The recent bankruptcy of Korea's Hanjin Shipping Co., Ltd. supplied stark evidence that carriers can’t continue to build more and bigger ships when the business isn't there to justify them.

Hanjin, of course, has had its own set of problems, including an increasingly insupportable debt load coupled with a sinking score on financial stress indexes. But its problems are also those of ostensibly more stable rivals and service partners.

Overcapacity is the chief culprit, made manifest by carriers’ relentless drive over the years to build mega-containerships that were supposed to offer unprecedented unit economies. And they would, if only there were sufficient cargoes to fill the slots.

Other aspects of carriers’ behavior have contributed to this sorry state of affairs, chief among them a decision around the year 2000 to begin slowing down their ships. The move was touted as a nod to environmental awareness, as it cut back sharply on the consumption of fuel. And, not incidentally, widened carriers’ profit margins. Whatever its rationale, slow-steaming brought down speeds from a high of 25 knots to as little as 15 knots, forcing shippers to keep goods on the water for longer periods of them, and raising their inventory cost.

In the end, it wasn’t that great an idea for carriers either, given that they were often impelled to add a vessel to a given route in order to fill in service gaps, thereby boosting total capacity in the trade. Then came those ships of 18,000 twenty-foot equivalents or greater, which carriers have struggled (and often failed) to fill.

It’s no wonder that they were unable to sustain a series of general rate increases, in the face of weakening demand and a persistent glut of supply. But carrier executives have continued to engage in their particular form of chicken, daring their rivals to sail off the cliff before they themselves reach the edge.

Which Hanjin now has, presenting the industry with “the largest financial collapse of a liner company in the history of containerization,” in the words of Drewry Shipping Consultants Ltd. (In terms of market share, Hanjin reportedly is the sixth largest container line in the Asia-North America trade.) For shippers, Hanjin’s demise couldn’t have come at a worse time, occurring in the midst of the peak season for cargoes moving to the U.S. for the 2016 holiday shopping season.

What happens next? In the short term, it’s a matter of freeing trapped freight from stranded Hanjin ships, many of which lie off the coast because ports and terminal operators refuse to work them for fear of not getting paid. In recent days, the logjam has begun to clear, with at least one vessel being allowed to dock at the Port of Long Beach following a temporary pledge of funds from Hanjin executives and shareholders, and another at the Port of Oakland. (Subsequent reports put the number of inbound ships to be unloaded at four.) Eventually, all of the captive cargoes should find their way to anxious consignees, probably making it to store shelves in time for Christmas.

But a deeper problem – one that’s sure to outlive the painful bankruptcy proceedings that Hanjin must now endure – confronts all major container lines and their customers. For their part, carriers will have to assess their individual economic plights, and figure out how to keep afloat in what promises to be a sluggish economy for the foreseeable future.

Shippers will undergo their own painful self-examination. Their response could be similar to that of customers of United Parcel Service back in 1997, when a strike paralyzed operations for more than two weeks. Legions of shippers swore at the time that they would never again trust a single major carrier with so much of their business, recalls Joe Dunlap, managing director of supply chain services for the Americas with commercial real estate giant CBRE Group, Inc.

He suggests that customers of Hanjin and other container lines will reach a similar state of awareness today. They should consider signing contracts with multiple carriers, he says, so as not to be left on the docks when one of their service providers abruptly drops out of the trade. By spreading the business around, they keep multiple options open, albeit at higher rates because of reduced loyalty to any single carrier.

Such a move makes sense on paper. But the proliferation of slot-sharing agreements among carriers today makes it difficult to carry out with any success. How does one know, precisely, on which ship one’s cargo will end up? Many shippers with containers on Hanjin vessels booked with one of the carrier’s service partners. A partial solution is to contract with multiple vessel-sharing agreements (VSAs), but that still doesn’t give the shipper precise knowledge about the actual line that will be moving its freight.

Nevertheless, Dunlap has spoken with multiple CBRE clients that are beginning to reassess their transportation-sourcing strategies in the wake of the Hanjin bankruptcy. This time around, they’re paying closer attention to the subject of risk, which is fast becoming a bigger concern of global supply chains in any case.

In the end, the bankruptcy of Hanjin (and other lines to come) could serve to alter the mentality of carriers and shippers alike. Carriers because they’ll finally abandon the strategy of flooding the market with capacity in hopes that their rivals will sink first. And shippers because they’ll back off their obsession with price, realizing in the event their partial culpability in the desperate plight of container lines. For which there is no replacement.

Comment on This Article