Guidebook for Assessing Evolving International Container Chassis Supply Models (2012)

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22 NCFRP Report 20 | Guidebook for Assessing Evolving International Container Chassis Supply Model s | 22 Chassis Supply Models Key Messages (Conventional) Ocean Carrier Chassis Supply Model: Chassis are owned (or leased) and operated individually by ocean carriers. Chassis are managed and maintained by the related ocean carriers. Regional Cooperative (Co-op) and Alliance Co-op Chassis Pools Supply Model: Chassis fleets are shared between member contributors, who have the responsibility to manage or delegate the management of the operation [e.g., Consolidated Chassis Management (CCM)]. Neutral Chassis Pools Supply Model: Chassis are provided and operated by a third party, and users are charged a per-diem rental rate, which includes related costs, but no t repositioning. Terminal Chassis Pools Supply Model : Several marine terminals either require or offer their own chassis pools to better control the chassis operation as part of the entire terminal process. The terminal ma y provide the chassis (like a neutral pool) or simply manage them (like a co-op pool). The terminal is responsible for management, maintenance, and storage. Motor Carrier or Logistics Company–Owned (or Leased) an d Operated Chassis Supply Model : The motor carrier or logistics company operates its own chassis and assumes all related costs and responsibilities. This model is the international standard. There is a growing trend for ocean carriers working with third parties to invoice motor carriers for chassis usage charges in any of the above mo dels (except for motor carrier chassis supply model).

Guidebook for Assessing Evolving International Container Chassis Supply Models | NCFRP Report 20 | 23 3.1 A Brief History of the Evolution of Chassis Supply in the U.S. The original intention of maritime container shipping, founded by Malcolm McLean in 1957, was to avoid the transfer of cargo between modes and essentially ship the truck box as a unit, reducing wait time at the port and labor cost. Thus, Mc Lean's shipping operation had to own and operate chassis to complete the movement of containers to the customer’s door in order to compete with the truck service he was attempting to replicate. As shipping international fr eight in containers grew in popularity in the 1960s, ocean carriers considered their chassis assets as service differentiators, and marketed them as such. (Conventional) Ocean Carrier Chassis Supply Model As a result of the ocean carriers' investment in chassis assets, and as these assets frequently were disconnected from the tractor (as marine and rail terminal operating practices required the use of the chassis as an operating asset), the U.S. intermodal motor carrier model adapted accordingly. Drayage companies and “owner-operator” drayage service providers did not need to invest in chassis, as they were provided by the ocean carriers. Further, the ocean carrier provided ample "free time" at the customers' facilities, whereby containers on chassis were unhooked from the tractor and left behind for unloading. Cooperative (Co-op) and Alliance Co-op Chassis Pool Supply Model Though ocean carrier “co-op chassis pools" existed by the start of the new millennium, they were mostly informal ventures cr eated through the vessel-sharing agreements (VSAs) of the ocean carriers that formed in the mid-1990s with the mega- alliances. These ocean carrier co-op chassis pools were largely established to minimize chassis mismatches and balance requirements, to improve chassis utilization, and reduce terminal storage space requirements. The co-op approach also reduced chassis requirements in the order of 20 % 5 as a result of these operating improvements. As an accommodation to quickly developing ocean carrier chassis pools, CCM was born as a wholly owned subsidiary of the ocean carrier discussion group, Oc ean Carrier Equipment Management Association (OCEMA), the U.S.-based industry association of 20 major oc ean common carriers. Today CCM is the largest chassis pool operator in the U.S., controlling approximately 125,000 chassis in cooperative chassis pools across the country. 5 Per in put of ocean carriers consulted. In this owner-operator drayage model, the drayage company, which may or may not actually own any trucks, dispatches, manages, and administers truck drayage activities to and from terminals, but does this primarily by sub-contracting the drayage work to individual truck owner - operators. Recent Developments with Respect to Co-op Chassis Pools Once a majority of the ocean co nt ainer chassis were consoli dated into ocean carrier chassis pools, eliminating chassis as a service differentiator, the ocean carriers, under the anti-trust protection of the OCEMA discussion group, started to plan how to discontinue ocean carrier chassis supply as a means to reduce the cost and co mplexity of U.S. container shipping operations. However, in August 2009, Maersk Line, which did not participate in CCM pools, was the first to take on an independent initiative and implement a model whose goal is to end the practice of providing chassis (Maersk has since sold it chassis leasing business—Direct ChassisLink Inc. (DCLI) to a private investor). Other ocean carriers have since followed with similar, albeit different approaches.

