Carriers are starting to make the first slight adjustments to their mid-June networks on some trades in what appears to be an attempt to match uneven demand patterns as countries and regions emerge from coronavirus disease 2019 (COVID-19) lockdowns at different times.
Two canceled sailings will be reinstated on the trans-Pacific by THE Alliance members Hapag-Lloyd, Ocean Network Express (ONE), and Yang Ming. That follows four sailings that were reinstated last week on Asia-Med services, although after additional blanks were announced for the coming weeks, it amounts to only one reinserted sailing.
“On Asia-North Europe, we are not about to reinstate any sailing,” a spokesperson for Hapag-Lloyd told JOC.com. “On Asia-Med, we are changing the weeks a little bit and in balance we have one voyage reinstated.”
The blank sailings have reached or just passed their apex, depending on the trade, according to data from Sea-Intelligence Maritime Consulting. By mid-May, the capacity withdrawn on the Asia-North Europe trade peaked at 25 percent, on Asia-Med 30 percent, and stood at 15 to 20 percent on Asia-North America routes.
By restricting capacity, carriers have managed to keep rates above last year’s levels despite declining demand. Rates on China-North Europe were 14 percent higher last week year over year at $831 per TEU, and China-Mediterranean rates were 25 percent higher at $875 per TEU, data from the Shanghai Containerized Freight Index (SCFI) show.
The SCFI also shows China-US West Coast rates on May 15 were $1,686 per FEU, 25 percent above the levels during the same week last year. The only outlier was the China-US East Coast trade, where rates fell 2.1 percent to $2,542 per FEU, the lowest it has been all year, according to the JOC Shipping & Logistics Pricing Hub.
Sea-Intelligence said in its latest Sunday Spotlight newsletter that from early April into late June, carriers on the trans-Pacific would blank 80 sailings from Asia to the West Coast and 43 to the East Coast, leaving little room for spikes in demand. Forwarders report that a growing volume of North American imports due to leave central and southern China over the past two weeks have been rolled to later sailings after a sudden surge in imports collided with the cuts in capacity.
Third quarter remains blank free, for now
No capacity withdrawals have been announced for the third quarter, but Sea-Intelligence said this was an indication that carriers have not yet made any decisions on capacity withdrawals for the third quarter rather than an expectation of any strong recovery.
“They all clearly expect demand to be depressed through to the end of Q2, and then the level of blank sailings drops to near-zero,” the analyst said. “While of course nothing can be ruled out, it appears exceedingly unlikely that demand will revert back to normal from July 1. We would therefore expect the level of blank sailings will once more start to increase, as carriers become forced to take a stance on their capacity management for Q3.”
The CEOs of CMA CGM, Maersk, and Hapag-Lloyd are expecting second quarter volume will be hit hardest by the coronavirus, with demand starting to pick up from mid-June.
Rodolphe Saadé, CEO of CMA CGM, said in a JOC Uncharted interview Wednesday that the industry has been reducing capacity to match the declining demand, which for CMA CGM has fallen by 10 percent so far this year.
“There is no point in offering too much capacity when you have no cargo to carry,” Saadé said. “I hope as carriers we will look at our P&L and try to find a good balance between supply and demand.”
Hapag-Lloyd CEO Rolf Habben Jansen warned in a May 15 call that if volume declined by 10 percent for the year as forecast by some analysts, the carrier will have to take out more costs, which will mean withdrawing additional capacity.
Maersk CEO Søren Skou said in last week’s earnings call his carrier will blank up to 140 sailings in the second quarter, and the aim through this period of declining volume was “to pair the drop in demand one-to-one with reduced capacity in our network.”
But Skou pointed out that the industry’s competitive dynamic was different from the severe demand declines that accompanied the global financial crisis in 2008-09 and the market downturns of 2011 and 2015 when the industry quickly fell into profitability-destroying price wars.
“The three large alliances now make it much simpler to adjust capacity in a certain way,” he told analysts and reporters. “When we operate 13 or 14 strings a week on Asia-Med, it is easier to take one out. The alliances are structured in such a way that the best ship is used for the best string. We operate one network and pay our own share of it, so adjusting capacity is very easy and quick.”
Saadé also said the carriers have learned harsh lessons from the collapse of business during the 2008-09 financial crisis, and now had the ability to quickly withdraw capacity and reinstate it to minimize disruption when demand returns.
“We learned it the hard way in 2008-09 when we had a lot of capacity available with limited volume, but at least we have learned,” he said. “This year we as an industry decided to take a different look at the situation and reduce capacity to match supply and demand.”