SEMINARS ON THE CONTAINER REVOLUTION

OCTOBER 2, 1967

I. THE CONTAINER REVOLUTION FROM DIVERSE POINTS OF VIEW

(By Edward Schmeltzer, Managing Director, Federal Maritime Commission)

I am very happy to be here tonight to introduce this year's seminar series. Last year's seminars, I am told, were very successful, but too long-long not in how many hours they ran, but in how many sessions they ran. This year we are running a series which will be shorter, and it is all on one subject-the container revolution.

The container revolution is an immense thing. It compares with the transition from grocery stores to supermarkets. It is important enough that this year we are going to have a whole seminar series limited to the container revolution.

Tonight I am going to introduce the series by talking about the savings that can result from use of containers; touch upon where the container revolution stands today; tell a little bit about the history of containerization; and finally outline the principal problems inherent in the revolution. On future Monday nights we will have other speakers come in and talk about the container revolution from their points of view. These will be people with very immediate interests in the container revolution.

The talks will not be in this order, but the following topics will be included:

A conference man will look at the container revolution. That will be next Monday night. The speaker will be Richard Gage, the Chairman of the North Atlantic United Kingdom Freight Conference.

We will have a nonsubsidized American-flag line representative looking at the container revolution. I think this will be Norman Scott, the dynamic man who is getting Matson into the Japan trade with containerships.

We will have a representative of a subsidized line looking at the container revolution, talking about what the implications are from the viewpoint of that subsidized line. He won't repeat what has been said in the other seminars. He will stick to the impact the container revolution will have on a subsidized line.

We are going to have a representative of a foreign-flag consortium. There is only one of those the Atlantic Container Line.

We will have an insurance expert examining the container revolution.

We will have a port man. Roy Pankhurst of the British Embassy was kind enough to arrange for Mr. Edwards, the Managing Director of the Port of Liverpool to speak on the container revolution from the point of view of a port man. This is firmly set for October 23.

We will have an antitrust lawyer, that is an antitrust prosecution lawyer, looking at the container revolution.

We will have a labor leader talking about the container revolution from the point of view of the unions.

We also will probably try to fit in a railroadman and a trucker. In future weeks we hope to have coffee. We did not yet get a check from our coffee sponsor, the Maritime Administrative Bar Association. We will try to end our programs promptly at 7 p.m.

Now what is this container revolution? What is its history? Briefly, it started in the Puerto Rico and Alaska trades, and the results were phenomenal. The break-bulk operator, I am sorry to say, was driven out of the Puerto Rico trade. I hope this isn't repeated in other trades. I hope there is an adjustment to the trade rather than the established line going out. But I think this is an inexorable kind of thing, and if the break-bulk lines can't find specialized employment it may be they will go the way of Bull Line, once the dominant carrier in the Puerto Rico trade. Hopefully, they will shift to containers or find specialized operations for their break-bulk carriers or get them into trades where break-bulk carriers are effective. At any rate, in the Puerto Rico trade there have been no general rate increases between 1959 and today. I am sure that if we took the overall rate structure in the Puerto Rico trade we will find that rates have not increased since 1959 and yet the principal lines in that trade are doing very well and their profits are very substantial.

Sea-Land entered the Puerto Rico trade with converted C-2 ships the line designated as "trailerships." This equipment was revolutionary in 1959. It is in a sense obsolete now, and the converted C-2's that were in the Puerto Rico trade and held 226 containers will not be in the foreign trades too long. It is in a sense an important stopgap facility in the North Atlantic trade that will doubtlessly be replaced by ships with about five times the 226-trailer capacity of the first trailerships.

We learned lessons from the Puerto Rico and Hawaii trades and to some extent the Alaska trade. These lessons I think will stand us in good stead in the inauguration of containership service in foreign trades.

Containerization in the foreign trades in a sense began years ago with the little Dravo boxes and with conventional ships that carried a number of containers on deck to supplement reefer space or to add to the space of the ship. But the real container system began in our foreign commerce in April 1966 when Sea-Land put its ships on the berth and did very well in the trade between the United States and Europe and the United Kingdom.

Why do the container lines do so well? For one thing we know that a container is a very safe thing in which to ship argo. You eliminate pilferage problems. In the early hearings I participated in as public counsel concerning container shipments to Puerto Rico, shipper after shipper got up and spoke about how wonderfully his cargo turned out when it was transported in containers. At the time I was a little cynical of shipper testimony. But I later found it was true-they meant it. We see it more and more now. When the shippers money is on the line, they will ship by containers if the cargo is breakable or if it is subject to pilferage.

There are also tremendous cost savings. I don't think there is any doubt any longer about the cost savings. I can't quantify this, but the hearing examiners have developed records in hearings and I think these records make the matter subject to some quantification. But let me tell you in general terms where the cost savings are centered.

