Economic Downturn Spells reduction in Container Capacity

Everybody expected that the airlines would reduce capacity this fall.  They have been saying this for months. Shippers planned for it.  I'm less sure however of how many US importers expected a reduction in container ship capacity.  The US and global economic downturn definitely has taken a toll on ocean carriers. They've just been a bit less visible in terms of planning for the crisis at hand.  

APL has now announced a reduction in capacity in its east-west trades between Asia, the US and Europe.   This is not surprising given the reduced demand created by the weakening in consumer confidence as well as fuel volatility particularly in the North American market place.  It also does not surprise me since APL CEO Ron Widdows is an operations guy.   He thinks in terms of ships and capacity.

What APL doesn't say is what they will do with their ships.  Containership capacity doesn't just "go away".  It gets laid up.  APL has made a calculated decision that ship capacity is cheaper being parked than moving freight.  Don't expect APL to be the first to make this decision either.  Consortium partners will naturally have to consider the impact, not only of APL's decision, but whether they themselves should also consider parking some tonnage to wait out the storm.   

Maersk, Evergreen and major Japanese carriers no doubt will be considering this as well even within their own homogenous, but huge fleets of container vessels.  The goal is matching market capacity against shippers ability to pay the highest rate that can be negotiated.  If ships are not available, rates go UP. Carriers are betting on this with fleet reductions. Much of it however is a reflection of re-balancing of trade. Ships follow the business. Current economic pressures will squeeze new origins and port pairs. APL is being very smart in waiting to see how this all balances out.

APL slashes capacity on major trade lanes Updated October 21, 2008 9:14:52 AM Peter T. Leach / The JOURNAL of COMMERCE ONLINE Today APL announced it is slashing vessel capacity on the major east-west shipping lanes and restructuring its network in response to what it called "increasingly challenging conditions in the major container trades". The subsidiary of Singapore-based Neptune Orient Lines, and the eighth-largest global liner company, said the capacity reductions would amount to 25 percent on the Asia-Europe trade and 20 percent on the trans-Pacific. "The traditional seasonal softening of demand in the main container trades has been compounded by the global financial crisis and economic slowdown," said APL President Eng Aik Meng. On the trans-Pacific trade between Asia and North America, APL already has suspended the PS3 (Pacific South Express 3) service. To cover the loss, it has upsized the PCX (Pacific China Express) service and revised its port rotation as follows: Ningbo, Yangshan, Kwanyang, Pusan, Long Beach, Oakland, Pusan, Kwanyang, Ningbo. The liner operator also has suspended the PSW (Pacific South West) service. In light of this change, the SAX (South Asia Express) service now makes additional calls at Yantian and Chiwan. The revised SAX rotation is: Singapore, Yantian, Chiwan, Singapore, Kaohsiung, Chiwan, and Singapore. The PCE (Pacific Coast Express) is omitting calls at Xingang and Nagoya, but includes an additional Pusan call in the eastbound direction. Revised coverage is Qingdao, Pusan, Yokohama, Singapore, Oakland, Dutch Harbor, Yokohama, Pusan, and Qingdao.

Add Freightdawg.com to your social bookmarks!

Comments

[Eric]

Thanks Paul for posting the story. However next time, a link would work just fine :-)

Eric

[Paul Page]

Traffic World had a nice cover story on trucking capacity in its Oct. 20. Here is part of it.

Truck Capacity in Reverse
Shippers, carriers ‘playing defense’ but look to recovery with less capacity

