Well-run container terminal operations are generally high margin businesses characterised by predictable revenue streams. In a bid to maximise profits, many port operators have actively pursued sector-based and geographical asset diversification, expanding their current operations or acquiring overseas port management businesses in order to grow, as well as to mitigate risks linked with specific regional or national markets. However, even as global trade continues to increase, warning signals on the future of the container terminal industry have begun to surface. The organic growth of container handling volumes has slowed in response to a declaration from China that it will see a five-year low in its economic growth rate this year. This slowdown is exacerbated by offshoring and outsourcing cycles from global sourcing reaching optimum levels. This in turn has led to a decline in the growth of container traffic driven by such activities. Correspondingly, the expansion of port operators and new port facilities coming online has led to increased levels of competition in the industry. Operators are now unable to raise container handling fees without losing business as liners have the option to head to other competing ports to service their cargo. With limited top-line growth, port operators have to look for new ways to optimise business returns. They must select the right customers and deliver the right level of service to maximise port output and profitability.
Traditional model overhaul
A fixed-variable cost approach is the standard way port operators use to analyse their business. Cranes, trucks and other physical assets are examples of fixed costs, while wages of dockworkers and utility bills are two types of variable costs.Operators measure the average variable cost of handling each container and set a price factoring in a profit margin after covering the costs of cranes, trucks and other container handling equipment. Such a model is simple to understand and easy to adopt. To implement this business model organisationally, a company’s sales department will be responsible for selling as much as they can at a price higher than the variable cost.