Logistics Blog | The Grimes Companies in Jacksonville, FL

When it comes to port operations and management, is it more cost effective to operate facilities or rent them out? Are landlord ports the way of the future?

The Landlord Port Model: Is it Cost Effective?

When a Japanese firm selected Northeast Florida for its massive TraPac container terminal, one thing was for certain: Jacksonville’s port wouldn’t have scored the touchdown if it operated its facilities rather than renting them out.

Jacksonville’s status as a “landlord port” was a driving factor in Mitsui O.S.K Lines’ investment in its $230 million Dames Point facility, the largest privately owned and operated terminal on the East Coast.

The 2009 addition to JaxPort’s portfolio has increased Asian container business in Northeast Florida by about 20 percent, a number expected to grow in 2016 when larger ships begin traversing northward via the expanded Panama Canal. The TraPac container terminal features new marine infrastructure, two 1,200-foot berths, six new Panamax container cranes, roadways and buildings.

“(Mitsui) selected Jacksonville over Savannah and other ports because they could build and operate their own terminal,” says George Gabel, a Jacksonville maritime attorney who champions local international outreach and global trade opportunities.

Yet, in the shipping business sweepstakes, Jacksonville lags behind Georgia’s and South Caroline’s ports, which have a sharply different business model as “operating ports.” There, the port authorities build the wharves, own the cranes and cargo-handling equipment, and hire the labor to move cargo in the sheds and yards. As measured by container traffic, Jacksonville is the 18th largest port in the nation and the sixth largest port on the East Coast.

JaxPort is an independent government agency responsible for developing seaport facilities along the St. Johns River. It owns three cargo facilities and a passenger cruise terminal: Blount Island Marine Terminal, Talleyrand Marine Terminal, Dames Point Marine Terminal and the JaxPort Cruise Terminal.

While all of Florida’s maritime transportation facilities are landlords ports, would the Jacksonville Port Authority – JaxPort – be better off if it developed and operated the majority of its commercial maritime activities?

In other words, does being a landlord port give Jacksonville a competitive advantage or does it put it at a disadvantage?

Marine supply chain experts say there are successful examples of both models. The irresolvability of the debate over whether it’s more advantageous to be a landlord or operating port is as certain as oceans continuing to be a critical component of the supply chain.

“In the end, it essentially comes down to who pays for what – like any business,” says Dr. Christopher Clott, State University of New York Maritime College’s chair of marine transportation and logistics.

Landlord ports vs. Operating ports

Generally, “landlord” port authorities are focused squarely on their broad duties to their stakeholders and the port. Terminal operators, meanwhile, are fixated on cargo-handling efficiency and service. There are also successful examples of hybrids that incorporate both business models.

Put simply, landlord ports are in the rental business, says Franc Pigna, a Coral Gables, Fla. port property consultant. “The business as a landlord port really is in leasing their assets, which, of course, is leasing property at the highest possible rate and maximizing their revenues and enhancing the value of the port,” says Pigna of Aegir Port Property Advisors. Port authorities and terminal operators rely on concession agreements to ensure that their respective missions are achieved. “The port authority ‘duty’ and terminal operator ‘profit roles’ and motives can be blurred,” the London firm Drewry Shipping Consultants said in a 2012 strategic advisory report to the Virginia Port Authority. “OPAs (operating port authorities) can become immersed in day to day operations at the cost of strategic development.” Still, it’s not that simple – by a long shot. “Clear division of roles and responsibilities is key,” the report says.

Trending toward the landlord port model

Forty years ago, landlord ports were uncommon. “That trend has come and gone … the operating port model is really the exception to the rule,” Pigna said. “There are a lot of reasons, starting with the overall inefficiency of most ports to handle ever-increasing sizes of ships and not being able to properly fund the capital requirements of the terminals.” The shipping business’s increasing global presence and the resulting consolidations within the industry also has favored the landlord model.

“When you start having more than one terminal operator in a location, you get a more competitive environment – for the benefit of cargo owners,” Pigna said.

Operating ports’ successes, such as in Savannah and Charleston, largely are the result of embracing a vertically integrated structure – from maritime into inland distribution services, for example – that results in a form of port regionalization, Pigna says.

“Savannah and Charleston do a good job dealing with their clients’ needs – some would say as well as a diversified landlord port,” he says.

Central to the discussion is governments’ ability to adequately fund ports. Pigna says creating legislation to enable port authorities to corporatize and to otherwise depoliticize port authorities is worthy of consideration. A similar approach has been under way for more than a decade in the healthcare field, where publicly funded hospitals are often operated by corporations. “It could help port authorities access the private sector more effectively,” Pigna says. In Australia, a more extreme solution is prevalent: governments are selling ports to the highest bidders.

Otherwise, port authorities aren’t likely to relinquish their landlord status. “I don’t see any major port authority in the world reverting back to operational ports,” Pigna says.

Maximizing efficiency

The South Carolina, Georgia and Jacksonville ports all benefit from the Southeast being the fastest-growing economic region in the country, meaning that trade will continue to grow. But container ports compete fiercely for market share and now, almost suddenly, shipping lines are requiring ports to make room for container vessels that are much larger than terminals were designed to handle. All are challenged, consequently, with the necessity of deepening their harbors.

