Commentary: For Ocean Carriers, It's Decision Time

Where has 2012 gone? It’s already Labor Day, but it seems like yesterday that we were at the TPM shipping conference listening to International Longshoremen’s Association President Harold Daggett say the union would strike if members didn’t get what they wanted.

Six months later, the rhetoric is the same, and we are getting close to the time the parties involved must make decisions that will impact many parties not directly involved.

If there is a strike, I don’t think the Obama administration will let it last for any length of time, because it would have far too big an impact on the economy just five weeks before the election.

Other decisions will have a far greater impact on how 2013 and possibly 2014 will turn out for our industry. Your financial and accounting people are preparing to distribute 2013 budget documents, the ones that tell you how other costs will decline, productivity will increase and freight rates are going down, right?

Ocean carriers have the monumental task of deciding what the markets will do in 2013 and how to react. From what I’ve read and heard, supply again will exceed demand as new vessels, most of them capable of carrying more than 10,000 20-foot-equivalent container units, are delivered from now through 2013. The markets will do what they do regardless of what experts say. It’s how carrier planning, finance and senior executives react to what they believe to be the realities that will determine the outcome.

From my perspective, the container lines have two distinct choices: They can let the ships enter the trades and do their best to fill them, while watching rates plummet to new depths — well below their costs — and suffer big losses.

Or carriers could manage capacity as they did at the end of 2009 and through most of 2010. In that instance, rates in 2009 were well under costs, so there were numerous rate increases of many names and nature throughout 2010.

Today’s rates are somewhat better and closer to costs — as long as they don’t plummet after October — so the rate restoration or recovery could be more orderly, possibly two reasonable general rate increases and a floating fuel surcharge applied to all customers. That would allow carriers to get rates to levels that relate to costs and profitability and set the stage for the markets over time to meet the vessel capacities.

The newer, bigger ships are far more efficient and less costly on a per-slot basis. Carriers should use that to their advantage to increase profitability and not raise rates wildly every 45 to 60 days, and not exempt half of those they do business with from those increases and fuel fluctuations. The results then would be profitability, a far better choice.

To many reading this, the choices are so disparate that it should be easy to make the most logical choice of profitability. But for those who have been around for a while, it isn’t that simple. Something always seems to stop the most logical route, the most logical decisions.

I know that many cargo interests are saying I’ve forgotten them. They don’t want to see rate increases. They have budgets, too, and must contend with managers who assume freight rates will fall, so the route to ocean carrier profitability isn’t really in their best interests. Cargo interests want overcapacity and low rates, far less complexity and risk involved. But for how long would those two forces leave their lives uncomplicated?

I’ve written several times that the top 10 ocean carriers in 2020 will control 90 percent or more of capacity and cargo, and about what the world will look like then. To most, 2020 may as well be 2200. But it’s just around the corner.

Just as I walked off of a Military Airlift Command plane in 1967 at Travis Air Force base after my tour in the Vietnam War seems like weeks ago, or seeing my first Sea-Land ship at Oakland in 1972 was just days ago, so too will those around in 2020 recall 2012 as just the other day.

And what a different world they will be looking at then, just as I am now.

Gary Ferrulli, a veteran of nearly 40 years in the shipping industry, is director of export carrier relations for non-vessel-operating common carrier Ocean World Lines, a subsidiary of Pacer International. Contact him at mrgtf4811@mindspring.com. The views expressed here are his own and do not necessarily reflect those of OWL.
 

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