Basically, ship chartering is nothing other than renting or leasing, although the latter terms are not commonly used in this area.
Aircraft are also chartered, which is why the term “charter flights” is often used in everyday language.
How does ship charter or ship chartering work?
Ship charters or ship chartering can be carried out in different ways.
The simplest approach is known as “bareboat charter” and means the provision of the pure vessel, whereby the charterer must also act as ship owner. In other words, the charterer has to provide the crew as well as take care of all maintenance and repairs and, of course, provide sufficient fuel.
The price for this form of ship charter or ship chartering is usually fixed in US dollars and per day. It is also possible to use it for a limited period of time, for example when goods have to be brought from A to B and this is not a regular transport.
What are the advantages of bareboat charter?
In the area of ship charter or ship chartering, the use of the pure ship (bareboat charter) is particularly popular.
The procedure is always used when ships sail under foreign flags and especially Liberia as well as Antigua and Barbuda are the countries to which the flag is flown. The advantage is that the ownership of the ship remains untouched and an entry in the German shipping register still exists.
When changing flags, one often speaks of flags of convenience, which means above all a lower tax burden and other occupation regulations. Furthermore, the crew can come from many different states, which is not possible under all flags. Of course, flagging out can also be associated with lower operating costs.
Ship chartering and flag of convenience
The principle of flag convenience in ship chartering is by no means new, but has been used since ancient times.
Although official ship registers have only existed since the middle of the 17th century, British seafarers, for example, used the Spanish flag to participate in Caribbean trade, or the French flag for fishing in the 17th century off Newfoundland. During the war between Great Britain and the United States, US merchants traded under the Portuguese flag and, since the end of the First World War, it was mainly Panama and Honduras that used open shipping registers and thus the possibility of using the flag for money.
There are different forms of registers and the classification as “flag of convenience” is also subject to specific criteria. Above all, the definitions of the International Transport Workers’ Federation (ITF) and the OECD must be observed.
Ship chartering as a supplier
Ship chartering or ship chartering out does not always have to be done “bareboat”. It is possible to take over both a ship and the complete supply of fuel, provisions and the necessary technology as well as the crew. In this case, the ship sails with a captain and a well-rehearsed crew, but is operated by a charter partner who also bears the business risk and realizes the profits.
Finally, so-called “demise chartering” is possible, in which the crew including the captain is transferred to the shipowner. This is made possible by a so-called “management agreement” clause in the charter contract.
Other forms of ship charter or ship chartering
The list of types and ways in which ships can be chartered out is even longer. One possibility is to charter by the hour or by the day. The period of time is agreed in advance and is fixed, whereby any excess must be paid additionally.
Billing is based on cargo, whereby faster transport is sometimes accompanied by a refund or a price reduction. A similar principle applies to time charters, whereby only the period of use plus the costs for fuel, use of ports, canals and so on is paid. Here, too, the contracts can be structured individually and it can be determined in advance who is liable for defects and who must repair them.
Legal bases of chartering
According to German law, the many possibilities of ship charter are to be evaluated differently. In other words, according to the law of obligations, no general statement can be made about the treatment of a chartered ship, but the form of the contract is important. In most cases, one speaks of a contract of service and not of a contract for work and labour.
In some cases, a rental contract can also be present if there is no crew on board or the charterer works with his own crew. Conversely, in the case of a permanent crew, the provisions of transport law also apply.
Is ship chartering insured?
The question of insurance for ship charters cannot be answered in a general way.
However, it is usually the case that a ship is “off hire” in the event of damage that makes it impossible to continue the journey. If this period is longer than ten to 14 days, the “Loss of Hire Insurance” takes effect and replaces the rate which is due per day.
Ship charter as an investment model
The chartering of ships can also be used for investment. The procedure is simple and in many cases promises very solid returns.
The starting point is the shipowner, who receives sufficient capital for the purchase of a ship by providing a subordinated loan. This ship is usually rented or chartered out to a charterer who has sufficient orders for the transport of goods and cargo.
The charterer has direct contact with a large number of customers (mostly from the corporate sector) who want to transport goods and therefore charters his ships on a long-term basis to handle the volume of orders. In this way, the rent for the ships is also secured, which flows from the income from transports.
In other words, the shipowner receives fixed income by chartering out his ships and can use this income to cover the running costs of the ship, repairs etc. and to pay interest and repay the loan. To ensure that this always works, there are also insurances that cover the costs in case of a defect or breakdown.
Furthermore, there is always the pure steel value as well as the sales value of the ship, which additionally secures the investment. The approach is also profitable because the charter rates are high enough to soon amortize the investment in a ship and the life of a ship is 20 years and more. The risk decreases with each year.