OPERATING ECONOMICS

THE FREIGHT MARKETS

The supply and demand for marine transport are matched in the short term through the
mechanism of the freight markets, and in the longer term through new building and
scrapping of ships. The market is international and the open competition provides a good
example of the laws of supply and demand.
Ships may be either chartered (i.e. hired to someone with cargo to transport) or operated
by the owner in his own business.
A. Chartered Ships
(i) Single Voyage Charter
The shipowner undertakes to provide a vessel for the carriage of specific cargo(es) for a
single voyage between two (or occasionally more) ports. The charterer pays freight per
ton of cargo actually loaded within specified limits. The shipowner pays :

Daily running costs of ship, covering crew expenses, upkeep, insurance, etc.

Capital charges, covering depreciation, interest, taxes, profit.

Fuel costs.

Port charges and canal dues.

Cargo handling charges.

The extent to which the cargo handling charges are paid by the owner may be varied
according to trade and usage, e.g.

Gross terms : shipowner pays for loading and discharging.

Free in and out (f.i.o) : shipowner pays for neither loading nor discharging.

Free on board (f.o.b) : shipowner does not pay for the loading.

Free Discharge (f.d) : shipowner does not pay for discharging.

Voyage chartering is generally used for full loads of liquid or dry bulk cargoes. Freight rates
are usually expressed as dollars per ton of cargo for dry cargo, or sometimes as a lump sum
for a ship load. The voyage charter market is sometimes called the spot market. A certain
number of days will be allowed for loading and discharging the cargo. If the port time is
less than anticipated, the shipowner pays the charterer despatch money, if longer, the
charterer pays the shipowner demurrage for delaying the ship.
(ii) Consecutive Voyage Charter

Consecutive voyage charter is same as single voyage charter, except that the ship is
contracted by the charterer for two or more consecutive voyages in succession. As an
example, oil companies may charter three consecutive voyages to cover peak demand in
winter. Over a year, the owner's income from either type of voyage chartering will be :
Average cargo tonnage per voyage * Number of loaded voyages per annum
* Average net freight rate per ton of cargo.
(iii) Timecharter
The shipowner undertakes to provide a vessel for a period of time for use by the charterer
on the latter's business. Timechartering is sometimes called period chartering. The period
may either be fixed in time , say three months, one year or even 20 years, or for a round
voyage (trip charter). The latter is sometimes used by liner companies to supplement their
existing fleet for peak periods, the former generally for bulk cargoes. The charterer is thus
responsible for arranging voyages and cargoes during this period; the shipowner provides
the ship and crew and maintains the vessel. He is thus only responsible for:

Daily running costs

Capital charges.

All voyage expenses, fuel, port charges, canal dues, cargo handling charges, are to the
charterer's account. The hire is usually expressed as dollars per unit capacity (e.g. ton
deadweight, cubic metre etc) per month, or as a lump sum per day, especially by offshore
companies. Hire is payable only for time in service, i.e. it ceases during repair or
breakdown (off-hire) but it continues to be paid even if the ship sails empty or is delayed
in port.
Timecharters, especially the longer term ones, have a stabilizing effect on payments for
freight and are much used by oil companies. Timechartering reduces the amount of on
capital needed, gives long term stability of transport costs, provides flexibility and
marginal tonnage, and a yardstick to measure the efficiency of the charterer's own fleet (if
any). Market fluctuations with supply and demand are usually less violent than for voyage
charters, especially long term charters.
Over a year, the owner's income from timechartering will be :
Deadweight * months on hire * freight rate (in per tonne dwt per month)
or
Number of days on hire * daily hire rate.
(iv) Bareboat Charter
The shipowner undertakes to provide a vessel to be operated entirely by the charterer for
a specified period. The charterer provides the crew, maintenance and generally uses the

ship as if he owned it, merely paying a hire for the bareboat.

