Modeling the Dry-Docking Cost The Case of Tankers

Agamemnon Apostolidis,* John Kokarakis, and Andreas Merikas

*Naval Architect and Marine Engineer, Technical Division, Enterprises Shipping and Trading SA, Athens, Greece

Vice President of Technology and Business Development, European Division, American Bureau of Shipping, Piraeus, Greece

Professor of Shipping Finance, Head of Department of Maritime Studies, University of Piraeus, Piraeus, Greece

Dry-docking is an integral part of a vessels life. With a frequency of approximately

30 months, flag legislation and classification society rules bring the vessel to a shipyards
dry-dock for an intermediate or special survey. Dry-docking cost is a significant element
of the ships operating cost and is always presented as a six or seven figure amount.
This paper, for the first time in the literature, unveils the determinants of dry-docking
cost and hence equips the decision maker with a valuable tool for the cost side of
his ventures. We have collected 414 cases of ship repairs from one of the biggest
ship repair yards of the Persian Gulf, over a time span of 4 years.
Making use of this primary database, we develop a simultaneous equations model
and express dry-docking cost as a function of ship type, size, and age. Other impor-
tant determinants are also incorporated into the model such as upswings or down-
swings in the shipping cycles and the shipping companys capacity as an effective
negotiator. The method of estimation is Generalized Method of Moments and our
results shade light on an issue, which has never before been effectively dealt with,
given its immense practical significance for the decision maker.

Keywords: repair, shipyards, maintenance, economics (operational)

1. Introduction There is an extensive literature on ship operating costs, identi-

IT IS WIDELY ACCEPTED that the trading environment for ship
managers has been extremely difficult, given that major economies
stagger to get back on their feet and emerging economies try hard to
adapt. Operating costs1 have therefore taken on a greater signifi-
cance in the pursuit of business survival, with the softer targets,
such as repair and maintenance, personnel, and administration,
taking center stage. So it is imperative for ship managers to have
all the necessary information about operating cost, which will allow
them better planning and monitoring to enhance their performance.
A part of the operating cost, which has never been taken up by
analysts, academics, and professionals alike, even though its
importance is generally accepted, is the dry-docking cost.
Manuscript received by JSPD Committee May 24, 2012; accepted
June 29, 2012.
1
Decade of cost management lies ahead, says Clarksons Research Services
Ltd director Martin Sopford (Lloyds List 2011).
fying the characteristics and determinants of costs in different
vessel types. This paper adds to the existing literature in two
ways. First, it is the first study to investigate the relationship
between dry-docking cost and its determinants using hand col-
lected shipyard information. Second, it develops the dry-docking
cost-profitability relationship of a shipyard treating dry-docking
as an endogenous variable.
Studying 414 invoices of real ship repair bills over a period of
4 years, from 2007 to 2010, we explore potential determinants
of ship repair and dry-docking costs. Our finding that ship size,
age, and number of stay days in the yard constitute the main
determinants of dry-docking cost is consistent with the literature
on operating costs as far as it concerns the ship size (Cullinane &
Khanna 1999; Gilman 1980; Ryder & Chappell 1979; Glen &
Reid 2010). Subsequently, we develop a simultaneous equation
model where dry-docking cost, measured by the amount on the
invoices (LINV) is treated as an endogenous variable and employ
the Generalized Method of Moments (GMM) to estimate the
interaction between dry-docking cost and its determinants. We
discover a statistically significant positive relationship between

