International logistics links are under increasing strain with many air and sea carriers struggling to minimise losses. But will this result in structural changes in the market?
Extended supply chains need reliable, efficient and cost-effective transport connections to bring goods from the point of manufacture to the point of consumption.
And, there is no doubt that there is plenty of desire among major corporations to move as much product by sea as possible to avoid expensive air cargo charges.
Nevertheless, the ocean carriers responsible for achieving this have been having a torrid time over recent months.
Maersk, the largest of the container lines came up with a market-changing move when it launched its “Daily Maersk” service last autumn. This promises a guaranteed on-time delivery service between Asia and Europe. Transit times are fixed along 12 corridors, with a promise of absolute reliability and compensation for delayed deliveries.
The move sparked a merger of two rival shipping alliances to create the six member G6 alliance in December on the Far East – Europe trade. Members include: APL, Hapag-Lloyd, Hyundai Merchant Marine, Mitsui OSK Lines, NYK and OOCL. That was quickly followed by Evergreen’s decision to cooperate more closely with the CKYH Alliance, which includes Cosco, K Line, Yangming and Hanjin. But, Evergreen stopped short of actually joining the alliance.
Despite all this activity, container lines have been struggling to push rates up to profitable levels on the Asia-Europe trades. In the first quarter Maersk, the largest container line, produced a loss of $571m compared to a profit of $451m in the first quarter last year – and that was after a 1.3 per cent rise in demand.
Earnings per transported forty foot equivalent unit, excluding divestment gains, declined by $480 compared to Q1 2011 primarily due to the decline in freight rates. Nevertheless, says group chief executive Nils Anderson: “Our efforts to increase container rates are paying off and we will continue our initiatives to improve rates throughout the year.”
Other lines have also had problems. OOCL reported that total volumes increased by 5.4 per cent in the first quarter. However, revenue was down 0.9 per cent – and on the Asia-Europe trade revenue fell 21.2 per cent to $219m. In fact, it said, overall average revenue per TEU fell six per cent compared to the first quarter of 2011.
Hapag Lloyd reported a loss of 132m euros for the first quarter and highlighted rising energy costs – the average bunker cost was 31 per cent up on last year in the first quarter.
CMA CGM reported a net loss of $248m for the first quarter, saying it “nevertheless represents one of the best financial and operating performances in the container shipping industry for the period”.
Maersk highlights a combination of factors that have conspired to limit the prices that shipping lines can command, notably a steady stream of new ships coming out of the yards adding to capacity and holding rates at unsustainable levels.
A total of 47 new vessels, of which 18 have a capacity above 10,000 TEU, were delivered to the global container fleet in the first quarter of 2012.
And, if another sign of the tough market conditions were needed, in May the G6 Alliance decided not to reinstate its planned seventh Asia-Europe loop service.
The original plan was to launch the service in March but it was postponed because of the unsuitable market conditions. The G6 said in May that it had not seen any improvements in the current market environment to justify the additional service.
Efforts to manage supply have focused on reducing speed and laying up vessels which has had some impact on the market balance. Slow steaming is popular with the shipping lines as it soaks up additional capacity as well as reducing fuel consumption. However, it is less popular with shippers as it increases the level of inventory in supply chains resulting in higher costs.
Maersk’s efforts to restore profitability have focused on a general rate increase and the withdrawal of nine per cent capacity on the Asia – Europe trades. Most of the capacity withdrawal came from a reduction of the average speed on a round-trip. Bunker consumption is reduced and vessel utilisation improved by the speed reduction.
The line now expects a negative up to neutral result in 2012, based on the assumption that the rate restoration that has taken place since March 2012 will continue. It warns that “the outlook is very sensitive towards changes in the market balance. Global demand for seaborne containers is expected to increase by 4-6 per cent in 2012, with lower increases on the Asia – Europe trades but higher increases on the North – South trades.”
One of the results of the move to slow steaming, has been something of an upturn in interest in the potential of sea-air services. Often this has been seen as an emergency measure. If you are running short of stock in London, you take goods off the ship in the Dubai and fly them the rest of the way. But, it can also been seen as a halfway house in terms of cost and time. Instead of a 30 day transit time from the Far East, the journey time can be reduced to 12 days via Dubai – or even shorter if goods are flown from Singapore. And the cost can be up to a third less than for a full airfreight transit.
