Transport Policy 18 (2011) 665–675

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Transport Policy
journal homepage: www.elsevier.com/locate/tranpol

Vessel and voyage determinants of tanker freight rates and contract times
Amir H. Alizadeh a, Wayne K. Talley b,n
a
Cass Business School, City University, London EC1Y 8TZ, United Kingdom
b
College of Business and Public Administration, Old Dominion University, Norfolk, VA 23529, United States

a r t i c l e i n f o abstract

Available online 5 February 2011 The behavior of shipping freight (charter) rates and the timing of shipping contracts affect the
Keywords: transportation costs of charterers and the operating cash flows of shipowners. Although the literature
Freight rate has established macroeconomic determinants of shipping freight rates, there has been no systematic
Tanker investigation of microeconomic determinants of freight rates and the delivery time of chartered ships
Shipping routes (the laycan period) in the tanker market. Therefore, the aim of this paper is to investigate the
Laycan importance of vessel and contract specific factors in the determination of tanker freight rates and
laycan periods in shipping contracts. Individual tanker shipping contracts from January 2006 to March
2009 are used to estimate freight rates and laycan periods using a system of simultaneous equations.
The estimation results suggest that the duration of the laycan period is an important determinant of the
shipping freight rate and vice versa. Other determinants of freight rates include the vessel’s hull type,
fixture deadweight utilization ratio, vessel age, and voyage routes. Determinants of the laycan period
include the former determinants as well as the Baltic Dirty Tanker Index and its volatility.
& 2011 Elsevier Ltd. All rights reserved.

1. Introduction
In 2008 the cargo carrying capacity of the world tanker fleet of
402 million tonnes was 38% of the total world shipping fleet and
the number of tanker ships exceeded 4800.1 During the same year
the tanker fleet transported 2795 million metric tonnes (mmt) of
liquid bulk commodities around the world, out of which
2043 mmt was crude oil and 752 mmt was petroleum products.
The tanker shipping market is by far the largest sector of the
world shipping industry in terms of trading volume and weight.
Therefore, it is not surprising that a large number of studies have
been devoted to analyzing tanker freight (charter) rates, charter-
ing decisions and policies, transportation strategies, and fleet
deployments and operations of the tanker shipping industry.
Freight rates in the tanker shipping industry fluctuate con-
siderably in short run (Glen and Martin, 1998; Kavussanos, 2003).
Such fluctuations affect the formation of shipping policies, trans-
actions, and contracts as well as cash flows and costs of ship-
owners and charterers (see Brown et al., 1987; Laulajainen, 2008).
While these fluctuations are argued to be due to the global
economic activity as well as the state of the tanker shipping
market, variables related to vessel and route characteristics
n
Corresponding author.
E-mail addresses: a.alizadeh@city.ac.uk (A.H. Alizadeh),
wktalley@odu.edu (W.K. Talley).
1
Statistics are from Clarkson Research Services Limited for tankers greater
than 10,000 deadweight tonne capacity.
(e.g., the size and age of the vessel and the geographical route
in which the vessel is employed) are also important in determin-
ing shipping freight rates. In addition, the terms and conditions of
the charter contract such as loading date in relation to contract
date and cargo size in relation to vessel capacity are important
determinants of freight rates. Yet, to our knowledge, there has
been no systematic attempt in the literature to investigate
microeconomic determinants of tanker freight rates and the
delivery time of tanker charter contracts. This paper aims to
investigate the effect of microeconomic variables including vessel
and voyage specific factors in determination of tanker freight
rates. In addition, determinants of the timing of the freight
contract in relation to the actual loading date, a period known
as the laycan period, as well as the interrelationship between the
freight rate and laycan period are investigated.
There are two important dates in any vessel charter contract.
The first date is the day on which negotiations between the
shipowner and the charterer are completed, i.e., the day on which
the contract is agreed and the charter-party is signed. This date is
known as the fixture date or the hire date. The second date is the
date on which the ship must present herself at the loading
port ready for loading the cargo, i.e., the layday. In practice, once
the loading or lifting day for the cargo has been determined, the
trader (charterer) will enter the market to find and charter
the most suitable tanker for transportation of the cargo from
the loading port to the destination port. Depending on the nature
of the trade, the route, and the type of cargo, the loading date may
be anytime from a few days to a couple of months ahead of the