24 NCFRP Report 20 | Guidebook for Assessing Evolving International Container Chassis Supply Model s | 24 Neutral Chassis Pool Supply Model Third-party chassis leasing companies and “neutral chassis pools,” independent of ocean carriers and mo tor carriers, found niche business opportunities in supplying to new carrier entrants , acting as short-term "supply buers" for existing lines th a t preferred leasing to purchasing assets, or by establishing their own chassis pools at some facilities. Terminal Chassis Pool Supply Model Terminal chassis pools are a minor factor in the overall ocean carrier chassis supply, as terminals generally have enough ocea n carrier-supplied chassis to operate unique eets on site for each customer. Never theless, the introduction of marine terminal – controlled chassis pools was largely the result of marine terminal land capacity constraints that started to be felt in the ear ly 2000s with the fast growth of global trade and container vo lumes. Marine terminal chassis pools helped reduce the chassis storage footprint at these terminals, thereby easing capacity issues, and provided a more contr olled chassis environment to maximize terminal eciency. This terminal po ol type is usually derived from a commercial decision by the terminal operating company to implement out of operational necessity. There are no railroad-controlled terminal chassis pools with respect to ocean container chassis. Instead, the railroads have opted to utilize co-op and neutral chassis pools. Motor Carrier Chassis Supply Model As will be discussed further in this Guidebook, motor carriers own and control a very small percentage of ocean container chassis because historically in the U.S. th ese chassis have been provided predominantly by ocean carriers. Those chassis owned by motor carriers are predominantly specialized (e.g., tri-axle) chassis used for the carriage of heavy cargo. Evolution of Container Chassis Supply outside the U.S. When container ization arrived in Europe in the 1960s, the limited available spac e at marine terminals and higher container-land density led to a model in which chassis were not stored at the terminal, but rather provided by motor carriers. By the time European ports developed new intermodal facilities at peripheral locations, the chassis management model was already well established. A similar evolution occurred in Asia and other major markets globally.

Guidebook for Assessing Evolving International Container Chassis Supply Models | NCFRP Report 20 3.2 (Conventional) Ocean Carrier Chassis Model In this conventional U.S. model, chassis are owned (or leased) and operated by ocean carriers. They are also managed and maintained individually by the respective ocean carriers. For reasons described earlier, this chassis supply model is waning as ocean carriers seek to exit the chassis supply business, and now roughly only a third of marine chassis in the U.S. are operated directly by ocean carriers. To underscore this point, none of the ocean carriers consulted for this study had purchased chassis in recent years. But, as indicated by one ocean carrier, the exit from the chassis supply business has not been easy, noting that ”once you start giving something away for free, or use it as a means of a competitive advantage, it is hard to extricate yourse lf.” The following summarizes the key characteristics of the ocean carrier chassis supply model. Asset Ownership Owned or leased by ocean carriers. Management/ Operation Chassis procurement, demand/supply, maintenance, logistics, administration, insurance activities performed by ocean carrier. Facilities Agreement Storage, inspection, and maintenance and repair usually contained within rail or marine terminal master transportation agreement. Typical Metrics Used by Chassis Operators Variable operating expense per day. Loaded lifts/chassis. Repositioning cost. Asset utilization. Street turn-time. Out of service percentage. From an operational standpoint, the general process for picking up a chassis and container for this chassis supply model is outlined in the Figure 3-1 below. Figure 3-1. Process for Chassis and Container Pickup in Ocean Carrier Chassis Supply Model 3.3 Regional Cooperative (Co-op) and Alliance Co-op Chassis Pools Supply Model In cooperative chassis pools, chassis fleets are shared between member contributors, who have the responsibility to manage or delegate the management of the operation. They were born out of two factors: the development of the carrier mega-alliances in the 1990s and the terminal capacity challenges in the 2000s. There is no general physical operating difference between a regional co- op pool and an alliance co-op. A co-op's chassis are typically located within the terminal, although not necessarily. The co-op pool requires joint decision making by contributors. This is an important distinction because one of the principal challenges co-ops face is speed to action, as co-ops act on consensus and therefore need time for the democratic process. In-gate Out-gate Select chassis Grounded: Load container Wheeled: Locate wheeled container | 25

