For only the second time in recent years, liner companies are managing vessel capacity in the major east-west trades effectively enough to lift freight rates and sustain them. They succeeded in doing this brilliantly in 2010, when they earned an estimated $20 billion profit, and they appear to be succeeding again this year, although not quite as dramatically as two years ago when they idled 10 percent of the container fleet.
After carriers incurred a collective $6.5 billion in losses last year and continued to bleed red ink through the first quarter of 2012, they combined forces in alliances and vessel-sharing agreements.
Almost 6 percent of the fleet was idled during the slack winter months leading up to March, but the idle portion has since been halved to less than 3 percent, or about 450,000 20-foot-equivalent units of capacity, according to research analyst Alphaliner.
Nevertheless, carriers have curtailed capacity enough to sustain a series of rate increases and peak-season surcharges through mid-August. Because spot rates have more than doubled over the last year on routes from Asia to Europe and North America, some carriers now project break-even results or profits for the full year.
But because more than half of the new vessel capacity scheduled for delivery this year — some 616,000 TEUs — has yet to hit the market, some analysts, including Drewry and Macquarie Securities, say the rates won’t hold up much longer. With bunker fuel costs climbing again after a spring lull, profit projections could be in jeopardy.
That remains to be seen, but the constant boom-bust cycles plaguing the industry since the onset of the Great Recession in 2008 again raise the question: Why can’t liner shipping do a better job of managing capacity?
The airline industry is subject to the same cycles in demand and to the rising cost of fuel as shipping, but does a better job of limiting capacity by idling or scrapping obsolete planes, like those that festoon the Arizona desert, and investing in new, more fuel-efficient aircraft. Airlines also are adept at retrofitting older jets with such features as winglets that improve fuel economy.
Liner companies, by contrast, are operating a huge number of inefficient, fuel-guzzling ships. Vessels built more than 10 years ago account for more than 30 percent of existing global fleet capacity. That’s not old in an industry that has historically held onto ships for at least 20 years, but the technology for reducing fuel consumption has progressed so rapidly that those rust buckets may be burning more fuel than the revenue they generate.
Why don’t liner companies emulate the airlines? They should bite the bullet, scrap those older vessels and replace them with the new, more fuel-efficient ships that burn half as much fuel per nautical mile. That would put them on the path to profitability on a longer-term basis.