The Box - Marc Levinson [136]
Cost structures changed dramatically with the arrival of second-generation containerships starting in 1969. The new vessels had been designed with ease of loading and unloading foremost in their architects’ minds, and their cost for handling cargo was very low. Quite unlike either breakbulk ships or first-generation containerships, though, the second-generation ships came with obligations payable regardless of the business situation. Interest and principle on money borrowed to buy ships, chassis, and containers loomed large. Instead of port fees that varied with time at the dock and the amount of cargo loaded or unloaded, there were long-term leases for wharves, cranes, and marshaling yards, with rent owed even if traffic was down. Transporting empty containers back across the ocean was a burden with no corollary in the breakbulk world, and it could be heavy: more than half the 100,000 containers passing through the port of Antwerp in 1969 were empty. The computer systems to keep track of the containers and prepare loading plans for ships were a major new fixed cost.6
The new ships’ larger sizes and higher speeds allowed them to move far more freight over the course of a year than earlier vessels. Ships purchased in the early 1970s by European lines sailing to the Far East, for example, had four times the cargo capacity of the breakbulk ships they replaced, and their higher speeds and faster port turnaround times let them make six round trips each year rather than 31/3. Over the course of a year, each one of these new ships could carry six or seven times as much cargo as a conventional vessel. Profitability required that at least three-quarters of the container cells be filled; beyond that point, the fixed costs could be spread widely and the cost per container would be low. Profits thus depended not only on the number of vessels competing for cargo, but on the business cycle. A global recession would hit shipowners twice over: the lack of freight would cause their fixed cost per container to increase at the same time as it would weaken their ability to hold rates at profitable levels.7
Precisely such a lack of freight led to lower shipping rates in the early 1970s. Shipping machinery from southern Germany to New York cost one-third less by containership than by breakbulk freight, a bank study found in 1971. From whiskey distillers in Scotland to apple growers in Australia, major users of international shipping abandoned breakbulk freight as soon as regular container service was able to meet their needs. They had no reason to make this switch unless they found container shipping advantageous. Shippers’ overwhelming choice—in economic terms, their “revealed preference”—is very strong evidence that containerization on a trade route lowered the cost of shipping. The willingness of ship lines to share revenues through arrangements such as the North Atlantic Pool in 1971 indicates their desperation as freight rates tumbled.8
Then came the oil crisis. The dramatic oil-price rises that began in 1972 and accelerated after the Yom Kippur War in October 1973 had a disproportionate impact on all transportation industries. The average price of crude oil on the world market rose from just over three dollars per barrel in 1972 to more than twelve dollars per barrel in 1974. Freight costs, whether by truck, train, or sea, rose relative to the cost of manufacturing.
The new containerships were hit especially hard. Their high speeds meant that they consumed two or three times as much fuel for a given amount of freight as the breakbulk ships they replaced. This had not been a concern at the time the fuel-guzzling vessels had been designed; in the early 1970s, fuel accounted for only 10 to 15 percent of containerships’ operating costs. By 1974, though, fuel prices were a crushing burden, eventually to reach half the total cost of running a ship. The liner shipping conferences raised rates, slapped fuel surcharges and currency adjustment surcharges onto customers