Executive Briefings

Is It Smooth Sailing and Clear Skies for Ocean and Air Cargo?

These competitive modes have at least two things in common: Each took a drubbing in the past year or so, and each is cautiously optimistic that things are looking up.

Here in the first half of 2010, it is the fervent hope of those in ocean and air freight transportation that we've put the worst behind us. It's spring, after all, and Mother Nature is bursting forth with new vitality all around us. Can't these vital sectors show new growth as well? Well, they may. Volumes are up in both arenas. How you read those figures, however, depends to some extent on whether you're a glass half full or glass half empty kind of person.

Take the ocean carrier and ports business first. The lines had a disastrous 2009 by anyone's reckoning. The container shipping industry alone lost perhaps $20bn, and that's left a number of lines reeling. Quite a few have issued shares and other instruments to raise needed capital, 'K' Line being one of the latest to do so. Others have turned to their governments for either bailouts or other relief. Hapag-Lloyd secured a $1bn in loan guarantees from the German government, for example. Happily for it, cargo volume seems to be up and management is optimistic that government backing won't be needed any longer. Government intervention, incidentally, has been a nettlesome subject in the industry as the degree of state help often turns on the amount of a government's stake in a line. Evidently, some privately held carriers have felt disadvantaged.

In any event, many in the industry are feeling a bit more confident these days. For instance, the Westbound Transpacific Stabilization Agreement, which numbers Hapag-Lloyd, 'K' Line,  APL, COSCO, Evergreen, Hanjin, Hyundai, Yang Ming, OOCL and NYK Line among its members, sees growth for all types of westbound cargo rising 4.1 percent this year and just missing 7 percent in 2011.

That would be a terrific boost for a beleaguered industry, but in the meantime a number of decisions, some quite painful, need to be made. For instance, rates are being raised - seemingly in a continual upward spiral - orders for new ships are being canceled where possible, and others are being furloughed.

WTSA members want to see rate hikes in April: in dry and reefer cargo for the U.S. West Coast, they want increases of $240 per 20-foot container and $300 per 40-foot box. Increases would be higher for most other kinds of freight.

The action comes on top of rate increases recommended by WTSA in September, December and January. Despite the boosts, carriers continue to lose money east and west between the U.S. and Asia, according to WTSA executive administrator Brian Conrad.

But, of course, it doesn't stop there. Mediterranean Shipping Co. has announced a general rate increase for exports from North America to Europe and the Mediterranean. Its comment that the decision was designed to "advance freight rates toward a sustainable level" suggests more price increases are coming.

OOCL has its rate-hike plans as well, and so does CMA CGM. The former says the cost is gong up by $100 per TEU on shipments from northern Europe, Mediterranean and Black Sea ports to Australia and New Zealand. It also plans a "peak season surcharge." For its part, the French line plans a slew of increases ranging from $100 per 20-foot container to $500 per 40-foot container.

This is not meant to single out these carriers but to illustrate an industry-wide approach. The lines say they have no choice, and many port operators are in agreement. For example, Jim Newsome, president and CEO of the South Carolina State ports Authority, which operates the Port of Charleston, says there is no reasonable alternative. Rates have declined to virtually unsustainable levels, in his view. "At a certain point, that's the only answer there is," he says. "You have to have capital to do container services."

If anyone doubted the effects of the downturn, just look at the number of vessels mothballed. Maersk is a good example. Several years ago, it ordered seven so-called "fast" ships that it planned to run between China and the U.S. West Coast at speeds of 30 knots or better. The financial meltdown torpedoed those plans, however. Several of those ships - which can hold only about a third of the cargo of the biggest boats - are docked permanently because it makes no sense to run such vessels.

In fact, slower ships just got slower. In order to save costly fuel, lines began slow steaming, cutting speeds in some cases by 25 percent. That, of course, kept those vessels at sea longer, but didn't contribute enough to suck up capacity. Still others had to be dry-docked.

Is the poor economy solely to blame for a situation that has resulted in vast parking lots for container ships? Well, yes and no. To their credit, carrier management has to put in ship orders years in advance, and no one saw the economy tanking like it did and taking demand down with it. And, too, the lines had been trained by experience: they had witnessed double-digit growth for years. Nevertheless, one has to question how effective the panning was by ocean carriers.

Asked for an outsider's perspective, Greg Borossay, senior manager for trade and carrier development at the Port of Portland, says, "They built out far beyond what the market needs or any reasonable economic forecast back in 2006 would have needed."

