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

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2 | 2 Ocean Container Chassis 101 Key Messages • Ocean contai ner chassis in t he U nited States (U .S.) are g enerally d esigned to specific container sizes (mostly 40’ and 20’) an d have tw o axles; they are typically lighter than chassis in other countries given lower U.S. national gross vehicle weight s tandards. Most ocean container chassis ca nnot accommodate 53’ domestic intermodal containers. • The chassis plays a critical role in supply chains and is involved in all first/last mile ocean container truck moves. The chassis also has a storage function, largely unique to the U.S. At "wheeled" terminals, primarily inland r ail terminals, containers are staged on a chassis until ready for pickup. Chassis are also often left at shippers' facilities for container loading/unloading ("drop and hook" operation), a practice uncommon outside the U.S. • There are over 700,000 chassis in the U.S., of which close to 80% are sta nda rd ocean container chassis. As a ratio t o loaded containers, the U.S. operates considerably more chassis than comparable overseas jurisdictions. • Conventionally, chassis in t he U.S. have been supplied and operated independently by ocean carriers as p art of their s ervice d elivery. D rayage is typically arranged by drayage firms that sub-co ntract owner operators. This is changing and new models have been e merging (chassis pools). Internationally, chassis are typically provided by motor carriers and stay connected with the truck. NCFRP Report 20 | Guidebook for Assessing Evolving International Container Chassis Supply Models

Guidebook for Assessing Evolving International Container Chassis Supply Models | NCFRP Report 20 | 3 1.1 What Is an Ocean Container Chassis? An ocean container chassis is a wheeled structure designed to carry marine containers for the purpose of truck movement between terminals and shipping facilities. It is a simple elect ro mechanical device composed of a steel frame, t ires, brakes and a lighting system. Figure 1-1 provides an overview of the basic component of a typical chassis. Figure 1-1. Typical 40’ Ocean Container Chassis

4 NCFRP Report 20 | Guidebook for Assessing Evolving International Container Chassis Supply Models | 4 1.1.1 Types of Ocean Container Chassis in the U.S. There are different types of ocean container chassis. The key differentiators are whether the chassis length is fixed or c an b e adjusted, whether multiple container configurations can be accommodated, and the number of axles. Ocean container c hassis in the U.S. a re generally built specifically to support specific container sizes and have f ixed sizes; the U.S. size ratio of 20-foot to 40 - foot to 45-foot chassis nearly equals the container size ratio in the U.S. trade, approximately 25:65:10. U.S. ocean container chass is are generally lighter t han other countries’ chassis because the U. S. has a national gross ve hicle weight (GVW) standard of 80,000 lbs. on Interstate highways, which is lower than most other nations (more than 20% lower in some instances). However, states’ truck size and weight laws vary and are often determined by maximum axle weight configurations. Accordingly, in order to maximize cargo weight ca rried in ocean containers originated a nd d estined to t he U .S. (which are also drayed on Interstate roads), ocean container chassis supplied b y ocean car riers are built a s lightly as possible. A typical ocean carrier - supplied container chassis in the U.S. has two axles, as represented in Figure 1-1. Heavier container shipments over t he regulated weight limit require heavier du ty, tri-axle container chassis, and permitting above the standard GVW allowance (Figure 1-2) . Because tri-axle chassis contribute to increased weight and a sset cost, they are less common in the U .S. ( less than 5 % of the estimated U .S. chassis fleet) and are often supplied by motor carriers specializing in handling heavier cargo, rather than ocean carriers. Figure 1- 2. 40’ Tri-Axle Chassis Source: Cheetah Chassis. 1.1. 2 N ot able Differences Between Ocean Container Chassis and Domestic 53’ Intermodal Container Chassis The "domestic i ntermodal container," or simply "domestic container" as commonly referred to in the U.S., is a container filled with freight m oving between North American terminals via railroad and does not m ove by waterborne service. T hese containers are longer than o cean containers, with t he s tandard being 53 feet, a nd b uilt to a lighter t are weight standard to accommodate more product. By contrast, standard ocean container chassis outside the U.S. typically have retractable “pins” i n order to carry multiple container sizes, thereby negating t he n eed to build different-size chassis to match the container length.