By John Gallagher

While financial markets are in turmoil over futures trading, short selling, derivatives and other instruments of the economy, Terri Ferraro is doing some hedging of her own in the transportation market.
The director of supply chain and transportation at retailer Famous Footwear is steering away from the volatile rate markets, keeping her shipping costs steady in hopes she’ll pay also pay reasonable rates to loyal carriers once capacity dries up and freight is moving again.
“I have been holding the rates I am paying my carriers steady over the past year even though there has been a lot of pressure to cut rates because of excess capacity,” said Ferraro. “I am paying those carriers now with the expectation that they will be there for me when capacity gets tighter.”
Ferraro is part of a field of transportation planners, buyers and observers growing increasingly concerned about the rapid withdrawal of capacity from trucking markets as carriers rush to align their fleets with sharply diminishing demand. That pullback may match today’s economic reality, experts say, but it could send a cloud over distribution strategies — and shipping costs — for those not positioned for a turnaround.
“We’ve been lulled into a false sense of security, that we’ve got a lot of capacity and we’ve got the drivers, and companies are making what seems like good business decisions to rationalize their fleets,” Rosalyn Wilson, author of the annual “State of Logistics” report sponsored by the Council of Supply Chain Management Professionals, said in an interview at the recent CSCMP annual meeting.
The trucking industry got some sharp reminders of the strong retreat in capacity in the past week.
Facing weak demand for new trucks, Daimler Trucks North America last week said it will close two plans and lay off 3,500 workers by 2010. Daimler also will drop its Sterling truck brand when it shutters its St. Thomas, Ont., plant next March.
The company said it is trying to “address structural market changes in a timely and consequent way.”
And J.B. Hunt Transport Services last week announced it pulled in a $60.3 million net profit in the third quarter that was 6.1 percent better than last year that was built largely from improvement in its non-asset business. In what used to be its core truckload business, J.B. Hunt cut 1,419 tractors from its fleet since last year’s third quarter, a 30 percent reduction.
The carrier absorbed some $1.4 million in losses from sales and write downs of idle equipment, the company said. It’s fleet now “is adequate to service our customers’ current demand,” Hunt said in a statement.
Wilson notes in addition to a surge of used equipment sold in the overseas market this year, more than 1,800 trucking companies went bankrupt or closed shop during the first half of the year, with more to come when insurance and lease payments come do in January. That kind of a capacity drawdown will leave a major dent when the economy finally turns around.
“It’s not going to be a slow recovery, the demand for trucking services is going to far outweigh the capacity we have,” Wilson said. “So it’s not a matter of finding a driver to put in the seat get and turn the key. We just won’t have the equipment.”
A capacity crunch, experts say, is more likely to hit users of truckload services, where major carriers such as Werner Enterprises, Knight Transportation and other carriers advance the sort of fleet reduction efforts that J.B. Hunt outlined in its report on thethird quarter.
So far, the largest company to leave the market entirely has been Jevic Transportation, a hybrid LTL and truckload operator. LTL executives do not foresee a capacity shortage if larger operators fall from the LTL arena. “There’s enough capacity in the industry to take care of that situation right now,” said David Vander Pol, co-president of Auburn, Wash.-based Oak Harbor Freight Lines.

At CSCMP’s annual meeting in Denver, the general mood among shippers was one of confusion, Wilson said.
“I think so many things are rapidly changing that nobody has exactly the right plan on what to attack first. I think a lot of dynamics are happening worldwide to make people rethink outsourcing strategies. We’re playing defense right now,” she said.
A critical strategy shippers should already have in place is working with their carriers to ensure they’ve got contracts in place that will ensure adequate truck supply once capacity tightens again.
“I don’t think people are looking far enough ahead for when we recover,” Wilson said. “If you don’t start looking at where the carriers are going to be a year from now, you’re going to be the shipper that loses out — you’re going to see delays, and there’s not going to be the capacity available.”
One of the only positive trends has been the steady drop in diesel fuel prices since mid-summer. But the sharp increase over the previous year means prices are still 22 percent higher than a year ago, and carriers are still trying to compensate for it.
“No one is in a mood to give up the (fuel) surcharges,” Wilson said. “I’ve heard shippers saying they’ve had to give breaks to the carriers they work with because everybody’s in an economic downturn and you don’t want your partners to go away. I think the best thing would be for all of us to accept that fuel is going to remain at higher levels - it’s the volatility that’s killing us. We need to come up with another way to deal with that in the surcharges.”
The companies that serve the trucking industry — truck and trailer manufacturers, and the companies that make the parts that go inside — are keeping close watch on capacity supply-demand trends as well.
“It’s not looking very pretty” for equipment manufacturers, said William A. Strauss, senior economist at the Federal Reserve Bank of Chicago. “If we’re not moving more freight, why buy the vehicles?” Strauss, who has been with the Fed for 27 years, has “never seen the markets this volatile.”
Such volatility has suppliers scrambling to readjust inventory projections, while carriers are holding back on equipment purchases.
“We’re working on that right now,” said Herb Schmidt, president of Con-way Truckload, of his company’s purchasing plans for next year. “We’re going to be very conservative on any net gains, given the economy.”
But Schmidt said the company will not lock themselves into making no capital expenditures. “We want to leave ourselves flexible with cash. We’re going to be very calculating and careful not to commit to net gain until early on year until they see what the environment looks like.”
“We’ve been through times like this before and history says it will be a bit of a roller-coaster,” said Jack Holmes, president of UPS Freight. “Sure, there seems to be a lot of capacity on the truckload and LTL side right now. But we’d also expect to have some closures (of carriers) and we’re certainly going to see that. The challenge for companies that have a strong balance sheet is to try to position themselves to come out the other end stronger.”