Time Charter Equivalent (TCE): What It Is, Calculation, and Importance

Time charter equivalent (TCE) is a fundamental metric utilized in the shipping industry to assess the average daily revenue performance of a vessel. It serves as a crucial tool for shipping companies, enabling them to evaluate period-to-period changes effectively. TCE is calculated by subtracting voyage expenses, including canal, bunker, and port costs, from voyage revenues, and then dividing the total by the round-trip voyage duration in days.

The formula for calculating time charter equivalent is:

\[
\text{TCE} = \frac{\text{Voyage Revenues} – \text{Voyage Expenses}}{\text{Round Trip Duration in Days}}
\]

TCE can also be calculated on a per-day basis, considering period, spot, and weighted average factors. While TCE revenue serves as a performance measure for tracking changes over time, it’s essential to note that it’s a non-GAAP measure. Despite this, some companies choose to report it in their financial statements as a footnote.

TCE plays a vital role in the shipping industry by providing a standardized method for presenting chartering opportunities to shipowners. These opportunities vary widely in potential revenues and costs, making comparisons challenging. TCE simplifies this process by expressing opportunities in a standardized format—dollars per day—facilitating easier comparisons for shipowners.

The significance of per-day costs in shipping operations cannot be overstated. Fuel and crew upkeep expenses constitute the primary variable costs of a voyage, directly correlating with the speed at which the voyage is conducted. The speed of the laden portion of the voyage is typically agreed upon with the charterer during negotiations, while the shipowner or time charterer selects the speed for the ballast voyage.

The relationship between vessel speed and TCE is intricate. Slower sailing reduces fuel consumption but extends the voyage duration, affecting TCE in two ways. While fuel cost savings increase net freight, the longer voyage duration reduces TCE. Consequently, shipowners must weigh the cost savings from slower sailing against the potential decrease in TCE and the opportunity cost of extended voyage durations.

The decision to sail at a slower speed must be made strategically, considering various factors such as fuel costs, TCE implications, and opportunity costs. It’s imperative for shipowners to assess these factors at the onset of a voyage to optimize profitability and operational efficiency.

TCE focuses specifically on the daily revenue performance of a vessel, providing insights into operational efficiency on a per-day basis. Unlike metrics such as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), TCE offers a more granular view of profitability within the context of voyage economics.

While TCE is valuable for evaluating period-to-period changes and standardizing chartering opportunities, it may not capture all operating costs associated with vessel operations. Additionally, TCE is a non-GAAP measure and may not be uniformly reported by all companies in the shipping industry.

Shipowners can optimize TCE by strategically managing vessel speed, considering factors such as fuel costs, voyage duration, and opportunity costs. By striking a balance between fuel savings and voyage efficiency, shipowners can enhance TCE and maximize profitability.