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

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Guidebook for Assessing Evolving International Container Chassis Supply Models | NCFRP Report 20 | 37 Alternative Chassis Supply Models: Stakeholder Perspectives Key Messages Different supply chain stakeholders have different and, in many cases, divergent interests with respect to chassis supply. Likewise, the perceived advantages and disadvantages of alternative chassis supply models also differ by stakeholder. BCOs’ interest in chassis goes no further than cost and service. In the traditional approach the chassis was a hidden cost; BCOs expect no impact to chassis availability with the model transition, but prefer the status quo of ocean carriers as well known and understood. From an ocean carrier perspective, chassis pools are an intermediate step in the ultimate end game to transition chassis responsibility fully to the motor carrier. Ocean carriers have no plans to invest in new chassis. Motor carrier interests are focused on productivity and maximizing turn times. Pool models tend to respond well to these interests. Barriers to motor carrier chassis supply include need for storage, increased chassis-related capital and operator costs, and conflicts with wheeled terminal operations. Terminal operators seek terminal productivity—currently on-terminal chassis occupy valuable terminal land. Terminals prefer the motor carrier chassis supply model, which would move chassis off-site, but few believed a significant transition was realistic in the short term.

38 NCFRP Report 20 | Guidebook for Assessing Evolving International Container Chassis Supply Models | 38 5.1 Different Stakeholders, Different Interests and Needs Many stakeholders have an interest in ocean container chassis supply. These stakeholders include, but are not limited to the following: BCOs—importers and exporters; Ocean carriers; Motor carriers; Terminal operators (marine and inland); and Public agencies and planning organizations, including port authorities. Each of these stakeholder groups has distinct interests vis-à-vis chassis supply. Likewise, each stakeholder group has different performance needs, expectations, and measures with respect to chassis supply and supply chain performance. Often, these interests and performance needs are distinctly unaligned among various stakeholders. For instance, BCOs typically do not see chassis and containers as separate, but in any case tend to prefer a perennial supply of chassis to minimize any transit delay resulting from chassis-related service failures. This is also the case for most motor carriers that want to increase driver productivity, maximize driver turn times, and minimize delays in sourcing chassis. On the other hand, marine and rail terminal operators want to minimize the amount of chassis needed within the terminal to support container operations, as chassis tie up costly capital, and can be a poor use of scarce terminal capacity. For public agencies and planning organizations, land-use, congestion, and environmental implications, among others, are of particular interest (discussed in the following chapter), whereas chassis leasing companies tend to be focused on maximizing a return on their chassis assets, specifically. As chassis supply models evolve in the U.S., these different interests can lead to tensions among competing stakeholders. These tensions will in turn influence the evolution of chassis supply in the U.S., although it is too early to determine just how and to what extent. In an attempt to make sense of the implications of evolving chassis supply models for different stakeholder groups, the section below provides an overview of the interests and motivations of each key stakeholder group with respect to chassis supply, as well as the advantages and disadvantages of each alternative chassis supply model vis-à-vis these specific interests and motivations. This section is largely informed by the more than 80 stakeholder consultations undertaken as part of the research effort for this Guidebook. 5.2 Beneficial Cargo Owners Broadly, BCOs, both importers and exporters, have three primary interests and performance needs with respect to the movement of goods within their supply chains: total logistics costs, transit time, and reliability. Supply chain decisions and operational considerations, including mode selection, frequency and distribution, and warehousing models are made on the basis of appropriate trade-offs among these performance drivers and related risks and are largely dependent on the nature of the goods being shipped and related supply chain performance parameters (time to market and inventory turn frequency, product cost, customer needs, etc.). Historically, chassis supply matters have only been visible and of concern to shippers when chassis shortages or service problems affected their supply chains. Nevertheless, the evolving chassis supply models are increasingly of concern to BCOs, which have questions about service levels, related risks and the extent to which chassis-related charges may get passed along to them. Source: CPCS.

Guidebook for Assessing Evolving International Container Chassis Supply Models | NCFRP Report 20 | 39 Profile of BCOs Consulted Ten BCOs were consulted in the development of this Guidebook, including importers and exporters and covering a range of containerized cargo including consumer packaged goods, manufactured and industrial products, chemical and agricultural commodities, among others.8 These BCOs ranged in size—the smallest moved 100 twenty-foot equivalent unites (TEUs) per year, and the largest moved over 300,000 TEUs per year. From a geographic standpoint, the sample consulted collectively utilized all major container marine ports in the U.S. as well as all major inland rail terminals. Together the annual traffic generated by the BCOs consulted is in the order of 1 million TEUs and roughly 750,000 drayage moves. While this sample only represents a fraction of U.S. containerized imports, exports, and drayage moves, the researchers expect this group to be sufficiently representative of BCO perspectives with respect to ocean container chassis supply in the U.S. The Retail Industry Leader Association (RILA) was also consulted. The majority of BCOs consulted reportedly had a very good understanding of chassis operations as they related to their own supply chains. The following provides a snapshot of the relative “Chassis IQ” of BCOs consulted, and is based on a survey question asking each to rate their level of understanding of chassis operations from “no understanding at all” (which no respondent selected), to “very familiar….” 5.2.1 Commercial Needs and Interests vis-à-vis Chassis Supply BCOs purchase ocean transportation and select “port to port” terms (merchant haulage) or “port to door/door to port” terms (carrier haulage) from ocean carriers. These terms indicate which party is responsible for the “first mile/last mile” drayage to/from BCO facility to intermodal terminal. For port to port, the BCO is responsible to contract with motor carriers for drayage; for port to door/door to port, it is the ocean carrier. In either case, historically the ocean carrier has included the chassis in the contractual terms of carriage. From the BCO’s standpoint, the evolving chassis supply landscape is particularly salient with respect to merchant haulage as this may require BCOs to arrange and pay for their own chassis, when they did not previously. Although rarely a primary consideration for BCOs, commercial needs with respect to chassis supply vary depending on a number of factors, including approaches to managing warehousing and distribution facilities, the need for additional storage space, among others. These needs often extend beyond chassis to container supply and related terms. The following factors with respect to chassis (and container) supply were identified by those BCOs consulted as being of particular importance to their operations and to the chassis supply model transition: Service Risk: BCOs care most about avoiding chassis-caused service failures, that is, a delay to the cargo transportation plan. This issue relates to having the right chassis at the right place at the right time. 8 With the exception of Target Stores Inc., all BCOs consulted did so under condition of non-attribution. “Some knowledge” of chassis operations 30% “Active awareness of chassis in my operation” 20% “Very familiar with chassis operation in my supply chain” 50%

