding guideline rates and contract terms which members and carriers outside the agreement may follow or not as they see fit according to their needs.

TSA has typically announced its annual rate programs for upcoming May 1 contract renewals during the previous October or thereabouts, in order to provide ample time for negotiation and shipment planning, even with the few contracts that have earlier renewal dates.

Most contract negotiations begin in February and March, after carriers and their customers have had an opportunity to reassess market prospects following the traditional December-February “slack” season. A brief peak period appears in March and April, with “back-to-school” merchandise that will be sold during the summer. The primary peak season runs approximately from July through October, when holiday inventory is shipped, with carriers beginning to ramp up service levels during June.

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