(v) Contract of Affreightment
The contractor undertakes to provide a specified transportation capability over a period.
Although usually no ships are named, there will be maximum and minimum limits on the
cargo quantities available, and possible restrictions at loading and discharging ports. The
ships may not actually be owned by the contractor, whose skills lie in matching a number
of charters to his available fleet, to minimize ballast time. If not already owned, the
necessary ships may be obtained by chartering by any of the above methods. Sometimes
used for large scale transport of minerals, e.g. iron ore from South America to Japan.
Freight is usually paid per ton of cargo actually carried.
N.B. For all types of charter, the brokers' commission must also be paid out of freight
income, typically 2.5%-5%, so that net, rather than gross, freight rates should be used to
determine income.

B. Owner Operated Ships

(i) Industrial Carriers
Vertically integrated industrial concerns may operate their own ships to transport raw
materials or finished goods, e.g. oil,. steel, sugar, aluminium, paper companies. About
30% of the world tanker fleet is owned by oil companies. Sometimes the actual
management of the fleet is subcontracted to a ship management company which may own
other ships itself. Freight as such is not necessarily earned : the object may be to minimize
transport costs of the overall industrial process, or occasionally to take advantage of
favourable tax and other allowances.
Other advantages of ownership include : greater control of design and specification, use
of vessel as testbed for new developments (e.g. coatings), greater flexibility of operation
and, of course, prestige.
(ii) Common Carriers
Most of the liner companies operate common carrier services, i.e. they provide a
scheduled service on regular routes for any quantity of cargo, usually general cargo, at
published freight rates. Manufacturers exporting goods c.i.f. (cost, insurance, freight)
require a regular service at predetermined rates, so that they can guarantee delivery time
and cost. Cargo liners carry a miscellany of general cargoes, none large enough to justify
chartering a whole ship. Occasional parcels of bulk commodities may be taken to fill ships
on a return voyage. Because fixed expenses are high in providing a regular service where
ships sail whether full or nearly empty, and variable expenses are low, freight rates would
tend to be depressed to this latter low level if competition were not regulated, eventually
resulting in the service becoming uneconomic and being abandoned. Most cargo liner

operators on a particular route are organized into Conferences, which regulate freight
rates and sailing for some time in advance, often in discussions with the shippers of cargo.
Freight is usually Liner Terms, i.e. the shipowner pays for all expenses quay shed to quay
shed including cargo handling. Commission is payable to cargo agents, as well as rebates
to shippers who use only Conference ships.
Linear freight rates do not always reflect the cost of carriage, as the value of each
commodity, the inward and outward imbalance of trade, seasonal factors and the high
cargo handling charges, especially for break-bulk cargoes, all influence the rate, while the
effect of distance is not very marked. The general level of freight rates is usually set so as
to give a reasonable rate of return to a Conference operator, and may be negotiated on
this basis with shippers' organizations and independent accountants. Competition between
operators in a Conference is on quality of service, not freight rates, e.g. offering faster
ships, better record in respect of cargo damage and pilfering, etc. Independent liner
operators (outsiders) provide competition on some routes, offering slightly lower freight
rates. Cargo liners tend to carry cargoes both ways (unlike most bulk carrying vessels) but
are usually limited by cubic capacity rather than deadweight. Consequently many rates are
expressed per measurement ton of one cubic metre (or formerly 40 cu. ft.) or as
weight/measurement where freight is charged either per ton weight or per ton
measurement (i.e. volume), whichever is the larger. On some containerized routes,
commodity box rates may be used, i.e. a rate per container, irrespective of the quantity
inside.
Over a year, the owner's income will be :
Maximum cargo capacity available * Average proportion of capacity filled
Round voyage per annum * Average net freight rate per ton * 2.
N.B

The 2 derives from the ability to carry one cargo outward, and another
homeward on a round voyage.

