Will They Never Learn?

It’s not a problem of too much vessel capacity, but rather good old-fashioned rate wars that have destroyed pricing on the Asia-Europe and trans-Pacific trade lanes.

The rate wars have plunged most of the major container lines into the red for the second quarter in a row for the first six months of the year, making this year the quickest down cycle the industry has ever experienced. Carriers suffered record losses in 2009, healthy profits in 2010 and now near-record losses again this year.

True, the container lines are taking delivery of big new ships and ordering even more of them, but they have to because of the ever-rising cost of bunker fuel. The technology of the engines on new ships is changing so quickly that carriers are forced to buy new ships in order to have any hopes of operating profitably at any point on the future.

If they don’t order new ships and hang on to their older ships, which burn fuel at a much higher rate, they won’t be able to compete with carriers that deploy the newer, more efficient ships that are coming to market in the next few years.

So why didn’t carriers learn a lesson from 2009, when they idled up to 10 percent of their fleet to reduce capacity and get freight rates back up? Because so many of them are still fixed on the importance of market share on the major trade lanes.

“We’re the only industry in the world that has the legal right to set prices,” said one carrier executive of the trans-Pacific trade, where the Trans-Pacific Stabilization Agreement is allowed to set rate guidelines. So why do many carriers ignore those guidelines and slash rates? “Because they’re stupid,” the executive said.

When carriers finish out this year with up to four quarters of red ink, they will have no choice but to slash capacity next year. Another carrier executive thinks they are likely to park enough older ships to cut capacity by up to a million 20-foot equivalent units next year.

But that could lead to the same problems that plagued U.S. importers and exporters in the winter of 2009-2010, when carriers rolled containers bound for the U.S. at ports in China and even turned saw containers bound for export at West Coast ports because they didn’t have enough capacity.

Will they never learn?

-- Contact Peter T. Leach at pleach@joc.com. Follow him on Twitter @petertleach.

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