40 NCFRP Report 20 | Guidebook for Assessing Evolving International Container Chassis Supply Models 40 Service Terms: The terms of delivery and chassis supply operations at the BCO’s facility, including live-unload versus drop and hook and “free time.” Cost* (see box below): As applicable, this consists of costs associated with the chassis (and container) use, explicit or implicit, current or expected in the future, including penalties relating to exceeding free time allowances. It should be noted that at present, many BCOs are provided chassis in their bundled contracts with the ocean carriers and do not know what the direct chassis costs are as these are not invoiced separately. Quality and Safety: Partly a sub-set of service delivery, shippers are sensitive to delays caused by equipment operations failures and are also cognizant in varying degrees of the newly enacted federal laws on chassis roadability and other FMCSA regulations. Liability: BCOs are sensitive to liability implications associated with transitioning chassis supply responsibility away from the ocean carriers. Service terms, including chassis free time allowance, are typically negotiated with the provider. The larger U.S. shippers occupy a strong position to negotiate preferred chassis supply terms and conditions with carriers, in large part on account of the revenue they provide to these carriers and the stability of this demand. Smaller BCOs have less market power in negotiating service terms, and may use split shipments managed by third-party logistics (3PL) providers or non-vessel operating common carriers (NVOCC), which in turn contract with carriers for chassis supply. *Cost Separate chassis costs to the BCO are not driven by the different chassis supply models per se. BCOs could be liable for chassis charges under any chassis supply model. There are different billing mechanisms for chassis use under each supply model, as referenced in Section 3.7. While there are exceptions, the general chassis billing models, from the BCO perspective, are as follows: Carrier haulage: BCO exempt from separate charge since ocean carrier supplies chassis as part of terms of transportation. Merchant haulage: Where a separate charge is applied, BCO pays for chassis through charges included in the motor carrier invoice. Exception: Large BCOs may be exempted from merchant haulage chassis charges per commercial considerations. BCO Performance Metrics with Respect to Chassis Supply BCOs are generally not concerned with the chassis specifically, but rather their containers since the BCO focus is the cargo they have paid for, particularly its inventory management. Typical metrics such as on-time performance, dwell time, detention charges, and equipment availability are monitored, but the chassis as an asset is not specifically monitored. All but one BCO consulted indicated that they did not currently pay separate chassis supply charges. However, many suggested that the potential introduction of separate chassis charges may lead to different chassis management methods. For example, some manufacturers indicated that visibility of a chassis cost center might lead to changes in approaches to transportation purchasing and related chassis supply terms. |

5.2.2 Advantages and Disadvantages of Alternative Chassis Supply Models for BCOs From the perspective of BCOs, the advantages and disadvantages of alternative chassis supply models are presented Table 5-1 below, with a focus on the implications to their specific commercial interests, as outlined in Section 5.2.1 above. Table 5-1. Advantages and Disadvantages of Alternative Chassis Supply Models from the Perspective of BCOs Chassis Supply Model Advantages Disadvantages Conventional(Ocean Carrier Chassis Model) Service Risk and Terms: No change to status quo. Quality and Safety: Status quo. Liability: Maintains status as “non-issue” for BCOs, as covered by ocean carriers. Service Risk: Greater risk of individual ocean-carrier caused service failure due to market chassis shortages relative to pool models. Chassis Pools (Co-op Model, Neutral and Terminal-Controlled) Service Risk and Terms: Less service risk than ocean carrier and motor carrier models. Quality and Safety: Pool models generally have a maintenance program. Liability: Maintains status as “non-issue” for BCOs. Pools generally have better liability regimen than individual ocean carriers and motor carriers. Motor Carrier or Logistics Company Owned (or Leased ) and Operated Chassis Model Quality and Safety: Potential for increased qualify/safety of chassis if maintenance and repair performed by motor carrier owners, which may have an interest in better maintenance control on their own equipment as IEP. Other: Exporters may benefit by being able to re- load containers recently made empty without having to pull empty equipment from terminals. Service Risk: Less practical for wheeled terminals, as chassis flip could lead to service delays. Also, potential for increased inspection (e.g., at terminal) could lead to delays. Service Terms: Increased coordination challenge with motor carriers at drop and hook facilities (increase challenge to ensure right chassis with right motor carrier).

