As reported in American Shipper's annual 'Who's making money' this issue (pages 34-39), the top 15 publicly traded liner carriers collectively lost a whopping $11.4 billion in 2009, and that number is probably much bigger when including the privately run operators.
These mega-billion-dollar profit losses demonstrate more than just the effects of a sour global economy, but an industry that has been collectively plagued by an ability to sink itself.
Three years ago, ask liner carrier executives why they're racing to build heaps of ever-larger containerships and the answer was inevitably 'economy of scale.' Ask them to further clarify what they meant by that and you would have likely been told freight volumes were on an unstoppable incline. History, as well as common sense, would tell you otherwise that the global economy periodically swings through highs and lows, and this low was surely one of great proportions.
How did the liner carriers respond next? Immediately cut their rates far below costs in an attempt to keep the cargo coming. Again, basic economics will tell you that a strategy such as this would cause more damage than good to the bottom line.
So during the thick of the recession, liner carriers started wising up. They cut capacity by laying up ships and looked for ways to reduce their operations costs ' all painful, but necessary measures if they wanted to stay afloat.
During the 2010-2011 service contract negotiations, liner carriers further stiffened their spines by demanding higher rates for transportation services and held the line despite a severe tongue-lashing from shippers who have also struggled to reemerge from the recession.
Is this a sign that liner carriers have started to 'run their business like a business,' where profits actually matter more than freight volumes? That, of course, remains to be seen. The industry is still vulnerable to falling back into bad habits of chasing volume over profit to achieve the appearance of filled vessel slots.
Rep. James Oberstar, chairman of the U.S. House Transportation and Infrastructure Committee, after having his ear bent by many shippers upset by the rapid ascent of freight rates and squeezed vessel capacity since earlier this year, said he would seek to eliminate the liner carriers' limited antitrust immunity under the Ocean Shipping Reform Act. At the end of June, the shipping public may also get some insight into the results of the Federal Maritime Commission's confidential fact-finding investigation into liner carrier capacity. Both initiatives may further degrade carrier-shipper relations in the U.S. trades during the year.
For now, the industry is poised to earn respectable profits this year, and as part of that hopefully a new mindset of running a business like a business. They should also reinvest a large portion of those earnings toward improving service levels so that shippers can actually get what they're now paying for.
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