Navigating maritime logistics demands a robust understanding of chartering options—each type has unique implications for operational strategy and financial outcomes.
Choosing between a time charter and a voyage charter isn’t merely a logistical decision; it’s a strategic one that impacts cost, control, risk management, and operational flexibility.
In this article, we delve deep into the two main types of charters – a time charter and a voyage charter – exploring their advantages and disadvantages, and offering a comparison between the two.
The goal of this article is to:
- equip you with the essential knowledge to navigate these choices
- ensure that your chartering decisions align seamlessly with your business objectives and market conditions
- enhance your company’s competitive edge in the global marketplace.
But before going any further, it’s important to understand the terms used by the industry. Here are the most common:
Time Charter
A time charter grants the charterer the use of a vessel and its crew for a specified period from a shipowner. The ship owner and the charterer will agree on the exact period the lease will run for.
However, the two parties will not need to agree on ports of call and destinations, as the charterer has complete discretion over this. The charterer can direct the vessel’s movements and cargo operations within agreed and imposed contractual limits.
The shipowner retains responsibility for the vessel’s operational aspects, including maintenance (ensuring the vessel meets all necessary maritime safety standards), and crewing, but the charterer must pay for fuel and supply costs, as well as the cost of cargo operations and port charges.
This arrangement is akin to leasing a car, where the lessee drives but doesn’t worry about long-term maintenance. For example, a charterer might lease the ship for six months, during which time they have the flexibility to choose their routes and destinations.
Ship owners generally prefer their vessels to be leased on a time charter. This is because time charters guarantee income for a long period, giving the ship owner increased security.
Voyage Charter
A voyage charter focuses on the transportation of a specific cargo on a single voyage between designated ports.
The most common way to pay for this type of charter is on a per-ton basis. As the name implies, this sees the charterer paying a set price for every ton of cargo they transport and is preferred when the amount of cargo they’re transporting is significantly less than the vessel’s gross maximum cargo tonnage.
The second most common payment method is a lump sum – one payment that allows the charterer to transport as much cargo as they wish. It is the ship owner’s responsibility to ensure the cargo weight does not exceed the gross maximum tonnage of the vessel. This type of payment is preferred by charterers when they’re carrying a higher weight of cargo.
Under this contract, the ship owner is tasked with delivering the cargo and handling all nuances of the voyage itself. Nearly all costs are covered by the ship owner and include costs relating to staffing, berthing, loading, unloading, and fuel. They cover these costs by charging the charterer a fee for leasing the vessel.
Before the charter contract is signed, the parties will agree on the end destination, any ports of call, laytime, and whether there will be any restrictions on cargo. The ship owner pays for all costs at the port of call. If the charterer exceeds the agreed time, they must pay demurrage to the ship owner.
This type of vessel chartering is generally preferred by charterers. This is because it often has more competitive prices, plus they are not tied down to any long-term commitments
Voyage and Time Charters
There are other definitions which are useful to understand.
Charter party
Central to these contracts is the charter party—the formal agreement that stipulates the specific terms, conditions, and obligations agreed upon by the ship owner and the charterer.
This document is crucial as it governs what each party is responsible for, including costs, risks, and how disputes are resolved.
Freight Rates
Freight rates, a critical element of the contract, determine the cost associated with transporting cargo and are influenced by various market conditions and ship specifications.
These rates not only affect the profitability of a voyage but also influence global trade patterns.
Cost Analyses
Cost analysis in this context involves evaluating the expenses related to different chartering options to determine the most cost-effective approach.
This analysis is essential for chartering managers and financial analysts who aim to optimize operational costs against market conditions.
The Statement of Facts (SoF) is an important maritime document that logs vessel activities while in port. It includes times of arrival and departure, cargo handling details, and records of any delays or incidents, providing a factual foundation for operational and legal evaluations.
Freight and Charges
Lastly, understanding freight & charges—the costs incurred during the shipment of cargo—is vital. These charges can vary widely depending on the route, type of cargo, and specific terms of the charter party.
Once again, the use of historical data from SoFs can assist in providing clarity and transparency on these fees.
Advantages and Disadvantages of a Time Charter
Time chartering presents a unique set of advantages and disadvantages that vessel chartering managers, operations VPs, and demurrage cost analysts must weigh carefully when strategizing for optimal operational flexibility and cost efficiency.