OPERATING ECONOMICS
The shipowners responsibilities for the various items of expenditure are illustrated in
Fig.1.
TOTAL CHARGES

Capital
charges

Daily
running
costs

Voyage
costs

Cargo
expenses

CAPITAL
CHARGES

DAILY RUNNING
COSTS

VOYAGE
COSTS

CARGO
EXPENSES

Loan Repayments
Loan Interests
Taxes
Return After Tax
(Depreciation)
(Profit)

Crew Expenses
Maintenance &
Repair
Stores
Insurance
Administration

Fuel Costs
Port Charges
Canal Dues

Cargo Handling
Cargo Claims

OWNER

BARE BOAT CHARTER

CHARTERER

TIME CHARTER
OWNER

CHARTERER

VOYAGE CHARTER
OWNER
CHARTERER
or sometimes OWNER

OWNER OPERATED
OWNER
Figure 1. Division of Responsibility for Operating Costs
Capital charges cover items such as loan interest and repayments, profit, all related to the

capital investment in the ship. The full calculation of effective capital charges can be
complex. Voyage costs cover fuel, port and canal dues, and sometimes cargo handling
charges. Daily running costs are those incurred on a day-in day-out basis whether the ship
is at sea or in port; these include crew wages and benefits, victualling, ship upkeep, stores,
insurance, equipment hire and administration. Voyage costs vary considerably from trade
to trade, while daily running costs are largely a function of type, size, and flag.
The type of charter and the division of responsibility for cost and ship's time between
shipowner and charterer can influence some features of the design of the ship and its
equipment, e.g. timechartered tankers may be designed to oil company specifications.
With bareboat charters less than the life of the ship, the charterer has less incentive than
an owner-operator to reduce fuel consumption, while time in port is more significant for
owners of owner-operated or voyage chartered ships than for timechartered ships. Owner
operators may thus be expected to be more forward-looking in fitting fuel saving devices
or better equipment to keep port turnarounds short, e.g. bow thrusters or more elaborate
cargo handling equipment. Owner operators often have the highest standards of
equipment and maintenance, especially if ships are partly self-insured.

APPLICATION TO SHIP DESIGN

Marine transport or service requirements must be developed into a series of feasible ship
designs, which must then be evaluated for their technical and economic performance,
covering the following :
Trading pattern and operating environment
Range of feasible technical designs
Estimation of building and operating costs, and income
Economic evaluation of alternatives.
Although a superficial glance might suggest that such a process is a matter only for ship
operators, this is not so; the shipbuilder is also concerned, in two principal ways :
Specialist knowledge : To design the optimal ship, extensive experience is
required of the influence of different design features on first cost. The builder is
much better able than the shipowner to quantify accurately the cost of alternative
hull proportions, materials, machinery arrangements, etc.
Commercial competition : Since ship operators are concerned to maximize the
difference between present worths of income and costs, rather than minimising
ship first cost, there has arisen a greater need for a shipbuilder to show not that
this design is necessarily the cheapest, but that it is the most profitable.

Traditionally, ship design from the builder's viewpoint has meant the receipt of an enquiry
from a shipowner, accompanied either by a statement of requirements or an outline
design. In the former case, a design is worked up, often using a basis ship; in the latter,
the design is checked out. Time usually prevents anything but a single design being
investigated. Then the cost is estimated and a price submitted to the shipowner. If the
tender is successful, a contract is placed, and the design worked up into a complete
building design. There are thus two principal stages of design :
i. Preliminary or tender design
ii. Detailed or post-contract design.
The importance of stage (i) is often overlooked, but it is at this creative stage that the
application of engineering economics has its greatest pay-off, since there is then greater
scope for selecting the most economic design variables.
In the traditional approach :

Design was usually based on previous ships, yet there was no existing
experience of the new ship types
Generally only one design for one size and speed was investigated
No economic evaluations were made either for the single design or any
alternative
Traditional cost estimating methods did not reflect the changing ship types and
production methods.

A modern approach aimed at improving designs of ships requires good collaboration

between potential owners and builders and the design process should include :
(i)
(ii)
(iii)

(iv)
(v)
(vi)
(vii)
(viii)

Investigation of transport demand, corresponding market research and feedback of

operational experience.
Concept formulation: range of possible technical solutions, ship types,
configurations, sizes and speeds.
Preliminary technical design of a number of alternatives including dimensions,
machinery, etc.
Estimates of first cost, operating costs and potential revenue earning liability of
each alternative.
Economic evaluation of the alternatives, under a variety of assumptions.
Selection of the optimal design, either by judgement, or mathematical
programming techniques.
Discussion of the proposed design (and any suitable alternatives) with clients.
Contract, detailed design and construction of the final selection.

