On the golf course with a carrier executive a few weeks ago, Bengt Henriksen asked his companion about reports that container lines were carrying some shipments between Asia and Europe for surcharges only, with a zero base rate.
The carrier executive confirmed it, and Henriksen, a 3PL who spent years working for a carrier, was aghast. "I said, 'You guys are crazy. No shipper would ever ask for that -- you did it to yourselves. This is madness.'"
Indeed it is, and it raises questions about who will be left standing when the smoke clears after the worst crisis that container carriers have ever seen. The first high-profile casualty came last week when Senator Lines announced it would cease operations.
Senator isn't a top-tier container line but is related to one. Since 1997, the Bremen-based company has been 80 percent owned by South Korea's Hanjin Shipping. Senator operates 13 liner services, including loops linking Asia, the Middle East and North Europe.
The impact of Senator's demise will be modest. Hanjin provided Senator with chartered vessels of 2,750 to 3,650 TEUs, a size that should be easier to redeploy than the 8,000-TEU-plus behemoths that shipyards are still churning out.
Senator's CEO, Hans-Hermann Mohr, said in late December that the carrier had 'a fair chance to turn the tide in the second half of 2009" because of an expected "substantial" increase in freight rates to and from Asia. The trouble is, even a substantial increase would probably leave rates below break-even.
For carriers, additional failures, mergers and acquisitions are likely. Carriers ordered scores of huge new ships just as the financial crisis hit. And because this economic bust is global, there's no good place to redeploy the surplus vessels.
Carriers' fleet expansions can be explained as a logical response to forecasts of long-term increases in demand. The drastic rate-cutting is harder to understand, especially because this isn't the first time it's happened. The question is, why?
Sometimes a bargain-basement rate can be rationalized on the basis that it adds incremental revenue to a voyage that the carrier is going to make anyway. Carriers reason that it's better for that few hundred bucks to go to them than to a competitor. They also don't want to surrender market share.
But lower rates alone do not generate additional cargo. Airlines can use cheap fares to boost passenger travel, but that doesn't work in the container business. Cargo interests will gladly accept a lower rate when it's offered, but they don't book containers for fun. As for market share, if it can be won through lower rates, it can be lost the same way.
Contact Joseph Bonney at firstname.lastname@example.org.