447
dry-docking cost degree and ship size, age, and number of days
staying in the yard. In addition, we find a strong and negative
impact of the bargaining power of the ship company on dry-
docking cost, a fact always suspected but never actually empiri-
cally substantiated before.
Moreover, our results largely explain why shipping firms are
keen on employing, as insiders, negotiators for dry-docking pur-
poses. They also have significant policy implications for vessel
operators, as they suggest that lower dry-docking cost is not a
mere effect of sound financial performance, but also, and perhaps
more importantly, a requirement for it.
The remainder of the paper is organized as follows. A brief
review of related literature is conducted in Section 2. In the third
section, we lay out our hypotheses. Our sample and methodology
are presented in Section 4. Section 5 presents and discusses our
empirical findings. In Section 6, we present an alternative model
specification to challenge the robustness of our model effectively.
Finally, the seventh section concludes the paper and provides
suggestions for future research.
2. Literature review
2.1. Prior research on operating cost
No academic paper or study has been found that is devoted
particularly to the dry-docking cost. The reason seems to be the
scarcity of such commercial information. However, dry-docking
cost constitutes a major element of the ship operating cost, and
therefore, we focused on past studies and papers on ship oper-
ating costs.
Ship operating cost has been investigated and approached with
respective mathematical models by a number of authors. Glen and
Reid (2010) presented a model for tanker cost2 elasticities. They
revisited the elasticity model of tanker costs capital, operating,
and voyage costs and found that such model principals are
still valid. They compared tanker data collected during 2007 to
2008 from Gibsons shipbrokers, Moore-Stephens, and Clarksons
with past studies of Glen (1990). Here, their approach is based
on previous research by Cullinane and Khanna (1999), Gilman
(1980), and Ryder and Chappell (1979).
Brown and Savage (1996) made a comparison of operating
costs between single hull and double hull tankers. Their figures
are based on data from the U.S. National Research Council (1991),
however they are of limited value as at that time double hull
tankers were very rare and thus their operating costs did not pro-
vide representative samples.
Cullinane and Khanna (1999), in their paper, examined two
ways to calculate containerships operating cost. The first was
related to the elasticity of cost with respect to the size of the
ship. This result was derived from an empirical analysis of ZIM3
containerships operating costs, conducted by Jansson and
Shneerson (1987). Similar approaches were adopted by other
researchers as well, like Heaver (1968) and Goss and Mann
(1974). Finally, Cullinane and Khanna (1999) proposed a calcula-
2
Glen and Reid, in their model, deal with all ship costs: capital, operation,
and voyage costs.
3
Zim is presently ranked in the 17th position of container carriers, with
325,000 teu capacity, according to Alphaliner (2011).
448 Modeling the Dry-Docking Cost - The Case of Tankers
tion of the operating cost as a function of ships capital cost and
particularly assumed operating cost 3.5% of the initial capi-
tal cost.
The same method was followed by Ryder and Chappell (1979),
Gilman (1983), and Pearson (1988). Such methods have the
disadvantage that they are applicable only close to the date of
publication of the study. The reason is that operating cost is
subject to inflation, and thus a steady annual increase of approxi-
mately 3% can be noticed, whereas the initial capital cost has
a commodity behavior, fluctuating strongly between good times
and bad times.
Apostolidis (1995), in his Master of Science thesis regarding
tanker design of techno-economical model, estimates the annual
operating cost for tankers as a function of deadweight (size):
operating cost 0:0059  deadweight 3,839:16
The above formula derives from a regression analysis which is
based on actual tanker operating costs as they were published by
Drewry Shipping Consultants (1995).
All above studies and models seem to give a fair approach to
the estimation of ship operating costs at the time of their publica-
tion. However, the volatile environment of tanker shipping, that
is, inflation in different countries, fluctuation of currency rate of
exchange, rise and fall of steel, oil prices, and energy domestic
demand, waive any advantage in long-term estimation. In the
future, correlating ship operating costs with historical values of
parameters such as gross domestic product of seafarers nations,
for the crew cost component, or steel and oil prices to achieve
a diachronic estimating model will be of value.
2.2. The significance of dry-docking cost among
operating costs
Both flag administration and classification society to renew
ships certificates require that a ship has conducted two dry-
docking surveys within the 5-year period.4 Dry-docking cost is
part of the operating costs of a vessel. It could not be classified
either with capital (requisition) cost or voyage cost. However, it
is not included in the daily operating costs; instead it is men-
tioned5 separately for each ship. Benchmark operating costs
for tankers for the year 2007 are listed in Table 1 according to the
Moore Stephens (2008) annual publication.6 It appears from
the table, that the major component of the operating cost is by
far the manning cost, which contributes almost half 7 of the total.
Second in significance is the group of costs contributing to the
repair and maintenance of the ship, which comprise close to 17%.
4
Two dry-docking surveys have to be equally distributed over the time of
5 years; thus a gap of 30 to 36 months is necessary.
5
Moreover, the accounting handling of dry-docking cost is not following
the traditional accounting of operating costs (Baylson 2008).
6
Moore Stephens Consultants publish a well-established review on ship
operating costs once per year. The annual report is released precisely every
September since the year 2000. It comprises data from almost 2,000 ships.
A number of ship managers voluntarily contribute their actual ship operating
figures against their right to purchase one free copy of the report.
7
According to the NASDAQ-listed Diana Shipping Inc.s latest annual
report (Diana Shipping Inc. 2010), manning cost comprises 60% of the
total operating cost, whilst spares and repairs comprise 28%, insurance 10%,
and tax and sundries 2%.
 Table 1 Annual operating cost (0,000 U.S. dollars per year) Table 3 Tanker sizes