42 | 42 5.2.3 BCOs and Chassis Supply Transitions All BCOs surveyed were aware of the changing landscape with regard to chassis in the intermodal supply chain. In every case, the status quo chassis supply model was preferred to any alternative, which is not surprising given the specific BCO interests and their current chassis supply arrangements—minimum or otherwise understood service risk, good service terms, and no separate explicit cost. Nevertheless, nearly all BCOs consulted have had a dialogue with at least one ocean carrier partner and motor carriers regarding new chassis paradigms. As a result, shippers are starting to prepare for constructive engagement with the other stakeholders—ocean and motor carriers—regarding potential necessary commercial and operational changes. Of the many concerns BCOs might have regarding this fundamental adjustment to their logistics structure, not surprisingly, the two highest rated in our surveys were the level of service and potential cost impacts, which were rated as roughly equal. Other factors including quality and safety (maintenance and repair) were ranked in the middle, with liability the lowest-rated concern. These results correlate well to the level of visibility each factor has with BCO supply chain managers. Cost and level of service are universally the top issues for all transportation purchasers; chassis-related liability has not traditionally been managed by shippers, but depending on future chassis supply strategies, may become of increased concern. Of note, nearly all the BCOs surveyed utilized drop and hook container operations, which has historically included “free time” at their facilities (though arguably had a cost associated with it buried in the freight rate). Should the introduction of new chassis supply arrangements include a separate and daily chassis rental rate, this would explicitly price the cost of drop and hook operations and related chassis time at the shipper’s facility. However, the BCOs consulted indicated that their current logistics arrangements are predicated on the drop and hook chassis supply model and that the introduction of chassis costs alone may not be reason enough to change this arrangement. One exporter that currently has chassis free time in excess of 10 days, however, is considering a change in its logistics pattern to reduce its exposure to potential chassis charges in a daily rate scenario. Another BCO indicated that transload operations may be considered in the future if chassis charges and arrangements become onerous, indicating that a transload operation could result in faster ocean chassis cycle times as operations are typically located close to port terminals. Likewise, some large BCOs operate private trucking fleets and have significant asset management experience and may opt to change or modify supply chains to respond to changes in chassis supply terms. In any case, it is likely that the discontinuance of the ocean carrier chassis supply model will have implications for BCOs (in particular as related to chassis charges and potentially service levels), although it is too early to assess the degree of these potential implications. In the short term, BCOs consulted indicated that evolving chassis supply models and their implications would have limited impact on their supply chain practices. For example, if a BCO has a drop and hook operation or a live-unload operation, it has indicated that these practices will likely be maintained for the utility they provide to the BCO’s supply chain, even if a separate chassis charge was being applied. NCFRP Report 20 | Guidebook for Assessing Evolving International Container Chassis Supply Models

Guidebook for Assessing Evolving International Container Chassis Supply Models | NCFRP Report 20 | 43 5.3 Ocean Carriers In almost all markets in the U.S., chassis supply has historically been the responsibility of the ocean carrier. Most ocean carriers considered providing chassis a cost of doing business in the U.S., the equivalent of providing containers. Chassis management became its own operational unit for ocean carriers, requiring staff and systems for logistics and maintenance. However, often these costs were considered “fixed,” akin to the vessel or container assets, and were not reflected in the net revenue contribution analysis. Despite the desire to exit the chassis supply business, the container shipping supply chain has developed around ocean carrier ownership and operations in the U.S. How the ties are severed and reconfigured in a way that does not unduly disrupt the supply chain flow is at the heart of the strategies carriers are employing to transition chassis models. Profile of Ocean Carriers Consulted Ten major ocean carriers were consulted in the development of this Guidebook, collectively serving all major U.S. container ports. In total, this group operates over 150,000 ocean container chassis, representing more than a quarter of the U.S. ocean container chassis fleet. The proportion of owned versus leased chassis differs by ocean carriers—in most cases, carriers consulted own more chassis than they lease, although the reverse is true of at least one consulted ocean carrier. On average close to 60% of chassis operated by those consulted are owned, as summarized in the adjacent pie chart. Other characteristics of the sample of ocean carriers consulted include the following: 70% of the ocean container traffic handled at U.S. ports was merchant haulage (30% carrier haulage). These ocean carriers did not own or operate specialty (e.g., tri-axle) chassis. They have not purchased chassis recently or in any great quantity—no new marine chassis purchases since 2008, average last purchase date in 2006, last major purchase (>10% of total fleet) was in 2003, size of purchases declined each year. 5.3.1 Commercial Needs and Interests vis-à-vis Chassis Supply The ocean carrier’s need for chassis is determined by its commercial strategies, its operating environment, and its customers’ logistics requirements. Wheeled marine and rail terminals, extra free time provisions, and customers’ drop and hook delivery needs locations are key factors that increase the demand for chassis supply. Also, ocean carriers have differing attitudes towa rd chassis ownership. Some have historically preferred ownership of assets and operating control; others prefer the flexibility of leasing assets and utilizing neutral chassis pools to avoid the long-term commitment of ownership. In any case, from an ocean carrier perspective, the primary interests with respect to chassis are the following: Capital costs/lease rates: The cost of purchasing/owning/replacing chassis and related financing costs (when owned by ocean carrier), or lease rates, when leased. Operating cost: Maintenance and repair costs, administrative costs, cost of storage, handling, and repositioning costs. Adequacy of supply: Right number of chassis in the right place, at the right time. Owned 58% Long-term Lease 33% Short-term Lease 9%

44 NCFRP Report 20 | Guidebook for Assessing Evolving International Container Chassis Supply Models | 44 Asset utilization: The higher the better, leading to more effective chassis cost per load. Liability: Chassis provider is responsible to provide adequate third-party liability insurance. Service offering: Potential commercial differentiator when chassis provided as part of service. Ocean Carrier Performance Metrics with Respect to Chassis Supply By and large, the chassis is tracked insofar as it is a cost to ocean carriers with chassis utilization the secondary consideration (compared for instance with ocean vessel utilization, which is of greater concern). Dwell time and total turn-time are used, but more as a metric for containers. Other chassis supply factors are tracked or captured in terms of services with BCOs, but not necessarily tracked using specific metrics.