Guidebook for Assessing Evolving International Container Chassis Supply Models | NCFRP Report 20 | 5 The construction of the ocean and domestic container c hassis is e ssentially the s ame in the U.S., with notable dif ferences bein g length and weight. Due to its increased length, a 5 3-foot chassis weighs between 500 and 700 lbs. more than an ocean container c hassis, which weighs approximately 6,500 lbs. Additionally, nearly all 53-foot domestic chassis h ave a "slider" mechanism which e nables the chassis axle bogie to be m oved forward or backward and alter t he w eight distribution and turning radius when traveling on local roads (Figure 1-3). Figure 1-3. Ex ample 53' S lider Chassis Source: Cheetah Chassis As the standard fixed 40’ ocean container chassis is not long enough to support the 53’ domestic container, ocean container and domestic container chassis are generally not interchangeable. 1 Another n otable difference between ocean container a nd d omestic c ontainer chassis i s the expected o perating life of the chassis. If properly maintained, an ocean container chassis’ useful life may be 20-plus years (excluding a m ajor refurbishment) while a 53’ chassis’ expected life is roughly 15 years, as the latter is generally built to the lightest, a nd thus least-durabl e, specification. This trade-off was made to allow domestic intermodal containers to compete directly with 53’ domestic trucks for domestic commerce. 1 40’ to 53’ slider chassis do exist i n the U.S. but t hese are not common b ecause t hey are heavier and there is not a lot of demand for 53’ container chassis among ocean carriers.

6 NCFRP Report 20 | Guidebook for Assessing Evolving International Container Chassis Supply Models | 6 1.2 U.S. Chassis Fleet and Ownership Today, it is estimated there are 725,000 chassis in the U.S., of which cl ose to 80 %, or 565,000, are ocean container c hassis ( o f which some 490,000 are active); the fleet of intermodal container c hassis is much smaller and estimated to be i n the order of 160,000 units. Ownership of the U.S. chassis f leet is changing with the progressive exit of ocean carriers from t he business of chassis suppl y and the emergence of new m odels. A current snapshot of chassis ownership in t he U.S. is provided both for ocean container chassis, as well as 53' intermodal container chassis (Figures 1-4 and 1-5) . Figure 1-4. Ocean Container Chassis Ownership 565,000 Units (est.) Figure 1-5. Domestic Container Chassis Ownership 160,000 Units (est.) Source: IANA a nd estimates based on consultation. Figure 1-4 reflects the segmentation of the ocean container c hassis m arket in the U.S.; however, it does not reflect its true fragmentation. Over 20 ocean carriers own or operate chassis, either independently or through various chassis p ool structures. The majority of the chassis are domiciled at the port facilities, but up t o one-third are l ocated at rail ramps o r container/c h assis yards. The chassis leasing companies play a stronger role in supplying the marine m arket compared to the domestic market. Of note with respect to t he p ercentage o f ocean c ontainer chassis owned by leasing companies in Figure 1-4, this reflects the recent sale of the Maersk chassis fleet to a p rivate investment company, thereby shifting the related c hassis count from ocean carrier to leasing company. Figure 1-5 illustrates t he domestic container chassis environment in the U.S. where there are only seven Class I railroads and a handful of large asset-owning logistics c ompan ies supporting the entire domestic c ontainer i ntermodal progr am. Of those, only two railroads operate their own chassis fleet—the Union Pacific Railroad and the Norfolk Southern Railway. Those that do not o perate their own chassis rely on the TRAC Intermodal domestic chassis pool. Together, the railroads and TRAC control the majority of the domestic chassis operation in the U.S., while a fe w large logistics companies, m ost notably J.B. Hunt and Pacer , control the rest. At t his time, t he domestic chassis operation i n the U.S. is well established and relatively stable, compared with t he ocean container chassis market, which is the focus of this Guidebook. Leas ing Companies 65% Ocean Carriers 32% Motor Carriers 3% Leasing Companies 33% Log is tics Companies & Motor Carriers 31% Railroad Controlled 36 %

