TSA has some explaining to do

TSA has some explaining to do    When the Transpacific Stabilization Agreement announced Dec. 15 they would be seeking an interim hike in rates this January to provide revenue until spring contract negotiations, my immediate thought was 'how did they arrive at those exact numbers?'
   The TSA carriers said they were seeking increases of $320 per 20-foot container and $400 per 40-foot container in mid-January, primarily to offset the steep drop in rates over the last 16 months and provide much needed revenue until the next round of annual contract negotiations occurs in spring. TSA members had previously said they would seek increases of $800 and $1,000 per FEU for shipments to the U.S. West and East coasts, respectively, during those spring negotiations.
   Whenever a conference or alliance recommends rates be increased, shippers overwhelmingly want to know what the factors are behind the increases. In this case, the TSA said the math is simple.
   'This particular charge is intended to address a sharp decline in rates that has been in place now for more than a year in some key route segments,' TSA spokesman Niels Erich told American Shipper last week. 'It does not fully reverse that decline.'
   In other words, this interim hike isn't about carriers' cost structure, it's about getting a basic amount of revenue for a service provided.
   I asked Erich if he could provide a snapshot of current operating costs for a typical vessel deployed on a transpacific U.S. West Coast service and one on an all-water service to the U.S. East Coast. I wanted to know how the suggested increases fit in the context of those costs.
   'Each carrier has its own proprietary cost structure, to which the group is not privy on the level of detail you’re talking about,' Erich responded. 'Even if it were, I’m not sure some kind of average cost would be relevant to a shipper in terms of what he/she is actually paying. The most obvious and useful comparisons are to the much larger reductions in freight rates widely reported since late 2008, and the quarterly revenue losses reported by carriers. Here too, TSA as a group relies on the same information you see in the trade press from carriers’ financial reporting and other non-proprietary sources.'
   In a follow-up e-mail, he added about the proposed spring increases: 'Those numbers were developed by carriers suggesting what it would take for them, within their organizations to restore rates overall to late 2008 levels. That in turn produces a guideline which each carrier can follow or modify as it chooses.'
   As has been said all year, no one will begrudge liner carriers for attempting to set rates that are appropriate for their business model. Lines are suffering and everybody is aware of that. The question is not whether carriers ought to be able to raise rates however they see fit. It’s that an average rate increase for 14 (soon to be 15, when Maersk Line joins the TSA) carriers with differing cost structures might not go down as well with shippers as it would if each individual carrier arrived at a rate increase that fit their own business.
   It's difficult to understand why a group of 15 of the world's biggest lines is able to set what appears (on the surface) to be a fairly arbitrary number when that group isn't able to provide even the parameters for an average voyage cost across the group. When I put the question of how TSA members arrive at the figures for their proposed increases to a couple individual lines, I was directed back to the TSA.
   Shipper advocates in North America have repeatedly said that lines should maintain the right to collaborate — whether on alliances or in broader groups such as the TSA — so long as the benefit to the carriers extends to the market as a whole. The problems come along when the collaboration benefits carriers to the detriment of the shipper (and thus the end consumer).
   Now Erich rightly points out that shippers have benefited greatly in the past year from absurdly low ocean freight rates.
   'Shippers know what they were paying in last year’s contracts relative to today, and that the $400 (interim rate increase) in most cases still leaves them in a better position,' he said. 'It is generally understood that the (interim rate increase) doesn’t begin to approach anything near cost recovery given today’s rates, shippers are well aware of that, and so I’m not sure that a more detailed cost discussion adds much value in this case.'
   Again, carriers raising rates to sustainable levels is not what I'm arguing against.
   Here's the point I am getting at. If each individual member of the TSA came up with a number in January that reflected their own costs that they need to recover, shippers would stomach that much more easily than being told that every line needs the exact same amount.
   I know the TSA's prescribed increases are merely guidelines and non-binding, and Erich pointed this out as well: 'The $400 per FEU (emergency revenue charge) is a voluntary, non-binding guideline. Carriers individually may implement all, part or none of it on a customer-by-customer basis as they see fit, depending on a range of factors — individual cost structure, account relationships, competitive factors and so on. They can tailor it to suit their individual situations.'
   But that suggested increase serves as a benchmark that would not exist in any other industry, including other transportation industries. And it's a benchmark that shippers repeatedly say should not exist.
   Let me frame this another way. It can be broadly gleaned how much demand is in the transpacific market in any given month. For argument's sake, let's say there's 100,000 TEUs of weekly demand. The most savvy of shippers would probably say it's fair for carriers to be able to gather together and jointly decide that they should only be providing 120,000 or so TEUs of capacity per week in that environment. Providing any more than that would be severely detrimental to the carrier industry as a whole. It could be argued that that could lead to consolidation, meaning less competition between carriers. That would be a negative for shippers.
   But what shippers won't say is fair is those same carriers gathering together and deciding the rates, or rate increases, for that capacity. For instance, if a manufacturer sees demand for its product decline, it will scale back production capacity. But that same manufacturer can't go to another manufacturer and say: 'Low demand is killing our revenue and we've had to lower prices too much. Let's raise the price of our products by the exact same amount even though our cost structures are totally different.'
   The reason this matters, as Erich aptly put it, is that each carrier's costs are different. Capacity is a commodity that doesn't vary between carriers. A slot on ship is a slot on a ship. But cost structures do vary and rates shouldn't be commoditized in the same way a 40-foot space on a containership is.
   Shippers have cried forever that they want to know why rates and surcharges increase, but the TSA isn't being all that clear about it, despite its laudable efforts the past two years to reach out to shippers. Merely saying that rates dropped last year and need to go back up to 2008 levels doesn't provide transparency. It just tells you what you already knew if you've been keeping track of the industry the last two years.
   Providing an average level of operating costs across 15 carriers (and thus providing a more comprehensive justification for rate increases) does not compromise the anonymity of any one carrier's individual costs. When demand rebounds and rates surpass costs, shippers will most definitely want to see this information before acceding to even higher rates.
   Sharing cost information, it could be argued, is the price the TSA should pay in 2010 for maintaining the right to collectively meet and discuss capacity and rate increases.
   Now perhaps the TSA is being more forthright with shippers in its outreach sessions. And perhaps individual carriers are breaking down their costs for shippers in confidential negotiations. But the point here is that talk of rates and costs should either both be restricted to confidential discussions, or both put in the public domain. Carriers ought not be able to publicly decree that rates need to rise by X amount without publicly giving details why.