Recovery Rate

Recovery Rate

A year ago in this space we noted the major question hanging over the world of trade and transportation was capacity — the availability of space on ships, trucks and aircraft.

It would be tempting heading into new year to take the major headache of 2010 as a signpost toward the business concerns for the coming year. But the fact is, 2011 has been shaping up for a couple of months now and the signs are already there for a different kind of concern.

We’ll go out on a limb on this to start the year and argue the main issue confronting the trade and shipping business in 2011 will be yield. For shippers and anyone else in the position to buy capacity, “yield” means rates, of course. For the operators of transportation networks, that also means pricing, but with the added layer of profitability as the main driver — profitability of overall business, as well as profitability measured by contract, by customer, by lane and even right down to the shipment.

It’s clear in reading the comments from industry executives and observers in this year’s Annual Review and Outlook that carriers across all modes have put an enormous effort into not only cutting costs but also into understanding those costs in the most detailed possible way.

The next step is to act on what you know, and for many carriers that will mean trying to manage the capacity to get the greatest return. As Tim Smith, CEO of Maersk Line’s North Asia Region, told The Journal of Commerce’s TPM Asia conference in October, ocean carriers will have to be ready to withdraw vessels or entire strings at short notice if demand wanes.

What some deride as capacity management is held up in other fields as the discipline of yield management, and it will figure prominently in shipping operations in 2011 as container ship operators, trucking companies and others try to get the right capacity to the right place at the right time — at the right rate.

That does not necessarily mean another season or two of conflict, as we saw in 2010.

We saw several times over the past year-and-a-half charts depicting the steep fluctuations in shipping rates over time, with lines rising and falling sharply outside high and low bars representing acceptable variations from the average rates. Those boundaries are just as important to shippers as they are to carriers, and shippers will face their own form of cost management this year as they try to keep their own outlays consistent with demand.

The lively rate market was in full swing as 2011 began.

The Shanghai Shipping Exchange showed container shipping rates were sliding for business heading to the United States but still well ahead of pricing at the start of 2010. Asia-Europe rates, however, had fallen back below the January 2010 level.

On the domestic front, FedEx Freight last month reported its pricing grew 5.4 percent from one fiscal quarter to the next — but shipment volume declined and the trucking company’s operating margin deteriorated.

Recovering rates, it seems, is only half the battle.

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.