People who manage global supply chains know that hub-and-spoke routing isn’t the norm for container shipping. But Danish carrier Maersk and its new partner Hapag-Lloyd will be launching the Gemini Cooperation on February 1, and as part of their plans they will go to a hub-and-spoke model in an effort to improve schedule reliability, which has been abysmal across global trade lanes of late. There are a lot of skeptics who wonder how this is going to work, because the plan counts on having efficient hubs where containers can be transshipped (switched from one ship to another), just as one would make connections at an airline hub. There are key operational benefits to this strategy, and if Maersk and Hapag-Lloyd can make it work it could cause others to switch as well.
Rotations suffer more from variability than routes with fewer stops
Traditional container shipping services use “rotations” in which a ship calls on a series of ports in a region, then travels to another region and makes another series of calls. For example, CMA CGM’s French Asia Line 2 starts in Tianjin, China, makes four more stops in China before reaching Singapore. It continues to Rotterdam, Hamburg, and Antwerp in Northern European before heading back. Maersk argues that long service loops are more prone to schedule delays than direct point-to-point routings. This is well known in operations management: variability gets worse when you have longer chains of steps in a process. We did a study of “linear” routings at United Airlines, in which aircraft flew a sequence of legs from city to city, versus “out-and-back” routings, in which they flew from a hub out to the end of a spoke and back. This is the operationally equivalent comparison to container ship rotations. Linear routings offer higher aircraft equipment utilization, but are prone to cascading delays. Out-and-back routings are more robust to disruptions because delays on individual legs are decoupled at the hubs so they don’t propagate. This is exactly the same problem container ships on rotations face when they suffer a delay at one port – they then reach every subsequent port late. Since they likely then miss their scheduled berthing time, they might have to wait, just like a plane who arrives late and can’t park at an available gate. United eventually implemented more out-and-back at its Newark hub after suffering significant disruptions, and this sounds like what Gemini is planning to do.
With the current low schedule reliability and the continuing risk of new disruptions such as in the Red Sea, decoupling legs could make a lot of sense. At the beginning of the Red Sea re-routings, Europe-bound cargo that was meant to be unloaded in the Mediterranean was in the wrong load sequence for unloading. The shift to transshipment on these routes was already a de facto hub and spoke implementation. As Maersk has pointed out, the hub-and-spoke model affords more flexibility for changing routings. This is the equivalent of having multiple airline hubs to route over.
Hub-and-spoke also makes economic and environmental sense
Shifting to a hub-and-spoke model will mean more efficient utilization of large ships on the long legs from Asia to Northern Europe and Asia to the Americas, because carriers will be able to aggregate demand and operate at higher load factors. This will become more important as we see production continue to diversify out of China into Southeast Asia and India, as it means load ports where cargo originates will be more spread out across smaller ports in Vietnam, Thailand, Indonesia and elsewhere rather than being concentrated at megaports like Yantian (Shenzhen), Ningbo, and Shanghai.
Another highly significant impact will be on the carbon footprint of cargo carried on these routes. If one studies the International Maritime Organization regulations, which mandate annual reporting of the annual efficiency ratio (AER) and carbon intensity index (CII) metrics for every ship engaged in global trade, larger ships that operate point-to-point with high load factors perform much better. This is significant not only for meeting regulatory requirements, it also means lower fees under the European Emissions Trading Scheme (ETS) which matters to shippers going into or out of the European Union.
What about the spokes? Over the short term, most of these routes outside Europe will not be subject to EU ETS fees. Over the medium term, they will be candidates for smaller ships that might use next generation fuels like methanol. More importantly, the capacity of ships used on spokes can be better matched to demand, which will improve efficiency.
The large network airlines have demonstrated the value of demand aggregation using large planes to carry passengers between hubs while serving other cities with smaller aircraft flying the spokes. All the major international carriers ended up with hub-and-spoke models. It was only when we started seeing highly efficient new generation airliners like the Boeing 787, Airbus A350XWB, and Airbus A321XLR that supported route fragmentation did we see more direct services, but even then most of these aircraft are still assigned to fly out of hubs.
Efficient transshipment will be key, and some ports are already good at this
The big concern among many shippers is the dependence this will place on efficient transshipment at major hubs. Just like airline hubs, transshipment hubs will have to be able to unload, sort, and reload boxes efficiently. Some Asian ports like Singapore are already very good at handling transshipment, and others that Maersk controls like the Port of Tanjung Pelepas in Malaysia are also very good.
This might also be less of a problem for destination ports. During a recent visit to Maersk’s APM Terminals operation at Rotterdam Maasvlatke in the Netherlands, we saw a highly automated and efficient operation that already supports extensive transshipments destined for the hinterland. The key is having sufficient yard capacity so that with the increase in container movements there is sufficient space for buffering and sorting without excessive stacking and resorting. The Maasvlatke operation uses sophisticated automation and computerized management tools, and is in the midst of a major expansion.
Unlike with passengers at an airline hub, ocean cargo can generally wait for a few days to change ships. If boxes can then be routed on an outbound long-haul leg that runs more predictably, Maersk and Hapag-Lloyd could have the opportunity to raise the bar on schedule reliability. That would probably force the other carriers to consider it as well. One container line executive told me that initially they were skeptical, but now they are starting to think about it more seriously. This could be the beginning of a significanr shift in how containerized ocean cargo is moved.
Source: https://www.forbes.com/