Advantages:
- Flexibility in Operations: Time charters offer charterers significant control over the vessel’s employment, including the types and routes of cargoes, as well as one of the most important: access to a vessel. This flexibility is invaluable for adapting to changing market conditions or specific logistical requirements. Using no-code workflows to streamline processes and voyage turnaround simulators can support maritime operations and greatly improve flexibility.
- Cost Predictability: With a fixed daily hire rate, companies can better forecast and manage their shipping expenditures. This predictability aids in budgeting and financial planning, reducing the unpredictability associated with fluctuating freight rates in spot market dealings.
- Reduced Exposure to Market Volatility: During periods of market volatility, time charter arrangements protect the charterer from soaring freight rates, as the hire rate remains constant regardless of market conditions.
Disadvantages:
- Long-term Commitment: One of the primary drawbacks of time charters is the requirement for a longer-term commitment to a vessel. This can be a double-edged sword, especially if market rates fall below the agreed hire rate, potentially leading to higher-than-market operational costs.
- Operational Costs and Risks: While the shipowner handles maintenance and crewing, the charterer is responsible for costs related to the voyage, including fuel, port charges, and other variable expenses.
Charterers should employ proactive cost tracking, negotiate favorable fuel clauses, utilize cost-efficient routing software, and maintain transparent communication with shipowners about anticipated expenses and operational strategies.
For example, a well-prepared and accurate Statement of Facts (SoF) can provide detailed information about the events that occurred during the time a vessel spent at port.
However, when the opportunity to properly analyze the SoF has not been made available, disputes over ambiguous statements may arise.
On one side, charterers will try to leverage the delays that happened to decrease demurrage. Shipowners, on the other hand, may challenge a charterer’s laytime statement based on the events that are available in the SoF.
Time charters often include terms for demurrage (charges when the charterer uses the vessel beyond the agreed period) and dispatch (rewards for completing operations early). The SoF provides the necessary data to calculate these charges or rewards accurately, documenting the exact time spent during loading and unloading.
- Lesser Control Over Maintenance: Charterers have limited control over the maintenance and condition of the vessel, relying on the shipowner to maintain standards. Poor maintenance can affect cargo schedules and overall shipping efficiency.
Maintenance of the vessel can also have a direct effect on the charterer due to new emissions regulations.
Keeping track of current changes in maritime emissions regulations is a challenging task. With so many initiatives and new norms being implemented, trying to provide frameworks to capture and report on emissions, makes the topic extremely complex for operators, shipowners, and commodity manufacturers.
Advantages and Disadvantages of Voyage Charter
Voyage charters represent a different approach compared to time charters, focusing on specific trips rather than extended periods. This method suits operations that require precise cargo deliveries without long-term ship commitment, but it also carries its own set of pros and cons.
Advantages:
- Direct Cost Association: The major appeal of voyage charters lies in their direct cost association with individual voyages. The charterer is not liable for any costs, except the initial charter fee, and is not responsible for finding a crew. Charterers pay per trip, making it easier to allocate costs directly to specific cargoes or projects.
- No Long-Term Commitment or Contract: Unlike time charters, voyage charters do not require a long-term commitment to a vessel, providing flexibility to switch between ships and routes as dictated by cargo needs or market conditions.
- High Control Over Cargo Operations: Charterers maintain extensive control over the loading and unloading processes, ensuring that handling aligns with their standards and schedules. This is particularly beneficial for sensitive or high-value cargoes.
Disadvantages:
- Vulnerability to Market Fluctuations: While time charters protect against market volatility, voyage charters expose charterers to fluctuating freight rates. During peak times, costs can escalate significantly, affecting overall profitability and a lack of flexibility for the charterer.
- Inconsistent Costs (and higher initial costs): The costs in voyage charters can vary widely from one trip to another, influenced by factors like fuel prices, port fees, and canal dues. This inconsistency makes budgeting and financial planning more complex.
For example:
a. Exceeding laytime – the time allowed for loading and unloading cargo at ports – can lead to demurrage charges. Having a well-prepared SoF ensures that the arrival, cargo operations, and departure times are documented, which are key data points for laytime calculations.
b. New emissions regulations leading to the use of specific fuels or ship adjustments may soon be passed on to charterers via higher freight costs. For many ships, technical modifications may be the only realistic way to attain the required certifications and to be under the emissions limit, impacting the commercial operation of the vessel.