Guidebook for Assessing Evolving International Container Chassis Supply Models | NCFRP Report 20 | 7 Chassis Age The U.S. ocean container chassis fleet is ag ing. A s it stands, roughly 40% of international chas sis in the U.S. were built befo re 1997 and are over 15 years old, as represented in Figure 1-7 bel ow. The international container chassis fleet (orange) is much older, on average, than the domestic container chassis fleet (blue). This is due in large part to the recent or planned exit o f ocean carriers from the chassis supply business. T he consequences of the aging ocean c ontainer chassis fleet are many, and include i nc reas ed risk of e quipment failure, safety, and roadability p roblems, as well as increased liability for those supplyi ng and using the chassis. Source: Adapted from Noel, V., Transportation Research Forum, March 2012. Internationally, chassis fleets appear relatively smaller than th ose in the U.S. There is no centralized source of data on g lobal or regional chassis fleets, but the research team was able to d evelop estimates of the chassis fleets in certain markets, including in Asia (China 2 , Japan, H ong Kong 3 ), through consultation with t he largest manufacturer of containers and chassis, China Intermodal Marine Containers (Group) Ltd. (CIMC). The total U.S. c hassis supply is roughly five times that of China, and likely more than twice the combined supply of East A sia, this despite the latter’s container throughput being significantly larger than that in the U.S. A possible explanatory factor behind the lower supply of chassis in Asia concerns drayage d istances and the nature of e conomic a ctivities. The export-oriented economic d evelopment model has favored the setting o f factories close to marine t erminal facilities. Drayage distances are relatively short and c ontainers are loaded/unloaded i mmediately, with the tractor remaining hooked to the chassis and the driver waiting until ready for a next move. The utilization level of chassis assets is therefore higher. U.S . (565,000 40' chassis) China, 170,000 Ja pan, 30,000 Hong Kon g, 15,000 Other Asia (est.), (100,000 ) Figure 1-7. Age of International Container Chass is and Domest ic Chass is in th e U .S. Figure 1-6. Asian Oc ean Chassis Fleet 2 Based on CIMC’s estimate of total chassis market sales of 190k units 2005–2011, adjusted for average Chinese chassis life of 5 to 6 years. 3 Registered chassis in Hong Kong.

8 NCFRP Report 20 | Guidebook for Assessing Evolving International Container Chassis Supply Model s | 8 1.2.1 Chassis Leasing in the U.S. 23 Chassis leasing companies o wn an estimated 350,000 marine units, close to t wo-thirds of t he total U.S. market, a nd much higher market share than any other global region. C hassis le asing has enabled ocean carriers to avoid related capital investments and to have access to a ready supply of chassis to meet seasonal and unexpected demand. The most p opular leasing product is t he long-term operating lease, for w hich t he ocean c arrier commits to a fixed volume of chassis for a 3- to 5-year period, and is responsible for maintenance, insurance, and taxes (known as a “triple-net lease”). A variation is the “master lease” for which a lessee c ommits to ma intain a minimum amount of chassis on-hire, at a t riple-net lease rate, but is allowed to pick up more units at that same rate, and also may return units, down to t he minimum on-hire amount, a s demand fluctuates. A third type of triple-net lease i s the “direct finance” lease, whic h is akin to a car lease. Th e lessee pays a daily rate that includes a sset a mo rt ization so t hat at the end of the lease period (typically 7 or 10 years), the lessee may purchase the chassis for a bargain price. The direct finance lease is really a variation o f purchase financing, and represents less than 10% of the leasing company portfolio. The oc ean carriers have used different approaches to chassis i nvestment; some carriers preferred to own a majorit y, some leased a h igh percentage, a nd some took a b alanced approach b etween ownership and lease. Historically, about 80% o f leasing companies’ assets have been under long-term lease arrangements, though that percentage has d eclined recently as ocean carriers are less willing to commit to long-term leases.

