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Shipping lines that lease containers have several leasing and financing options available to them, and these options are designed to provide the greatest amount of flexibility and quickest access to containers as and where the units are needed. Previously, we discussed how shipping lines can opt for acquire containers through finance leases or operating leases, and we've also discussed how a shipping line can create liquidity while retaining access to containers through sale and leaseback programs. Today, we're going to provide an overview of the different types of operating lease options available to shipping lines.
Many shipping lines keep a blend of owned and leased containers available to them at all times, and depending on the overall market and economic conditions it can range from the shipping line owning 40% to 60% of their total container fleet. The questions that this ratio presents are:
The first question is simple: shipping lines lease containers to provide supply flexibility and manage their balance sheet. Flexibility is provided through master and short term lease agreements (which will be discussed later), and these agreements allows the shipping line quick access to containers in specific locations so that they can make quick adjustments for surges in demand.
Example: If a shipping line owned 100% of its container fleet and their utilization rate would be greatly impacted by the location of their containers. A low utilization rate would mean idle assets and potential storage charges in the depot, followed by possible charges to reposition containers to more desirable location.
Shipping line also lease containers to better manage their balance sheet. If lending rates are higher than current market lease rates, it could make sense to invest available capital into vessels as opposed to containers. Or, if more containers are needed and the company wants to limit the exposure to their balance sheet they may opt for operating leases, which only show up on the profit and loss statement, not the balance sheet.
Finance leases, or capital leases, are pretty straight forward. It's similar to a car loan with an agreed interest rate, stream of payments, and balloon payment based on the residual value. Operating leases have a few different options available in that they can be long term, short term, or a master lease agreement.
Shipping lines normally lease new equipment on a long term agreement. The term is typically 5-8 or 10 years, for a set number of containers, and the lessee is responsible for all aspects of the container during that period, including maintenance and repairs and repositioning. At the end of the period the line can either renegotiate the terms and extend the lease, or deliver the container to an agreed upon location.
Short term container leases are typically established for a round trip carry, or terms extending for less than 2 years. Like a long term lease, there is a fixed number of units, and the lessee is responsible for the condition of the container and it must be returned to an agreed upon location, in the agreed upon condition. Any repair costs are the burden of the lessee.
| Master lease agreements are unique in that they allow a great amount of flexibility to the shipping line or other lessee. A master lease is established for a range of containers (maximum and minimum), the term is variable (usually short to medium), and the collection and return locations are generally more flexible and based on credits. This type of agreement allows the shipping line to plan and budget their costs accordingly, while providing flexibility with regards to the location of the containers. |  |
Also, when the container is returned, typically the leasing company is responsible to manage any necessary repairs, as well as reposition it to any new location.
Example: A shipping line might have a new customer might need 25 containers in Houston, Texas. If the shipping line doesn't have the available inventory there, they can contact one of their master lease clients and arrange to pick up the needed containers at a depot in Houston; this activating the masters lease agreement.
Container shipping lines provide themselves adequate flexibility and cash flow by efficiently utilizing their available inventory of shipping containers. Through a blend of owned and leased containers their goal is to manage their equipment and keep utilization rates as high as possible. Long, short, and master lease agreements are some of the tools a line will use when planning and growing their business and market share.
If you have any questions on container finance, leasing agreements, or container fleet management and sales services feel free to contact ContainerAuction.com directly at any of the listed locations or addresses.