0967-070X/$ - see front matter & 2011 Elsevier Ltd. All rights reserved.
doi:10.1016/j.tranpol.2011.01.001
666 A.H. Alizadeh, W.K. Talley / Transport Policy 18 (2011) 665–675
time when the trading contract and transportation decisions are
made. Hence, assuming vessels are available in the market at all
time and at a constant flow, the trader has the option to enter into
the freight market and hire a vessel anytime until the very last
minute, as long as it is practical, before loading of the cargo.
Therefore, it is the trader’s – or charterer’s – decision for all
practical purposes as to when to enter the market and charter (or
hire) a ship. For instance, if the conditions are not favorable and
there is enough time prior to the cargo loading date, the trader
may wait and not inform the shipbroker about the cargo and the
need for a ship. The charterer’s decision of when to charter a ship
is dependent on such market conditions as current and expected
freight rates, the volatility of freight rates, and the cost to be
incurred of not being able to find a ship to charter if the decision
to hire is delayed.
The purpose of this paper is fourfold: (1) investigate vessel and
voyage determinants (e.g., vessel age, hull type, route, and dead-
weight utilization of the fixture) of individual tanker freight rates;
(2) investigate vessel and voyage determinants of the delivery
time of chartered tanker ships (the laycan period); (3) examine
differences in tanker freight rates and laycan periods across
different routes; and (4) investigate the relationship between
individual tanker freight rates and laycan periods of tanker
charter contracts. From the point of view of charterers the timing
of entering into the market for fixing a vessel may affect the
demand in the market and consequently move freight rates.
However, waiting for more favorable freight rates may be risky
as freight rates tend to move very sharply in a very short period of
time. From the shipowners’ point of view, information on the role
of vessel and voyage specific factors in determination of freight
rates can be used in investment, operations, and deployments
strategies.
The remainder of the paper is as follows. Section 2 presents a
brief review of previous studies on tanker shipping and freight
determination. Section 3 presents the methodology (i.e., econo-
metric equation specifications) for investigating vessel and voy-
age determinants of individual freight rates and laycan periods for
tanker shipping contracts. The data are described in Section 4,
while Section 5 presents the empirical results. Finally, conclusions
are presented in the last section.
2. Review of literature
The tanker freight market is characterized by the interaction of
supply and demand for tanker shipping services (Tinbergen,
1934; Koopmans, 1939; Zannetos, 1966; Beenstock and
Vergottis, 1993). The demand for tanker services is a derived
demand, in the sense that it is derived from the international
trade in oil and oil products, which in turn depends on world
economic activity and imports and consumption of energy com-
modities (see Stopford, 2009). The supply of tanker shipping
services, on the other hand, depends, for example, on the size of
the tanker fleet, the tonnage that is available for trading, tanker
shipbuilding activities, bunker fuel prices, the scrapping rate of
the fleet, and the productivity of the tanker fleet at any point
in time. Studies by Hawdon (1978), Strandenes (1984), and
Beenstock and Vergottis (1989, 1993), among others, empirically
investigate the determination of shipping freight rates, the price
for sea transportation, through the interaction between supply
and demand for sea transportation. They find that factors such as
world economic activity, growth in industrial production, sea-
borne trade in commodities, oil prices, availability of vessel
tonnage, new vessel buildings on order, and tanker shipbuilding
deliveries and the scrapping rates determine freight rates for sea
transportation. More recent studies by Dikos et al. (2006)
and Randers and Göluke (2007) also use macroeconomic variables
in a system dynamic setting to model and forecast tanker
freight rates.
Other studies have examined the time series properties of
shipping freight rates such as their dependence on past values;
further, they use univariate or multivariate time series models to
capture the dynamics of freight rates and their volatilities. These
models are then used to forecast shipping freight rates and
volatilities (Veenstra and Franses, 1997; Kavussanos and
Alizadeh, 2002; Kavussanos, 2003; Adland and Cullinane, 2005,
2006; Lyridis et al., 2004; Batchelor et al., 2007). These studies
utilize aggregate data and macroeconomic variables in an attempt
to capture the dynamics and fluctuations in shipping freight rates
and accordingly utilize the models for forecasting purposes;
however, their performance in predicting shipping freight rates
has not been promising. The underperformance of structural and
time series models using macroeconomic variables for forecasting
shipping freight rates may be attributed to the use of aggregate
and macroeconomic data. While aggregate macroforecasts of
freight rates could be useful for medium to long term investment
purposes, shipowners and charterers require microforecasts for
making operational decisions, cash flow analyses, and budgeting
(e.g., microforecasts of shipping freight rates for specific routes).
The literature on microeconomic determinants of shipping
freight rates is limited to the studies by Tamvakis (1995)
and Tamvakis and Thanopoulou (2000). In particular, Tamvakis
(1995) hypothesized that the construction and employment of
double-hull tankers as mandated by the US Oil Pollution Act 1990
(OPA) would affect the freight rates for double-hull versus single-
hull tankers. That is to say, the increasing pressure on oil
importers and charterers to hire double-hull vessels would result
in a relative increase in the demand for double- versus single-hull
tankers, consequently resulting in higher rates for double-hull
tankers. However, the empirical results were mixed; no signifi-
cant premia was found in the hiring of double- versus single-hull
tankers. In the study by Tamvakis and Thanopoulou (2000), the
existence of a two-tier dry-bulk ship charter market, reflecting
the age of vessel, was investigated. However, the empirical results
based on the time period 1989–1996 (that covered different
stages of the shipping cycle) found no significant difference
between freight rates paid for newer versus older vessels.
In a theoretical study, Strandenes (1999) argues that in order
for a two-tier liquid-bulk ship charter market to exist, the
demand for quality tankers has to increase by more than 30%
from its levels at the end of 1990s. She also points out that stricter
enforcement of OPA compliance in Europe of substandard tankers
may trigger a two-tier tanker market in which quality tankers
trade at a premium. However, such market conditions may last
for only 3–5 years as substandard tankers will be forced out of the
market. Mokia and Dinwoodie (2002) investigate the spatial
organization, segmentation, contractual terms, and pricing
aspects of tanker operations and lay-times.2 They observe sig-
nificant differences in lay-times across tanker shipping routes and
ship sizes and suggest that the differences in lay-times should
appear in tanker charter contracts. However, they do not inves-
tigate differences in laycan periods and charter rates of tanker
contracts across routes.
Although numerous studies have investigated the formation
and behavior of shipping freight rates, specific vessel and voyage
determinants of these rates in the tanker freight market have not
been investigated in the literature. This paper undertakes such an
2
In ship chartering terminology, ‘‘laytime’’, usually quoted in hours, is defined
as the time allowed for a ship to load and discharge its cargo and is usually stated
in ship charter contracts.
 A.H. Alizadeh, W.K. Talley / Transport Policy 18 (2011) 665–675
investigation for shipping freight rates as well as for the timing of
charter contracts (i.e., laycan periods) in this market. The results
of the investigations will be useful to shipowners, charterers, and
investors in their decision-making processes with respect to
tanker ships.
3. Methodology
In order to investigate the vessel and voyage specific determi-
nants of the freight rates for tanker shipping contracts, the
following model can be estimated:
fri,t ¼ a0 þ a1 BDTIt þ a2 HTi þ a3 UTi þ a4 AGEi þ a5 AGE2i
X K
þ a6 VOLt þ dj RTj,i,t þvi,t ; vi,t  iidð0, s2 Þ ð1Þ
j¼1
where fri,t is the log of the freight rate of the ith fixture (contract)
at time t, HTi is a dummy variable representing the vessel’s hull
type in the ith fixture (i.e., a single hull versus a double hull), UTi
is the deadweight utilization ratio of the fixture expressed as the
ratio of cargo tonnes to deadweight (dwt) of the vessel,3 and AGEi
is the vessel’s age in contract i. The square of the age variable,
AGE2i , also appears in Eq. (1) since the operational performance,
technological efficiency, and quality standard of ships decline as
they get older, and consequently their hire rate becomes a
nonlinear function of age. The binary dummy variable, RTi,j,t,
identifying route j for contract i at time t, is included in Eq. (1)
to differentiate the fixtures according to the route in which the
vessel is employed (see Section 4 for detailed explanation of
routes). Thus, the coefficient of dummy variable, dj, signifies the
difference in average freight rate for route j in comparison to
average freight rate in all unidentified fixture routes (‘‘other
routes’’), depicted by constant a0. Furthermore, to control for
macro-determinants of tanker freight rates in the model, we
include the log of the Baltic Dirt Tanker Index (BDTIt), a bench-
mark indicator for the condition of the tanker freight market, and
the BDTI (VOLt), measuring the volatility of the freight market.
Determinants of the timing of tanker shipping contracts by
charterers are investigated by regressing the fixture laycan period
on the hypothesized explanatory variables, including the route,
tanker market condition, and various vessel characteristics such
as hull type, utilization ratio of the vessel, and vessel age. Hence,
the laycan regression model is specified as
LCi,t ¼ b0 þ b1 HTi þ b2 UTi þ b3 AGEi þ b4 VOLt
XK
þ lj RTj,i,t þ ei,t ; ei,t  iidð0, s2 Þ ð2Þ
j¼1
where variables HTi, UTi, AGEi, and VOLt, are hypothesized to
determine charterers’ decisions on the timing of hiring tankers,
i.e. the laycan period. The route dummy variable, RTj,i,t, is also
included to examine possible differences in laycan periods of
contracts across different tanker routes. Thus the coefficient of the
route dummy variable, lj, signifies the difference in the laycan
duration for route j in comparison to average laycan period for all
unidentified routes (‘‘other routes’’) depicted by constant b0.
3
The utilization variable UT is constructed as the ratio of cargo size to
deadweight (dwt) of the vessel in a fixture. This is because the high correlation
between the cargo size and dwt can lead to the problem of multicolinearity when
estimating the model, whereas inclusion of the ratio of cargo to deadweight in the
model eliminates this problem. A negative sign for the coefficient of this variable is
expected, because as dwt increases the freight rate decreases and for a vessel with
a given dwt, the smaller the size of the cargo, the higher should be the freight rate
to satisfy the owner to accept the contract.
667
However, it might be the case that freight rates and laycan
periods are interrelated and should be modeled as a system of
simultaneous equations. If so, the individual estimation of the
above two equations using the Ordinary Least Squares (OLS)