5.3.2 Advantages and Disadvantages of Alternative Chassis Supply Models for Ocean Carriers From the perspective of the ocean carriers, the advantages and disadvantages of alternative chassis supply models are presented in Table 5-2, with a focus on the implications to their specific commercial interests, as outlined in Section 5.3.1 above. Table 5-2. Advantages and Disadvantages of Alternative Chassis Supply Models from the Perspective of Ocean Carriers Chassis Supply Model Advantages Disadvantages (Conventional) Ocean Carrier Chassis Model Service Offering: Potential commercial differentiator when chassis provided as part of service. Highest operating control by the ocean carrier. Capital Cost: Chassis capital costs borne by ocean carriers or lessors. With respect to ownership by the ocean carrier, a disadvantage is that the carrier must pay capital cost and related storage fees, among others, even when the chassis are not needed and used. Operating Cost: All costs associated with chassis supply, including maintenance and repair, administration, repositioning between or within regions/locations, and so forth borne by ocean carriers or lessors. Adequacy of Supply: More difficult to manage and balance supply relative to pool models, which aggregate and balance supply more easily. Asset Utilization: In general lower utilization than pools, which aggregate multiple chassis fleets to supply multiple ocean carriers. Liability: Ocean carrier is responsible to provide insurance. National / Regional Cooperative (Co-op) and Alliance Co-op Chassis Pool Model (Note: some terminal pools are neutral and some are co-op.) Service Offering: As in ocean carrier chassis supply model. Asset Utilization: Improved asset utilization (compared to ocean carrier model). Liability: Improved insurance regime and lower insurance cost (through collective approach). Other: More uniform maintenance and repair practices (versus individual ocean carrier model). Capital Cost: Does not achieve divestiture of chassis assets. Operating Cost: Operating costs ultimately borne by the individual ocean carriers that have contributed to the chassis pool. Other: Required collective decision making causes slower reaction time, some member dissatisfaction with decisions, and optimization of the “whole” at the expense of the individual lines.

Neutral Chassis Pool Model (Note: some terminal pools are neutral and some are co-op.) Capital Cost: No chassis-related capital investment needed for ocean carriers. Operating Cost: Reduced administrative expenses for ocean carriers. Adequacy of Supply: Can move quickly to right-size pool due to single fleet/management structure and large fleet structure of leasing companies (compared to co-op pools, which require cooperative decision making, or ocean carrier model, in which ocean carrier may not be able to quickly inject supply during peak needs). Liability: Ocean carrier is not the chassis provider in this model, and has lower liability risk compared to ocean carrier/co-op chassis supply models. Other: -Transfers cyclical and structure asset risk to pool asset provider (though user will pay higher per diem for over-utilization and potentially under-utilization as well). -Ocean carrier not responsible for long-term supply . Operating Cost: Highest per day chassis per diem lease fees. Other: Single-supplier risk of increasing cost over time (due to lack of competition). Motor Carrier or Logistics Company Owned (or Leased) and Operated Chassis Model Capital Cost: No chassis-related capital investment needed by ocean carrier. Operating Cost: Reduced direct chassis-related expense, and related administrative expense for ocean carrier. Liability: No direct liability under the federal roadability regulations, but depending on motor carriers’ insurance program may face increased risk compared to pool models. Reduced third-party insurance against the chassis operation. Chassis Charges: Chassis “cost” control lost; subject to incur increased expense (via motor carrier) or lower revenue (commercial concessions to customers). Service Offering: Ocean carriers lose control over reliability of chassis supply, if completely motor carrier provided. Other: Incompatibility with wheeled terminals complicates transition.

Guidebook for Assessing Evolving International Container Chassis Supply Models | NCFRP Report 20 | 47 5.3.3 Ocean Carriers and Chassis Supply Transitions According to the OCEMA website, 16 ocean carriers have implemented chassis model transitions of some type. Most have ended the general practice of providing chassis in smaller container volume markets though a few lines have implemented transition strategies in major markets as well. As of February 1, 2012, only two ocean carriers, Maersk and CMA CGM, have implemented national programs to transition chassis models. However, APL, one of the largest lines to remain quiet on the issue, recently announced plans to exit the chassis supply business. While the ocean carriers recognize there would be revenue and drayage rate trade-offs in exchange for elimination of the direct chassis expense, our consultations with ocean carriers indicate that ocean carriers are targeting a 50% net savings during the transition phase nonetheless. Savings for ocean carriers do not automatically mean expense for other stakeholders, as the ocean carriers expect that operating efficiencies executed by all stakeholders may drive financial waste out of the system. As the process is unfolding among the ocean carriers, certain challenges in transitioning chassis models are emerging. These issues are in general applicable to most, though not all, ocean carriers, but as a group are affecting the speed of execution: Disposition of Owned Assets Even with the sale of Maersk’s chassis (DCLI), an estimated 175,000 chassis are still owned by ocean carriers. The model of asset disposition remains a big question. As one ocean carrier put it: Chassis sales from ocean to motor carriers has occurred in very limited quantities compared to the existing potential supply, and sales to brokers often result in chassis being repositioned to non-U.S. markets. There are also potential opportunities for creating chassis leasing businesses, which will draw private capital into the market, as was recently done with sale of DCLI. Commercial Considerations/Requirements by BCOs Prior to selling assets, the ocean carriers have to overcome the commercial pressure from customers who will resist change to the status quo. Underpinning this resistance is the larger issue of vessel capacity demand/supply forces that drive service contract negotiations. Internally within the ocean carrier business, there is a natural tension between the operations function, which is pushing this change to obtain cost savings, and the sales function, which is responding to customer pressure not to change. A related major concern expressed by ocean carriers, once they relinquish control over chassis, is whether the market will ensure there is adequate supply as container growth resumes, or chassis replacement is required. Any transition moving toward a lower level of service or a more unreliable supply of chassis may cause some reconsideration of the approach. If today I could find a buyer for my chassis, I would opt out tomorrow. Where the book value is very high, it’s hard to get out though; only low book value ones can be sold in large quantity.

