word-forming element meaning "quality, condition; act, power, skill; office, position; relation between," Middle English -schipe, from Old English -sciepe, Anglian -scip "state, condition of being," from Proto-Germanic *-skepi- (cognates: Old Norse -skapr, Danish -skab, Old Frisian -skip, Dutch -schap, German -schaft), from *skap- "to create, ordain, appoint," from PIE root *(s)kep-, forming words meaning "to cut, scrape, hack" (see shape (v.)). It often forms abstracts to go with corresponding concretes (friend/friendship, etc.).
Old English scip "ship, boat," from Proto-Germanic *skipa- (source also of Old Norse, Old Saxon, Old Frisian, Gothic skip, Danish skib, Swedish skepp, Middle Dutch scip, Dutch schip, Old High German skif, German Schiff), "Germanic noun of obscure origin" [Watkins]. Others suggest perhaps originally "tree cut out or hollowed out," and derive it from PIE root *skei- "to cut, split" (see schizo-).
Now a vessel of considerable size, adapted to navigation; the Old English word was used for small craft as well, and definitions changed over time; in 19c., distinct from a boat in having a bowsprit and three masts, each with a lower, top, and topgallant mast. French esquif, Italian schifo are Germanic loan-words.
Phrase ships that pass in the night is from Longfellow's poem "Elizabeth" in "Tales of a Wayside Inn" (1863). Figurative use of nautical runs a tight ship (i.e., one that does not leak) is attested from 1965.