Can carriers solve their dilemma?

Can carriers solve their dilemma?

Two senior shipping executives that I know and admire have been in the news recently, discussing essentially the same issue - the long-term viability of ocean carriers. Rudy Mack, who's retiring as chief executive of Hapag-Lloyd North America, and Al Pierce, the recently retired executive director of the Transpacific Stabilization Agreement, both discussed the need for carriers to recover costs and for shippers essentially to have to pay their "fair share." The rising costs of vessels, fuel and inland transportation, coupled with carriers' inability to reduce rising costs or to price their services in a logical way are contributing to carriers' poor profitability.

I essentially agree with Rudy and Al in their defining of the issues, but I'm not sure that I see the carriers addressing the real problems in resolving the dilemmas of the industry.

The cost of vessels, while escalating, actually provides a savings to the carriers. Their cost to build on a per-TEU basis is relatively low, and their cost per TEU to operate is lower because of the economies of scale. Growth in global trade has been so rapid that carriers have been barely able to keep up with the supply-demand ratios; carriers have been forced to build larger vessels and in doing so have found efficiencies to help with their overall cost structure.

On the other side of the ledger is the cost to load and unload those larger vessels, specifically in the United States. While Asian terminals regularly reach or exceed 40 moves per hour, U.S. terminals languish at between the low 20s and the mid-30s. Why? If a terminal in Manzanillo, Mexico, can exceed 41 moves an hour, why can't they get close to that in Los Angeles, Long Beach and many other U.S. locations? The issues are known and have been for a long time; they've been addressed, but remain unresolved. Is it fair for cargo interests to pay for inefficiencies?

Railroads raised their rates to carriers by 25 to 40 percent over the last two-plus years - one of the noted cost increases. Why didn't the ocean carriers recover that in their latest service contract negotiations? Al Pierce suggests that the rails should "roll back their rates." Why? The rails recognized that the intermodal segment of their market was the lowest returning segment because of long-term contracts with low rates, and that with international volumes growing at or near double digits yearly, more capacity is needed. If you have to spend capital to handle more volume, and the existing return isn't sufficient, what do you do? Address costs and raise the rates. Sound familiar? The difference is the rails did it, the ocean carriers didn't.

The early financial reports in 2007 from the ocean carrier industry are a mixed bag. On the bright side, the Asia-to-Europe trade has grown nearly 20 percent, and the rates, while not soaring, are at least increasing. The trans-Pacific showed predicted trade growth in January and February, but slowed considerably in March and April. The retail industry is still forecasting a robust growth in the peak season, a piece of good news.

Trans-Pacific rates have taken a move upward. How much that really is depends on whom you talk to - from what I've seen and heard, the increases are maybe $150 per FEU as an average of averages, but nowhere near the announced levels that were being trumpeted as early as last October and November. Why? Decades ago, carriers' internal conversations used to revolve around "fill the ships, the rest will take care of itself." Now those discussions revolve around empty slots being the "missed opportunity." It almost seems that carriers are happier losing money with full ships than making money with half empty ships. On that basis, 2006 must have made many happy.

Rudy correctly says the industry must "take its head out of the sand" and face up to poor terminal productivity, the need for reasonable rates, improved infrastructure and information technologies, among other issues. Al says that container shipping is a collaborative effort and that everyone must participate in providing the carriers with enough money to have a viable future. I think it is a matter of the carriers really addressing their cost issues and creating a logical pricing structure that allows them to continue in business.

No company, in any industry, can survive if it doesn't address those issues. They don't deserve to.