48 NCFRP Report 20 | Guidebook for Assessing Evolving International Container Chassis Supply Models | 48 5.4 Motor Carriers The motor carrier drayage model in the U.S. container trade is predominately “asset light,” utilizing primarily owner-operators (aka “sub-contractors”) to provide drayage services, without investments in trucks, chassis or storage land. However as the costs of trucking and regulatory scrutiny increase, many drayage firms are hiring more company drivers and larger carriers are expanding into the port services area. In any case, there are over 6,000 drayage companies registered with Intermodal Association of North America’s “Uniform Interchange Intermodal Agreement.” In the U.S. chassis system, the motor carrier is in a unique position because it is the stakeholder that handles the asset the most, yet, in general, has the least amount of control over it. Other stakeholders establish the “rules” of chassis usage and the motor carrier in turn must play by them. There are four key factors controlled by other stakeholders, which have a direct impact on drayage productivity with respect to chassis: Factor Primary Influencer Wheeled vs. grounded terminal Marine/rail terminal Chassis supply Ocean carrier/neutral pool operator/terminal pool operator Chassis condition IEP Inspection and maintenance of chassis Terminal operator/ocean carrier/union The motor carriers’ challenge is to maximize operating efficiency while navigating the rules of the game that traditionally have been different by ocean carrier, by terminal, and by geography. Up until the ocean carriers started to transfer their responsibilities for chassis supply, the rules for chassis had been fairly stable. Now that most of the ocean carriers have implemented some form of chassis usage or expense-shifting program, and that many of these programs are again unique by line, terminal, and geography, the transition for the motor carrier involvement for chassis responsibility is complex.

Guidebook for Assessing Evolving International Container Chassis Supply Models | NCFRP Report 20 | 49 Profile of Motor Carriers Consulted Thirty motor carriers were consulted in the preparation of this Guidebook, collectively serving all major ocean and inland rail terminals in the U.S. The adjacent figure provides an overview of regions served by the sample of motor carriers consulted. It should be noted that certain motor carriers consulted serve a very limited geography (e.g., 150 to 200 mile radius of the ports of New York and New Jersey), whereas others indicated that they served nearly all major U.S. regions. In terms of drayage activity, the motor carriers consulted cumulatively make approximately 70,000 drayage moves per week, ranging from 30 moves per week for a smaller carrier, to over 13,000 moves per week for a larger carrier. The majority of these motor carriers use owner-operators, under sub-contract, for ocean container drayage services. Only a few of the motor carriers consulted owned and operated their own chassis. With respect to delivery of containers to shipper facilities, there was a significant range of live-unload vs. drop and hook services by motor carriers, although on average, drop and hook service was most typical (62%) vs. live-unload (38%). 5.4.1 Commercial Needs and Interests vis-à-vis Chassis Supply The economics of the U.S. marine drayage business is based on maximizing the number of truck trips daily, since drayage rates, and driver compensation, are move-based. The motor carrier industry is highly sensitive to any operational or commercial factors that cause idle time while the driver is working within his/her hours of service schedule. Turns (trips) per day and minimizing terminal dwell time were the two most important productivity measurements cited in our motor carrier survey responses. For the most part, the commercial needs and interests of motor carriers vis-à-vis chassis relate to the potential impact of the chassis or chassis supply on the motor carrier productivity (number of turn trips and terminal dwell times). Chassis-related factors influencing productivity include whether chassis are stored on the terminal or off the terminal, whether the terminal operation is wheeled (requiring chassis flips under this model) or grounded, inspection, and over-the-road repair, among others. The following are other commercial factors, currently of less immediate concern to motor carriers given the current U.S. chassis supply environment, but that could become much more important as chassis models evolve: Capital Cost: Any capital costs associated with purchasing/owning/replacing chassis and related financing costs. Operating Costs/Lease Rate: Direct operating costs associated with owned chassis including maintenance and repair, administration, and so forth, or chassis lease rates. Liability: Cost of purchasing third-party liability insurance, if chassis owned, or otherwise risk equipment breakdowns or failures if third party supplied. Safety and Regulation: Minimizing roadability repairs, and violations. In an environment of increased regulatory scrutiny created by the FMCSA, roadability concerns and the risk of being stopped for equipment safety violations is of critical concern. South Atlantic 17% Northeast 18% Midwest 14% Gulf 14% West Coast 37%

50 NCFRP Report 20 | Guidebook for Assessing Evolving International Container Chassis Supply Models | 50 Supply: Ensuring adequate supply of chassis—right place at the right time. Motor Carrier Performance Metrics with Respect to Chassis Supply Motor carriers were typically less inclined to measure chassis performance given they are still typically not paying this cost, and ownership rates are very low. The utilization of their drivers and tractors is more pressing. Where they do own chassis (e.g., specialty tri-axle chassis), maintenance and repair costs and related metrics (e.g., maintenance and repair costs per day) are unsurprisingly the largest cost. Another signicant metric for motor carriers is the damage expense charged to them during chassis operation. The largest share is repair costs incurred during transportation, when a chassis component, typically tires, fails and must be immediately repaired. The other case is when in-gate inspections of chassis returned to terminals have identied damage as dened under contract or regulation, and the cost to repair is billed back to the motor carrier.