Where possible, lines have canceled orders for new builds or in some cases planned containerships have been converted to other types of vessels, according to Alphaliner, a maritime news service. To be sure, most outright cancellations involve smaller ships. Altogether, the service reports, cancellations have affected almost 7 percent of 6.5 million TEUs of containership capacity that had been ordered through October 2008.

The question is, even with this great "overhang" in capacity, are there enough vessels in a given trade? The Agriculture Transportation Coalition has recently complained that operators, particularly on the U.S. West Coast have underestimated U.S. exports and not seen fit to supply enough shipping to meet demand. Peter Friedmann, executive director of the AgTC, says exporters are simply unable to meet the demand of their customers because of capacity constraints. The National Industrial Transportation League has not been as critical, but its executive vice president, Peter Gatti, notes that inbound cargo has been inadequate to meet the shipping needs of American exporters.

How much of that is a conscious attempt by carriers to bring inbound-outbound movements into balance is anyone's guess. But while growth in the developed countries is modest, it continues at a rapid clip in developing nations, especially in China. Those nations have a heavy demand for U.S. raw-materials exports.

On the import side, hopes may be running ahead of hard facts. Some predict a double-digit import trade this year, but that wasn't the view among most participants in October at the Retail Industry Leaders Association conference. There, many felt that beyond replenishment of inventories, imports might grow 5 percent structurally at most.

Going forward, the companies that have prepared themselves best for a recovering economy are the ones that have attended to their infrastructure and cut costs where possible. That's true for ports as well as carriers.

In down times, you still have to maintain your facilities. In the case of ports, you must still solicit the business of the major lines. Business may be up and down, dramatically so at times as we've seen in the last couple of years, but a large part of your cost structure remains the same.

To infrastructure upkeep, add legislation surrounding many permitting activities, ever growing security mandates and environmental initiatives.

And then there's the Panama Canal and the effect on ports that the much larger vessels that will navigate the channel will have. Newsome, at Charleston, says 72 percent of the capacity on order is post-Panamax in nature, requiring deep harbors to handle them. Going forward, that will mandates huge amounts of strategic investment.

As for the airfreight industry, how's this for optimism: the sector can bounce back from the recession stronger than other modes as manufacturers decide outsourcing, particularly to Asia, isn't such a bad and expensive idea after all. That's the view of the chairman of the International Air Cargo Association, Ulrich Ogiermann. He says the renewed emphasis on nearshoring-sourcing materials and components closer to final points of production in, say, Europe or North America-is misguided. Higher local production costs far outweigh higher transportation costs, he says.

Even if his prediction is borne out, it won't be soon, by his own reckoning. The cargo industry has to stop the hemorrhaging from 2009. He feels the transition to sustainable improvement isn't likely until sometime in 2011.

Be that as it may, the numbers have crept up a bit. December 2009 figures from the International Air Transport Association show freight demand up more than 24 percent over a year earlier. Sounds impressive, but that's still 9 percent lower than the high point in January 2008. December was the nadir of 2008.

Things are bit better in Asia itself. The Association of Asia Pacific Airlines says January 2010 recorded more than 33 percent growth in freight-ton kilometers over a year earlier. But again, January 2008 is the benchmark, and this January's performance was still 7 percent lower than that. So, in both cases, the current numbers look good, but compared to what?

To position their companies for the coming recovery, wise company managers have overseen lean initiatives that have mandated cost cutting and efficiencies. They've had to. Here's the backdrop to how we got here.

In 2008, things looked a lot different. Volumes were up, and that was no surprise. After all, air cargo had seen annual growth of just under 7 percent for the past 20 years, according to Boeing, which publishes a biannual World Air Cargo Forecast. At the time, the aircraft manufacturer was confident enough to say that airfreight movements would continue annual growth at that pace for another two decades. Hardly wishful thinking, the forecast is based on data that drives the company's production. Officials there felt that the industry would require another 3,360 freighters by 2027.

That was then and this is now, and in between Boeing has ratcheted its cargo-growth prediction down twice. It stands at 5.4 percent a year now. Most operators would take that and fly, if they could.

Speed to market is a primary benefit of air cargo. Competitors on  ground and ocean have vastly improved their speeds as well. But as mentioned above, many fast ships are stuck in neutral now, and the trucking industry, which takes days rather than weeks to get from A to B, is purely a domestic affair. Electronics, pharmaceuticals, clothing, high-value and highly-sensitive products are among the verticals where time-to-market considerations may dictate going by air.