- Dependency on Ship Availability: Charterers are at the mercy of market availability. During periods of high demand, finding suitable vessels can be challenging and more expensive, potentially leading to delays and increased operational risks.
How to Choose Between Time Charter and Voyage Charter: Factors to Consider
Choosing between a time charter and a voyage charter is a strategic decision that hinges on several criteria to be weighed carefully to align with organizational objectives and the dynamic nature of the maritime industry.
Here we present six criteria that every chartering manager or analyst should consider.
- Duration and Frequency of Cargo Needs
Consider the length and frequency of your shipping needs.
Time charters are more suitable for longer and more regular shipping requirements, providing stability and predictability. These agreements are signed only for a limited period, without providing any specified route to the other party. Throughout this charter period, the Charterer can use the vessel for trading on the recognized trade routes without restrictions.
On the other hand, voyage charters are ideal for single, occasional, or irregular shipments. These contracts are signed for carrying a particular quantity of goods on the preset by the two parties. They also are obliged to carry the stated commodity onboard between pre-decided ports only. After the said trip is completed, the contract is automatically terminated.
- Market Conditions and Freight Rate Volatility
The current and anticipated market conditions play a crucial role.
In a volatile market with rising freight rates, a time charter might lock in a more favorable rate for a longer period.
Conversely, in a stable or declining market, voyage charters might offer more cost-effective and flexible options.
- Operational Control
Evaluate the level of control you need over the vessel’s operation.
Time charters offer more control over the vessel’s itinerary and operations, beneficial for complex logistics operations.
Voyage charters provide control over the cargo but less so over the vessel’s operations.
- Financial Planning, Profitability, and Budget Constraints
Assess your financial flexibility
Time charters require a substantial and consistent financial commitment, which is predictable but potentially higher in the long term.
Time charters provide more predictable cash flow due to fixed daily hire rates, which can be advantageous in a volatile market as they protect against rate increases.
However, they may result in negative cash flow if the market rates decrease significantly below the charter rate agreed upon, as the charterer still must pay the fixed rate.
Voyage charters, while potentially more variable in cost, do not require long-term financial commitments and can be adjusted according to budgetary needs. The absence of a long-term commitment allows companies to avoid the financial drain of a non-performing asset, which is possible in a time charter if market conditions worsen.
Typically, payments in voyage charters are tied to specific milestones, such as loading or unloading completion, which can help in planning cash flow.
- Cargo Specificity and Handling Requirements
Consider the nature of the cargo. Special handling requirements, sensitivity, and value of the cargo might dictate the need for more direct control over handling processes, favoring voyage charters.
- Risk Tolerance
Finally, analyze your company’s risk tolerance.
Time charters minimize exposure to market fluctuations but involve commitment risks. They provide more predictable cash flow due to fixed daily hire rates, which can be advantageous in a volatile market as they protect against rate increases. However, they may result in negative cash flow if the market rates decrease significantly below the charter rate agreed upon, as the charterer still must pay the fixed rate.
Voyage charters offer flexibility but expose the charterer to market rate risks and operational uncertainties. Profitability and effectiveness in managing cash flow depend on the charterer’s ability to manage and mitigate risks associated with market volatility and operational uncertainties.
By automating manual workflows with available low-code technology, companies can save and reduce risk while maintaining data integrity and real-time visibility of their voyages’ most essential KPIs.
To reduce risk, dedicated software to automatically assign tasks and notify stakeholders prevents constant back and forth through emails or updating of spreadsheets can be implemented. Stakeholders can be given dedicated access to track their inbound shipments, schedule changes, and collect documents.
Conclusion
If you want the lowest possible ongoing costs, the clear winner is the voyage charter.
Why? Because they don’t require a long-term contract. They do have a higher initial cost, but this is offset by the fact that no other significant fees need to be paid, in general.
But, when it comes to the initial cost of chartering a ship, it’s nearly always going to be cheaper to go with a time charter.
A ship owner is more open to a lower price, as they know you’ll be hiring the vessel for longer. What’s more, you, and not the ship owner, will be expected to cover other costs, pushing the initial price down further. As the vessels are leased for long periods, the vessel can be used to travel anywhere, without restriction.
In making your final decision, engage with stakeholders, including operations managers, financial analysts, and logistics coordinators, to understand the full implications of each option.
Besides, using a holistic approach to evaluate these factors will guide you toward the most strategic chartering decision for your specific circumstances.