Guidebook for Assessing Evolving International Container Chassis Supply Models | NCFRP Report 20 | 9 1.3 The U.S. Chassis Supply Environment and Relevant International Differences The U.S. ocean container chassis supply market is the product of a number of historic and structural factors. These are described below, as they will continue to influence the evolution of U.S. chassis models going forward. As and where relevant, international comparisons with Canada, Europe, and Asia are provided to contrast the U.S. experience and related chassis supply implications. 1.3.1 Ownership Structure The U.S. is the only region where the vast majority of ocean container chassis are owned by ocean carriers and leasing companies. Currently, motor carriers own only a very small percentage of chassis in the U.S., and these are often limited to heavier duty tri-axle chassis, principally because ocean carriers have traditionally shouldered the responsibility of supplying typical marine container chassis. Additionally, the U.S. is the only region where ownership and operation are not necessarily one and the same. In fact, over 70% of the active ocean container chassis are operated in chassis pools and controlled by third-party managers. 1.3.2 Road Weight Limitations and Chassis Specifications In the U.S., the maximum GVW is 80,000 lbs. for the Interstate highway system, which is generally lower than in other parts of the world (see sidebar). The effect of the U.S. having a lower GVW than other countries is that the standard U.S. marine chassis—a two-axle chassis sized to its container length—is significantly lighter than its foreign counterpart. There are no overweight permits granted for the federal highway system, but states have the option to grant such permits for intrastate carriage. Some states allow the intrastate up to 100,000 lbs. for non-dividable loads. 1.3.3 Commercial (Bill of Lading) Terms About half of U.S. container cargo is delivered/originated under carrier haulage, and half as merchant haulage (see box for distinction). The commercial Bill of Lading terms are relevant to the ocean carrier chassis model transition strategy because in carrier haulage, the ocean carrier is responsible for the first/final leg of transport, and thus is responsible for providing a chassis for that movement, either directly or through sub-contract. As most ocean carriers today either own or have committed to long-term lease chassis, it is more economical to provide these “sunk cost” chassis in a carrier haulage move than to pay for an additional chassis (through the drayage rate, or directly from a In Canada, Europe, and Asia, chassis are supplied primarily by motor carriers, logistics companies/3PLs, and to a lesser extent leasing companies through long-term leases to trucking operators. In these markets, motor carriers operate the truck and chassis as a single, unattached asset. In certain jurisdictions, including in Europe, terminals also own their own fleet of chassis; these chassis are used for internal terminal operations only and are not roadworthy. The maximum authorized vehicle weight in the European Union, for example, is 40 metric tons (88,000 lbs.) for articulated vehicles with a two- to three-axle semitrailer, and 44 metric tons (97,000 lbs.) for motor vehicles with a two- to three-axle semitrailer. In China, the gross vehicle weight limitation— including truck, cargo, and trailing equipment—is 49 kilotons, roughly equivalent to 100,000 lbs. In other Asian countries, the weight limitations are similar. Also, in foreign countries that have higher GVW limitation, heavier cargo requires a heavier, sturdier chassis for safe conveyance. That's why the standard foreign chassis is up to 40% heavier and with an additional axle. The term "carrier haulage" is used when the drayage of a container, and by extension chassis supply, is arranged by and under the control of the ocean carrier. The term "merchant haulage," in contrast, is used when the BCO arranges the drayage move with its preferred motor carrier, which must source, in one way or another, a chassis for the related move.

10 NCFRP Report 20 | Guidebook for Assessing Evolving International Container Chassis Supply Model s | 10 chassis leasing company) in the open market. In m erchant haulage, the responsibility for transportation of the container stops at the origin/destination terminal, either rail or marine. By way of contrast, in Canada and Europe, the majority of o cean containers are carried gate to gate (merchant haulage) and either gate to o cean terminal gate for local (truck) delivery or inland rail terminal gate in the case of railed containers. In parts of Asia including China, Hong Kong and Japan, on the other h and, carrier haulage can be much m ore common, between 70% and 75%, although in other Asian countries, including Vietnam and Thailand, merchant haulage is m ore typical. Given t he differing commercial term m odels in Asia, and the consistent p revalence of motor carrier-supplied chassis in any case, this suggests that merchants vs. carrier haulage is not the key driver of chassis supply models. 1.3.4 Supply Chain Operation Preferences The U.S. is largely unique from most other parts of the world with respect to at least two major supply chain processes. First, due in large part to the ocean carrier chassis supply model and other terminal operating preferences, certain m arine terminals and the vast majo rity of rail terminals store containers within the terminal on c has sis (“wheeled” terminal). A “grounded” operation is the standard terminal operating model in the rest of the w orld, which does not r equire chassis t o be stored on terminal for operating use (the impl ications of wheeled vs. grounded terminal operations for ch assis s upply are outlined in the following chapter). A secon d factor differentiating t he U.S. chassis s tructure from t he rest of the world is the origin/destination logistics of loading/unloading the container. When a container is delivered t o a shipper’s facility for loading or unloading, it is common i n the U.S. for t he chassis to be unhooked from the tractor and left behind for loading/unloading. This is referred to as a “drop and hook” operation. The time that the container and chassis are left a t the shipper’s facility is contractually s pecified between the carrier a nd customer. Penalties for detaining a box at a customer facility are enforced after t he m aximum allowable “free days” have expired. Smaller s hippers, some exporters, and several t ransload operations require the driver to stay w ith the container during the loading/unloading p rocess. In most other parts of the world, the truck typically remains hooked t o the chassis unti l the container is loaded/unloaded (referred to as “liveload/unload”). Although both types of operations are practiced in the U.S., the drop and hook operation is no t common outside th e U.S. 1.3.5 Governmental Regulation The "roadability" rule was introduced in 2005 and became effective on June 17, 2009. This requires chassis equipment providers to operate a systematic chassis maintenance p rogram, and requires users to inspect chassis and report certain defects to responsible parties. There are criminal and commercial penalties for non-compliance. The intended effect of this law, administered by the Federal Motor Carrier Safety Administration (FMCSA) (FMCSA is a branch of the Department of Tr ansportation), is to increase the overall safety of the intermodal chassis fleet. The federal roadability law in the U.S. is perceived by some chassis equipment providers, including ocean carriers, as increasi ng the risk and liability of operating chassis and has been one reason that ocean carriers are seeking to exit the chassis business. 1.3.6 Terminal Labor In the U.S., ocean container chassis domiciled at port facilitie s staffed by labor unions are governed by contract for union la bor to inspect, maintain, and repair the units. Since approximately 75% of ocean container chassis are utilized at ports, the major ity In most international jurisdictions, including Canada and Asia, there are no equivalent chassis-specific roadability laws. Instead, safety r egulations generally apply to the truck as a unit (i.e., tractor and chassis or trailer). of U.S. chassis are inspected and maintained by terminal operators that c ontract labor through one of three unions: the