26 NCFRP Report 20 | Guidebook for Assessing Evolving International Container Chassis Supply Models | 26 The CCM co-op pools allow for non-ocean carrier contributors to the pool; this arrangement is called a "Unitary Pool Concept" (UPC). Leasing companies and other companies owning chassis may act as a UPC, whereby they contribute their own chassis into the co-op and represent ocean carriers. The following summarizes the key characteristics of the co-op chassis model. Asset Ownership Owned or triple-net leased by ocean carriers. Other entities (e.g., leasing companies) that own chassis may contribute to the pool. Management/ Operation Chassis procurement, demand/supply, maintenance, logistics, administration, insurance activities performed by professional management company, with contributing ocean carrier board oversight (e.g., CCM). Facilities Agreement Separate agreement necessary for storage, inspection, and maintenance and repair rules. Typical Metrics Used by Chassis Operators Variable operating expense per day. Loaded lifts/chassis. Repositioning cost. Utilization: total pool, contributor, user, street turn-time, terminal dwell (dwell same as neutral pool). From an operational standpoint, the general process for picking up a chassis and container for this chassis supply model is outlined in the Figure 3-2 below. Figure 3-2. Process for Chassis and Container Pickup in Co-op Chassis Supply Model The chief example of the co-op chassis supply models is CCM, which was started in 2005 to be the chassis pool operating company of the ocean carrier discussion group OCEMA. Additional information on the structure of CCM and a case study on CCM are provided in Appendix A, Section A.1. 3.4 Neutral Chassis Pools Supply Model In this arrangement, chassis are provided/owned and operated by a third party, which is responsible for assets, demand/supply balance, repositioning, maintenance and repair, and insurance. Users (ocean carriers and motor carriers) are charged a per diem rental rate that includes a single daily rate for all the preceding, except repositioning. Neutral pools, like all other pools, are known as “gray fleet” chassis and are usually domiciled at or very near terminals. Motor carriers who use neutral pool chassis may also use the equipment to move any carrier’s containers, which can lead to enhanced labor and equipment productivity due to time savings from the interchange process. Neutral pools were established by chassis leasing companies as a turnkey product for ocean carriers akin to the rental car business model. Neutral pools enable fast access to chassis to handle demand surges, and allow for quick off-hire when In-gate Out-gate Select chassis Select chassis Grounded: Load container Wheeled: Locate wheeled container OFF TERMINAL POOL OFF TERMINAL POOL

Guidebook for Assessing Evolving International Container Chassis Supply Models | NCFRP Report 20 | 27 demand falls. Similar to co-op pools, they also usually offer multiple on-hire and drop-off points to allow for commercial flexibility of freight flows without having to physically reposition the chassis, though on a more limited basis. The following summarizes the key characteristics of the neutral chassis pool model. Asset Ownership Owned by third party (typically a chassis leasing company). Management/ Operation Chassis procurement, demand/supply, maintenance, logistics, administration, insurance activities performed by neutral chassis pool operator, typically leasing company. Facilities Agreement Stand-alone agreement for storage, inspection, and maintenance and repair rules between pool operator and terminal, also known as a “hosting contract.” Typical Metrics Used by Chassis Operators Revenue rate per day. Utilization: total pool, individual user. Maintenance and repair cost per day. Street turn-time. Terminal dwell. Out of service percentage. From an operational standpoint, the general process for picking up a chassis and container for this chassis supply model is outlined in Figure 3-3 below. Figure 3-3. Process for Chassis and Container Pickup in Nuetral Chassis Pool Supply Model An example of this chassis supply model is the recently established Bay Area Chassis Pool (BACP), which is open to ocean carriers and motor carriers. The pool covers three marine terminals (Total Terminal Inc., the Oakland International Container Terminal, and Ports America Outer Harbor), the Union Pacific railroad, and two off-terminal container yards. A case study of this chassis supply model is provided in Appendix A, Section A.2. 3.5 Terminal Chassis Pools Supply Model Several marine terminals either require or offer their own chassis pools to better control the chassis operation as part of the entire terminal process, or as a commercial convenience for their customers. These terminal-operated pools may be either neutral (the terminal owns/operates) or co-op (the terminal manages on behalf of the lines). The key differentiating factor is that the terminal operates, manages, and is the intermodal equipment provider (IEP) designation for U.S. Department of Transportation roadability regulation purposes. The following summarizes the key characteristics of the terminal chassis supply model. In-gate Out-gate Select chassis Select chassis Grounded: Load container Wheeled: Locate wheeled container OFF TERMINAL POOL OFF TERMINAL POOL