Comparison of Alternative Designs

A typical situation faced by the designer is to compare alternative designs considering
both technical and economic factors. The comparison of alternatives need not be for entire
designs. They may involve comparison of individual features, such as different cargo
handling systems or different materials for piping systems. Such features are
straightforward to analyse economically, when they do not affect earning capacity, as in
the latter case. The alternative first costs and maintenance costs are evaluated in terms of
annual cash flows and converted to present worths to find the system with the highest
NPV (in this case income is not involved, so the least negative value is looked for), or
incremental rate of return, if cost savings are being related to extra first cost.
In practice, most alternatives designs differ not only in building and operating costs, but in
performance, so that care must be taken to include second-order effects. For example,
better cargo handling gear may not only save on operating costs, but may save port time,
offering the prospect of carrying more cargo per annum. Here, those alternative features
which have a significant effect on the overall design are mainly considered. The secret of
success in comparing alternative designs are to obtain sufficiently realistic data and to use
an appropriate method of economic analysis.
General Approach to the Evaluation of Economic Performance of Freight Earning
Vessels
In any marine transport system, the principal parameters to be considered are :

Cargo type, quantity and unit value

Distance and physical characteristics of route
Operating system, e.g. unitized, bulk, dedicated vessels.

Secondary parameters include :

*
*
*
*
*
*
*
*
*
*
*
*

Number of vessels in fleet

Vessel size
Vessel speed, or transit time
Cargo stowage and handling rates
Fluctuation in cargo availability
Availability of return or backhaul cargoes
Terminal restrictions
Port time
Inland transport
Power requirements
Vessel first cost, new or secondhand
Shore investments

*
*
*
*
*
*

Operating costs dependent on throughput

Operating costs not dependent on throughput
Fuel costs and availability
Financial conditions : taxes, loans, subsidies etc.
Life of system components
Alternative service and conditions.

In more specific terms, especially applicable to the movements in ships of bulk

commodities available in large quantities, these parameters may be expressed as :
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*

Cargo payload
Load factor+
Round trip distance
Speed
Effective cargo handling rate
Number of ports of call and duration
Daily fuel consumption at sea and in port
Service days per annum
Ship cost
Crew cost
Maintenance, insurance and other daily running costs
Bunkering pattern
Fuel cost per tonne
Port charges
Cargo handling charges
Freight rate
Expected rate of return
Tax rate
Ship life
Depreciation (capital) allowance
Credit facilities
Subsidies
Anticipated escalation.

Load factor can be broadly defined as :

Actual tonnes- miles per annum

potential tonnes- miles per annum

It has thus two components.

Average cargo payload on loaded voyages Average miles- steamed with cargo
*
Maximum cargo payload
Total miles steamed

The essential first step is to establish the technical performance of the vessel (and any
alternatives) from design calculations, and collect operational and economic data.
(a)

Ship Data
Type of ship and general characteristics,
Deadweight in tonnes (usually to summer draft)
Cargo cubic capacity in m3 (bale, grain, liquid, etc.), or container capacity
Service speed in knots (loaded and ballast)
Service power in kW
Specific fuel consumption (sfc) in gms/kW-hr
Auxiliary and port fuel consumption per day
Gross and Net Tonnage (GT, NT)

(b)

Operational Data
Cargo to be carried, average storage factor
Cargo load factor (% full when cargo on board)
Steaming load factor (% miles loaded)
Typical round trip steaming distance in nautical miles
Number of ports of call per round trip
Average duration of each port call, days
Days off-hire per annum

(c)

Economic Data
Type and duration of charter, where appropriate
Average freight rate, less commissions
Ship first cost, for single ships (or multiple ships if fleet)
Any necessary extra initial costs for vessel in question, e.g. outfit of containers
Expected life of ship
Expected disposal value
Required rate of return, money or real terms
Loan terms
Tax conditions
Exchange rates, if income and expenditure are not in same units
Crew costs, annual including benefits, victualling etc.
Upkeep costs, annual including maintenance and repair, stores, etc.
Other costs, annual including insurance, administration, etc.
Fuel costs per tonne, main and auxiliary machinery
Port costs, average per port per GT/NT, or total per round trip
Cargo costs per unit, including loading, discharging, claims, etc.
Annual escalation of each cost item.