method will yield biased and inconsistent parameter estimates.
If a simultaneous interrelationship exists between the laycan
period and the freight rate of a shipping contract, then
Eqs. (1) and (2) must be re-specified to reflect this simultaneous
interrelationship—i.e., by including LCi,t as an explanatory vari-
able in the fri,t equation (1) and including fri,t as an explanatory
variable in the LCi,t equation (2). Thus, Eqs. (1) and (2) rewritten as
a simultaneous equations system may be specified as
fri,t ¼ a0 þ a1 BDTIt1 þ a2 LCi,t þ a3 HTi þ a4 UTi þ a5 AGEi þ a6 AGE2i
X
K
þ a7 VOLt1 þ d1,j RTj,i,t þ vi,t LCi,t ¼ b0 þ b1 fri,t þ b2 LCi1,t
j¼1
þ b3 HTi þ b4 UTi þ b5 AGEi þ b6 VOLt1
!
XK vi,t
þ d2,j RTj,i,t þ ei,t xi ¼  IIDð0, RÞ ð3Þ
j¼1
ei,t
where xi is the vector of residuals, which follows a bivariate
distribution with zero mean and variance–covariance matrix R.
When specifying a system of simultaneous equations, there are
two main issues that should be considered. The first issue is the
problem of identification, which arises when parameters of the
structural equation cannot be deduced from the parameters of
the reduced form model. Therefore, for a system of simultaneous
equations to be identified, both the order and the rank conditions
should be satisfied.4 The system of equations presented in equation
system (3) satisfies both the order and the rank conditions.5 The
second issue is the estimation method. Because of the correlation
between variables and error terms in each equation as well as cross
correlation among error terms, the OLS estimation method is not an
appropriate estimation technique for estimating parameters of
simultaneous equations system. An appropriate estimation techni-
que is the Three Stage Least Squares (3SLS) estimation technique,
since it yields unbiased, consistent, and efficient estimates of the
parameters of the system in the presence of heteroscedasticity and
contemporaneous correlation in the errors across equations.
4. Description of data
The tanker fleet is broadly differentiated into five size classes:
Very Large Crude Carriers (VLCC) (more than 160,000 dwt, nor-
mally 250,000–320,000 dwt), Suezmax (130,000–160,000 dwt),
Aframax (70,000–120,000 dwt), Panamax (50,000–70,000 dwt),
and Handysize (20,000–45,000 dwt).6 The two larger size tankers,
namely VLCC and Suezmax, are only involved in transportation of
4
There are two conditions that must be satisfied for the system of simulta-
neous equations to be identified. These are the order and the rank conditions of
identifications. The order condition, which is a necessary but not sufficient
condition for identification of simultaneous system of equations, requires the
number of excluded and predetermined variables in each equation to be at least
less than the number of endogenous variables minus one. The two equations in
the system defined in (3) satisfy this condition; that is, the freight equation is
exactly identified and the laycan equation is over-identified. The over-identifica-
tion is not a major problem because we use the 3SLS estimation method, which
yields efficient, unbiased, and consistent estimates.
5
The variable LCi  1,t is included in the laycan equation to achieve both
identification of the system and reduce serial correlation in residuals.
6
In December 2008, the tanker fleet was comprised of 517 VLCC (153.6 mil-
lion dwt), 364 Suezmax (55.4 million dwt), 771 Aframax (79.9 million dwt), 363
Panamax (25.6 million dwt), and 2858 Handysize (89.3 million dwt) tankers. The
proportion of single-hull (single side or bottom) tankers in each sector was VLCC
23.6%, Suezmax 12.9%, Aframax 11.9%, Panamax 15.2%, and Hnadysize 15.2%.
668 A.H. Alizadeh, W.K. Talley / Transport Policy 18 (2011) 665–675
crude oil. Aframax vessels are also involved in crude oil trans-
portation, but occasionally are hired for transportation of oil
products. Smaller size tankers such as the Panamax and Handy-
size vessels are mainly involved in the transportation of clean and
dirty oil products, although they are occasionally employed in
short-haul crude oil transportation.7 This paper focuses on the
three larger size tankers, since they are involved in transportation
of one commodity (crude oil), serving a relatively limited number
of trading routes, thereby simplifying the empirical analysis of
this paper.
The data for this study were collected from Clarkson’s
Research Services Ltd. website, Shipping Intelligence Network
(SIN),8 and comprise information on tanker spot fixtures for the
period January 2006 to March 2009. The fixtures for VLCC,
Suezmax, and Aframax tankers are considered for the analysis.
The data include such information as vessel characteristics,
voyage characteristics, shipowner, and charterer. After filtering
the data for missing values, omitted information, and other
unusable observations, a total of 3435, 3994, and 6682 fixture
observations remain for VLCC, Suezmax, and Aframax tankers,
respectively.9 Specifically, the information on each fixture con-
sists of the vessel’s name, size, age, type, dwt, and the owner of
the vessel as well as the loading, discharging ports and regions,
the freight rate for the fixture, the fixture’s date, the layday, the
cargo type and size, and the charterer. The Baltic Dirty Tanker
Index (BDTI) values were also obtained from SIN over the same
period.
Spot (or voyage) tanker freight rates that have been expressed,
negotiated ,and agreed upon are reflected in the Worldscale
index. The Worldscale index is essentially a measure of the
breakeven rate of a standard tanker on a round trip between a
loading port and the discharging port under certain assumptions
regarding the vessel’s specifications, port charges, fuel prices, and
other factors. This index has evolved and has been used by the
tanker industry since World War II. The breakeven rate for the
standard tanker is calculated on a US dollar per metric ton ($/mt)
basis by the Worldscale association for every possible tanker
route around the world and published every January. The calcu-
lated breakeven freight rate in every tanker route is known as the
‘‘flat rate’’, which is considered as Worldscale 100 for that route.10
Following the publication of these rates, charterers, tanker own-
ers, tanker operators, and brokers negotiate and draft shipping
contracts on the basis of Worldscale. Perhaps the main benefit of
the Worldscale index in the tanker freight market is that if fuel
and other costs are assumed to be the same across different
routes, then one can easily compare the profitability of voyages by
simply comparing the market or negotiated rates across tanker
routes.
Table 1 presents the routes used in this study for each vessel
type. For the VLCC trade, 14 major routes are found in Table 1,
representing more than 75% of the fixtures; the remaining
fixtures are for many minor routes with less trading activities.
Eleven of these fourteen routes are out of the Persian Gulf, two are
out of West Africa, and one out of the North African port of Arzew
(Algeria). The most active route in the VLCC market is the Persian
Gulf–Korea with 426 fixtures, followed by West Africa–US Gulf
7
The employment of Handysize tankers in oil product transportation is
mainly due to the small parcel size of petroleum products, which rarely exceed
60,000 tons.
8
www.clarksons.net.
9
The data used here is tanker voyage contracts by observations every day.
Therefore, although the structure of the data can be considered both cross-
sectional and time-series, the difference here is that the number of observations
every day may vary depending on the number of actual fixtures reported.
10
See www.worldscale.co.uk for detailed definitions and explanations on how
the Worldscale flat rate is calculated.
with 378 fixtures. The other routes constitute between 1.43% and
7.69% of the total fixtures in the VLCC sector.
The number of routes defined for the Suezmax market is 15
(see Table 1) and covers 54.01% of the liquid trading routes; the
remainder of the fixtures are spread across many routes with less
trading activities. The most active Suezmax routes are the West
Africa–US Gulf with 345 fixtures (8.64% of total fixtures), Black
Sea–UK and continent Europe with 340 fixtures (8.51% of total
fixtures), and West Africa–US Atlantic Coast with 310 fixtures
(7.76% of total fixtures). The routes with less trading activities are
the Persian Gulf–China (42 fixtures), Ceyhan–UK and Continent
Europe (44 fixtures), and Ceyhan–US Gulf with 55 fixtures. Other
routes with less trading activities constitute between 1.48% and
5.53% of the total trading activities in the Suezmax sector.
In the Aframax trades, 6682 fixtures are utilized in this study.
The 16 high-liquidity routes found in Table 1 represent 55.97% of
the total trading activities in this market. The most liquid routes
in the Aframax market are the Caribbean–US Gulf with 617
fixtures (9.23% of total fixtrues), followed by Black Sea–
Mediterranean with 589 fixtures (8.81% of total fixtures), and
Primorsk–UK and Continent Europe with 562 fixtures (8.41% of
total fixtures). Other routes comprise between 0.55% and 6.26% of
the total Aframax trades.
The descriptive statistics of the laycan period of fixtures for
different size tankers are also found in Table 1. It is interesting to
note that the average (or mean) laycan period is directly related
to vessel size. For instance, average laycan period for VLCC
fixtures is 20.7 days, while the average laycan period for Suezmax
and Aframax tanker fixtures are 19.4 and 12.6 days, respectively.
The variation (standard deviation) of laycan period for different
tanker sizes seems to be more or less similar with 6.4 days for
VLCC fixtures, 6.6 days for Suezmax, and 5.9 days for Aframax
fixtures. One reason for the existence of a direct relationship
between laycan period and tanker size may be the duration of the
voyage. The average duration of the voyage for larger tankers is
longer than that for smaller tankers because larger tankers due to
their economies of scale are employed to serve trades on longer
routes, whereas smaller tankers (Aframax) are employed in
relatively shorter routes. This means that owners and charters
of larger tankers tend to plan their voyage requirements and
chartering activities relatively earlier compared to owners and
charterers of smaller tankers, which results in a longer average
laycan period for larger tankers compared to smaller ones.
The average laycan period, however, appears to vary across
different tanker routes. For instance, the average laycan period for
the VLCC fixtures varies between 17.2 days for route 10 (Persian
Gulf–India) and 26.3 days for route 13 (West Africa–US Gulf). The
standard deviations of VLCC laycan periods across different routes
seem to be more stable with values between 4.8 and 6.7 days. For
Suezmax fixtures, the average laycan period varies from 11.3 days
in route 1 (Caribbean–US Gulf) and 25.2 days in route 10 (West
Africa–US Atlantic Coast), with standard deviations ranging
between 4.3 and 6.7 days across different routes. The data
in Table 1 also suggest that tanker routes out of West Africa
seem to have longer laycan periods compared to tanker routes in
the Caribbean. In the Aframax sector, the average laycan period is
between 6.5 days in route 2 (East Coast Mexico–US Gulf) and 19.8
days in route 11 (Persian Gulf–India), while standard deviations
range from 3.0 to 9.1 days. It can be noted that while the average
laycan period seems to be lower in the Aframax sector compared
to the VLCC and Suezmax sectors, there seems to be higher
variation in the laycan period of Aframax tanker fixtures.11
11
The relationship between the duration of the laycan and vessel routes will
also be addressed in the empirical results section of this paper.
 A.H. Alizadeh, W.K. Talley / Transport Policy 18 (2011) 665–675 669