Spares, Size Category Deadweight

Stores Repairs and
Tanker Size Crew and Lubs Maintenance Insurance Overhead Total Chemical carrier 10 to 30,000 dwt
Product carrier 30 to 55,000 dwt
Chemical 1,119 264 392 202 279 2,256 Panamax 55 to 80,000 dwt
Product 1,184 314 436 194 369 2,498 Aframax 80 to 120,000 dwt
Panamax 1,388 360 504 267 358 2,877 Suezmax 120 to 200,000 dwt
Aframax 1,193 331 395 279 412 2,610 VLCC 200 to 400,000 dwt
Suezmax 1,308 411 422 323 461 2,925
VLCC 1,432 503 639 476 443 3,493
Average 46% 13% 17% 10% 14% Deadweight cargo bunkers stores provisions crew
VLCC Very Large Crude Carrier
Depending on their deadweight, tankers are always classified
into the well-known size categories (Table 3). Ceteris paribus,
the size of the ship is positively associated with the extent of
Table 2 Dry-docking versus operating cost (0,000 U.S. dollars
per year) dry-docking cost.

Dry- 3.3. Stay days

Dry- Annual Dry- Five-Year Docking
Docking Operating Docking  Operating Versus Stay days are calculated from the ships arrival date at the
Tanker Size Cost Cost 2 times Cost Operating yard until the departure date. A part of these days are spent in the
dry-dock (normally 5 to 7 days), whereas in the remaining days
Chemical 1,244 2,256 2,489 11,280 22%
Product 1,319 2,498 2,639 12,491 21% the vessel is berthed alongside to complete her repair and mainte-
Panamax 1,286 2,877 2,572 14,386 18% nance jobs. Dry-dock facilities8 and berths are limited for every
Aframax 1,359 2,610 2,719 13,048 21% shipyard and constitute a yards most valuable assets. The volume
Suezmax 1,460 2,925 2,921 14,625 20% of repair work is proportional to the stay days. As repair work is
VLCC 1,601 3,493 3,203 17,464 18% very intensive and no time can be wasted, every additional stay
day increases the final dry-docking cost. Even if, in the case that
additional stay days are not corresponding to additional repair
In the same report, the dry-docking cost for the year 2007 is given. work,9 the shipyard is often considering to transfer an opportunity
Dry-docking cost occurs twice in a 5-year life span of a vessel. cost (of the underused facilities) to the owners bill. Drawing on
Therefore, Table 2 shows the impact of the dry-docking cost com- this argument, we formulate our hypothesis that longer stay days
pared with the operating cost for the same 5-year period. Table 2 contribute to the increase of the dry-docking bill. Ceteris paribus,
shows that dry-docking is adding 20% to the operating cost, equal the number of stay days in the shipyard is positively associated
to the cost of one year every 5 years. with the extent of dry-docking cost.
Concluding, the significance of the dry-docking cost among the
other operating costs, is the main reason motivating the authors
3.4. Market conditions
to explore the nature and determinants of the dry-docking cost.
This is a binary variable, an indication whether the shipping
market is at high levels or not. When freight rates are increased,
3. Hypotheses
owners silently accept paying a repair premium to shipyards. In
3.1. Age the first quarter of 2008, for example, a VLCC had a daily charter
hire of 200,000 United States dollars (USD); her owners were
The age of a ship is counted from the date the ship is okay with paying for overtime, first class airfreight of express
delivered by the building shipyard to her owners. All insurance supply of spares, attendance of specialists, and other such accel-
documents, flag, and class certificates are issued for first time erating processes for their ship to leave the shipyard and return
at that date. Drawing on these issues, we formulate our first back to her operations as soon as possible. Every day counted.10
hypothesis: Older ships, like older humans, experience higher Ceteris paribus, the market conditions are positively associated
wear. Additionally, flag and class have higher criteria for sur- with profitability of the shipyard.
veys of older ships. As a result, older ships demand more exten-
sive repairs and maintenance than younger ships. Ceteris paribus,
the age of the ship is positively associated with the extent of dry- 8
There are two types of dry-dock facilities: graving docks (permanent
docking cost. excavated docking tanks into the land) and floating docks (steel structured
docking tanks, which can be emerged after removing thousand of tons of
3.2. Size ballast water from tank compartments).
9
A frequent case is a vessel occupying a berth or, worse, a drydock, only for
In the present study the size of tankers is taken from their waiting on a critical spare part such as a propeller, tailshaft, or rudde.
deadweight (dwt) capacity, which can be openly translated into 10
Moreover, in mid 2008 repair shipyards were urging owners to book yard
the carrying capacity. It is provided in weight metric tons (dwt). slots 1 year in advance (Wingrove 2008).