Those movements essentially are inbound to America. Could the industry be missing a bet by not pursuing U.S. exporters looking to go the other way? Jens Tubbessing, who heads up GSSA Airline Network Services, thinks so. He says it's a mistake not to educate those small and mid-sized businesses about the possibilities of exports by air. The reality is that less than one percent of the country's 30 million companies do any exporting, according to the U.S. Commerce Department, and when they do, almost 60 percent ship to only one country. Commerce has reportedly partnered with UPS to try to stimulate exports by SMBs. It's a a bitter irony then that the air cargo market is in such a state that in February UPS announced that it would lay off at least 300 pilots in another cost-cutting move.

If the latest numbers are not merely a blip but in fact reflect a sustainable recovery in cargo volumes, then the question has to do with how to match capacity with demand. There's a parallel between airfreight and ocean transportation in one sense. With too many planes and boats, each sector resorted to laying up assets. That led to jokes about "parking lots" outside Singapore and in the desert in the American Southwest, jokes that weren't terribly funny inside the industry. If airfreight demand is on the upswing, can some of landlocked air freighters be returned to service?

The bigger question is whether the recent bump in volumes is real at all or just a holiday surge. It's well known that cargo stacked up in Asia when retailers realized late in the game that there was more demand this past holiday season that many had planned for. All of a sudden, they needed replenishing.

As in ocean transportation, those air cargo providers who are best positioned for the recovery are the ones who have pared costs but are ready to provide a full palate of services. Perhaps there's a lesson in what airfreight forwarders have done for years: diversify.

When many shippers view air cargo as a premium, it becomes a big opportunity to drive down costs by simply cutting it out. For them, airfreight is an exception, not something that's planned. Those clients look for the best overall value in service and cost tradeoffs, while maintaining their own level of customer service.

The forwarders' response: they have moved into other modes in order to provider the service and price points that meet customer demand. In addition, they have onboarded such value-adds as kitting, pick/pack, poll distribution, transloading, you name it. These develop additional revenue streams and benefit the client base.

Both are clearly top of mind for air cargo operators who hope 2010 has brought the end of the economic turbulence.

Resource Links:
Westbound Transpacific Stabilization Agreement, www.wtsacarriers.org
Agriculture Transportation Coalition, www.agtrans.org
National Industrial Transportation League, www.nitl.org
Alphaliner, www.alphaliner.com
South Carolina State Ports Authority, www.scspa.com
Port of Portland, www.portofportland.com
International Air Cargo Association, www.tiaca.org
Boeing Company, www.boeing.com
Association of Asia Pacific Airlines, www.aapairlines.org
International Air Transport Association, www.iata.org

Here in the first half of 2010, it is the fervent hope of those in ocean and air freight transportation that we've put the worst behind us. It's spring, after all, and Mother Nature is bursting forth with new vitality all around us. Can't these vital sectors show new growth as well? Well, they may. Volumes are up in both arenas. How you read those figures, however, depends to some extent on whether you're a glass half full or glass half empty kind of person.

Take the ocean carrier and ports business first. The lines had a disastrous 2009 by anyone's reckoning. The container shipping industry alone lost perhaps $20bn, and that's left a number of lines reeling. Quite a few have issued shares and other instruments to raise needed capital, 'K' Line being one of the latest to do so. Others have turned to their governments for either bailouts or other relief. Hapag-Lloyd secured a $1bn in loan guarantees from the German government, for example. Happily for it, cargo volume seems to be up and management is optimistic that government backing won't be needed any longer. Government intervention, incidentally, has been a nettlesome subject in the industry as the degree of state help often turns on the amount of a government's stake in a line. Evidently, some privately held carriers have felt disadvantaged.

In any event, many in the industry are feeling a bit more confident these days. For instance, the Westbound Transpacific Stabilization Agreement, which numbers Hapag-Lloyd, 'K' Line,  APL, COSCO, Evergreen, Hanjin, Hyundai, Yang Ming, OOCL and NYK Line among its members, sees growth for all types of westbound cargo rising 4.1 percent this year and just missing 7 percent in 2011.

That would be a terrific boost for a beleaguered industry, but in the meantime a number of decisions, some quite painful, need to be made. For instance, rates are being raised - seemingly in a continual upward spiral - orders for new ships are being canceled where possible, and others are being furloughed.

WTSA members want to see rate hikes in April: in dry and reefer cargo for the U.S. West Coast, they want increases of $240 per 20-foot container and $300 per 40-foot box. Increases would be higher for most other kinds of freight.

The action comes on top of rate increases recommended by WTSA in September, December and January. Despite the boosts, carriers continue to lose money east and west between the U.S. and Asia, according to WTSA executive administrator Brian Conrad.