Table 1
Descriptive statistics for routes and laycan periods for different size tankers.

Route Number of fixtures Laycan period (days)

No. Percentage Mean Median Min Max SD

VLCC
1 Persian Gulf–US Gulf 203 5.91 21.1 21.0 6.0 35.0 6.1
2 Persian Gulf–UK/Continent 49 1.43 22.1 21.0 9.0 35.0 6.5
3 Persian Gulf–Singapore 124 3.61 19.2 19.0 0.0 27.0 5.1
4 Persian Gulf–Japan 213 6.20 20.8 21.0 7.0 35.0 4.8
5 Persian Gulf–China 264 7.69 19.0 19.0 0.0 41.0 5.1
6 Persian Gulf–Taiwan 199 5.79 17.7 18.0 0.0 46.0 5.2
7 Persian Gulf–Korea 426 12.40 20.1 20.0 1.0 35.0 5.5
8 Persian Gulf–Thailand 230 6.70 18.5 19.0 2.0 51.0 5.5
9 Persian Gulf–East 138 4.02 20.3 21.0 2.0 33.0 5.2
10 Persian Gulf–India 146 4.25 17.2 18.0 1.0 35.0 6.6
11 Persian Gulf–Ain Sukhna 99 2.88 17.5 17.0 1.0 49.0 6.0
12 Arzew/Algeria–US Gulf 59 1.72 22.7 23.0 3.0 35.0 6.2
13 West Africa–US Gulf 378 11.00 26.3 27.0 0.0 40.0 5.8
14 West Africa–China 61 1.78 25.4 25.0 11.0 52.0 6.3
15 Other routes 846 24.63 20.7 21.0 0.0 49.0 6.7
Total fixtures 3435 20.7 21.0 0.0 52.0 6.4

Suezmax
1 Caribbean–US Gulf 75 1.88 11.3 11.0 3.0 21.0 4.5
2 East Coast Mexico–Spain 59 1.48 14.9 16.0 0.0 28.0 5.5
3 Black Sea–UK/Continent 340 8.51 17.6 17.5 2.0 44.0 4.6
4 Sidi Kerrir–Mediterranean 131 3.28 13.0 13.0 2.0 26.0 4.5
5 Arzew/Algeria–US Gulf 71 1.78 16.7 18.0 1.0 28.0 6.1
6 Ceyhan–UK/Continent 44 1.10 16.0 16.5 5.0 30.0 5.1
7 Ceyhan–US Gulf 55 1.38 16.7 17.0 6.0 27.0 4.6
8 West Africa–Brazil 102 2.55 20.0 20.0 0.0 51.0 5.8
9 West Africa–UK/Continent 215 5.38 23.7 24.0 5.0 44.0 4.5
10 West Africa–US Atlantic Coast 310 7.76 25.2 25.0 2.0 45.0 4.3
11 West Africa–US Gulf 345 8.64 23.0 24.0 1.0 33.0 4.9
12 West Africa–ST Criox 84 2.10 22.8 24.0 1.0 33.0 5.1
13 Persian Gulf–India 221 5.53 19.2 20.0 4.0 33.0 6.0
14 Persian Gulf–China 42 1.05 19.0 19.0 4.0 31.0 6.2
15 Marsa Bahhayer–Far East 63 1.58 19.3 20.0 5.0 34.0 6.5
16 Other routes 1837 45.99 18.5 19.0 0.0 41.0 6.7
Total fixtures 3994 19.4 20.0 0.0 51.0 6.6

Aframax
1 Caribbean–US Gulf 617 9.23 8.6 9.0 0.0 39.0 3.8
2 East Coast Mexico–US Gulf 418 6.26 6.5 7.0 0.0 33.0 3.0
3 Bahamas–US Gulf 62 0.93 7.7 9.0 1.0 13.0 3.1
4 Primorsk–UK/Continent 562 8.41 13.0 13.0 3.0 44.0 3.8
5 North sea–UK/Continent 170 2.54 9.1 9.0 1.0 17.0 3.0
6 Black Sea–Mediterranean 589 8.81 14.7 15.0 1.0 28.0 3.9
7 Ceyhan–Mediterranean 172 2.57 11.3 11.0 2.0 43.0 4.7
8 Sidi Kerir–Mediterranean 327 4.89 11.1 11.0 0.0 46.0 4.0
9 Libya–Mediterranean 195 2.92 10.1 10.0 1.0 17.0 3.2
10 Algeria–Mediterranean 60 0.90 10.2 10.0 1.0 18.0 3.7
11 Persian Gulf–India 85 1.27 19.8 19.0 4.0 48.0 9.1
12 Malaysia–India 92 1.38 16.7 17.0 0.0 27.0 5.8
13 Indonesia–Australia 113 1.69 15.9 15.0 3.0 29.0 5.6
14 Indonesia–Korea/Japan 126 1.89 15.1 15.0 2.0 28.0 4.6
15 Marsa Bahhayer–Far East 115 1.72 19.5 19.0 1.0 39.0 6.2
16 Vung Tau–Australia 37 0.55 15.9 17.0 4.0 26.0 5.0
17 Other routes 2942 44.03 13.8 13.0 0.0 40.0 6.3
Total fixtures 6682 12.6 12.0 0.0 48.0 5.9

Sample period: 1 January 2006–31 March 2009, consists of 3435 VLCC fixtures, 3994 of Suezmax fixtures, and 6682 Aframax fixtures.

The descriptive statistics in Table 2 reveal that worldscale
freight (charter) rates are higher for smaller than larger tankers.
For instance, the average (or mean) freight rate for a VLCC in the
sample is 90.91WS points, while the average freight rate for
Suezmax and Aframax tankers are 139.25WS and 164.04WS
points, respectively. This is expected, since vessels exhibit econo-
mies of ship size at sea, i.e., the $/tonne of transport cost declines
as vessel size increases. The freight rates for all tanker sizes show
significant skewness and kurtosis, with the Bera and Jarque
(1980) test for normality rejecting the null hypothesis that
freight rates are normally distributed at conventional significance
levels.
The descriptive statistics in Table 2 for tanker age show that
the average age of the VLCC fleet is 10.31 years versus 7.48 and
7.49 years for Suezmax and Aframax tankers, respectively. It is
also interesting to note that the maximum ages of Suezmax and
Aframax tankers are 32 and 38 years, respectively, which are
higher than the maximum age of VLCC tankers of 25 years.
Utilization ratio statistics are also found in Table 2. The
utilization ratio is the ratio of the amount of cargo in each fixture
to the dwt (or carrying) capacity of the vessel. The average ratio of
90.8% for VLCC tankers is higher than 84% and 77% for Suezmax
and Aframax tankers, respectively. The standard deviations of the
utilization ratios are inversely related to the sizes of vessels, e.g.,
670 A.H. Alizadeh, W.K. Talley / Transport Policy 18 (2011) 665–675

Table 2
Descriptive statistics of explanatory variables.

Age Dwt Cargo Utilization Laycan Rate BDTI

(years) (000 mt) (000 mt) ratio days (WS) index

VLCC
Mean 10.31 289.84 262.41 0.908 20.66 90.91 1255.34
Median 11.00 298.68 260.00 0.907 21.00 80.00 1214.00
Maximum 25.00 442.47 400.00 1.000 52.00 330.00 2347.00
Minimum 0.00 239.78 80.00 0.265 0.00 23.00 524.00
Std. dev. 6.16 20.155 13.795 0.053 6.38 43.19 331.63
Skewness  0.061  0.376  3.372  2.380  0.017 1.587 0.681
Kurtosis 1.76 4.08 44.16 26.01 3.72 5.92 3.84
JB test 221.4 248.5 248935.1 79013.5 74.8 2663.9 367.4
p-value 0.000 0.000 0.000 0.000 0.000 0.000 0.000

Suezmax
Mean 7.48 153.05 129.12 0.84 19.36 139.25 1264.74
Median 6.00 151.46 130.00 0.86 20.00 130.00 1218.00
Maximum 32.00 167.55 150.00 1.00 51.00 450.00 2347.00
Minimum 0.00 121.00 50.00 0.34 0.00 30.00 511.00
Std. dev. 5.92 7.59 11.19 0.07 6.55 52.82 350.39
Skewness 0.67  0.80  3.68  2.49  0.21 1.14 0.63
Kurtosis 2.46 4.83 17.04 11.95 2.92 5.03 3.54
JB test 349.3 976.2 41801.7 17468.1 30.3 1555.7 314.0
Probability 0.000 0.000 0.000 0.000 0.000 0.000 0.000