(d)

Derivation of Annual Cash Flows of Income and Expenditure

(i)

Sea days per round trip (SD) = nautical miles / (24 * service speed in knots)
(Speed should be a realistic value allowing for weather, fouling, ballast voyage
speed, canal passages etc.

(ii)

Port days per round trip (PD) = Number of ports of calls * average duration
(Port duration should allow for waiting time and berthing time, delay, etc.)

(iii)

Number of round trips per

annum (RTPA) =
365 - off hire days
SD + PD

(iv)
(v)

Sea fuel per day (tonnes) =

service power * sfc * 24

+ auxiliary fuel
6
10
Total fuel consumed per round trip (FPRT) = sea fuel * SD + port fuel * PD
(Maximum fuel load carried will depend on location of bunkering ports and
prices, amount of reserve fuel, bunker capacity of ship. Typical reserve is about
20% of total carried or 4-6 days steaming)

(vi)

Maximum payload :
For Mass limited
= Dwt - maximum fuel carried - crew and effect - fresh water
For Volume limited
= cargo capacity/average stowage factor

(vii)

Cargo carried per annum (CCA) = Maximum payload * RTPA * LF * 2

N.B. The 2 derives from the ability to carry one cargo outwards and one
homewards on a round trip

(viii)

Cargo cost per annum = CCA * cost per unit

(ix)

Port costs per annum =

Number of calls * RTPA * cost per GT * GT (or NT for certain ports)

(x)

Fuel costs per annum = FPRT * RTPA * cost per tonne

(xi)

Daily costs per annum = crew + upkeep + other costs

(xii)

Voyage costs per annum = cargo + port + fuel costs

(xiii)

Capital charges (CC) =

For Uniform cash flows
For Nonuniform cash flows

:
:

CR * (First cost - PW * scrap value)

Full DCF calculation year by year

Freight Revenue
(xiv)

Voyage charter or common carrier

CCA * freight rate per unit

(xv)

Time charter =
dwt * months on hire per annum * freight rate
or
daily rate * days on hire
In timecharter amount of cargo, port or fuel costs, and round trips and cargo
carried per annum is not important

Example 1.
Consider a 40,000 tonnes dwt oil products carrier bought by a flag-of-convenience
shipowner, for a total of 18,000,000 pound cash. It is operated on a 5 year time charter
rate at 9.00 pound per tonne dwt per month after commissions, and then sold for
13,000,000 pound cash. Assume that crew costs are 700,000 pound in the first year rising
by 10% per annum and other operating costs are fixed at 600,000 per annum. Calculate
the NPV at 10% discount rate to assess whether the investment is profitable.
Assume 11.5 months trading per annum.
Annual income = 40000 * 9.00 * 11.5 = 4,140,000 pound
Present worth factor (PW) = (1 + i)-N

(in thousands of pounds)

YEAR

SHIP
COST

0
1
2
3

-18000

CREW
COST
-700
-770
-847

OTHER
COST
-600
-600
-600

INCOME

4140
4140
4140

CASH
FLOW

PW
10%

DCF

-18000
+ 2840
+ 2770
+ 2693

1.000
0.909
0.826
0.751

-18000
2582
2288
2022

4
5
6

13000

TOTAL

-5000

-932
-1025

-600
-600

4140
4140

+ 2608
+ 2515
+13000

-4274

-3000

+20700

+8426

0.683
0.621
0.565

1781
1562
7345
-420

Net present value = - 420,000

pound.
N.B.

Although in crude terms (i.e. no time value of money) the ship is `profitable'
having a positive cash flow of 8,426,000 pound, the yield is less than 10% because
the NPV is negative. This investment is thus less than profitable than others which
induced the shipowner to set a 10% rate of return as target. The actual rate of
return is found by iterating the last two columns and the value is 9.4%.
A typical cash flow pattern for a complex problem is shown in Figure 2.