But, of course, it doesn't stop there. Mediterranean Shipping Co. has announced a general rate increase for exports from North America to Europe and the Mediterranean. Its comment that the decision was designed to "advance freight rates toward a sustainable level" suggests more price increases are coming.

OOCL has its rate-hike plans as well, and so does CMA CGM. The former says the cost is gong up by $100 per TEU on shipments from northern Europe, Mediterranean and Black Sea ports to Australia and New Zealand. It also plans a "peak season surcharge." For its part, the French line plans a slew of increases ranging from $100 per 20-foot container to $500 per 40-foot container.

This is not meant to single out these carriers but to illustrate an industry-wide approach. The lines say they have no choice, and many port operators are in agreement. For example, Jim Newsome, president and CEO of the South Carolina State ports Authority, which operates the Port of Charleston, says there is no reasonable alternative. Rates have declined to virtually unsustainable levels, in his view. "At a certain point, that's the only answer there is," he says. "You have to have capital to do container services."

If anyone doubted the effects of the downturn, just look at the number of vessels mothballed. Maersk is a good example. Several years ago, it ordered seven so-called "fast" ships that it planned to run between China and the U.S. West Coast at speeds of 30 knots or better. The financial meltdown torpedoed those plans, however. Several of those ships - which can hold only about a third of the cargo of the biggest boats - are docked permanently because it makes no sense to run such vessels.

In fact, slower ships just got slower. In order to save costly fuel, lines began slow steaming, cutting speeds in some cases by 25 percent. That, of course, kept those vessels at sea longer, but didn't contribute enough to suck up capacity. Still others had to be dry-docked.

Is the poor economy solely to blame for a situation that has resulted in vast parking lots for container ships? Well, yes and no. To their credit, carrier management has to put in ship orders years in advance, and no one saw the economy tanking like it did and taking demand down with it. And, too, the lines had been trained by experience: they had witnessed double-digit growth for years. Nevertheless, one has to question how effective the panning was by ocean carriers.

Asked for an outsider's perspective, Greg Borossay, senior manager for trade and carrier development at the Port of Portland, says, "They built out far beyond what the market needs or any reasonable economic forecast back in 2006 would have needed."

Where possible, lines have canceled orders for new builds or in some cases planned containerships have been converted to other types of vessels, according to Alphaliner, a maritime news service. To be sure, most outright cancellations involve smaller ships. Altogether, the service reports, cancellations have affected almost 7 percent of 6.5 million TEUs of containership capacity that had been ordered through October 2008.

The question is, even with this great "overhang" in capacity, are there enough vessels in a given trade? The Agriculture Transportation Coalition has recently complained that operators, particularly on the U.S. West Coast have underestimated U.S. exports and not seen fit to supply enough shipping to meet demand. Peter Friedmann, executive director of the AgTC, says exporters are simply unable to meet the demand of their customers because of capacity constraints. The National Industrial Transportation League has not been as critical, but its executive vice president, Peter Gatti, notes that inbound cargo has been inadequate to meet the shipping needs of American exporters.

How much of that is a conscious attempt by carriers to bring inbound-outbound movements into balance is anyone's guess. But while growth in the developed countries is modest, it continues at a rapid clip in developing nations, especially in China. Those nations have a heavy demand for U.S. raw-materials exports.

On the import side, hopes may be running ahead of hard facts. Some predict a double-digit import trade this year, but that wasn't the view among most participants in October at the Retail Industry Leaders Association conference. There, many felt that beyond replenishment of inventories, imports might grow 5 percent structurally at most.

Going forward, the companies that have prepared themselves best for a recovering economy are the ones that have attended to their infrastructure and cut costs where possible. That's true for ports as well as carriers.

In down times, you still have to maintain your facilities. In the case of ports, you must still solicit the business of the major lines. Business may be up and down, dramatically so at times as we've seen in the last couple of years, but a large part of your cost structure remains the same.

To infrastructure upkeep, add legislation surrounding many permitting activities, ever growing security mandates and environmental initiatives.

And then there's the Panama Canal and the effect on ports that the much larger vessels that will navigate the channel will have. Newsome, at Charleston, says 72 percent of the capacity on order is post-Panamax in nature, requiring deep harbors to handle them. Going forward, that will mandates huge amounts of strategic investment.

As for the airfreight industry, how's this for optimism: the sector can bounce back from the recession stronger than other modes as manufacturers decide outsourcing, particularly to Asia, isn't such a bad and expensive idea after all. That's the view of the chairman of the International Air Cargo Association, Ulrich Ogiermann. He says the renewed emphasis on nearshoring-sourcing materials and components closer to final points of production in, say, Europe or North America-is misguided. Higher local production costs far outweigh higher transportation costs, he says.