Aframax
Mean 7.49 104.12 80.26 0.77 12.64 164.04 1266.63
Median 6.00 105.25 80.00 0.76 12.00 153.00 1222.50
Maximum 38.00 117.10 110.00 1.00 48.00 430.00 2347.00
Minimum 0.00 81.28 30.00 0.31 0.00 49.00 540.00
Std. dev. 6.05 7.07 8.59 0.09 5.92 58.91 349.38
Skewness 1.00  0.42 0.82 0.34 0.86 0.92 0.54
Kurtosis 3.75 2.96 4.33 3.09 4.56 3.97 3.44
JB test 1273.1 199.2 1236.3 128.9 1498.8 1205.3 384.7
Probability 0.000 0.000 0.000 0.000 0.000 0.000 0.000

Sample period: 1 January 2006–31 March 2009, consists of 3435 VLCC fixtures, 3994 of Suezmax fixtures, and 6682 Aframax fixtures.
JB is the Bera and Jarque (1980) test for normality, which follows w2ð2Þ . The 5% critical value for this test is 5.991.

the standard deviations in Table 2 increase from 5.3% for VLCC
tankers to 7.0% and 9.0% for Suezmax and Aframax tankers,
respectively. In fact, the estimated standard deviations suggest
that the size of cargoes transported by larger vessels is more in
line with size of these vessels, while cargo sizes of smaller vessels
are less in line with their size (given the greater variability in their
utilization ratios).
The average size of the cargo transported by different size
tankers in Table 2 reveals that VLCC tankers transported 262,410
metric tonnes (mt) on average, while Suezmax and Aframax
tankers transported 129,120 and 80,260 mt on average, respec-
tively. The variation (or standard deviation) in cargo size for
different size tankers declines in moving from larger size tankers
to smaller ones—i.e., declines from 13.8 for VLCC tankers to 11.2
and 8.6 for Suezmax and Afamax tankers, respectively. However,
when the standard deviations are adjusted with respect to their
means, i.e., divided by their means to compute the Coefficient of
Variation, CV, a different conclusion follows with respective to
relative variability—i.e., the relative variability in cargo size
increases as tankers become smaller in size. For instance, the
ratio of cargo size variation to average cargo size for VLCC is 5.3%
(13.795 mt/262.410 mt), while the same ratio for Suezmax and
Aframax tankers is 8.7% (11.190 mt/129.120 mt) and 10.7%
(8.590 mt/80.260 mt), respectively.
5. Empirical results
The empirical investigation is undertaken by estimating the
parameters of the system of simultaneous equation (3), which that
assumes the laycan period and freight rates of tanker fixtures are
interrelated. However, before estimating the system of simulta-
neous equations, it has to be examined whether a simultaneous
relationship exists between tanker freight rates and laycan periods.
This is investigated by using the Hausman (1978) test for simulta-
neity. The Hausman test is performed using the two-step method
of Davidson and Mackinnon (1993). The test is performed by first
estimating the laycan equation (2) as the auxiliary regression and
then using the estimated residuals from this estimated equation as
observations for the explanatory variable (e^ i,t ) in the freight rate
equation (1). In addition, the Hausman test is performed by first
estimating freight equation (1) as the auxiliary regression and then
using the estimated residuals (v^ i,t ) from this equation as observa-
tions for the explanatory variable in the laycan equation (2). The
results of the Hausman tests are found in Table 3. It can be seen that
the coefficient of fitted-residuals variable (e^ i,t ) in the freight
equation and the coefficient of fitted-residuals variable (v^ i,t ) in the
laycan equation are both statistically significant at the 1% level for
VLCC and Suezmax tankers, supporting the notion of a contem-
poraneous relationship between laycan periods and freight rates.
However, the null hypothesis of no simultaneity between freight
rate and laycan period could not be rejected in the Aframax market.
For consistency in the presentation of estimation results, the
estimate of the simultaneous equation system (3) for the Aframax
market is presented as well. Estimates of the simultaneous-equa-
tion system (3), using the 3SLS estimation method, are reported in
Tables 4–6 for VLCC, Suezmax, and Aframax tankers, respectively.12
12
As suggested by an anonymous referee, the system of simultaneous Eq. (3)
was also estimated using Full Information Maximum Likelihood (FIML) and
Generalized Method of Moments (GMM). The results of both estimation methods
are consistent with the ones from 3SLS. However, the benefit of 3SLS is that the
 A.H. Alizadeh, W.K. Talley / Transport Policy 18 (2011) 665–675
Table 3
Hausman test for simultaneity of freight rates and laycan periods.
Main regression LCi,t ¼ b0 þ b1 HTi þ b2 UTi þ b3 AGEi þ b4 VOLt þ
Test regression fri,t ¼ a0 þ a1 BDTIt þ a2 HTi þ a3 UTi þ a4 AGEi þ a5 AGE2i þ a6 VOLt þ
VLCC
Coeff. p-val
Significance of f 0.007 0.000
Main regression fri,t ¼ a0 þ a1 BDTIt þ a2 HTi þ a3 UTi þ a4 AGEi þ a5 AGE2i þ a6 VOLt þ
Test regression LCi,t ¼ b0 þ b1 HTi þ b2 UTi þ b3 AGEi þ b4 VOLt þ
VLCC
Coeff. p-val
Significance of f 3.510 0.000
Sample period: 1 January 2006–31 March 2009, consist of 3435 VLCC fixtures, 3994 of Suezmax fixtures, and 6682 Aframax fixtures.
The standard errors of the test regression are corrected for heteroscedasticity and autocorrelation using the Newey and West (1987) method.
5.1. VLCC tankers
The estimated coefficients of simultaneous equation system (3)
for the VLCC contracts are reported in Table 4. The results reveal
that in the freight equation 10 of the 14 route dummy variables
are statistically significant at the 5% level. The estimated coeffi-
cients for 4 out of these 10 routes are negative, indicating lower
freight rates on average compared to other routes. These four
routes are—Persian Gulf–the US Gulf (route 1) and Persian Gulf–
UK and Continent Europe (route 2), where larger than standard
VLCCs and ULCCs operate, as well as the West Africa–US Gulf
(route 13) and West Africa–China (route 14). The first three routes
are westbound routes, while the last is a back-haul route—VLCCs
are returning to the Persian Gulf, where vessel owners would be
expected to lower their rates on this route in order to fix a
contract that optimizes their overall voyage revenue on the way
back to the East from either the US Gulf or Europe (which is
expected to be lower compared to other routes). The routes with
positive and significant coefficients of dummy variables are all
east bound routes from the Persian Gulf. The estimated coefficient
of the route dummy variable is not significantly different from
zero for route 4 (Persian Gulf–Japan), route 7 (Persian Gulf–
Korea), and route 12 (Algeria–US Gulf).
The significant and positive coefficient of the log of BDTI level
was expected, since this variable reflects the tanker market
condition as well as the effect of macroeconomic determinants
of tanker freight rates. In addition, the magnitude of its estimated
coefficient (1.165) indicates that for every 1% change in BDTI, the
VLLC freight rates change by 1.165%, revealing high sensitivity in
this sector to changes in the market. The positive coefficient of
lagged BDTI volatility (0.227) indicates that as market volatility
increases, the level of freight rate for hiring a tanker increases as
well. This is in line with asset pricing theories, which suggest a
direct relationship between risk and return. The negative esti-
mated coefficients of hull type, deadweight utilization ratio, and
age suggest that these variables have a negative effect on tanker
freight (charter) rates. For instance, the coefficient estimates
indicate that freight (charter) rates for single-hull VLCCs tankers
are 13.8% lower than for double-hull VLCCs. The deadweight
(footnote continued)
standard errors are corrected for heteroscedastiocity thought the estimation
procedure.
671
P
K
lj RTj,i,tr þ ei,t ; ei,t  iidð0, se 2 Þ
j¼1
P
K
dj RTj,i,t þ fe^ i,t þ vi,t ; vi,t  iidð0, sv 2 Þ
j¼1
Suezmax Aframax
Coeff. p-val Coeff. p-val
0.001 0.000 0.0004 0.413
P
K
dj RTj,i,t þ vi,t ; vi,t  iidð0, sv 2 Þ
j¼1
P
K
lj RTj,i ,t þ fv^ i,t þ ei,t ; ei,t  iidð0, se 2 Þ
j¼1
Suezmax Aframax
Coeff. p-val Coeff. p-val
1.004 0.047 0.280 0.373
utilization ratio coefficient of  0.876 indicates that a 1% increase
in the utilization ratio will result in a decline in the freight rate by
0.876%. The signs of the coefficients for age and age-squared
suggest a quadratic relationship between age and VLCC
freight rates.
Estimated coefficients of the laycan equation in equation
system (3) for VLCC tankers found in Table 4 reveal that
significant differences exist in the laycan period of the VLCC
charter contracts as indicated by the values of the coefficients of
the dummy route variables. Specifically, the laycan periods for
routes 3, 5, 6, 8, 10, and 11 are shorter than those for the other
routes as indicated by the negative and significant coefficients of
their route dummy variables. On the other hand, the significant
and positive coefficients of dummy variables for routes 12, 13,
and 14 indicate that the laycan period for charter contracts in
these routes is longer than in other routes by 2.561, 5.647, and
5.160 days, respectively. These routes extend from North Africa
and West Africa to the US Gulf and from West Africa to China. The
empirical evidence suggests that the laycan periods of VLCC
routes out of these regions are generally longer. The longer laycan
periods could be due to trade and terminal requirements as well
as availability of tankers in these regions. In the VLCC market, the
normal waiting region is considered to be the Persian Gulf, where
vessels are directed for their next cargo. However, any fixture out
of the general trading route for VLCCs should be done with ample
time. Furthermore, route 14, in particular, is considered to be a
back-haul route for vessels trying to utilize the ballast return leg
from the US Gulf to the Persian Gulf. As a result, some chartering
managers try to find employment in this route in advance to
maximize the round trip voyages from the Persian Gulf to the US
and Europe.
The positive coefficient of the freight rate (2.552) in the laycan
equation suggests that increases in freight rates lead to increases
in laycan periods. Higher freight rates may be an indication of a
lower supply or higher demand (or both) and unavailability of
ships. If so, charterers are expected to enter the market earlier and
thus hire tankers earlier, thereby avoiding disruptions that would
occur in not being able to hire tankers at desired times. The
negative coefficient of BDTI volatility (  3.679) suggests that
increases in this volatility reduce the laycan periods of charter
contracts. Specifically, the laycan period declines by 3.7 days if
the BDTI volatility increases by one standard deviation. The
positive coefficient of the deadweight utilization ratio (10.885)
suggests that VLCC laycan periods are longer for full-load than for
672 A.H. Alizadeh, W.K. Talley / Transport Policy 18 (2011) 665–675