Let's take a sample shipment from somewhere in the interior of the United States-Frankfort, Ky., perhaps, or Chicago-to somewhere in Germany-Bonn, Germany-across the North Atlantic route. The first thing the shipper takes care of is loading the cargo into a container at his plant if it is a through shipment. Immediately he gets away from some of the cost of full export packaging. Ultimately, there will be insurance decreases. I think most insurance people will warn that the insurance savings won't be as great as some speakers, such as I, might lead one to expect. But there will be savings, and it is because this is a safe way to ship. Immediately, you have the export packaging savings and the insurance savings.

Next, the shipper gets a containerload rate between Chicago and New York. Unit trains no doubt will be introduced. I am sure many of you know that the Pennsylvania Railroad filed a unit train rate which will get the boxes between Chicago and Port Newark in a day at a phenomenally cheap rate. So this is another saving.

Further, the container shipper doesn't have to worry about slugging through the traffic to get to the downtown piers in New York, and that is a tremendous saving. He doesn't have to wait in lines on the piers in New York, and this is a saving. People agree that is fine for Port Newark but ask how it works in the rest of the world. I think that throughout the world the container terminals are being built away from the downtown areas. Each new container terminal is being built in the middle of a highway network that is somewhere between the outlying production or suburban-use areas and the downtown cities. A container no longer has to go through downtown San Juan, or downtown San Francisco, or downtown New York, or downtown Rotterdam. It goes to an easily accessible terminal in an outlying area.

I might tell a story I found amusing in one of our first cases. Pacific Far East Line put in a container freight station that was a mile away from the downtown San Francisco dock area. Competitors complained about unfairness by PFEL. We argued about what unfairness there could be to PFEL's competitors in the line receiving cargo a mile away from the pier. The charge turned out to be that the shipper via PFEL got a break if he used PFEL because he didn't have to drive his truck through that extra mile of congested traffic to the pier and this was unfair to other lines.

Next, the cargo doesn't have to be unloaded from the rail car and put into a shed. Instead the container full of cargo loaded at the shipper's warehouse is left on a parking lot at the terminal. The cargo isn't moved into a shed; therefore, no wharfage generally has to be paid. on the cargo. The cargo is loaded onto the ship in the same container. Obviously, that is a very big saving. The cost of loading from the shed to the ship is not eliminated completely, but it is decreased phenomenally. In some of our domestic rate cases we develop the cost of loading at New York, break-bulk versus loading by containers. Even considering the additional capital and administrative and overhead expenses

needed for container operations, the difference in the cost is very greatly in favor of containerships.

You are using a big expensive ship, but that big expensive ship doesn't go from New York to Philadelphia, Baltimore, Newport News, and perhaps back through Boston before it takes off across the Atlantic for the Continent. These big expensive ships are going to go directly between New York and one port in the United Kingdom and a continental port, probably Rotterdam or Antwerp. Thus, another great saving is in ship time.

When the ships get to the other side, about the same thing happens and I will not here recount the savings. There may be arguments that not all of these savings apply to every shipment, but there are a great number of savings on every shipment. We will, in the next year, quantify these cost savings on either proforma or sample shipments.

Let me tell you about one of the savings I am suggesting; that is a comparison of the cost of loading a ship in New York and bringing it to Rotterdam and unloading it. This does not include the ship diversions we were talking about either under the break-bulk system or the container system, but just comparing a break-bulk ship from New York to Rotterdam, with a container ship. That is, taking the cost of each system and adding an allowance for additional capital cost needed for containers. The Port of New York Authority estimated that it costs about one-third as much to make the trip with containerships as with break-bulk ships. There is also a report by McKinsey & Co., Inc., made for the British Transport Dock Board, which says about the same thing. They have taken certain cargoes and sent them through a container system, and find it costs only one-third as much in the container system. I haven't checked these out and I don't think anybody in the Commission has checked these out, but I expect that when we do we will find a saving somewhere in this magnitude.

These great savings bring many problems. We are working on the solutions to these problems and these will be discussed later.

Now, I am going to invite questions on the first part of this talk, that is, the savings. Are there any comments on cost savings?

Question: There have been two court decisions which said that for the purposes of limiting liability a container is a package and therefore the limitation of liability on a container is $500. This doesn't jibe with operational facts.

Answer: I will go into that specifically when I discuss the problems of containerization. It doesn't make sense. Steps are being taken to remedy it by a treaty convention. I have some involvement in those steps, so I will talk about it later in detail.

Question: What about the cost of the container itself?

Answer: I asked that question twice of the Port of New York man. who spoke to us on containerization. We haven't seen the numbers, but in each case he said the amortization cost or the container rental was taken into account in coming up with the one-third computation. This isn't my figure; it is the Port of New York's, and to a certain extent it is reflected in the McKinsey study's appendix which goes into through transportation of certain commodities which they think are important and representative.

Question: Does that show the sophisticated equipment required to handle containers on container-type ships?