I read Tom Craig’s letter to the editor on missed sailings in the March issue and it’s hard to disagree on the negatives that he points out. However, at the recent TPM conference the keynote speaker, Karl Gernandt, chairman of the board for Kuehne + Nagel, in discussing the state of affairs from his standpoint, hit on several key factors that also need to be included in this conversation.
The first point Gernandt made was that “you get what you pay for. You are getting discounted services for discounted prices.” He noted the carriers, as an industry, haven’t made money since 2010 and rates of today are comparable to 25 or 30 years ago. Gernandt said he thought there was room today for two levels of service, one of those for shippers who need the lowest possible rates and another for those that would pay a premium for a more consistent, reliable service. Other speakers at TPM echoed that sentiment, even a BCO speakers’ panel commented they would pay a premium for a better and more reliable service.
That said, days later, Maersk announced the cessation of the Daily Maersk from Asia to Europe. Why? Because shippers wouldn’t pay for the premium service.
Therein lies the crux of the real issue—shippers will not agree to pay ocean carriers more money. In fact, they are asking for reductions to their May/April transpacific eastbound service contracts as negotiations have started taking place. The carriers, again as an industry, react by skipping sailings when their utilization factors are too low at the low rates they are getting from those service contracts. For those who understand, virtually no carrier, including Maersk, has made money on the transpacific in five years. The $1,650 to $1,750 per 40-foot rates from China to the U.S. West Coast, which added $275 to $400 per 40-foot rates back to China, simply don’t have any profit in them. That’s why Maersk and IKEA parted ways two years ago during service contract negotiations. That same year Maersk also would not accept the rates for Walmart’s cargo to the U.S. West Coast. That was a huge loss of volume, but the carrier made money from it by handling more spot market cargo.
Two quick facts: First, all major BCOs have corporate objectives each year and those are cascaded down to the logistics and transportation people. I guarantee that one of the CEO’s specific objectives is “cost containment and reductions.” Not on logistics specifically, but when the vice president of logistics has his boss say to him “cost containment and reductions,” he will do one of two things—go after reductions and try to get his bonus/incentive money, or say, “no, we’ll take increases and I’ll forego my bonus this year so I can get better service from ocean carriers.” Guess which choice the logistics executive will chose?
Second, only U.S.-flag carrier Matson is able to charge a premium for its Shanghai-to-Long Beach service, which is done in 10 days. Matson gets a $150-$250 premium per container for 2,700 TEUs. When Matson had two services, it couldn’t fill the second service and pulled it. Recall FastShips? Recall Sea-Land’s 33-knot SL 7 ships? What happened to those fast premium services? Fast-sailing ships never happened and are gone from the market. No one would pay Sea-Land a dollar more to get their containers days in advance of others. Sea-Land ended up selling those vessels to the Department of Defense where they are now used in the Fast Deployment fleet.
Understandably, this is no simple conversation. As in many similar instances some ocean carriers jumped at the IKEA and Walmart cargo that Maersk would not move at the offered rates. However, they lost money on every single load, although they got close to or filled their space allocations and gained a few tenths of a point in market share. And skipped sailings.
Craig gave a picture of the market, but not a complete one.
Gary Ferrulli
President,
Unicon Logistics,
Los Angeles
This letter to the editor was published in the May 2015 issue of American Shipper.
Letter to the Editor: Complete picture on skipped sailings