Sensitivity, Uncertainty and Trade-offs

The results of a techno-economic ship design process may be sensitive to changes in the
data, because there may be uncertainty about many of the technical and economic
parameters. For example, it is not possible to predict exactly over the life of a ship fuel
prices, maintenance costs, port time etc. The simplest way of investigating such
uncertainties is to repeat the calculation with the different values of key parameters, and
assess how sensitive the results are to such changes. Figure 3 presents a typical
presentation of such calculations (which might be for alternative fuel saving designs), with
the economic measure of merit plotted against the key parameters. Where the curves for
alternative designs do not cross, the ranking is not changed, but where there is crossover
the decision to be made is whether the operating situation is likely to be to the left or right
of the crossover.
It is also possible to make the results of sensitivity calculations to make trade-offs, e.g.
how much extra in first cost can one afford to pay to obtain a reduction of fuel
consumption. The decrease in NPV from say a 10% increase in first cost can be compared
with the percentage decrease in fuel consumption needed to generate a corresponding
increase in NPV.

THE OPTIMAL SHIP

The factors involved in selecting the optimal size and speed for a ship are examined

below.
Optimal Ship Size for a Given Speed
For a bulk cargo trade where there are no restrictions on ship size or cargo availability, the
economies of scale in building and operating costs indicate that the optimal ship is in
general the largest possible, offering the lowest transport costs.
The situation is shown diagrammatically in the Figure 4. The top half shows a curve of
freighting costs per tonne, FC, against ship size; one particular freight rate, FD, is shown.
The lower half shows the annual cost (or present worth), i.e. multiplying the unit cost
curve by the payload at each ship size. Maximum NPV is obtained at CD with the
maximum permissible size of the ship for the trade. This size may be determined by a
number of physical restrictions particularly depth of water, also canal restrictions, shallow
water en route, etc.
There may also be limitations on cargo availability. In this case, an upper bound is set on
freight income, G'E', after all the cargo has been lifted. Here the maximum return occurs
at A'B'; any increase above this optimal size merely increases expenditure (which includes
capital charges), while income remains constant along B'E'.
A similar effect is obtained if the loading or discharging rate is slow compared with the
size of ship. Port time increases with size, reducing the number of voyages per annum
and hence restricting income.
Major factors and their effect on ship size includes :Greater annual flow of cargo
Faster cargo handling or port turnaround
Anticipated port improvements

larger
:

larger
:

larger
Longer voyage distance
:

larger

High frequency of service

:
smaller
Higher value cargoes
:
smaller
Reduced cargo handling and stockpiling costs
Cargo available one way only

larger
:

Increasing long term availability of cargo

larger

larger

Large seasonal fluctuations

:

larger

High interest rates

:
smaller
Increased unit costs of building ships

:
smaller

The influence of several of these factors can be seen when comparing the large size of
container ships with break-bulk cargo vessels. The first seven factors are the most
significant.
A dynamic view should be taken of physical restrictions, weighing up the possibility of
changes during the ship's life. This is particularly so in the case of draft : it may be worth
paying a little more for a deep drafted ship, even though it may not be able to use all this
draft on more than a small proportion of the voyages in its life. If there are no restrictions
on length or breadth, larger ship at reduced draft may well have a greater payload and
offer lower freighting costs per tonne than a smaller ship down to her marks. Choice of
optimal size is then a trade-off between known costs of greater size against the chances of
being able to use the size sufficiently often over the ship's life to justify this cost.

Optimal Speed for Ship Size

In transport situations, there is often demand for the greatest practicable speed to be
adopted. Figure 5 illustrates diagrammatically effect of ship speed on total costs and total
income. Broadly speaking, increasing ship speed does not have a great effect on hull first
cost (apart from an influence through reducing the block coefficient, so increasing
dimensions to keep payload constant). Likewise, crew costs, and many of the other
operating costs are not much affected by speed. Installed power does, however, increase
roughly as the cube of speed, so total fuel consumption and fuel cost goes up roughly as
the cube, while machinery first cost goes up roughly as square of speed. Meantime,
however, transport capability, even with zero port turn around time, can only increase
directly proportional to the speed. Thus as indicated in the Figure 5 there is an optimal
speed for ships, which is a function of both technical and economic factors: at which point
the increased capital and operating costs outweigh the increased revenue.
The optimal speed occurs where there is the greatest difference between the annual
income and annual expenditure. The lens shape indicates that the curve of maximum profit
is shallow in the region of the optimum; flat laxity is phenomenon frequently found in
such situations. The effect of three other factors is also illustrated in Figure 6. Increased
freight rates increase the slope of the income line, so increasing the optimal speed.
Similarly, reduced fuel costs (or reduced power requirements) swing the expenditure line

down, increasing the optimal speed; while increasing cargo value and inventory costs also
increase optimal speed.
General factors which encourage higher speeds of ships are summarized :
(The converses are also generally true.)
Economic
-