Modeling the Dry-Docking Cost - The Case of Tankers 449

3.5. Owners negotiating capacity Table 4 Data elaborated for the model and
dry-docking parameters
This is another binary variable, which is the mirror of the
preceding Market conditions variable. Although the previous Average Average
variable is reflecting the shipyards ability to take advantage of Tanker Size Records Average Age Days of Stay Cost (USD)
the good shipping market, the new variable herewith is express-
ing the owners ability to achieve better terms and conditions, Chemical carrier 47 11 15 479,823
Product carrier 54 11 16 583,368
highlighting their fleet size, financial credibility, preference fre-
Panamax 29 9 17 732,108
quency in a specific yard, or better preparedness regarding the
Aframax 51 10 16 922,827
dry-docking requirements.11 Without a doubt, for the same Suezmax 36 10 25 1,309,755
repair job, a big, sound, frequent, or organized ship-owner VLCC 197 9 16 987,381
pays less than another ship-owner. Ceteris paribus, the bargaining Total 414 10 17 879,261
power of the owner is negatively associated with the extent of
dry-docking cost.
An irregularity occurs for the Suezmax size, which brings
4. Data and methodology higher average costs (1,309,755 USD) than VLCC (double size;
987,381 USD). Such deviation is explained by the average longest
4.1. Data collected stay of 25 days compared with the average stay of 16 days for
the VLCCs. Therefore, further investigation in the future seems
For the purpose of developing the cost function and testing interesting to explain the reason of longer stay of Suezmaxes.
our hypotheses, more than 1,000 actual dry-docking invoices
have been manually collected. They spanned over a 4-year period 4.2. Methodology
(2007 to 2010) from one of the biggest ship repair yards, which
is strategically located in the Persian Gulf. Data were collected To map the causal interdependence between dry-docking cost
for all types of ships, which visited the above shipyard during and its determinants, we set up a model of simultaneous equations:
the given period.
We chose to collect and analyze data from only one major LINV f (AGE, LTONS, DAYS, BP)
shipyard to eliminate geographical effects, such as different labor PROF g (LINV, AGE, LTONS, DAYS, DUM,
costs (which vary between Europe, Middle East, or Far East),
exchange rate fluctuations (which were highly volatile during Where
2007 to 2010), and different transportation and purchase costs of  LINV is the dry-docking cost in logarithmic13 terms. This
materials and spares (when yards do not have the same access to is the net payable amount in USD that a ship owner pays to
factories and manufacturers). Invoices were classified and sorted the yard.
according to the ship type, age, repair period, and reason (regular  AGE is the age of the ship. The age of a ship is counted
dry-docking or damage/accident repair). Inherent differences12 from the date the ship is delivered by the building shipyard to
between types of ships made us restrict our analysis to use only her owners.
those of tankers out of the overall collected the ship type with  LTONS is the size in logarithmic terms. In the present
the highest data population. On the other hand, such restriction study the size of tankers is taken from their deadweight capacity,
increased the uniformity of the analyzed data and the confidence which can be openly translated into the carrying capacity.
of the extracted conclusions.  DAYS is stay days. Stay days are calculated from the