28 In-gate Out-gate Select chassis Grounded: Load container Wheeled: Locate wheeled container NCFRP Report 20 | Guidebook for Assessing Evolving International Container Chassis Supply Models | 28 Asset Ownership Ocean carrier, terminal, or leasing company may contribute. Management/ Operation Chassis procurement, demand/supply, maintenance, logistics, administration, insurance activities performed by terminal operator. Facilities Agreement No ne, since terminal operator controls both terminal and pool. Typical Metrics Used by Chassis Operators Variable operating expense per day. Loaded lifts/chassis. Repositioning cost. Utilization: total pool, contributor, user, street tu rn-time, terminal dwell (dwell same as neutral pool). From an operational standpoint, the general process for picking up a chassis and container for this chassis supply model is outlined in Figure 3-4 below. Figure 3-4. Process for Chassis and Cont ainer Pickup in Terminal Chassis Supply Model SSA, one of the largest U.S. marine terminal companies, operates a terminal-controlled chassis pool at its two Seattle marine terminals (known as T-18 and T-30). SSA provides the assets, manages the chassis, and performs the maintenance. Ocean carriers have the opportunity to contribute their assets to the SSA pool. SSA also provides billing services for ocean carrier s that are sub-leasing chassis to motor carriers through the SSA pool. A case study on SSA Pacific Northwest Pool is provided in Appendix A, Section A.3. Another example of a co-op–based terminal model is the Hampton Roads Chassis Pool (H RCP) II, established in 2003 as the nation’s first port-wide cooperative chassis pool, connecting all the marine terminals and rail facilities in the Norfolk, VA, area. Under this cooperative arrangement, the ocean carriers contribute chassis to support their cargo requirements, and a pool management company that is owned by the terminal operator manages th e macro supply and maintenance. A case study on HRCP II is provided in Appendix A, Section A.4. 3.6 Motor Carrier or Logistics Company Owned (or Leased) and Op erated Chassis Supply Model Chassis are owned (or leased) and operated by motor carriers or logistics companies. When picking up a container at a terminal, the motor carrier or logistics company will arrive at the terminal gate with its own chassis. Once the container is loaded onto the chassis at the terminal site, the motor carrier will deliver the container and chassis to the receiver’s facility. The general operational characteristics of this model are as follows: a) grounded/live-lift terminal operation, b) chass is normally stays hooked to the truck at all times during its operation, c) trucker stays with the container while it is loaded/unloaded at the cargo interest, d) off-terminal parking of chassis, and e) maintenance is performed by the owner. 6 6 Where a motor carrier provides exclusive haulage services in a trade lane, a “drop and hook” operation may exist.

Guidebook for Assessing Evolving International Container Chassis Supply Models | NCFRP Report 20 | 29 The following summarizes the key characteristics of the motor carrier or logistics company chassis supply model. Asset Ownership Owned or triple-net term leased by motor carrier. Management/ Operation Chassis procurement, demand/supply, maintenance, logistics, administration, insurance activities performed by motor carrier. Facilities Agreement N/A - Motor carrier chassis stored off terminal. Typical Metrics Used by Chassis Operators Operating cost per day. Capital cost per day. From an operational standpoint, the gener al process for picking up a chassis and container for this chassis supply model is outlined in the Figure 3-5 below. Figure 3-5. Proces s for Chass is and Co ntainer Pickup in Mot or Carr ier or Lo gis tics Company Chassis Supply Model The South Florida region composed of the Port of Miami, Port Everglades, and the FEC Rail terminals is the largest concentration of motor carrier–operated chassis in the U.S. A case study of the motor carrier chassis model’s prevalence in South Florida is provided in Appendix A, Section A.5. 3.7 Chassis Billing Models Although some motor carriers have been accustomed to leasing neutral chassis pools for years (fo r specific commercial needs), motor carriers have never had a commercial relationship with ocean carriers exclusive to chassis. This situation changed in August 2009 when DCLI began operating chassis on behalf of Maersk, and commenced the practice of charging motor carriers a daily fee for the use of its chassis. This initiative was well-publicized in the trade press, garnered widespread attention fr o m all intermodal stakeholders, and jump-started the larger industry effort to transition ocean carriers away from providing chassis for “free.” In short, DCLI became a chassis leasing company, though not in the traditional long-term operating lease sense of its competitors,7 wholly owned by Maersk at the onset of this study. As of this writing, Maersk has announced and subsequently completed the sale of DCLI to the private investment firm, Littlejohn & Co., LLC, completing Maersk’s divestment of chassis. Other chassis leasing products are provided by leasing companies Flexi-Van and TRAC Intermodal. The three major “by the day” chassis lease products are summarized in Table 3-1 below. 7 With in this study DCLI has been characterized as a leasing compa ny though their operational model differs slightly from TRAC and Flexi-Van and their neutral pools may better be characterized as rental fleets. In-gate Out-gate Grounded: Load container Wheeled