Curtis Foltz, the Georgia Ports Authority’s executive director, says being able to control the entire port’s operations helps control costs. In Georgia, the Port of Savannah is now the fourth busiest container port in the country and the Port of Brunswick is the nation’s No. 1 automobile importer.

“We do feel that we have maximized our efficiencies,”said Foltz.

It also helps that, unlike landlord ports, Georgia ports aren’t limited by formal lease agreements in developing and implementing policies and procedures.

And interstates also helped to look inland. The Jimmy Deloach Parkway Extension, connecting the Port of Savannah with Interstates 95 and 10, will be completed in summer 2016. The thoroughfare trims eight minutes off trucks’ travel times to and from the port.

Home Depot, Target and other retailers will greatly benefit from efficiencies created by the harbor and road projects, as will manufacturers and distributors of major exports ranging from automobiles to poultry to Georgia carpet.

Landlord ports: Flexibility vs Diversity

JaxPort CEO Brian Taylor counters that a primary advantage of being a landlord port is the flexibility it provides.

“Rather than having to go into an operating port and conform to how business operates in that port, here at JaxPort a customer can lease land from us and lease assets from us, and they can put together a business model that works for them and works for their customers,” he said.

A second advantage is the diverse cargo base being a landlord port is able to attract – along with being able to simultaneously accommodate cruise ships. “We have a business model allowing us to bring breakbulk cargo or bulk cargo or automobiles or containers,” he said. Finally, being able to split costs associating with setting up terminal facilities – “a shared capital investment” – is a game-changer, Taylor says.

Something’s working. A record 8.3 billion tons of cargo and nearly 1 million containers were moved through JaxPort in 2014, creating a $26.9 billion total impact and about 24,000 onsite jobs, JaxPort records show. With the recent addition of Maersk Line, Jacksonville now hosts 9 of the 10 global shipping carriers. JaxPort spokesperson Nancy Rubin says that along with appreciating JaxPort’s successes, it’s important that the community properly understand the authority’s role.

“What we do is create an environment for the private sector [to add jobs and contribute to the tax base],” she said. “We’re proud that we’re not growing government.”

Whatever their business model, Pigna says, port authorities serve themselves well when they continually examine how they can best serve their constituencies and create economic vitality for their regions. Along that line, he suggests that Jacksonville leaders gain a full understanding of the port’s assets and, using that information, properly structure the lease rates.

“From there, I would do an overview of their holdings to make sure … everything is leading up to a highest and best use threshold to optimize the use of their land,” he said. Clott, meanwhile, says he and his colleagues in the maritime field are increasingly encouraging port authorities to embrace supply chain integration.

“Historically, all the pieces didn’t talk to each other; that’s changing,” he said. “That’s going to have to change or you’re going to have fewer players.” Charleston, traditionally known as a “heavy-lift port,” has increased its production by working closely with new automobile plants nearby, noted. “They have adjusted accordingly for the better,” Clott says.

Landlord ports: A Good Story to Tell

Along that line, JaxPort’s best step moving forward would be “take an analysis of everything you have and determine what you want to be,” Clott says.

“For example, they should ask, should we invest in larger cranes with the advent of larger ships, especially with events like the Panama Canal? Or, should we be looking at other pieces of the supply chain where we might have more of an advantage?” he said.

Clott says the entire logistics field must be contemplated, from joint rail and motor carrier procurement to involving third-party logistics (3PL) firms in planning. It’s important to remember, he says, that the local port economy is just a notch in the global system of production, transportation, distribution and consumption.

“In my view, the more innovative things that are occurring in the industry are occurring through 3PLs; these are things that a port has to think about,” he said. “You’ve always got to be able to think beyond the next fire.”

Noting that Jacksonville’s geographic proximity to I-95 and I-10 arteries and extensive rail service are among its selling points, Clott says that JaxPort is making some key – and necessary – adjustments.

For example, JaxPort’s upcoming Intermodal Container Transfer Facility will complement existing ondock rail and enhance the competitiveness of the Blount Island and TraPac terminals by enabling direct transfer of containers between vessels and trains.

Meanwhile, federal construction to remove a navigational hazard in the St. Johns River is under way; the world’s first LNG-powered container ships are slated to operate out of JaxPort; Crowley Maritime recently agreed to consolidate the company’s Jacksonville operations at the Talleyrand terminal; and JaxPort is wrapping up pre-construction, engineering and design of the project that will deepen the river channel to 47 feet.

“Being a landlord port is an advantage as far as thinking in terms of the other pieces involved in the supply chain process,” Clott said. “You can’t just think about your own facility. For a long time you could, but those days are over.”

Pigna and Clott note that landlord ports being able to turn to local, state and federal government to deepen river channels – and make way for increasingly larger shipping vessels – is a tremendous benefit over operating ports.

But that’s just the beginning of the battle for business, they say. “Differentiating yourself from what the others do is the key – and, of course, is the hard part,” Clott said.

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