Ship Management Explained in Brief for Students and Knowledge Seekers

Commercial shipping is a mean of transport for delivering all kinds of goods and services, as vessels transport some 90% of all international goods. They keep our society and the “global village” running.

However, there is more to see than container ships and bulkers. Most people are not aware of the many different types of ships. Special ships may deal with underwater robots (ROV’s), transportation of gigantic oil rigs via piggyback, or the maintenance of large wind turbines.

Crews run all of these ships; both crew and ship must be organized. Someone has to deal with laws, bills, decisions and processes; this is normally a ship manager.

Ship Managers and Owners

According to Statista.com the worldwide merchant fleet in 2014 consisted of 49,582 vessels (bulkers, container vessels, tankers, ferries). Before we discover how these vessels are managed, let us explore their ownership.

Big shipping companies can afford to order new ships (e.g. container vessels), costing typically between US $ 70 to $ 120 million. However, today most vessels are not owned by a single company but by a fund, which involves multiple persons or companies buying a ship together, resulting in shared ownership and risk. To limit the risk further the vessel becomes its own company, using any style of public limited liability, e.g. Ltd. and GmbH & Co KG.

How can banks, investment clubs or private investors manage a ship without any expertise? Well, they cannot. Therefore, they hire companies who possess the means to handle this task – a ship management company. Once contracted, such companies receive a fixed budget to buy necessary equipment, consumables and everything else the ship needs in order to operate.

The extent of the service depends on the contract between owners and managers. Some ship managers serve only to keep the vessel running; others may deal with crewing, chartering or vetting. Ship management companies usually handle several ships, serving one or more owners.

Ship management companies require a fee for their services. Another option is to employ a ship manager directly at the site of the owner; this is common when the owner is a maritime company.

Some large shipping companies might be both owner and manager of ships, in addition, they may rent ships for a fixed period, starting as low as one day. Renting (called “chartering”) a vessel has the purpose of transporting goods that otherwise could not have been delivered, because sometimes there is not enough capacity, or the right ship at the right distance from the harbor is not available.

Difference between Charterer and Ship Manager

There are three most common charter types: Bareboat chartering means to rent the whole vessel, you pay for fuel, food, maintenance and you source your own crew. Voyage chartering is quite the opposite and means renting the ship for one or two trips, resulting in a flat rate and no other concerns. A time charter simply means to rent the boat for a fixed duration of time and pay for it on a daily basis.

Chartering is one of the most convoluted elements of the shipping industry, especially as charterers are free to rent the vessel to a sub-charterer who may also do the same. To find a suitable vessel the charterer may employ a shipbroker who has knowledge about available vessels with the required capacity and price.

Many shipping companies own ships but charter in addition. Here lies a huge advantage – they do not have to carry the risk of ownership. The owner is going to make a loss if a vessel is not generating revenue by transporting goods, leading to his possible bankruptcy.
The charterer instead binds himself only for the contract period. Therefore chartering is the most efficient way of reducing long-term risks for the price of slightly higher operational costs, due to the owner’s margins.

How it mixes and mingles

The market laws of specialization apply to commercial shipping too. The further a working package is split the lower the cost for each single working task. A shipping company with only two vessels may have a hard time dealing with all necessary tasks, or it can deal with them but is not as cost efficient as bigger competitors. The same applies on a bigger scale to large companies, with the difference that additionally strategic and quality consideration both play elevated roles.

Note: Many shipping companies have a very low number of vessels. They can offset the unused economy of scale through low communication costs and small administrative overheads.

Some shipping companies therefore found their own ship management agencies, which deal with their vessels and the vessels of others. This strategy applies to many fields and departments such as crewing, supervision, purchasing and freight forwarding or insurance handling. Another strategy is to outsource a task completely by involving a third party, e.g. an external crewing agency.

The shipping industry is the second oldest in the world, therefore high standards are difficult to find and the market is interwoven. Shipping companies build alliances and support each other just as airlines do, and within alliances specialization may occur. One specialist may handle crewing and another may take care of operations or technical supervision.

To sum it up: Conventional shipping companies own ships and use them to transport goods – sometimes they may charter vessels in addition, whereas conventional ship management companies administrate vessels not owned by them. But ship managers are found in both as employees.

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