Table 4
3SLS estimation results for VLCC freight rate and laycan period.

X
K
fri,t ¼ a0 þ a1 BDTIt1 þ a2 LCi,t þ a3 HTi þ a4 UTi þ a5 AGEi þ a6 AGE2i þ a7 VOLt1 þ d1,j RTj,i,t þ vi,t !
j¼1 vi,t
xi ¼ ei,t  IIDð0, RÞ
X
K
LCi,t ¼ b0 þ b1 fri,t þ b2 LCi1,t þ b3 HTi þ b4 UTi þ b5 AGEi þ b6 VOLt1 þ d2,j RTj,i,t þ ei,t
j¼1

fri Equation LCi Equation

Variables Coeff. p-val Variables Coeff. p-val

a0 Constant  3.803 0.000 b0 Constant  1.666 0.489

a1 Log BDTI, BDTIt  1 1.165 0.000 b1 Log freight rate, fri 2.552 0.000
a2 Laycan, LCi 0.032 0.000 b2 Layan, LCi  1 0.155 0.000
a3 Hull type, HTi  0.138 0.000 b3 Hull type, HTi 0.892 0.017
a4 Utilization, UTi  0.876 0.000 b4 Utilization, UTi 10.885 0.000
a5 Age, AGEi 0.009 0.000 b5 Age, AGEi  0.094 0.001
a6 AGE2i  0.0003 0.012
a7 BDTI volatility, VOLt  1 0.227 0.000 b6 BDTI volatility VOLt  1  3.679 0.000

d1,1 Persian Gulf–US Gulf  0.240 0.000 d2,1 Persian Gulf–US Gulf 0.821 0.069
d1,2 Persian Gulf–UK/Continent  0.121 0.003 d2,2 Persian Gulf–UK/Continent 1.290 0.118
d1,3 Persian Gulf–Singapore 0.061 0.024 d2,3 Persian Gulf–Singapore  1.511 0.005
d1,4 Persian Gulf–Japan 0.002 0.943 d2,4 Persian Gulf–Japan  0.271 0.529
d1,5 Persian Gulf–China 0.050 0.014 d2,5 Persian Gulf–China  1.752 0.000
d1,6 Persian Gulf –Taiwan 0.103 0.000 d2,6 Persian Gulf–Taiwan  2.886 0.000
d1,7 Persian Gulf–Korea 0.016 0.355 d2,7 Persian Gulf –Korea  0.553 0.103
d1,8 Persian Gulf–Thailand 0.091 0.000 d2,8 Persian Gulf–Thailand  1.826 0.000
d1,9 Persian Gulf–East 0.034 0.179 d2,9 Persian Gulf–East  0.827 0.105
d1,10 Persian Gulf–India 0.111 0.000 d2,10 Persian Gulf–India  3.395 0.000
d1,11 Persian Gulf–Ain Sukhna 0.090 0.006 d2,11 Persian Gulf–Ain Sukhna  3.361 0.000
d1,12 Arzew/Algeria–US Gulf  0.062 0.105 d2,12 Arzew/Algeria–US Gulf 2.561 0.001
d1,13 West Africa–US Gulf  0.171 0.000 d2,13 West Africa–US Gulf 5.647 0.000
d1,14 West Africa–China  0.190 0.000 d2,14 West Africa–China 5.160 0.000

R-bar squared 0.589 0.240

JB 69.17 [0.000] 43.48 [0.000]
WH 10.76 [0.000] 623.4 [0.000]
DW 1.129 2.018
SC 15332.0 [0.000]

Sample consist of 3994 individual VLCC fixtures over the period January 2006 to March 2009.
The system is estimated using 3SLS estimation method. Standard errors are sequentially updated and corrected for heteroscedasticity and serial correlation.
JB is the Jarque and Bera (1980) test for normality of estimated residuals of the system.
WH is the White (1980) test for heteroscedasticity.
DW is the Durbin–Watson test for 1st order serial correlation.
SC test is the system residual portmanteau test for 10th order Autocorrelations in residuals.

part cargoes—likely explained by the fact that full-load cargoes
generally move on main trade routes and part cargoes mainly
move on back-haul routes. That is to say, charterers tend to fix
tankers for part cargoes mainly in the direction that is opposite to
that of main trade flows; further, for part cargoes, they tend to
hire vessels that are available at the loading area for immediate
hire. The negative coefficient of the age variable ( 0.094)
suggests that the laycan period for newer VLCCs is longer than
that for older VLCCs; i.e., modern vessels are likely to be hired
earlier than older ones, everything else being equal. Finally, the
positive and significant coefficient of hull type in the laycan
equation suggests that on average the laycan period for single
hull tankers is almost one day (0.892) longer than that of double-
hull tankers.
5.2. Suezmax tankers
In Table 5 the estimate of the freight rate equation for
Suezmax tankers reveals significant differences in hire rates in
different routes—11 of the 15 route dummy variables are statis-
tically significant at the 5% level. Five of the 11 significant route
dummy variables have negative coefficients and thus the trade is
at a rate discount, i.e., the East Coast Mexico–Spain (route 2),
Algeria–US Gulf (route 5), West Africa–UK/Continent (route 9),
West Africa–US Gulf (routes 11), and Persian Gulf–India (route
13). The East Coast Mexico–Spain route is considered a back-haul
route and is thus expected to trade at a rate discount. The results
also reveal that the coefficients of trade route dummy variables 1,
3, 4, 8, and 15 are positive, indicating that the freight rates trade
at a rate premium that ranges between 4.3% and 23.5% higher
than average (i.e. than the unidentified routes). The estimated
coefficients of log BDTI and volatility of BDTI are in line with those
of the VLCC estimate, i.e., increases in both BDTI level and
volatility lead to increases in Suezmax freight rates. Furthermore,
a positive relationship exists between the freight rate and the
laycan period, which suggests that there is a premium to hire a
vessel early, while existence of a negative relationship between
freight rates and the hull type of Suezmax tankers, as expected,
suggests that single hull vessels are traded at a discount to
double-hull tankers. The significant coefficient of the laycan
period indicates that charterers tend to pay a premium when
hiring vessels early. The estimated coefficient of deadweight
utilization variable also reveals that there is a negative relation-
ship between Suezmax tanker freight rates and the deadweight
utilization ratio, which indicates that freight rates are relatively
lower for fixtures with higher deadweight capacity utilization
 A.H. Alizadeh, W.K. Talley / Transport Policy 18 (2011) 665–675 673

Table 5
3SLS estimation results for Suezmax freight rate and laycan period.

