How to solve the drama at the U.S. ports

Domestic maritime ports, where a growing fleet of container ships have wedged themselves, have become a primary focal point of the ongoing transportation dysfunction.

A few popular port punching bags have emerged, too: Terminal operators, the respective local port authorities, the state of California, federal regulators, a shortage of drayage truckers — just to name a few.

However, there’s one giant gorilla in the room that hasn’t really been addressed, and it’s one of the primary roots of the dysfunction: The backwards financial incentives that make it more profitable for the shipping lines to operate in this current state than in an environment where ports run smoothly.

While all the aforementioned parties work to find avenues to unclog the port pipe, the maritime shipping lines have been raking in record-setting profits. The handful of mega firms that ship containers back and forth across the Pacific will combine to earn some $150 billion in profit in 2021. That’s up dramatically from the roughly $40 billion in profit for those same companies in 2020 and $25 billion 2019. What’s more, the cost to ship a container from Asia has jumped to about $20,000 on average – up from about $3,000 pre-pandemic.

Giving shippers, forwarders and drayage truckers the ability to take advantage of so-called dual transactions, however, could be critical. It would provide a pivotal counterweight to the power disparity between the ocean shipping lines and the parties being forced to hold (and pay to hold) empty shipping containers. A dual transaction is when a motor carrier picks up an empty container from one shipper or forwarder, hauls it to the port, drops it to be loaded onto another ship, and then leaves with an imported full container and to a warehouse or other facility.

Currently, those transactions are hard to coordinate between shippers and forwarders holding the empty containers and the drayage truckers hauling loaded imported containers. Furthermore, the incentives aren’t there for dray carriers to spend the time finding empties to move back to the ports.

Some of the prominent maritime shipping lines are contributing to the port backlogs at the expense of shippers — but to the benefit of their own profits — in a few key ways.

For starters, they’re not sending vessels to pick up and return the mounting volume of empty containers that shippers and freight forwarders have in their possession, and they’re charging those parties daily fees for holding those empty containers.

Tens of thousands of empty containers are currently being held by these parties, and the per diem rate is often a couple of hundred dollars. So, the charges add up fast. Shippers, motor carriers, and forwarders are literally at the mercy of the maritime shipping lines to send vessels so that they can rid themselves of these empties.

Also, because the ocean carriers are prolonging containers’ return times, they’re effectively metering capacity to keep rates elevated, which is why a container now costs nearly seven times more to ship across the Pacific.

Dual transactions, however, work to mitigate these incentives. They keep containers flowing back to the ports and put the onus on shipping lines to hold them or export them. Dual transactions shift the incentives for all parties. They make it more advantageous for drayage truckers to find and haul empties back to the ports. They give shippers and forwarders more capacity to send their empty containers back. And, chiefly, they incentivize ocean carriers to take them back to Asia to be re-loaded and re-imported.

These dynamics not only alleviate the per-diem shipping charges for shippers and forwarders, but they also help tighten container turn-around times and effectively create more ocean capacity. That, in turn, will help lower rates and help all parties, including consumers, with climbing costs.

It’s going to take at least another year to two years to sort out the current congestion, barring a major economic downturn that saps demand or a sudden reversal of spending habits.

Longer term, as in over the next decade, there’s plenty of cause for optimism. There’s a sense of urgency by all parties - consumers, retailers, regulators, port authorities, drayage truckers, terminal operators - to fix the port snafus. Technologies are being adopted that create a more efficient, more connected digital system to underpin port operations. The gross lack of coordination between the aforementioned parties is being ironed out, albeit slower than is necessary. Also, large financial investments from public and private sectors are flowing into building new ports and expanding existing ports on both sides of the U.S.

Near term, though, as in the next few years, there’s little hope the kinks at the ports will get worked out. There’s simply too much money at stake for the shipping lines — who are partial owners of the terminals, by the way — to work toward solutions that would eat into their profits.

So, while there’s strong momentum against these backwards financial incentives in the long term, the shipping lines will continue to capitalize on the dysfunction for as long as they can — that is, until the tools are in place to block them from doing so.

Steve Wen is the founder and CEO of Dray Alliance, a venture-backed startup focused on building a container trucking platform to deliver shipping containers from ports to warehouses. He can be reached at [email protected]

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