Short Sea Shipping
Part II


Founding Director, Center for Maritime Studies
Assistant Academic Dean, Professor of Maritime Business

United States Merchant Marine Academy

Gary A. Lombardo, Ph.D

An Economics Perspective1

    This article is the second in a series of three articles addressing short sea shipping issues. The reader may recall the first article which appeared in the December/January issue of WWS/World Wide Shipping. Briefly the first article reported the results of a survey questionnaire administered to maritime professionals that was part of a research report1 examining the issues and prospects of short sea shipping. The article summarized the findings as follows:
    "Market size and annual market growth, both external market factors, were the only survey factors not rated neutral overall. This suggests industry stakeholders consider the potential demand for SSS and the potential for future growth of that demand as the only factors favorable to the industry."
    The third article in the series will address the environmental impact of short sea shipping and is scheduled to appear in the April issue.
U.S. infrastructure costs for overland transport have grown to the point where overland network infrastructure cannot be expanded easily. Today, highway construction in the U.S. costs approximately $32 million per lane mile plus $100 million per interchange. The interstate highway system was originally authorized at 41,000 miles. To construct a parallel system of roughly comparable extent, intended for trucks only, with only two lanes in each direction, would cost a minimum of approximately $5.2 trillion. This amount ignores interchanges and is nearly one-half the annual U.S. GDP.

Roll On/Roll Off Vessels

     Short sea shipping can operate in several different alternative modes: container carriers, roll on/roll off vessels, and an integrated tug-drawn barge service. Although it is likely that at some point in the future, all three conceptual models will operate in parallel, this article will address the economics of the RoRo alternative.
    RoRo vessels would be especially well suited for most SSS service. They offer the shortest cargo turn around time at both route terminals, as well as call for the minimum investment in port infrastructure. No cranes are required for container loading – in fact, RoRos could carry conventional tractor-trailers as readily as containerized ones. This improvement in flexibility is a distinct advantage to both SSS operators and their customers. No large yards for transient container storage are required, only a parking lot sufficient for parking one ship load of tractor-trailers, with perhaps 20% excess capacity for overflow. Delivered cargo is intended to be driven away from the terminal as soon as it can be driven off the ship. Loading ramps can be built into the ship itself, or provided as part of port infrastructure, though it appears obvious that two ramps, one at each port terminal, that would service many ships, would offer significant savings over fitting each ship with its own ramp system or systems.
    The shortcoming of the RoRo concept is that at least approximately 30% of weight and volume capacity has to be devoted to carrying the tractor-trailer cabs, and even containerized tractor-trailers can never be packed nearly as densely as on a containership. RoRo benefits compared to container carriers diminish the longer the route. Traditionally, RoRo service has attracted higher-value freight, and charges higher freight rates, which are justified by the faster port turnaround. In short sea shipping, the relevant comparison is not so much with container carriers or an alternative shipping configuration, but with the overland interstate trucking or railroad freight which is never handled by the maritime industry.

Required Freight Rates and Optimal Operating Speeds

    Water transport rates evolve over time. Between 1979 and 1992, the average increase in freight rates for all types of ocean transport has been 3.096 percent per year, which closely approximates the inflation rate over this period. Below we will consider the costs involved in operating a RoRo service and determine the required freight rate (RFR) the operator must charge to break even. This RFR must be significantly lower than the standard overland freight rate of approximately $1.25 per statute mile for SSS to be considered economically viable.
    Baseline assumptions for estimates presented graphically below are that short sea shipping is initially instituted with a single RoRo vessel designed to carry 80 tractor-trailers. These assumptions are conservative, and SSS operators should depart from them if and only if such departures provide additional cost savings. The RFR results from the size of the ship and the operating speed. Figure 1 graphs RFR as a function of operating speed, which is allowed to vary between five and forty knots, for different route lengths, which are allowed to vary between 200 and 800 nautical miles.