Briefly, a general picture of the data collected and elaborated arrival date at the yard until the departure date (Fig. 2).
on can be seen in Table 4. As can be seen from Table 4, the size  PROF is profitability. Shipyard has an index to assess
of the ship and the number of days that each ship stayed in the the profitability of each repair project. This index is always
yard directly influence the dry-docking cost. However, age con- positive; however a certain value corresponds to the break-
tribution to the level of dry-docking cost cannot be distinctly even point of the shipyards operation cost.
shown. As can be seen in Fig. 1, the data collected for this study  DUM equals dummy assuming the value of one if
mostly refer to young ships, thus the age contribution among on arrival the market is booming and zero if the market is
samples cannot help us to derive a reliable conclusion regarding in recession.
the impact of the age factor.
More specifically, within our data span of 2007 to 2010, the
market enjoyed unprecedented growth rates in freights and ship
11
For that reason one of the InterManager Operational Performance KPIs values as well as a deep dive during 2009 and 2010. This can be
is the Drydock management performance (Matthews 2011). clearly demonstrated by comparing the yard profitability (Fig. 3)
12
A good example of such differences is that bulk carriers have cargo holds to oil tanker spot freight rates (Fig. 4; Clarksons Research
with opening/closing hatch covers and sometimes crane facilities. Container- Services Ltd. 2010) over the same period. BP equals the bar-
ships have increased numbers of small ballast tank, wide cargo hold openings, gaining power of the ship manager measured as a dummy. More
strengthened hatch covers, and demanding electric power production due to
the reefer containers they are carrying. Tankers have extensive piping net-
work and often coated cargo tanks. Liquefied Natural Gas (LNG) carriers have
more sophisticated machinery, which is culminating with the minus 162 C 13
Standard literature procedure is to scale out differences in the magni-
cargo cooling facility. tudes of data series (Cherkassky & Mulier 2007).

450 Modeling the Dry-Docking Cost - The Case of Tankers

 Fig. 1 Distribution of ships age among 414 samples

Fig. 2 Distribution of stay days (5-day periods) among 414 samples

specifically, the shipyard gave discounts between 5% to 20% on
the dry-docking initial offer depending on the following criteria:
a) whether the company was a regular customer, b) when there
was a capable mediator to bargain the prices, and c) whether the
customer was a significant industry player and or, of considerable
size. For all three cases the variable was assigned the value one
and zero otherwise. At this point it must be mentioned that this is
inside information emphasizing the uniqueness of the data set
used. So, its estimated coefficient would show the impact of
bargaining power on the dry-docking cost.
Initial inspection of pairs of variables of interest, shown in
Figs. 57, as well as theoretical considerations, lead us to the
formulation of the linear model of simultaneous equations. In
detail, even though cost functions and profit functions are often
cited in the literature as quadratic, in our case we model cost
per unit as well as profit per unit, both long-run functions as
this shipyard operates over 30 years. Therefore, we are justified
theoretically, as well as from the data generating process, to
assume both equations in our model to be linear. Two of our
variables, LINV and LTONS, are expressed in logarithms. There

