What’s in a number?

Shipping, being an international industry with many service providers necessary to ‘put on a show’, is rather an opaque business by standards long-established in many other industries. It’s not only the potential conflicts of interest and ‘self dealing’ that may be hidden under the cloud of opaqueness, but mainly the fact that many parties in the industry, and for many reasons, use same terminology but different definitions to communicate their message.

In the last decade when shipping was hot due to China’s stratospheric growth and comparable freight rate trajectory, many newcomers, especially institutional investors, started looking into shipping primarily through the public equity markets (think ‘shipping IPOs’.)  More recently, mostly private equity is also is taking a hard look at shipping and acquiring shipping assets. What we find amazing, to a certain extent, is the way information, especially quantitative information, is conveyed that may make certain companies or operators have an advantage or better performance, when in reality the main difference is that a different denominator is used in each case.

When more emphasis was on public equities a few years ago, there was confusion of what were  ‘vessel revenue days’ and ‘vessel operating days’, ‘off-hire’ and ‘utilization rate’, numbers that could affect the ‘Time Charter Equivalent’ (TCE) rate and show that some companies were generating more ‘alpha’ from the market. For instance, vessels have to be dry-docked every so often; a shipowner knowing that they have a dry-dock due coming up next year for a vessel, would they count those ten (approximately) dry-docking days as ‘revenue days’?  The vessel by law has to be dry-docked and those ten days are ‘lost days’ as far as revenue is concerned, no matter what; but some owners were starting their ‘revenue year’ with 365 days for the vessel while others with ten days fewer. Guess which owner has an advantage and why, as far as ‘performance’ is concerned.

More recently, with shipping in turmoil, and a dearth of newbuilding orders (temporarily, at least), shipbuilders had to offer something new, a compelling reason to entice new business in the middle of a deadstill market. How about efficiencies then, namely fuel efficiencies? With bunker prices high, fuel efficiency was a logical card to play. Now, we are not claiming to be naval architects and marine engineers, and also we do not claim that certain yards didn’t work very hard to improve indeed vessel designs. On the other hand, we have seen designs with claims of 30% in fuel efficiency, something that would require a revolution rather than evolution in the science of naval architecture, something that regrettably didn’t happen recently as far as we can tell. But again, some of these efficiencies were due to the fact smaller engines were used to propel the same vessel (definitely lower fuel consumption but at a trade off of under-powering the vessel and increasing the chance of an accident); other efficiencies were calculated at different drafts of the vessel than design draft, assuming certain conditions of trim that were placing limitations on the trade of the vessel, certain (favorable) weather conditions, etc.,  or the result was based on comparisons against patently outdated designs or poorly maintained vessels.  We understand that improvements in fuel efficiency are usually limited at the very best to less than 15% based against previous designs, ceteris paribus. We are not claiming that 15% in fuel savings is a negligible concern, but it’s quite different making an economic decision on whether a company should be undertaking multi-million dollar commitments for newbuildings based on baked information of 30% in fuel savings.

Now that passive investors such as private equity funds (passive at least in the form of vessel management) have been looking for third party vessel managers, vessels operators and pool managers, certain definitions have been stretched to the limit.  Under pool employment and third party vessel management for instance, the more of the vessel expenses and downtime the pool manager passes back to the vessel owner, the better the pool results, which not only means more profit for the pool manager, but mostly, better pool results to brag about that will be used in presentations to convince more owners to bring vessels under the pool. Repositioning a vessel? It may be an ‘owner’s item’, as far as some pool managers can tell. Ballasting a vessel to a loading port? Also, it could be an ‘owner’s item’. Loss of hire due to vetting and port state control inspections? Ditto.  Similarly for technical management, how much of spare parts have to be kept onboard the vessel? Is it an expense or an investment? How about the cost when a minor part is missing and the charterer places the vessel off-hire and refuses to pay freight for the downtime? How about the reputation and goodwill a vessel and her owner create with the chartering community by providing well equipped and maintained vessels? How about the higher demand and potentially higher price the vessel will obtain in the secondary market later on with the vessel coming for sale from a ‘good stable’, as the shipping lingo goes?

It’s the holy grail of business gurus, business schools and management experts  reaching for optimization; not to mention the genuine goal of many good companies and managers. And, no doubt, there will always be debated among bean-counters whether certain business cash ‘outflows’ are expenses or investments / capital improvements.  After all, that’s the ‘nature of the beast’.  On the other hand, there should be a certain amount of transparency on how certain numbers are achieved by the companies, the managers, the pool operators, etc But more importantly, parties receiving such information should look diligently ‘under the hood’ and demand a thorough explanation on how the numbers are defined. Just because one manager is ‘cheaper’ than another, or one pool is ‘better performing’ than another, etc is immaterial unless a common denominator can be established.  As they say, the devil is in the details, and sometimes such details can offer surprises.

© 2013 Basil M Karatzas & Karatzas Marine Advisors & Co.

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