 Higher profitability puts onus on container lines to build value |
Source |
American Shipper |
Post Date |
09/03/2020 |
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Ocean carriers are having quite a year, as several recent earnings announcements have made clear. But lines¡¯ increased profitability could have important implications for the industry¡¯s future, raising anew the question of just what carriers are doing with their improved financials to increase value in the supply chain.
Carriers¡¯ ability to use blank sailings to respond to unforeseen changes in demand by rapidly adjusting capacity came of age in 2020 amid the COVID-19 pandemic. Many observers believe that having experienced the upside of this strategy, a stark contrast to the much slower and more costly capacity withdrawal that occurred in 2009, carriers will not retreat, just as they never reversed course on slow steaming after implementing it prior to the financial crisis more than a decade ago. Container speeds have fallen 25 percent on average over the past decade, according to shipbroker Clarksons.
But proactively and successfully influencing the direction of the market as carriers have done this year, resulting in record eastbound trans-Pacific spot rates and robust increases in profits at several carriers, will inevitably provoke a regulatory reaction.
Liner shipping regulation has long focused on the potential for rate collusion among carriers, although carriers have a lengthy law-abiding track record. Their newfound ability to influence the market through capacity management within the major alliances, however, will prompt a rethink among regulators.
Although any reappraisal will likely take years, the process is already underway. The European Commission earlier this year exted the bloc exemption for liner consortia for five years through 2024, but several shippers complained during the rulemaking process that carriers are using the alliances to unfairly influence the market. More recently, China¡¯s Ministry of Transport requested an explanation for the current sky-high rates from several carriers in response to complaints from shippers.
Two US Federal Maritime Commissioners also favor increased scrutiny of blank sailings. This stems from growing discontent among shippers, with an added challenge being that the virtual business environment of Zoom calls is preventing parties from engaging in the type of in-person dialogue that can solve many of the problems arising from a shortage of capacity and/or an erosion of on-time performance.
This begs the question: If the day arrives when regulators initiate a serious review of liner shipping regulation, addressing carriers¡¯ ability to influence the market indirectly via capacity management, will the carriers be prepared to respond in a convincing manner? In other words, are lines acting responsibly in support of customers, supply chains, and trade more broadly?
The carriers will point to their costly investments in ships, terminals, and landside services, which enable global supply chains accounting for 60 percent of the value of global waterborne trade, according to Statistica, an analytics software provider. But the carriers¡¯ track record in taking actions that support shippers can be questioned when considering slow steaming, the construction of mega-ships (which also increase -to- transit times), and more recently the widespread use of blank sailings. The benefits of these actions accrue mostly to the carriers, not the shippers.
Which raises the question of what carriers should be doing to protect, or ¡°future-proof,¡± their ability legally to continue acting as they are this year. Are they reinvesting in the ability to serve shippers more effectively? The answer to that question is yes.
Consider the formation last year of the Digital Container Shipping Association (DCSA), d and funded by the carriers to build basic data standards, in part to enable customers to more easily interact with carriers digitally. The steps the DCSA is taking are basic but important. The standards could, for example, enable an Evergreen Line container traveling on a ship operated by its alliance partner Cosco Shipping to communicate with that ship to visibility for the customer; a common standard for schedules to eliminate current widespread inconsistencies; or common booking documents similar to the ones long in place for airlines.
By creating standards around such basic functions, carriers would agree to put aside competition on basic functionality and compete instead in areas meaningful to the customer, such as the scope of the network, reliability, and -to- services. Creating standards represents collective action and investment by the industry to improve the industry for the benefit of customers.
Should the day come when regulators put the industry under a microscope, it will be ?industry-wide efforts such as these that will form the message from carriers that their actions have improved service for customers and, by extension, improved the efficiency of supply chains and expanded the economic benefits of trade. But the caveat is that efforts such as the DCSA need to succeed f
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