Case study- Mystery shoppers tackle forwarders
It might seem that in these tough trading conditions, companies would be pushing resources into the sales effort – so a new study by consultants Simon-Kucher & Partners might come as a surprise. It used mystery shoppers to test eight of the leading forwarders from nine countries and found that over half the sales activities were performed insufficiently, and four of the six sales activities failed to differentiate from the competition.
Simon-Kucher argues that core freight forwarding products have become commoditised. To overcome the pressure, many forwarders offer additional services – this in turn spreads their service palette as logistics providers very thin.
“Companies must seize this opportunity to differentiate their services which in turn will boost their returns,” says partner Philipp Biermann.
The Global Forwarding Mystery Shopping Study found that in most cases, the forwarders asked the mystery shopper to write down the shipment details and send the information by e-mail. “The opportunity to make an active sales pitch was completely lost,” says Frank Hälsig, who headed the study.
However, it also found that most forwarders excelled in actively cross-selling air and ocean freight services. The mystery shoppers were able to get combined offers for both freight routes from the same sales rep. While several forwarders sent their air and ocean freight services in one offer, others sent them separately. In the worst case, separate documents were sent from two different people within a company.
Air cargo- Carriers look for an increase in volumes
It’s been a difficult time for air cargo operators with falling demand and over-capacity affecting rates. However, the International Air Transport Association reckons demand has bottomed out, following a sharp fall in 2011, in line with the moderate improvement of business confidence in some economies outside Europe.
In a revision to its industry outlook for 2012, it warns that the upturn is weak and narrowly based, with only Middle Eastern airlines seeing significant volume gains. European economic weakness is expected to limit any further improvement. Overall 47.8 million tonnes of freight are expected to be shipped by air in 2012, basically unchanged from the 47.7 million tonnes carried in 2011.
Growth in available tonnes kilometres (a combined measure for the passenger and cargo capacity) is forecast to be limited to 3.3 per cent this year, compared with growth in both passenger and cargo traffic of 3.5 per cent.
European carriers are expected to post the industry’s largest aggregate losses of $1.1 billion as the Eurozone crisis continues. This is a $500 million downgrade from the March forecast. Demand growth is expected to slow to 2.3 per cent, which is significantly down on the 6.7 per cent expansion of 2011. Some major European economies are already in recession (Spain and the United Kingdom) and it is anticipated that economic weakness will spread further during the course of the year as the Eurozone crisis deepens. Concurrently, European carriers continue to be hit by high and rising tax regimes, inefficiencies in air traffic management, and the high cost of complying with poorly thought-out regulations.
The problems are highlighted by Cargolux, where sales rose 8.4 per cent to $1.87bn, but the carrier slumped to an $18m net loss last year after producing a profit of $60m the year before. Chairman Albert Wildgen said: “It is difficult to pinpoint one reason specifically, as a combination of factors impacted our performance negatively, including excess capacity in the markets, steadily rising oil prices, an unfavourable fleet mix coupled with higher wet leasing costs and reduced network flexibility.”
Clearly, all the major carriers are under pressure to match capacity to demand more closely, and there is some evidence of consolidation in the market with IAG taking over bmi.
Air France has just set out plans to reduces its freighter fleet from five to four and to integrate its cargo business more closely with sister companies KLM and Martinair.
A tough market is not the only problem for the aviation industry. It is fighting tooth and nail against EU proposals for an emissions trading scheme. In his keynote address to the IATA conference last month, director general and CEO Tony Tyler called the EU scheme “a polarising obstacle that is preventing real progress”.
Perhaps it was significant that IATA chose Beijing as the location for the conference. At any rate, Tyler was quick to point out that China has been at the forefront of the opposition to the European ETS.
“To meet our ambitious targets we will need a globally-agreed approach covering the areas of technology, operations, and infrastructure as well as positive market-based- measures. Everyone, including Europe, agrees that the solution must be a global agreement through ICAO at the 2013 Assembly.”
ICAO is currently working on four options for a single, global market-based measure for international aviation. These are: a global mandatory offsetting scheme; a global mandatory offsetting scheme with additional revenue-raising; a global emissions trading scheme; and a global “Baseline & Credit” scheme based on efficiency.
“We are very encouraged by the recent progress at ICAO,” said Tyler. “For the first time there will be concrete proposals on the table for states to consider. It is vital that agreement is reached at the next ICAO Assembly so that industry and government can proceed together.”