5.4.2 Advantages and Disadvantages of Alternative Chassis Supply Models for Motor Carriers From the perspective of the motor carriers, the advantages and disadvantages of alternative chassis supply models are presented in Table 5-3, with a focus on the implications to their specific commercial interests. Table 5-3. Advantages and Disadvantages of Alternative Chassis Supply Models from the Perspective of Motor Carriers Chassis Supply Model Advantages Disadvantages (Conventional) Ocean Carrier Chassis Model Capital Costs: No capital investment required for chassis or chassis storage. Operating Costs: Not borne directly by motor carrier. Maintenance and Repair Costs: No maintenance cost (other than for identified damage attributed to the motor carrier). Other: Does not constrain ability to grow truck fleet base. Productivity: Different chassis-related policies, that is, maintenance and repair and free time rules to manage with each ocean carrier. Supply: Reliant on third parties to ensure adequate supply, proper maintenance, and chassis handling, including gate inspections. Other: Having multiple points of contact—one for each line—for chassis supply and maintenance issue increases complexity of business rules and adds administrative costs. National/Regional Cooperative (Co-op) and Alliance Co-op Chassis Pool Model Productivity: Tends to reduce delays for flips on mismatched chassis/containers (compared to ocean carrier model). Less complexity (relative to ocean carrier model) with respect to rules and points of contact. Capital Costs: No capital investment required for chassis or chassis storage. Operating Costs: As above, not borne directly by motor carrier. Liability: Liability and third-party insurance cost not borne by motor carrier. Other: Does not constrain ability to grow truck fleet base. Supply: Reliant on third parties to ensure adequate supply, proper maintenance, and chassis handling, including gate inspections. Neutral Chassis Pool Model Productivity: “Gray fleet” increases efficiency when it serves multiple terminals due to more “start” and “stop” locations. Capital Costs: No capital investment required for chassis or chassis storage. Operating Costs: Maintenance, repair, administration costs not borne directly by motor carrier, unless damage attributed to motor carrier. Liability: Liability and third-party insurance cost not borne by motor carrier. Other: Does not constrain ability to grow truck fleet base. Supply: Reliant on third parties to ensure adequate supply, proper maintenance, and chassis handling, including gate inspections Operating Costs: Highest per diem chassis lease rate.

Terminal Chassis Pool Model Productivity: “Gray fleet” increases efficiency when it serves multiple terminals due to more “start” and “stop” locations. Capital Costs: No capital investment required for chassis or chassis storage. Operating Costs: As above, not borne directly by motor carrier, unless damage attributed to motor carrier. Liability: Liability and third-party insurance cost not borne by motor carrier. Other: Does not constrain ability to grow truck fleet base. Supply: Reliant on third parties to ensure adequate supply, proper maintenance, and chassis handling, including gate inspections. Less operational flexibility since chassis constrained to the terminal’s customers. Motor Carrier or Logistics Company Owned (or Leased) and Operated Chassis Model Grounded Terminals: At grounded terminals, less terminal time in chassis inspection, handling, and repair; improved driver productivity. Safety and Regulation: Ability to control maintenance quality and thus cost and productivity; minimize incidences of bad- order chassis. Other: Ability to differentiate product especially in low-density geographic regions where chassis supplies can be short. Productivity: With a growing demand for exports in many regions, keeping the chassis off terminal could allow motor carriers to minimize miles between inbound and outbound loads. Productivity: Potential for increased transit miles with bare chassis (if loads unbalanced), depending on the operation at the terminal and the market balance in the region. Wheeled Terminals: Motor carrier model requires chassis flip at wheeled terminals, which may lead to delays, increased turn times, and so forth. Capital Cost: Chassis and infrastructure (storage) capital investment requirements to be borne by motor carrier. Need to obtain land for storage and M&R, or pay third party for it. Operating cost: Maintenance and repair, administration (increased staff to manage and maintain chassis; invoice and collect chassis charges). Managing chassis utilization as a capital asset increases business complexity. Liability: Liability and third-party insurance to be borne by motor carrier. Other: Potential additional chassis inspections by terminal labor could lead to redundancy, delays , and lower productivity. From a motor carrier perspective, the co-op pool was a big efficiency improvement over the traditional ocean carrier–controlled model due to the flexibility to drop off chassis at more terminals covered by the pool, as well as the big decrease in chassis flips caused by terminal mismatches of containers and chassis. Motor carriers also favored chassis pools, such as neutral and terminal pools. However, many did not fully understand the constructive differences between co-op, neutral, and terminal chassis pools, but tended to refer to chassis pools generically as “neutral pools.” The researchers believe this is a reference to the chassis as a “gray” asset, which is how the motor carrier derives the majority of its efficiencies. As one motor carrier put it: “A gray fleet in a cooperative-type chassis pool. It gives me the flexibility to pick up any chassis and not worry.”

