Good Times for Trans-Atlantic Carriers

Good Times for Trans-Atlantic Carriers

Copyright 2004, Traffic World, Inc.

The trans-Atlantic container trades bounced back last year after hitting bottom in 2002 and all signs point to a continuing recovery.

John Fossey, a consultant with London-based Drewry Shipping Consultants, said that 2003 was one of the most profitable years on record for carriers due to a combination of new technologies, rising freight rates, cost cutting, cargo selection and asset management.

"Carriers are not just loading cargo in order not to lose it," he said. "They are willing to move empty boxes to get them back in demand faster."

With carriers holding the line on capacity, load factors have increased 81.2 percent to 84.5 percent on the westbound leg and from 62.8 percent to 65.6 percent eastbound through the first quarter of 2004 versus last year. Drewry forecasts westbound net slot utilization rates of 92.4 percent and 88.7 percent respectively for the second and third quarters of this year, and eastbound rates of 65.3 percent and 60 percent for the same periods.

For the first half of 2004 Drewry expects westbound capacity to increase by around 5 percent and eastbound to stay the same, with few changes for the rest of the year. Volumes have been stable through the first quarter, with westbound largely unchanged and eastbound nudging up by around 2 percent over last year. For the remainder of 2004, Drewry is forecasting a 3 percent to 4 percent rise in westbound traffic - up from the 1.2 percent growth reported last year - and eastbound growth coming in between 2.8 percent and 3.5 percent, slightly up from last year.

"I expect capacity to closely reflect actual demand in the trans-Atlantic," said Fossey. "All the carriers want to avoid a bloodbath."

The historically strong westbound trade has been bolstered by the weakness of the dollar relative to the euro, which is hovering at four-year highs against the U.S. currency. Brian Clancy, a principal of MergeGlobal, said that consumer products shipped to the United States are much more sensitive to currency fluctuations than common eastbound commodities such as synthetic resins, organic chemicals, paper and paperboard. Products commonly traded between subsidiaries of companies, such as auto parts, are also less impacted because they often involve long-term supply contracts and hedging strategies.

Clancy expects the euro and the dollar to reach parity over the next 18 months, which could boost traffic both ways, particularly if sluggish European economies improve.

"If the currencies have parity within 10 percent of each other it would help bi-directional load factors," he said.

Geoffrey Giovanetti, managing director of the Wine and Spirits Shippers Association, said that he has not seen a decline in volume of westbound shipments during the past year and a half even amid the dollar''s dramatic decline. Many wine and spirits customers have definite price points for favorite brands and distributors are reluctant to risk sales by changing them.

"Price points haven''t changed," said Giovanetti. "It means importers have eaten into profits to maintain them."

Citing data from PIERS, the Port Import Export Reporting Service, Paul Bingham, principal in the global transportation group of Global Insights, said that spirits and beverages are among the top westbound commodities, accounting for around 11 percent of annual containerized, nonmetallic U.S. imports from Europe.

Currency and bunker adjustment factors have been steady for a year, at around $158/TEU and $316/FEU to and from U.S. East Coast ports. Retail prices of beverages imported by WSSA members generally are unaffected by BAF and CAF charges, which translate to around 20-25 cents per bottle, except for wine in the $2-$3 range. Fuel prices announced by TACA indicate surcharges will stay the same at least through July.

Giovanetti said that carriers are reporting full westbound sailings this year. To mitigate the potential for not getting space during peak season, WSSA members have expanded their group of carriers to between 20 and 30 worldwide and are seeking space allocations on a port-by-port basis.

The introduction in February of a westbound round-the-world service by Norasia Line, China Shipping Container Lines and Gold Star Line potentially adds at least 2,000 TEUs to the trade each week and should help maintain supply and demand balance in the trans-Atlantic. In March, CMA CGM, Lloyd Triestino and Zim Israel Navigation launched a new fixed-day, weekly gateway service connecting Montreal with Antwerp, Hamburg and Rotterdam, adding another potential 4,500 weekly TEUs to the trade, with another new North Atlantic service planned for the end of the year.

Bingham said that the supply/demand balance in the trans-Atlantic is directly impacted by macroeconomic trades such as the economic growth in the United States, moderate growth in Japan and continuing strong growth in China.

"There may be some shift away from the trans-Atlantic to get capacity to the Pacific," said Bingham. "That''s part of the story in the trans-Atlantic. It doesn''t exist in a vacuum."

The rationalization of capacity last year by Yang Ming Line, Hanjin Shipping, China Ocean Shipping and "K" Line, which merged pendulum services linking Asia to the U.S. East Coast and Northern Europe, helped reduce westbound capacity by just over 5 percent westbound in 2003 and eastbound by 4.3 percent and contributed to the carrier''s bottom line.

"No doubt about it, some of the service rationalization that took place last year helped in revenue recovery per TEU," Fossey said.

For many carriers operating in the trans-Atlantic, 2003 was one of the best years on record. CP Ships reported 10 percent growth in trans-Atlantic volume. For the first quarter of 2004 the company reported higher rates and an 8 percent jump in volume over last year in its trans-Atlantic markets. Combined North American imports and exports account for over 80 percent of the carrier''s annual volume of around 2.2 million TEUs.