Even if his prediction is borne out, it won't be soon, by his own reckoning. The cargo industry has to stop the hemorrhaging from 2009. He feels the transition to sustainable improvement isn't likely until sometime in 2011.

Be that as it may, the numbers have crept up a bit. December 2009 figures from the International Air Transport Association show freight demand up more than 24 percent over a year earlier. Sounds impressive, but that's still 9 percent lower than the high point in January 2008. December was the nadir of 2008.

Things are bit better in Asia itself. The Association of Asia Pacific Airlines says January 2010 recorded more than 33 percent growth in freight-ton kilometers over a year earlier. But again, January 2008 is the benchmark, and this January's performance was still 7 percent lower than that. So, in both cases, the current numbers look good, but compared to what?

To position their companies for the coming recovery, wise company managers have overseen lean initiatives that have mandated cost cutting and efficiencies. They've had to. Here's the backdrop to how we got here.

In 2008, things looked a lot different. Volumes were up, and that was no surprise. After all, air cargo had seen annual growth of just under 7 percent for the past 20 years, according to Boeing, which publishes a biannual World Air Cargo Forecast. At the time, the aircraft manufacturer was confident enough to say that airfreight movements would continue annual growth at that pace for another two decades. Hardly wishful thinking, the forecast is based on data that drives the company's production. Officials there felt that the industry would require another 3,360 freighters by 2027.

That was then and this is now, and in between Boeing has ratcheted its cargo-growth prediction down twice. It stands at 5.4 percent a year now. Most operators would take that and fly, if they could.

Speed to market is a primary benefit of air cargo. Competitors on  ground and ocean have vastly improved their speeds as well. But as mentioned above, many fast ships are stuck in neutral now, and the trucking industry, which takes days rather than weeks to get from A to B, is purely a domestic affair. Electronics, pharmaceuticals, clothing, high-value and highly-sensitive products are among the verticals where time-to-market considerations may dictate going by air.

Those movements essentially are inbound to America. Could the industry be missing a bet by not pursuing U.S. exporters looking to go the other way? Jens Tubbessing, who heads up GSSA Airline Network Services, thinks so. He says it's a mistake not to educate those small and mid-sized businesses about the possibilities of exports by air. The reality is that less than one percent of the country's 30 million companies do any exporting, according to the U.S. Commerce Department, and when they do, almost 60 percent ship to only one country. Commerce has reportedly partnered with UPS to try to stimulate exports by SMBs. It's a a bitter irony then that the air cargo market is in such a state that in February UPS announced that it would lay off at least 300 pilots in another cost-cutting move.

If the latest numbers are not merely a blip but in fact reflect a sustainable recovery in cargo volumes, then the question has to do with how to match capacity with demand. There's a parallel between airfreight and ocean transportation in one sense. With too many planes and boats, each sector resorted to laying up assets. That led to jokes about "parking lots" outside Singapore and in the desert in the American Southwest, jokes that weren't terribly funny inside the industry. If airfreight demand is on the upswing, can some of landlocked air freighters be returned to service?

The bigger question is whether the recent bump in volumes is real at all or just a holiday surge. It's well known that cargo stacked up in Asia when retailers realized late in the game that there was more demand this past holiday season that many had planned for. All of a sudden, they needed replenishing.

As in ocean transportation, those air cargo providers who are best positioned for the recovery are the ones who have pared costs but are ready to provide a full palate of services. Perhaps there's a lesson in what airfreight forwarders have done for years: diversify.

When many shippers view air cargo as a premium, it becomes a big opportunity to drive down costs by simply cutting it out. For them, airfreight is an exception, not something that's planned. Those clients look for the best overall value in service and cost tradeoffs, while maintaining their own level of customer service.

The forwarders' response: they have moved into other modes in order to provider the service and price points that meet customer demand. In addition, they have onboarded such value-adds as kitting, pick/pack, poll distribution, transloading, you name it. These develop additional revenue streams and benefit the client base.

Both are clearly top of mind for air cargo operators who hope 2010 has brought the end of the economic turbulence.

Resource Links:
Westbound Transpacific Stabilization Agreement, www.wtsacarriers.org
Agriculture Transportation Coalition, www.agtrans.org
National Industrial Transportation League, www.nitl.org
Alphaliner, www.alphaliner.com
South Carolina State Ports Authority, www.scspa.com
Port of Portland, www.portofportland.com
International Air Cargo Association, www.tiaca.org
Boeing Company, www.boeing.com
Association of Asia Pacific Airlines, www.aapairlines.org
International Air Transport Association, www.iata.org