Guidebook for Assessing Evolving International Container Chassis Supply Models | NCFRP Report 20 | 53 5.4.3 Motor Carriers and Chassis Supply Transitions Approximately 85% of the motor carriers surveyed still are unsure of their chassis strategies or are passively awaiting the market to sort it out. Nevertheless, the potential implications of chassis supply transitions from the motor carrier perspective are many. Among the key considerations are the following: Chassis Lease Charges Motor carriers are concerned their costs will be impaired if the chassis supply transition necessitates renting chassis daily through chassis pools. The three highest related concerns among those motor carriers consulted were potential challenges to recoup these costs, the increasing lease rates offered by the neutral pool operators, and the lack of supplier choice for some of the chassis pools (i.e., limited competition among chassis providers). Chassis Flips at Wheeled Terminals A motor carrier bringing its own chassis into a wheeled terminal may incur an additional wait to move the container from the chassis on which it is resting in the terminal to that of the motor carrier, endangering appointments and running down the hours of service clock. The cost of the chassis flip would be borne by the motor carrier. Chassis Delivery and Pickup Logistics At many shipper facilities multiple motor carriers are requested to drop a full container and pick up an empty one. This could create billing accuracy and chassis accountability challenges (if, for example, motor carrier A drops off chassis A, but returns with chassis B, controlled by motor carrier B). Cost of Capital and Operating Costs (If Chassis Purchased) Should motor carriers purchase their own ocean container chassis, this would lead to higher capital and related financing costs, which for smaller players may be prohibitive. There would also be a number of operating costs, including, in particular, maintenance and repair costs, not currently incurred directly by most motor carriers for ocean container chassis. Potential for Redundancy in Chassis Inspection Some motor carriers have expressed a concern about the potential for redundancy in chassis inspections, where inspections may occur off the terminal, and may be inspected again by terminal labor, which could lead to added delays and lost productivity. Storage The majority of motor carriers surveyed listed parking and storage requirements as the major hurdle to chassis ownership, second only to capital cost and ahead of maintenance requirements and all management and utilization concerns. Indeed 90% of all motor carriers, including every one operating over 10,000 moves per week, said that they would need to acquire more land to transition to a full motor carrier model.

54 NCFRP Report 20 | Guidebook for Assessing Evolving International Container Chassis Supply Models | 54 5.5 Terminal Operators (Marine and Inland) Terminals, both marine and rail, are the place where the container in transit changes transportation modes. Chassis are used at terminals to support drayage operations, for internal terminal operations (moving containers within the terminal), and in storage (particularly the case for wheeled terminals). When not in use at terminals, chassis are stored, typically on site in stacks, racks, or simply parked, as described in Chapter 2. Marine and rail terminals in the U.S. have developed terminal infrastructure and operating practices around ocean carrier chassis domiciled on-property. Profile of Terminal Operators Consulted Fourteen major terminal operators and port authorities were consulted in the preparation of this Guidebook, of which seven were marine terminal operators, five rail terminal operators, and two operating port authorities. From a geographic perspective, all major U.S. marine terminals were covered. In terms of rail terminals, representatives from five major railways were consulted. 5.5.1 Commercial Needs and Interests vis-à-vis Chassis Supply Though terminal operators seek to optimize the profitability of their system, they must also consider the requirements and needs of their customers and stakeholders (motor carriers, shippers, and unions), which may influence operating processes. For the most part, terminals rely on ocean carriers provisioning and managing chassis to sufficient quantity and quality to operate effectively and efficiently. Most rules governing chassis on-terminal are contained in the commercial contract between the terminal operator and ocean carrier or pools, though some provisions such as storage and maintenance may be contained in general tariffs. From a terminal operator’s perspective, the primary interests with respect to chassis are the following: Terminal Productivity: Maximizing terminal throughput and using terminal assets, including land and equipment, efficiently. This includes eliminating/minimizing/reducing handling and processes of containers and chassis, maximizing labor, yard, and handling equipment productivity, and maximizing land-use productivity. Supply: Ensuring an adequate supply of chassis for efficient terminal operations and to minimize chassis flips. Chassis Storage Footprint: The physical terminal space utilized for chassis storage, which cannot otherwise be used for container storage or other terminal operations (related to land-use productivity). Capital Cost: Any capital costs associated with purchasing/owning/replacing chassis and related financing costs. Operating Costs: Costs associated with chassis maintenance and repair and chassis administration (when chassis owned and supplied by terminal). Based on the researchers’ discussions with the largest marine and rail terminal operators in the U.S., it was found that their highest priorities for chassis are to have sufficient quantity so as not to delay container handling operations, and that they be well maintained to avoid repairs after being matched to a container and truck, thereby minimizing the need for chassis flips. Also, terminals tend to prefer minimizing the footprint of chassis on terminal sites, given that this space cannot be otherwise used for container storage or other terminal operations. Terminal Operator Performance Metrics with Respect to Chassis Supply Since chassis are the conveyance equipment to deliver and receive containers, and in the U.S. system supply is generally maintained on-terminal, terminal operators possess a keen interest in certain performance indicators. However, apart from the

Guidebook for Assessing Evolving International Container Chassis Supply Models | NCFRP Report 20 | 55 cases of terminal-operated chassis pools, they are not as inclined to be concerned with utilization rate so much as cost control and supply liquidity. The primary metrics used by terminal operators and port authorities with respect to chassis are varied and often inconsistent, but include share of total land devoted to chassis storage; percentage of bad-order chassis; and administrative cost and maintenance and repair costs, as applicable.