Modeling the Dry-Docking Cost - The Case of Tankers 451

 Fig. 3 Profitability index (20072010)

Fig. 4 Tanker spot freight rates (20072010)

are three reasons mentioned in the literature why we should be
doing that: a) to linearize a nonlinear function but then logarithms
should be taken throughout it, b) to have individual estimated
parameters expressing elasticities, and c) to scale out differences
in the magnitudes of the data series. This third reason is adopted
in our case. The proper methods of estimation are the well known
Two Stage Least Squares (2SLS) and 3SLS. The drawback of
3SLS is that it depends heavily on the parametric modeling of
all the endogenous variables (that is LINV and PROF jointly
with LTONS, DAYS, and the complete set of variables that are
jointly determined in this context). Therefore, 2SLS is preferable
but it is not flexible in terms of delivering robust standard errors,
so we can resort to GMM.
Generalized Method of Moments was purposely chosen over
2SLS that is, Instrumental Variables (IV), because in the presence
of heteroskedasticity, it is more efficient than the simple IV esti-
mator, but even in the absence of it, is no worse asymptotically
than the IV estimator.

452 Modeling the Dry-Docking Cost - The Case of Tankers


Fig. 5 Pairs of variables (Profitability versus LINV)
Fig. 6 Pairs of variables (Profitability versus LTONS)
The general idea of GMM can be explained as follows. Suppose
we have an equation of the form: Yt b1 Xt1 . . . bk Xtk ut .
Some or all of the explanatory variables may be endogenous and
correlated with the error term u. In that case, suppose there are
variables Z1 , . . . , Zm correlated with the Xs but not with the
error term. Then we could use the Zs as instruments and solve
the orthogonality conditions:
T
n1
( Zjt Yt  b1 Xt1  . . .  bk Xtk 0, j 1, . . . , m, in terms of b:
t1
Of course when m > k (more instruments than explanatory
variables) this has to be done in the least squares or some other
sense. Indeed, the modern literature of GMM has provided
many such criteria, some of which can even be used to deliver
heteroskedasticity-robust or autocorrelation-robust standard errors,
Modeling the Dry-Docking Cost - The Case of Tankers
Fig. 7 Pairs of variables (LINV versus LTONS)
depending on the problem. For an accessible treatment of modern
GMM, see Hansen (2002) and Wooldridge (2001).
The problem with GMM is how to proceed when we are not
really certain that a given variable is an instrument or not. A
proper instrument is a variable correlated with the regressors but
uncorrelated with the error term. Such variables may be hard to
find and this is indeed so, in most empirical applications.
Assume our set of instruments is as follows. X [AGE, DAYS,
LTONS, BP] where none of them appears explicitly on the left
hand side of our equations. To provide more orthogonality con-
ditions we use not only X but also XX that are squares and
cross-products of the variables in X. In our case this would mean
15 instruments (k 15)14 in total.
Given the linear system:
PROFi g (LINVi , AGEi , DAYSi , LTONSi , DUMi ) ui1
LINVi f (AGEi , LTONSi , DAYSi , BPi ) ui2
The error terms can be correlated and exhibit arbitrary patterns
of heteroskedasticity15 because we use cross-sectional data. The
orthogonality conditions are as follows:
n
n1 ( PROFi  f LINVi , AGEi , DAYSi , LTONSi , DUM; yXik 0
i1
n
n1 ( LINVi  zAGEi , LTONSi , DAYSi , BPi ; yXik 0:
i1
y is the vector of parameters in the linear models f, z, and w. This
provides a total of 2k (30 in our case) equations for the 15 parameters
14
The number of instruments (k 15) is explicitly stated as: AGE, (AGE)2,
DAYS, (DAYS)2, LTONS, (LTONS)2, BP, (BP)2, (AGE*DAYS), (AGE*
LTONS), (AGE*BP), (DAYS*LTONS), (DAYS*BP), (LTONS*BP), and
C (the constant).
15
Heteroskedasticity occurs when var(ut) 6 0, which makes hypothesis
testing invalid. In our case we use GMM as a more efficient estimator com-
pared to 2SLS to deal with arbitrary heteroskedastic error terms. Best reference
for it is Wooldridge (2001).
Also, benefits of GMM for a system of equations are explicitly shown
in Arellano and Bond (1991) and Blundell and Bond (1998).
453
 Fig. 8 Goodness of fit variable PROFITABILITY

