Market needs sustained improvement to get rates up
Spikes in demand won’t be enough, no matter what the carriers do with GRIs. There is just too much capacity around.
The head of an Asia Pacific airline association said in Hong Kong yesterday that there were so many freighters either parked in the desert or “resting” at air cargo hubs around the world that at the first sign of a market improvement, the planes would immediately be shoved back in service.
This would prevent freight rates from rising and the profitability pressures would continue until there was a sustained upturn in cargo demand.
Ring any bells? Yes, it is a mirror of the situation the container shipping business finds itself in: Too much capacity slow steaming to a standstill, laid up alongside or in some quiet waterway just around the corner from a major trade route.
The freighter aircraft resting at airports are the aviation equivalent of shipping’s “hot lay-ups”, where ships are maintained and ready to come online at very short notice.
Container shipping lines are struggling to get freight rates to rise on the east-west trade lanes and with economic growth in Europe expected to be zero this year, with maybe 1.5 percent growth in the US, demand is going to remain weak for a while. Supply, on the other hand, is stronger than ever, and the carriers need to start laying up more capacity or the profitability problems that kept most lines in the red last year will persist.
Also this week, we came across an interesting comment in a business magazine where a carrier executive maintained the container shipping industry was “at a crossroads where cargo interests must choose between paying higher rates for value-added service, or contending with another round of consolidation as carriers merge to survive”.
Not being a paid subscriber, we were unable to read beyond the first paragraph to see how the executive expanded on this point, but the comment raises some issues.
In our experience, it is not the shippers that are forcing container lines into offering low freight rates. The mega shippers such as Wal-Mart, Target and IKEA, or forwarders K+N, DHL and others, may have strong negotiating positions because of the huge volumes they ship, but as far as we know, no guns are drawn at those contract meetings. Cigars and cognac, maybe, but no weapons.
It is the lines themselves that are locked into a market share maintaining mindset that results in carriers chasing each other in a race to the bottom.
And as far as we know, forwarders and shippers do not like to pay bargain basement freight rates for the very reason that it often has an impact on service levels. Schedule reliability, drop-off and pick-up times cast in stone, last-mile delivery – that is what excites shippers, not rates that drive lines into the poor house.
Surely profitability is more important than maintaining market share, is a question that never gets answered? A profitable container line can build for the future, while a loss-making carrier is continually cutting costs and trying to find new ways of servicing its debt.
Ocean freight is all about getting large amounts of cargo from A to B at a reasonable price, in a scheduled period so the goods can be picked up and delivered in good condition and on time.
Forwarders are always looking for good prices, but most would be happy to pay a little more if it came with better service and guarantees.