    From Figure 1 it appears that the optimal operating speed always falls in a range approximately 18 to 20 knots. The RFR curves are extremely flat near their minima, meaning the diseconomies of marginally faster operating speeds are not particularly punishing in terms of imposing additional costs and calling for higher RFRs. Figure 1illustrates that the greatest operating economies occur with operating speeds of around 20 knots. While lower speeds reduce costs and fuel consumption, they also impose the cost of making fewer runs each year between fixed endpoints of various lengths between 200 and 800 nautical miles, meaning fewer trucks can be removed from highways. Higher speeds allow more trips, but impose higher operating costs in terms of fuel consumption.
    Note that in Figure 1, minimum RFR rises more slowly than route length, indicating that the cost advantage of SSS increases on longer routes. This improvement in economy is only limited by the feasible limit of SSS service, which, due to the geography of the U.S. East, Gulf and West coasts, cannot be implemented over routes much longer than 800 nautical miles. Dividing minimum RFR, a measure of operational cost, by route length, gives minimum RFR/nm, a measure of cost per nautical mile traveled. Minimum RFR/nm does not reach a minimum over the distances relevant for SSS, indicating that, for the relevant distances, the cost advantage for SSS increases as the distance carried increases. This is illustrated in Figure 2.

    Figure 2 shows the same RFR values as Figure 1, but divided by the route length to get RFR/nm of freight carried. The RFR/nm compares roughly with the cost per statute mile charged by truckers. SSS operators should not seek to undercut interstate trucking or railroads beyond the minimum amount necessary to assure full capacity on each SSS trip. SSS operators should then take advantage of their significantly lower costs to operate at a higher profit margin.
    The RFR per nautical mile carried can be compared with the overland shipping rate charged per statute mile, approximately $1.25. This allows us to conclude that SSS routes less than 200 nautical miles cannot undercut the costs of overland operators, and thus cannot compete effectively. More importantly, SSS can compete on longer routes, and its cost advantage increases dramatically the longer the route. On an 800 nautical mile route, SSS has approximately half the cost of overland shipping. Charging only a small amount below what truckers charge, sufficient to ensure vessels sail fully loaded, ensures SSS operators a higher profit margin.

Government subsidies

    The data presented above demonstrate SSS can provide private ship owners significant profits. There seems to be an implicit belief that SSS cannot compete effectively with interstate truckers or railroads. It is also felt that since SSS seeks to address critical problems outside the maritime industry, highway traffic congestion and pollution, government subsidies are justified and will render SSS profitable, at least initially. In fact, SSS can be implemented without subsidies, and subsidizing SSS cannot serve the public welfare. If private owners cannot earn profits engaging in an activity, consumers do not sufficiently value that activity to justify its performance.
    It may also be argued that the government subsidizes competing overland transportation, and that SSS cannot compete with subsidized transportation unless it receives an equal and comparable subsidy. This only makes a case for removing the subsidy on the other forms of transportation. There remain legitimate spheres where the government can play a financial role. The government can utilize SSS as a customer, taking advantage of cost savings and lowered environmental impact. The government can utilize SSS to move the mail, defense equipment and troops, critical war materiel, etc., bypassing potential bottlenecks in overland transportation networks. The government can rebate fuel and vehicle use taxes to SSS customers, to reward them for cutting down on pollution and relieving congestion. The government can create a tax environment favorable to SSS operators and their customers, including but not limited to, permitting accelerated depreciation, tax rebates, and tax cuts.
    Because overland shippers, the potential customers of SSS, pay significant taxes and user fees, mostly to state governments, part of these taxes can be rebated. Every mile a truck is carried over the SSS network translates into one less mile traveled over the interstate highway system. Rebating highway and fuel taxes rewards truckers for the role they would be playing in lessening the congestion experienced by other truckers and personal autos using the interstates, and for mitigating environmental impact.


    In summary, given the lack of operational cost and revenue data, the theoretical analysis indicates that short sea shipping operators can be profitable. In this case, the government’s primary role should be that of a short sea shipping customer and not in the role of providing subsidies to the operators. In this way, operators may secure government contracts as they establish their enterprises to project revenue streams to offset fixed costs. This government contribution will then provide, in effect, a funding mechanism for short sea operators to market their services to the private sector to generate revenue for profitable operations.                     {}