Fig. 9 Goodness of fit variable LINV

(including constant terms) and provides the fundamental basis for
GMM. Thus, we run GMM estimations for three models.
An important issue in GMM estimation is the issue of weak
instruments. If instruments are weak, 2SLS and GMM can lead
to biases even in large samples, and the distributions can be far
from normality. This issue is dealt with in Stock and Yogo (2005).
As noted in Stock and Watson (2003, p350), a simple guide is the
calculated F-statistic in the first stage (reduced form) regression.
If F is greater than 10, we need not worry, but this number of
course depends on the number of instruments used. About the
weak instrument problem, Wooldridge (2002) demonstrates that
in certain instances the problem of weak instruments can result
Table 5 Our set of instruments
R2 F
LINV 0.70 16.08
PROF 0.77 23.11
in the (biased) ordinary least squares (OLS) estimator being
preferred. In our application, LINV and PROF pass the test com-
fortably (Table 5).
5. Discussion of results
Running our model under the estimation method of GMM,
we reach finally the following equation for dry-docking cost:
LINV 8:424 0:0076  AGE 0:3741  LTONS 0:0277
 DAYS  0:5376  BP,
whereas, profitability is deriving as:
PROF 91:3182 to 8:8251  LINV 0:17  AGE 0:2725
 DAYS 3:1921  LTONS 5:6441  DUM:
Table 6 contains the GMM estimation of our model.
Our findings support our hypotheses and are consistent with the
literature. In our model all variables have the expected signs and

