The value of jumboization in transportation ships: A real options approach

In the presence of budget constraints, "jumboization," has been adopted as a practical solution to meet increased transportation needs. By jumboization, we mean increasing the capacity of a ship by extending its length at a future date. There are, however, two kinds of jumboization: Fixed design (retrofitting) and flexible design. With fixed design, the initial construction cost is lower, but the subsequent jumboization cost is higher. With flexible design, the initial construction cost is higher, but the subsequent jumboization cost is lower. In this article, for both designs, we build and analyze economic decision models, and show how to value the option to jumboize. Our framework utilizes a stochastic optimal control approach that considers the volume of transportation needs (the demand) as an underlying uncertain factor. Under the criterion of cost savings maximization, we determine optimal threshold demand level to jumboize. Through analytical and numerical analyses, we obtain conditions under which the flexible design is preferred over fixed design, and vice versa. A comprehensive, illustrative example is also provided.