X
K
fri,t ¼ a0 þ a1 BDTIt1 þ a2 LCi,t þ a3 HTi þ a4 UTi þ a5 AGEi þ a6 AGE2i þ a7 VOLt1 þ d1,j RTj,i,t þ vi,t !
j¼1 vi,t
xi ¼ ei,t  IIDð0, RÞ
X
K
LCi,t ¼ b0 þ b1 fri,t þ b2 LCi1,t þ b3 HTi þ b4 UTi þ b5 AGEi þ b6 VOLt1 þ d2,j RTj,i,t þ ei,t
j¼1

fri Equation LCi Equation

Variables Coeff. p-val Variables Coeff. p-val

a0 Constant  2.226 0.000 b0 Constant  2.714 0.155

a1 Log BDTI, BDTIt  1 1.047 0.000 b1 Log freight rate, fri 2.050 0.000
a2 Laycan, LCi 0.018 0.019 b2 Layan, LCi  1 0.063 0.000
a3 Hull type, HTi  0.087 0.000 b3 Hull type, HTi 1.074 0.006
a4 Utilization, UTi  0.910 0.000 b4 Utilization, UTi 13.474 0.000
a5 Age, AGEi 0.007 0.000 b5 Age, AGEi  0.108 0.000
a6 AGE2i  0.0004 0.000
a7 BDTI volatility, VOLt  1 0.175 0.000 b6 BDTI volatility, VOLt  1  1.186 0.022

d1,1 Caribbean–US Gulf 0.235 0.000 d2,1 Caribbean–US Gulf  7.442 0.000
d1,2 East Coast Mexico–Spain  0.398 0.000 d2,2 East Coast Mexico–Spain  3.651 0.000
d1,3 Black Sea–UK/Continent 0.131 0.000 d2,3 Black Sea–UK/Continent  1.834 0.000
d1,4 Sidi Kerrir–Mediterranean 0.176 0.000 d2,4 Sidi Kerrir–Mediterranean  5.624 0.000
d1,5 Arzew/Algeria–US Gulf  0.063 0.033 d2,5 Arzew/Algeria–US Gulf  1.961 0.005
d1,6 Ceyhan–UK/Continent 0.098 0.012 d2,6 Ceyhan–UK/Continent  3.100 0.000
d1,7 Ceyhan–US Gulf  0.018 0.592 d2,7 Ceyhan–US Gulf  2.263 0.004
d1,8 West Africa–Brazil 0.043 0.067 d2,8 West Africa–Brazil 1.349 0.021
d1,9 West Africa–UK/Continent  0.093 0.022 d2,9 West Africa–UK/Continent 4.738 0.000
d1,10 West Africa –US Atlantic Coast  0.097 0.059 d2,10 West Africa–US Atlantic Coast 6.196 0.000
d1,11 West Africa–US Gulf  0.080 0.024 d2,11 West Africa–US Gulf 4.106 0.000
d1,12 West Africa–St Criox  0.056 0.153 d2,12 West Africa–St Criox 4.002 0.000
d1,13 Persian Gulf–India  0.050 0.007 d2,13 Persian Gulf–India 1.092 0.020
d1,14 Persian Gulf–China  0.029 0.373 d2,14 Persian Gulf–China 0.145 0.872
d1,15 Marsa Bahhayer–Far East 0.155 0.000 d2,15 Marsa Bahhayer–Far East  0.053 0.943

R-bar squared 0.755 0.241

JB 257.29 [0.000] 56.33 [0.000]
WH 6.859 [0.000] 9.756 [0.000]
DW 1.518 1.992
SC 3314.0 [0.000]

Sample consists of 3994 individual Suezmax fixtures over the period January 2006–March 2009.
The system is estimated using 3SLS estimation method. Standard errors are sequentially updated and corrected for heteroscedasticity and serial correlation.
JB is the Jarque and Bera (1980) test for normality of estimated residuals of the system.
WH is the White (1980) test for heteroscedasticity.
DW is the Durbin–Watson test for 1st order serial correlation.
SC test is the system residual portmanteau test for 10th order Autocorrelations in residuals.

compared to part-cargo contracts. Finally, the positive and nega-
tive coefficients of age and age-squared, respectively, confirm that
there is a quadratic relationship between the age of the vessel and
freight rate in the Suezmax tanker sector.
The estimated coefficients of route dummy variables in the laycan
equation reported in Table 5 reveal that laycan periods for Suezmax
fixtures in routes 1–7 are significantly shorter than those for routes
8–13. The rationale for these findings are that routes 1–7 are all
westbound routes with the exception of route 2 (East coast Mexico–
Spain), while routes 8–12 are routes out of West Africa, and route 13
is the Persian Gulf–India. The estimation results also suggest that
Suezmax laycan periods are positively related to Suezmax freight
rates, type of hull (single versus double), and the utilization factor, but
negatively related to the BDTI volatility and tanker age. More
precisely, single-hull tankers tend to have a longer laycan period
than modern double-hull tankers. One explanation could be that
single hull tankers are mostly traded in routes with longer laycan
periods such as Persian Gulf–India and the Far East, while routes to
North America and Europe are served only with double-hull tankers.
The positive coefficient of the dwt utilization variable suggests that
laycans for full-load take place well in advance of loading, while part
cargoes tend to be contracted at short notices and thus have relatively
short laycans.
5.3. Aframax tankers
The 3SLS estimate of the Aframax freight rate equation
reported in Table 6 reveals that 10 of the 16 route dummy
variables are significant at the 1% level. In particular the results
suggest that freight rates in routes 1, 2, 3, 6, 7, and 8 are on
average higher than freight rates in routes 5, 11, and 12. The
coefficients of the route dummy variables for routes 1, 2, and
3 indicate that on average the Aframax routes from Caribbean,
East Coast Mexico, and Bahamas to the US Gulf trade at a
premium of 24.7%, 29.6%, and 25.3%, respectively. Further, the
Aframax Mediterranean routes – Black Sea, Ceyhan, Sidi Kerir, and
Libya to the Mediterranean – trade at a premium of 5.1%, 9.2%,
5.6%, and 10.0%, respectively, of the average Aframax freight rates.
On the other hand, the dummy variable coefficients for the routes
Persian Gulf–India (route 11) and Malaysia–India (route 12), are
negative, indicating trading Aframax rate discounts of 32.2% and
17.0%, respectively.
Furthermore, the estimated coefficients of the freight rate
equation indicate that Aframax freight rates are positively related
to BDTI and its volatility, but negatively related to the hull type
and the cargo utilization factor. More precisely, on average, the
freight rate for single-hull Aframax tankers tends to be 7.9% lower
674 A.H. Alizadeh, W.K. Talley / Transport Policy 18 (2011) 665–675

Table 6
3SLS estimation results for Aframax freight rate and laycan period.

X
K
fri,t ¼ a0 þ a1 BDTIt1 þ a2 LCi,t þ a3 HTi þ a4 UTi þ a5 AGEi þ a6 AGE2i þ a7 VOLt1 þ d1,j RTj,i,t þ vi,t !
j¼1 vi,t
xi ¼ ei,t  IIDð0, RÞ
X
K
LCi,t ¼ b0 þ b1 fri,t þ b2 LCi1,t þ b3 HTi þ b4 UTi þ b5 AGEi þ b6 VOLt1 þ d2,j RTj,i,t þ ei,t
j¼1

fri Equation LCi Equation

Variables Coeff. p-val Variables Coeff. p-val

a0 Constant  1.532 0.000 b0 Constant  0.027 0.986

a1 Log BDTI, BDTIt  1 0.935 0.000 b1 Log Freight rate, fri 1.791 0.000
a2 Laycan, LCi 0.022 0.006 b2 Layan, LCi  1 0.058 0.000
a3 Hull type ,HTi  0.079 0.000 b3 Hull type, HTi 2.096 0.000
a4 Utilization, UTi  0.574 0.000 b4 Utilization, UTi 6.054 0.000
a5 Age, AGEi 0.002 0.113 b5 Age, AGEi  0.058 0.000
a6 AGE2i 0.000 0.206
a7 BDTI volatility, VOLt  1 0.079 0.000 b6 BDTI volatility, VOLt  1  1.307 0.000

