Pricing Under Water

Pricing Under Water

In case you were stuck at an airport and missed the latest travel news, most major U.S. airlines raised their fares $5 each way last week, and they did that after several carriers reported strong earnings even in the face of skyrocketing costs.

Delta Air Lines, for example, saw its fuel costs grow by $1 billion and expanded its revenue 10 percent year-over-year in the third quarter. But the airline’s net profit of $549 million was 51 percent better than a year earlier.

Those $5 fare increases, not to mention the longer menu of ancillary charges that have become a feature of flying, certainly add up. Delta’s response to this good fortune is to go back to its 1 percent capacity cutback in the third quarter and — you can guess — take it even further, slashing capacity 5 percent the rest of this year and up to 3 percent in 2012.

So much for fighting over market share.

The reports from the passenger airlines came as a business more significant to the global industrial economy, container shipping, saw the latest signs of a business going in an entirely different direction. The 0.5 percent week-to-week decline in the Drewry Container Rate Benchmark was a relatively slight slip, but it leaves that pricing measure $822 off the level at the same time last year and at the lowest point in nearly two years. It’s even worse on Asia-Europe lanes, where the Shanghai Shipping Exchange’s Shanghai Container Freight Index showed some of the longest voyages in the world were commanding just $677, which would barely be enough to get Delta Air Lines to answer the phone — if they sold tickets by phone anymore.

The retail airline passenger world, of course, isn’t an industrial business, so it’s far from the ocean container shipping arena.

Maybe a better analogy is rail freight business.

That’s where Union Pacific Railroad expanded its net profit in the third quarter 16 percent to $904 million even though actual freight volume grew only 1 percent over 2010’s third quarter. The demand, UP said, came in an “uncertain economy.” But UP’s internal economics remained dead certain: Average revenue per shipment increased 14 percent, and that measure of yield for intermodal shipments grew 14 percent even though intermodal volume fell 6 percent.

The story was similar across the rail industry, with carriers reporting strong gains in profit despite generally uninspiring demand trends.

Even in the international air cargo industry, there are signs that weak demand is triggering a significant response. UPS said last week it grounded 10 percent of its capacity in Asia after a “high single-digit” decline in export volume there in the third quarter.

There’s nothing mysterious about these operators’ strategies: They’re all trying to maximize profitability by matching their capacity and service to demand. The mystery, for those of us standing alongside the shipping industry and the shippers that buy the services, is when the graphical lines representing carrier profitability and pricing will cross and trigger some sort of action.

Understanding that will mean understanding ocean container line economics. Right now, however, we’re having an easier time understanding passenger airlines, where they raise prices because, well, they can.

Paul Page is executive director of The Journal of Commerce. He can be contacted at 202-355-1170, or at ppage@joc.com. Follow Paul Page on Twitter, www.twitter.com/paulpage.