5.5.2 Advantages and Disadvantages of Alternative Chassis Supply Models for Terminal Operators From the perspective of terminal operators (rail and marine), the advantages and disadvantages of alternative chassis supply models are presented in Table 5-4, with a focus on the implications for their specific commercial interests. Table 5-4. Advantages and Disadvantages of Alternative Chassis Supply Models from the Perspective of Terminal Operators Chassis Supply Model Advantages Disadvantages (Conventional) Ocean Carrier Chassis Model Capital Costs: No capital investment required for chassis by terminals. Operating Costs: Costs associated with chassis maintenance and repair and chassis administration not borne by terminal operators. Other: Direct contractual relationship between ocean carrier and terminal improves supply coordination and responsibility. Terminal Productivity: Highest mismatch potential for wheeled operations—requiring chassis flips, which leads to delays, inefficiencies. Also, coordinating maintenance regimes with each line is inefficient. Chassis Storage Footprint: Largest footprint for ocean carrier chassis model, particularly in wheeled terminal operations. Supply: Managing supply sufficiency for each line is a challenge (more so than for co-op and other pool models). National/Regional Cooperative (Co-op) and Alliance Co-op Chassis Pool Model Terminal Productivity: Higher chassis utilization than ocean carrier model, enabling fewer chassis to be stored on terminal. Supply: Chassis supply is generally better than in ocean container model. ”Gray fleet” eliminates chassis flip caused by mismatching containers to chassis, although flips may still be required for damaged chassis, etc. Chassis Storage Footprint: Lower chassis storage footprint than in ocean carrier model. Capital Costs: No capital investment required for chassis by terminals. Operating Costs: Costs associated with chassis maintenance and repair not borne by terminal operators. Decreased administration of chassis through a single point of contact for supply, logistics, and management. Capital Costs: No capital investment required for chassis by terminals. Other: Need to develop third-party contractual relationship governing chassis rules. Neutral Chassis Pool Model Advantages as in co-op model above. Chassis Storage Footprint: Lower chassis storage footprint than in ocean carrier model. Cost: If neutral pool is controlled by for-profit third party, potential for neutral pool chassis cost increases to become commercial issue for terminal. Other: Need to develop third-party contractual relationship governing chassis rules.

Terminal Chassis Pool Model Terminal Productivity: Higher chassis utilization than ocean carrier model. Gray fleet eliminates chassis flips caused by mismatching containers to chassis. Potential for fewer flips with terminal-managed chassis fleet. Supply: Because the terminal operates the pool, it has the highest degree of control to adjust to cyclical or structural demand. Chassis Storage Footprint: Lower chassis storage footprint than in ocean carrier model. Other: Integration of terminal management and chassis management could lead to greater terminal efficiencies. Capital Costs: Capital investment in chassis borne in full or in part by terminal operators. Operating Costs: Costs associated with chassis maintenance and repair borne by terminal operators. Other: Not effective if multiple terminal pools serve a region, as this would effectively recreate multiple chassis fleets at a terminal. Motor Carrier or Logistics Company Owned (or Leased) and Operated Chassis Model Terminal Productivity: Faster gate inspections by not inspecting chassis (chassis considered by the terminal to be an extension of the truck, thereby not requiring specific chassis inspection). Chassis Storage Footprint: Increases terminal capacity by eliminating dedicated chassis storage areas and reducing motor carrier dwell time caused by pre-exit chassis repair or flip. Capital Costs: No capital investment required for chassis by terminals. Operating Costs: Costs associated with chassis maintenance and repair not borne by terminal operators. Wheeled terminals: Problematic at wheeled terminals (requires a chassis flip). Supply: Terminals cannot hold their customers accountable for chassis supply. Of the terminals consulted, even those operating in a partial wheeled environment, the motor carrier supply model was deemed the “long-run solution.” The following is a selection of related comments from terminal operators: “May need longer truck queue as all trucks will come in with chassis, instead of just tractors. However, inside terminal there will be more space. There will be faster truck turn-time at the terminal due to no time to obtain and inspect chassis by the drivers. “ “A pure trucker wheel environment would provide a substantial increase in terminal productivity.” “A trucker model holds the most promise in my mind. It gets the assets off the terminal and they are better controlled and maintained.”

58 NCFRP Report 20 | Guidebook for Assessing Evolving International Container Chassis Supply Models | 58 5.5.3 Terminals and Chassis Supply Transitions Though marine terminals prefer the motor carrier owned/operated model, which would ef fectively move the chassis storage terminal, none surveyed believed transition to this model was realistic in the short term, as the barriers to wholesale change are too numerous and too high to undo the current chassis structure. These factors have been described previously, but include the many challenges in the transfer of assets from ocean to motor carriers (capital, storage facilities, maintenance, and administration), the conversion from wheeled to grounded operations, commercial free time, and drop and hook delivery logistics. 5.6 Other Chassis Stakeholder Perspectives 5.6.1 Leasing Companies The business structure built by the leasing companies is quickly changing. The decades-old chassis leasing business model of high percentage of revenue derived from long-term leases is less sustainable in the current market flux, as customers are shunning long-term or master lease commitments in favor of chassis pools. In the immediate future, the leasing companies see chassis pools growing, and triple-net lease business shrinking in their revenue profile. While term leasing to motor carriers is on the rise, it is not seen as coming close to compensating for the reduction from ocean carriers. 5.6.2 Labor Unions Labor unions have had a significant interest in evolving chassis supply models. For example, at the March 2012 Journal of Commerce–sponsored Transpacific Maritime Conference, the spokesman for the ILA, which has jurisdiction for U.S. East Coast ports, identified four essential issues that would need to be resolved in this year’s contact negotiations. These issues included (1) automation, (2) jurisdiction, (3) chassis, and (4) overweight containers. The ILA prefers jurisdiction over chassis maintenance and are particularly concerned with how evolving chassis supply models may impact employment.