d1,1 Caribbean–US Gulf 0.247 0.000 d2,1 Caribbean–US Gulf  4.655 0.000
d1,2 East Coast Mexico–US Gulf 0.296 0.000 d2,2 East Coast Mexico–US Gulf  6.749 0.000
d1,3 Bahamas–US Gulf 0.253 0.000 d2,3 Bahamas–US Gulf  5.684 0.000
d1,4 Primorsk–UK/Continent 0.020 0.268 d2,4 Primorsk–UK/Continent  1.420 0.000
d1,5 North sea–UK/Continent 0.007 0.868 d2,5 North sea–UK/Continent  4.165 0.000
d1,6 Black Sea–Mediterranean 0.051 0.000 d2,6 Black Sea–Mediterranean 1.003 0.000
d1,7 Ceyhan–Mediterranean 0.092 0.000 d2,7 Ceyhan–Mediterranean  2.226 0.000
d1,8 Sidi Kerir–Mediterranean 0.056 0.022 d2,8 Sidi Kerir–Mediterranean  2.587 0.000
d1,9 Libya–Mediterranean 0.100 0.002 d2,9 Libya–Mediterranean  3.502 0.000
d1,10 Algeria–Mediterranean 0.067 0.087 d2,10 Algeria–Mediterranean  3.201 0.000
d1,11 Persian Gulf–India  0.322 0.000 d2,11 Persian Gulf–India 5.041 0.000
d1,12 Malaysia–India  0.170 0.000 d2,12 Malaysia–India 2.909 0.000
d1,13 Indonesia–Australia  0.034 0.211 d2,13 Indonesia–Australia 2.023 0.000
d1,14 Indonesia–Korea/Japan  0.005 0.836 d2,14 Indonesia–Korea/Japan 1.431 0.002
d1,15 Marsa Bahhayer–Far East  0.049 0.316 d2,15 Marsa Bahhayer–Far East 5.287 0.000
d1,16 Vung Tau–Australia  0.029 0.498 d2,16 Vung Tau–Australia 2.266 0.008

R-bar squared 0.577 0.245

JB 72.17 [0.000] 1061 [0.000]
WH 10.68 [0.000] 607.52 [0.000]
DW 1.664 1.997
SC 1714.7 [0.000]

Sample consists of 6682 individual Aframax fixtures over the period January 2006–March 2009.
The system is estimated using 3SLS estimation method. Standard errors are sequentially updated and corrected for heteroscedasticity and serial correlation.
JB is the Jarque and Bera (1980) test for normality of estimated residuals of the system.
WH is the White (1980) test for heteroscedasticity.
DW is the Durbin–Watson test for 1st order serial correlation.
SC test is the system residual portmanteau test for 10th order Autocorrelations in residuals.

than that of double-hull tankers, while every 1% increase in
utilization ratio can lead to a 0.574% decrease in freight rate.
Additionally, Aframax freight rates increase with increases in the
laycan period, while age of the vessel seems to have no impact on
Aframax freight rates.
The estimate of the Aframax laycan equation, also reported
in Table 6, reveals that average laycan periods are shorter for routes
1–10 , with the exception of route 6 (Black Sea–Mediterranean), but
longer for routes 11–16. Once again, the estimation results suggest
that laycan periods are longer for routes in the East (routes 11–16,
east of Suez) than routes in the West (routes 1–10, west of Suez).
The age and hull type coefficients suggest that Aframax laycan
periods decrease with the age of the vessel and increase if the vessel
is of single-hull. Further, the coefficient of deadweight utilization
(UT) indicates that laycan periods for full-load contracts are longer
than those for part-cargo contracts, while the freight rate level has a
positive effect and the volatility of BDTI has a negative effect on
laycan periods. This is again in line with what is observed in the
market for larger tankers, since a higher freight rate is an indication
of a tight supply condition and thus forces charterers to fix their
transportation requirements well in advance. Higher volatility of the
freight market, on the other hand, makes the charters delay their
decisions on when to enter the market, which may reflect their
perception of the condition of the market and the fact that their
entry may increase instability in the market. Additionally, charterers
may wish to wait for the market to stabilize and avoid paying a
premium to fix a vessel when the volatility in the market is high.
A comparison of estimated coefficients of certain variables
across different tanker markets points to some interesting con-
clusions. First, the estimated coefficients of log of BDTI in the
freight rate equations (i.e., 1.165, 1.045, and 0.935 for the VLCC,
Suezmax, and Aframax tankers, respectively) indicate that the
freight rates for larger vessels are more sensitive to market
changes, i.e., BDTI, compared to smaller vessels. Second, the
estimated coefficients of hull type (i.e.  0.138,  0.087, and
 0.079 for VLCC, Suezmax, and Aframax tankers, respectively)
in the freight rate equation suggest that the differences in the
freight rates for single hull and double hull tankers are relatively
smaller for smaller tankers compared to larger ones. Finally, the
estimated coefficients of BDTI volatility in the freight rate equa-
tions (0.227, 0.175, and 0.079 for VLCC, Suezmax, and Aframax
tankers, respectively) reveal that freight rates for larger vessels
are more sensitive to tanker market volatility compared to freight
rates for smaller vessels. This can be explained by the size of the
 A.H. Alizadeh, W.K. Talley / Transport Policy 18 (2011) 665–675
fleet for larger tankers compared to the fleet size for smaller
tankers (see footnote 6); the inflexibility of larger tankers in
carrying different cargoes compared to smaller tankers, and the
limited number of routes in which larger tankers can operate.
Thus, freight rates for larger tankers are expected to be more
sensitive to market uncertainty and changes in the market
relative to smaller tankers.
6. Conclusions
The purpose of this paper has been to investigate vessel and
voyage determinants (e.g., vessel age, hull type, deadweight
utilization, and route) of individual tanker freight (charter) rates
and laycan periods as well as to investigate the relationship
between these rates and the laycan periods of tanker charter
contracts. Data for the investigation were obtained from Clark-
son’s Research Studies website and comprise information on
tanker spot fixtures for the period January 2006–April 2009 for
VLCC, Suezmax, and Aframax tankers.
The investigation reveals several important findings. First, on
average, freight rates of single-hull tankers are at a discount in
comparison to those of double-hull tankers. Second, tanker freight
rates, as expected, are positively and negatively related to the length
of the laycan period and the utilization factor (cargo/dwt), respec-
tively. Third, a simultaneous equation relationship exists between
tanker freight rates and the length of laycan periods. Fourth, tanker
freight rates and laycan periods vary across shipping routes, e.g.,
tankers employed in back-haul routes trade at discounted freight
rates. The laycan periods of routes out of West Africa and Persian
Gulf to India and the Far East are generally longer than routes out of
the Mediterranean, the Black Sea, the North Sea, the Caribbean, and
the Baltic Sea. Fifth, the laycan periods of tanker freight contracts
vary directly with freight rates and indirectly with freight rate
volatility. This is expected, since higher freight rates generally reflect
a lower availability of tanker tonnage—therefore, vessel charterers
anticipating tanker shortages will seek to enter the tanker charter
market earlier, in order to fix their transportation requirements well
in advance. When the volatility and uncertainty of freight rates
increase, tanker owners and charterers are expected to delay their
letting or hiring of vessels as long as it is feasible and wait to utilize
their option value to delay fixing. Sixth, tanker laycan periods are
negatively related to tanker age, i.e., newer tankers have longer
laycans than older tankers.
The findings of this study may be used in practice by tanker
owners and tanker charters in negotiating tanker freight rates and
contracts—e.g., tanker owners and charterers can determine and
negotiate freight rate premiums and discounts, especially in
regard to specific routes and vessel characteristics. From the
point of view of tanker charterers, the decision to enter the
market to fix vessels may affect market demand and consequently
tanker freight rates. However, waiting for more favorable freight
rates may be risky as freight rates tend to move very sharply in a
very short period of time. Therefore, information on the effects of
market volatility, vessel type and size, trading route, and cargo
size on tanker freight rates may be of value to charters and their
chartering decisions. From the owners’ point of view, information
on the effects of vessel and voyage specific factors on tanker
freight rates can be used in their investment, operations, and
vessel deployment strategies. Finally, it has been shown that
675
freight rates and laycan periods for tanker shipping contracts are
interrelated, i.e., the choice of the laycan period can affect the
freight rate and alternatively, the level and volatility of the freight
rate can influence the choice of the laycan period in tanker
chartering.
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