By Joseph Bonney
ECONOMISTS, ESPECIALLY those of the armchair variety, keep yapping about “green shoots” heralding a recovery from the worst global recession since the 1930s.
In container shipping, the green-shoots talk centers less on a rise in demand or a fall in ship supply than on something that may be more imminent — bankruptcies of major carriers.
Bankruptcies aren’t usually seen as positive events, but some suggest that a few of them could be just what container shipping needs. According to this theory, the collapse of a high-profile carrier or two may benefit surviving lines by jolting them into pricing their services at profitable rates.
riers’ rate-cutting spree with a combination of amazement and concern. They appreciate the savings but know the current rates are unsustainable and that inevitably will contribute to weaker service.
Shippers are businesspeople, too. The more thoughtful ones acknowledge that carriers operate in a complex, fast-changing business requiring advance commitments of huge amounts of capital.
Will that sympathy translate into more cash for carriers? We’ll find out during the next few weeks. The early betting is that the lines will persuade shippers to agree to some adjustments, but not across-the-board increases of $500 per TEU in addition to peak-season surcharges.
WHILE ECONOMISTS SEARCH FOR SIGNS OF
A RECOVERING ECONOMY, CONTAINER LINES
ARE SEARCHING FOR GREEN SHOOTS OF A
DIFFERENT KIND: A BUSINESS MODEL THAT
EMPHASIZES REVENUE OVER MARKET SHARE.
No question, the carriers are in dire financial straits. The Trans-pacific Stabilization Agreement emphasized that with its extraordinary appeal for customers to share the pain by agreeing to hefty rate increases in newly signed contracts.
The TSA’s announcement was accurately described by the Financial Times as “half justification, half plea for clemency.” The carriers admitted they blundered badly by agreeing to rate cuts in a panicky effort to fill ships in a slumping market.
Just as extraordinary as the TSA’s statement is the agreement by many shippers that the lines have a valid point. Shippers I’ve spoken with say they’ve watched the car-
That brings us back to the subject of carriers’ survival — and the question of what would happen if a prominent carrier goes bust. Would a big bankruptcy really change carriers’ thinking? Would it really represent a turning point for their profitability?
I doubt it, for several reasons:
■ Although all carriers are being hit hard during the worst crisis in container shipping’s 50-year history, only a few appear to be in real danger of disappearing. Most of the big lines are part of diversified companies with non-shipping interests, or can count on at least indirect government support. They will have to cut services and lose experienced
staff, but most of the big carriers will survive the current crisis. Container shipping will still be a fairly fragmented industry, meaning shippers will still have opportunities to shop for a lower rate.
■ Even when carriers disappear, their ships don’t. The industry is awash with a huge and still-grow-ing oversupply of big vessels that were ordered during the flush years before the economy crashed. Carriers are returning chartered tonnage to owners and laying up ships as fast as they can, but these steps will provide only temporary relief. The moment that demand starts to pick up and rates begin to rise, carriers will seize the opportunity to use some of these ships to launch new services or expand existing ones. Either way, there will be downward pressure on rates.
■ Despite mea culpas such as the TSA’s, carriers have yet to prove they’ve kicked their addiction to market share. Liner executives admit this is what got them into their current mess — and into previous messes during the last half century — but they seem powerless to do much about it.
For outsiders, the solution seems simple: just say no to unprofitable business. For those in the arena, it’s not so easy, especially if you have an expensive ship that’s sailing half empty while your company needs cash to meet its obligations.
While economists look for signs of a recovering economy, container ship lines are searching for green shoots of a different kind: a business model that emphasizes revenue over market share. Let’s hope they don’t need bankruptcies to find it. JOC
Joseph Bonney is executive editor of The Journal of Commerce. He can be contacted at 973-848-7139, or a jbonney@joc.com.
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