Why chartering teams should focus on the total charter lifecycle cost, not charter rates

By Helgi Benediktsson

Photo by Shaah Shahidh on Unsplash

Before chartering a vessel for a trade, to understand cost structures and make comparison with other potential vessel candidates; the estimation of the vessel’s expected total charter lifecycle cost (in principal the total sum of the daily charter rate and fuel cost) should be the focus of every chartering team.

Ankeri’s Fleet & Chartering platform comes equipped with a module, Vessel Evaluation, for both owners and charterers to make these estimations a quick and effective process.

In this blog I will explain why a structured process that models and evaluates vessels' total lifecycle cost on a trade is necessary and leads to a more informed and ultimately more successful decision making in the long run.

The challenge

In the charter market, both the charterer and owner have an incentive to understand the accrued costs behind a trade and the eventual total charter cost of a vessel.

For the charterer the incentive is to select the most optimal vessel for the trade (or service) in question. Getting this decision right can save the charterer large amount of money over the duration of the charter party with a roll-on effect if better decisions are consistently made on deployment over the entire fleet.

For the owner the incentive is to show that their available vessels compare favourably with other vessel candidates competing for the same trade. Being able to showcase this value can help the owner retrieve a premium charter rate for more technically advanced and sustainable vessels.

In today’s environment it is at least clear that basing decisions only on the charter rate, as has been common practice, is an exercise doomed to result in sub-optimal results going forward.

To understand this, let’s look at a simple example.

Vessel 1 is the optimal vessel based on charter rate only and vessel 3 the most expensive.

According to the chart above vessel 1 seems to be the obvious choice.

But what is ultimately interesting is the combined lifecycle cost of the charter that accounts for both the charter rate and the expected fuel cost.

The total lifecycle cost of the charter rate combined with fuel cost is the number all chartering teams should be focused on to get closer to the optimal chartering decisions. In this example vessel 3 becomes the most optimal vessel after factoring in the fuel cost.

As the charts above show, the vessel candidate that at first seemed to be the most expensive option (vessel 3) , because of its highest charter rate, becomes the most optimal vessel to charter after estimated fuel costs have been accounted for.

Of course, charter rates always matter and there are many factors to consider during the fixing process, but the fact remains that both charterer and owner will improve their business operations, and results, by employing a structured process for evaluating and comparing vessel candidates before a vessel is fixed.

Furthermore, the current business climate is transitioning to requiring stakeholders to be able to evaluate the environmental impact of trade decisions in a consistent and traceable way. And this can only be done by estimating the fuel consumption and emissions of the fuel used.

Decomposing the process of evaluating a vessel’s lifecycle cost

Evaluating the fuel consumption and lifecycle cost of a vessel on a trade is not as simple as it might seem. Numerous factors have to be considered, including the trade route properties, vessels' fuel types and expected bunker costs.

Furthermore, fuel consumption curves, which are of cubic nature (that is, consumption does not increase linearly with increased speed, but by the power of 3), will have to be sourced and modelled for the evaluation to be as accurate possible.

The process flow for evaluating fuel consumption, fuel cost, total life cycle costs and environmental impact can be decomposed as follows:

The process of evaluating vessel’s total lifecycle costs on a trade.

Ankeri’s Vessel Evaluation

As can be seen above the evaluation process is pretty complex for a human to keep track off without help.

Thankfully we have software to help us and the Vessel Evaluation in Ankeri’s Fleet & Chartering solution is designed to help the user through the steps above in an easy and efficient manner.

The following screen shots show how the Vessel Evaluation is manifested in Ankeri.

Ankeri’s Vessel Evaluation turns a complex process into a quick and efficient exercise, with the added benefits of traceable steps, transparent decision making and ability to collaborate.

Using Vessel Evaluation, charterers and owners alike can quickly compare vessel candidates in a matter of minutes and then share results with colleagues or counter parties for making the best charter decision based on the data and results at hand (charterer perspective) or convince charterers to pay premium on a vessel (owner perspective).

Ankeri’s Vessel Evaluation and the whole Ankeri product suite carries many more features so feel free to contact us for an in-depth demo, if you are interested to learn how you too can reach the best business results in your chartering operations.