Technical
-

High value cargoes as described above. Note the converse : low value
cargoes cannot afford to travel at high speeds.
High freight rates : the ship carries greater amounts of high-earning cargo
over a period. Note the converse : when freights are low, ship speeds are
often reduced, e.g. tankers in times of surplus.
Cheaper fuel (or fuel costs rising slower than other items of income and
expenditure).
Short port turnaround time : increasing the proportion of time at sea when
the higher speed can be used.
Competition : especially where freight rates are fixed, e.g. liner
conferences, so non-price factors become more important.
High interest rates : so that high capital charges on the ship are spread over
more voyages.
High daily operating costs, e.g. crew : increasing productivity per unit
time.
Increased trade : but larger ships would be a better solution, which
themselves permit higher speeds (speed-length ratio).
Shortage of building funds or building capacity : greater transport
capability per unit investment.

Lower specific fuel consumption : fuel weight and cost reduced.

Availability of machinery of requisite high power.
Reduced cost of main machinery : e.g. from economies of scale in
manufacturing, improved materials etc.
Reduced volume or weight of machinery plant or bunkers : effect not very
marked.
Improved hull form design : reduced power requirements.
Improved propulsive performance : reduced power requirements.
Smoother hulls : both when new and in service, e.g. better coatings.
Improved sea performance : reduced speed loss due to ship motions,
weather routing etc.

Optimal Speed for Different Ship Types

For ships carrying high value cargo like containers, cars, passengers, etc. freight rate and
hence earning is high. Expense is also high. The optimal speed is therefore high. So these
ships have a high operating speed and fine form. On the other hand, ships carrying low
value cargo have a low freight rate and therefore, bulk carriers and crude oil carriers are
slow speed full form ships.
Studies of nuclear-powered container ships demonstrate a number of these points; their
optimal speed will be higher than conventionally-powered container ships, although their
maximum rate of return may be lower depending on assumptions about building costs,
fuel prices, etc., as indicated in Figure 7. As the curves such as those in Figure 7 are
usually quite flat in the region of the optimum, in many cases practical and commercial
considerations may be allowed to dictate the selection of exact size or speed, e.g. the
stepwise availability of diesel engines. Thus the penalty for departing from the true
optimum may be quite small. The optimum may, of course, move during the ship's life,
e.g. with changing fuel prices, so it is generally preferable to err on the side of sizes and
speeds somewhat greater than the theoretical optimum; this tendency is often reinforced
by competition and the desire to offer potential charterers an attractive ship, and a general
desire to reduce capital investment per annual tonne-mile, even at the cost of increased
operating expenses over the ship's life.

Selection of Optimal Design Draft

A very deep draft ship will only be able to call at very few ports, while a shallow drafted
ship may not take the full advantage of the water depths available. The optimal drafts for
a range of port and cargo availabilities can then be estimated by simulating the operation
of a range of possible ship designs through a chosen spectrum of possible ports and
cargoes. The selection of design draft therefore requires an assessment of the
probabilities of being able to use the extra draft sufficiently often to pay for its extra cost.
Figure 8 shows the results of one such study, which takes into account both port and
cargo availability. It can be seen that the optimal ship is not necessarily the biggest deepest
draft vessel. The limited depths of water available and some high stowage factor cargoes
combine to reduce the value of extra deadweight and draft. The incorporation of such
probabilistic considerations in practical design process is discussed in the chapter entitled
"Economic Uncertainty in Ship Design".

These notes have been compiled from the book entitled Engineering Economics in
Ship Design by I. L. Buxton, BMT, 1987.