454 Modeling the Dry-Docking Cost - The Case of Tankers

 Table 6 Modeling results try as a whole. Finally, the value of the J-statistic confirms the
validity of our model.
Estimation Method: Generalized Method of Moments Below, we present within sample forecasts, our two dependent
variables from first stage regressions. Looking at the values of
Dep. Variable: LINV Dep. Variable: PROF
the Theil inequality coefficient and the root mean squared error
Coefficient Coefficient
Const. 8.424051 91.31821
we deduce that the forecasting ability of our model is very good.
(21.06320)*** (13.19933)*** This is presented here as another diagnostic for the goodness
AGE 0.007680 0.170000 of fit of our model.
(1.581717)* (1.920761)**
LTONS 0.374144 3.192184
(11.54703)*** (7.849129)*** 6. Alternative model specifications
DAYS 0.027718 0.272594
(13.48093)*** (33.31700)*** To provide evidence and investigate further the robustness
DUM - 5.644102 of our results, we have specified two alternative models. The first
- (5.158217)*** is presented in Table 7, where we express the dependent variable
LINV - 8.825140
PROF in logarithmic terms to see if this will change the significance
- (39.78476)***
BP 0.53765 -
of the impact of any of the explanatory variables in our model.
(11.34257)*** - We observe that apart from the change in interpretation, now
J-statistic{ 0.113497 that the coefficients of dry-docking cost and size in the LPROF
equation represent elasticities, the results remain consistent both
Significance at the 1% level implies that we reject the null hypothesis that theoretically, have the expected signs, and statistically, their
the population parameter is equal to zero with probability 1% to be wrong. impact remains strongly significant from zero. The only variables
So, it is the strongest level of significance.
*, **, *** denotes significance at the 10%, 5%, and 1% level. impact that has turned to insignificant in both equations of our
{ model is the age of the ship. It also had the lowest significance in
In the context of GMM, the overidentifying restrictions may be tested via
the commonly employed J-statistic of Hansen (1982). This statistic is none our presented model (Table 6). Age does not verify its signifi-
other than the value of the GMM objective function, evaluated at the efficient cance on the dry-docking cost or the profitability of a shipyard
GMM estimator. The J-statistic is distributed as w2 with degrees of freedom
equal to the number of overidentifying restrictions L K, 15 4 11 in our
because our sample population consisted of an apparently young
case, rather than the total number of moment conditions L because, in effect, tanker fleet (Fig. 1). The J-statistic remains strong to verify the
K degrees of freedom are used up in estimating the coefficients. J is the most suitability of our model.
common diagnostic utilized in GMM estimation to evaluate the suitability of Additionally, we run again the model having redefined our
the model. In our case the value of J is much smaller than the critical value dependent variables as follows. The dependent variable in the first
of w2 which is 19.675. So we cannot reject the null of model suitability.
equation is now RATIO LINV/LPROF to measure revenue out
of profit for the shipyards point of view. Our dependent variable
the impact of ship size, age, and stay days in the yard have in the second equation of our model is SCOST LINVLPROF
a positive and highly significant impact on dry-docking cost. to measure the difference between revenue and profit from the
Furthermore, it appears that a lower dry-docking bill, goes hand shipyards point of view. The results are presented in Table 8.
in hand with better profit performance, and as such, it evolves as The signs of the coefficients are as expected and all results have
an important item in the investors decision-making process. It is a strongly significant impact on the dependent variables apart
worth mentioning that results of the current study offer a com-
prehensive tool to both sides of the dry-docking bill: the shipyard Table 7 Modeling results
operator/investor as well as the customer/ship manager.
Focusing on our model, which passes comfortably the weak Estimation Method: Generalized Method of Moments
instruments test (Figs. 8 and 9), it appears that a lower dry-docking
bill contributes significantly towards greater profitability; more Dep. Variable: LINV Dep. Variable: LPROF
specifically, 1% reduction in the dry-docking cost will increase Coefficient Coefficient
Const. 8.743769 5.363477
profitability by 8.8%. It also appears that the larger the ship is and
(15.68446)*** (17.54399)***
the longer the number of days she stays, the higher the dry-
AGE 0.009444 0.003981
docking cost will be; more specifically, for 1% increase in the (1.408127) (1.068836)
number of days the ship stays in the yard the bill rises by 0.03% LTONS 0.363633 0.072523
and 1% increase in the ships size implies, according to our results, (7.917745)*** (4.247922)***
a 0.37% rise in the bill. Also, from the dry-docking cost equation DAYS 0.028444 0.009134
of Table 6, we observe a significant and negative impact of the (9.481279)*** (22.16376)***
bargaining power of the shipping company on the formation of the DUM - 0.227588
dry-docking cost; if the bargaining is effective the reduction in - (3.831332)***
the final bill is 0.54%. This result, which is reported for the first LINV - 0.266135
- (22.45820)***
time in the literature, renders support to the view that professional
BP 0.709680 -
customers are treated in a preferential way.
(3.820095)*** -
Furthermore, it appears from our results that market conditions J-statistic 0.103177
in shipping affects positively and strongly yard profitability, a
finding that allies with the results reported for the shipping indus- *** denotes significance at the 1% level.

Modeling the Dry-Docking Cost - The Case of Tankers 455

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456 Modeling the Dry-Docking Cost - The Case of Tankers