Guidebook for Assessing Evolving International Container Chassis Supply Models | NCFRP Report 20 | 11 International Longshoremen's Association (ILA), t he International Longshore and Warehouse Union ( ILWU), and the International Association o f Mechanics (IAM). Company signatories to the collective bargaining agreements include o cean car riers, marine terminals and maintenance companies. The union jurisdiction of maintenance and repair work has a long history going back decades, and their c laim to c ontinuing their responsibility for c hassis maintenance and repair is one of th e top issues for union management as they observe changes in chassis supply models. Chassis leasing companies and motor carriers that own or operate chassis are not parties to the u nion–ocean c arrier contracts. Motor carriers are n ot party to the m aster agreements and t hose t hat operate chassis are n ot s ubject to t he same inspection and maintenance routine as signatory companies. The unions that have historically performed all chassis maintenance at marine t erminals hav e concerns that as c hassis p rovisioning transfers from ocean carriers (which require union labor for maintenance of chassis) to mot or c arriers (which do not), this could impact the quantity of union jobs. Therefore the unions a r e an interested and relevant stakeholder in the evolution of chassis models. 1.3.7 Liability Regimen Due to high-profile truck road accidents in the past 15 years in the U.S., third-party l iability cover age for chassis has become increasingly important fo r an equipment provider. For a m otor c arrier, minimum liability coverage of $750,000 is required by la w 4 , though the standard practice is to have $1 million. Wh ile there is no specific third-party liability coverage minimum required for ocean carriers, it has become cust omary to carry at least $20 million in liability insurance for chassis, with even higher amounts being c arried by chassis p ools, which also demand that maintenance and repair c ompanies have sufficient liability insurance coverage. Wi th the evolution o n the ch assis m odel away from ocean carrier–controlled chassis i n the U.S., t he liability regime may be a factor t o be considered by purchasers of i ntermodal transportation. Once the ocean carrier is no longer involved in the chassis operation, for example, other entities—such as motor carriers, terminal operators, and l easing adequate liability insurance coverage. 4 For nonhazardous materials; liability for hazardous substances can range from $1 to $5 million (Title 49 CFR 487.9) In most other parts of the world, including Canada and Europe, liability insurance is a c ondition precedent t o registering a truck for drayage p urposes, a lthough t he coverage is not specific to the chassis. Minimum c overage requirements vary from region to region, but those in Europe, for example, are more or less on par with coverage requirements in the U.S. In many parts of Asia, it is common, but not required, for logistics and trucking c ompanies t o purchase third-party liability coverage. In many countries there is no minimum, but in C hina the typical insurance requirement is 1 million RMB (approximately $162,000). In addition, o cean carriers often r equire minimum coverage as a condition of c ontract with motor carriers. In Canada, for example, shipping lines require proof of a minimum liability coverage ($1 million or more depending on the shipping line) before truckers are considered acceptable to haul their containers. companies—will be responsible for providing