OOCL''s net profit went from $51.7 million in 2002 to $329 million last year, with big volume increases in all trade routes. "2003 has turned out to have been one if not the best year to date for the container liner industry," said OOCL Chairman and CEO C.C. Tung. "Our international transportation, logistics and terminals division enjoyed an unprecedented trading environment during 2003 as we experienced a much better supply and demand balance despite the substantial growth in capacity."

A.P. Moller Maersk Group''s net revenue increased by around 9 percent in 2003 as Maersk Sealand''s Atlantic trades were rationalized. Hapag-Lloyd Group had an operating profit of 343 million Euros in 2003, a 70 percent increase over 2002 and a record for the company. Volume in the company''s North Atlantic routes grew to 550,000 TEUs, a 7 percent increase over 2002. P&O Nedlloyd reported a 2003 operating profit of $77 million versus an operating loss of $234.6 million in 2002. Total volume was up over 5 percent, with an increase of over 139,000 TEUs in the combined Europe/Americas trade.

On April 1 the seven members of the Trans-Atlantic Conference Agreement, which handle around half of the cargo moving between the United States and Northern Europe, announced westbound rates increases of $400 per 20-foot container and $500 for 40-ft. and 45-ft. containers. Eastbound rates jumped by $120 per 20-foot container and $150 for 40-or-45 footers. The TACA tariffs are considered are considered a benchmark in confidential shipper-carrier contract negotiations. More increases are expected later in the year as part of the carrier''s rate restoration plan for 2004.

Joseph Saggese, executive managing director of the North Atlantic Alliance Association, a nonprofit shippers group, said that strong U.S. exports have allowed carriers to realize the eastbound rate increases in some contract negotiations but that westbound increases have not really taken hold. If exports increase through the year, as he expects, eastbound rates could go up even more.

The complexity of contracting in a partially deregulated, post- OSRA environment creates a new learning curve for shippers and is raising the profile of NVOCCs and other ocean transportation intermediaries. On the cutting edge are BAX Global, FedEx, UPS and other companies that have petitioned the Federal Maritime Commission for the right to sign confidential shipping contracts. Such companies have the expertise and economies of scale to better manage ocean transport, Saggese said, especially for small and midsize shippers who do not have the infrastructure to monitor rates, regulations, services and surcharges on a daily basis.

"NVOCCs, freight forwarders, rail and intermodal people, all are playing a bigger role," he said.

A key question is whether shippers are willing to pay for premium services. Saggese said that some shippers would pay more for faster transit times and more frills but that the market is generally all about price. Unfortunately, no-frills rates often mean poor service and hidden costs.

"At no-frills rates services are like an a la carte menu," he said. "Shippers have to learn through their mistakes and seek out better service providers."

Giovanetti said that carriers in general have neglected customer service in a big way. Basic functions such as rating cargo have been outsourced and delegated to people with no familiarity with the cargo or consignee. Lately WSSA members have had wine and beer rated interchangeably even though each has a separate rate. Containers sometimes disappear for days, forcing shippers to expend valuable time and resources tracking down rates and boxes after the fact.

At one time there was a clear distinction between bottom and top-tier carriers, but as service has declined in general the gap has narrowed and ocean shipping is increasingly becoming a commodity.

"Those distinctions have blurred as the top tier tries to improve profitability and consolidate customer service, move it offshore or generally reduce the quality of people talking to customers," he said.

In the wine and spirits industry there is a definite need for different tiers of service, Giovanetti said. Shippers of high-value goods like cognac and scotch, who might have $100,000 in goods in a single container, might even be willing to pay more per container for faster transit times and quick release of merchandise.

Giovanetti said he thinks the reason carriers don''t offer two-tier service is that major shippers would abuse the standby rate by demanding it along with guaranteed space. One thing he would like to see is better exception reporting - not just online but through personal contact - when glitches occur that deviate from the routine flow of goods.

"We deal with 20 to 30 carriers worldwide and are not going to be monitoring all those websites," he said. "A lot of our members want someone to give them a call if there is a problem."

Clancy said that the dominant carriers in the trans-Atlantic trade tend to be more disciplined in managing and deploying capacity than carriers with less aggregate market share. They are better at customer selection, a key to profitability in the mature trans-Atlantic trade. Ideally a customer is in a profitable industry in which ocean shipping represents only a small percentage of costs. Less desirable customers switch supply and demand patterns often, require special handling and select carriers solely on the basis of rates.

"There is no such thing as an ideal customer, but some are better than others," Clancy said. "Some liner companies are especially good at recognizing hidden costs and are willing to fire their customers."

Starting in 2005, a "tsunami" of new capacity could contribute to systemic overcapacity in 2007 or 2008, which could lead to a downward drift in rates, said Clancy.

"In a perfectly rational market you would have discipline among competitors when making capacity decisions," he said. "In management you would have a much tighter feedback loop."

The nature of the liner industry, with high costs and long lead times associated with both adding and scrapping capacity, means there are few short-term solutions to manage supply and demand, said Ben Hackett, executive managing director of international consulting at Global Insights. It is always a step behind the capacity curve; the ability to react quickly is not there.

Shippers and carriers are also watching the ongoing European Commission probe of conference line exemption from EU competition rules. Fossey said he expects a decision by the end of the year. If immunity is withdrawn there could be short-term market disruption but things should then settle down quickly, as they did after passage in the United States of the Ocean Shipping Reform Act of 1998.