30 NCFRP Report 20 | Guidebook for Assessing Evolving International Container Chassis Supply Model s | 30 Table 3-1. Evolving Chassis Billing Models: Entities Leasing Chassis to Motor Carriers "By the Day" Brand Name Program Description Locations Daily Rate Billing Mechanics Direct ChassisLink Formerly owned by Maersk Line (now Littlejohn & Co., LLC, per recent transaction). Rents chassis directly to motor carriers for a fee, including maintenance. Nationwide. Operates out of former Maersk- contracted facilities, including APMT, BNSF, CSX, and off-terminal depots. $13- $15 100% moves invoiced to motor carrier. TRAC Connect Owned by TRAC Intermodal. Chassis leased directly to motor carriers for a fee, including maintenance and insurance. TRAC also provides longer- term "triple-net leases" to the motor carrier, which is responsible for maintenance, insurance, and taxes. Operates on terminals where TRAC has established neutral pools, or on terminals within co-op pools. TRAC Metropool in NY, NJ, Philadelphia, Baltimore. TRAC Railpool on CSX locations. TRAC's Gulf Regional Pool in Houston, New Orleans, Tampa, Mobile, and Dallas. Within CCM pools in South Atlantic, Memphis, Kansas City, St. Louis, Denver, and Salt Lake and within SSA pools at Con Global locations in California. $12- $15 Ocean carrier has flexibility to direct invoices based on Merchant/Carrier Haulage and "customer exception." FlexiDay Owned by Flexi-Van. Chassis leased directly to motor carriers for a fee, including maintenance and insurance. Flexi-Van also provides longer-term "triple-net leases" to the motor carrier, which is responsible for maintenance, insurance, and taxes. Operates from Flexi-Van depots in NY/NJ, South Atlantic, Midwest, BACP, and within CCM Pools in South Atlantic and Gulf. $12- $15 In addition to the Flexi- Day Program, Flexi-Van direct invoices based on Merchant/Carrier Haulage and customer exception. Source: Team research.

Guidebook for Assessing Evolving International Container Chassis Supply Models | NCFRP Report 20 | 31 3.7.1 Competing Chassis Models Creating Confusion for Motor Carriers As ocean carriers are individually developing their chassis exit strategy and implementing various motor carrier billing mo del solutions to progress their transition plans, the chassis landscape in some regions is evolving into an assortment of programs that is confusing motor carriers. The following box provides an example of the different models at play in one region. Options in Oakland: As an illustrative example, at the Port of Oakland, as of February 1, 2012, there are eight different chassis models that motor carriers must be cognizant of, and possibly participate in, to support their customer requirements: In no particular order: 1. Ocean carrier provides for no charge (ocean carrier model) 2. Ocean carrier owns, motor carrier pays (CNS Equipment Inc./Hyundai) 3. Ocean carrier cooperative pool for no motor carrier charge [The New World Alliance (TNWA)] 4. BACP —ocean carrier pays (neutral pool) 5. BACP—motor carrier pays (neutral pool) 6. TRAC management of CMA within BACP—motor carrier pays 7. Direct ChassisLink – motor carrier pays (neutral pool) 8. BNSF/Flexi-Van rail pool—supplied by railroad Of course, there is a ninth approach – the motor carrier can provide its own chassis. As a motor carrier put it: “It’s a headache to track. I feel like we’ve been guinea pigged, and the rates keep changing. You may get 5 days on the box and nothing on the chassis. We are an agent for the ocean carriers. We get charged, bill back the ocean carrier for the chassis. The leasing company wants to get paid right away and the ocean carrier doesn’t pay quickly.”