Paying to have the rug pulled

Paying to have the rug pulled    Forget the chicken-and-egg question, let's try this one instead: should liner carriers plan ahead for demand surges or react to them after they have occurred?
   It's a big question and one with implications beyond space constraints for shippers or low vessel utilization for carriers. What sparked this question for me was an interesting discussion about special loaders during the TPM Asia conference in Shenzhen in mid-October.
   Carriers that had reduced capacity in 2010 to better align supply and demand began introducing these so-called special loaders to accommodate what they say was an unexpected surge of volumes that outpaced supply, albeit on a short-term basis. However, shippers have said the rates for the special loaders were high ' higher than rates agreed in spring contract negotiations, and much higher than rates from 12 months prior.
   'Capacity on special loaders is charged at a different rate than in service contracts,' Philip Damas, division director at Drewry Supply Chain Consultants, said at the conference.
   The question is, where is the line drawn between manipulation and reaction? What obligation, if any, do carriers have to plan ahead for projected spikes in demand? Or better yet, what obligation do they have to provide capacity at the same rates if demand surges?
   Carriers have two basic tasks: provide ocean transportation service to shippers, and make a profit doing so. If carriers failed to perform that first basic function ' restricting capacity to the extent that their operated capacity didn't meet demand ' then is it their obligation to meet demand through short-term capacity boosts? Or can they use these demand surges to help meet the second task ' make profits?
   The question boils down to whether those capacity boosts, in the form of special loaders, are tools to meet the basic service levels required of them, or short-term chances to derive revenue. Shippers might well argue carriers are taking advantage of a situation the lines helped create.
   To be more blunt, if a carrier pulls 10 percent of its eastbound transpacific capacity, and then months later finds it is unable to meet demand on that trade for a given week, it could operate a special loader designed to clear the backlog of demand. Now does that loader constitute a special service, for which the carrier should expect to receive premium rates? Or should that loader be considered a mere replacement for capacity the carrier pulled?
   It's a difficult set of questions, isn't it? And it's yet another issue between carriers and shippers that is far from black or white. Despite liner regulation in North America and Europe, there is no body yet tasked with determining whether a special loader, in this instance, should be classed as different from a carrier's normal service.
   Perhaps this is just the sort of determination an emboldened U.S. Federal Maritime Commission may make in the future. But then again, these are the sorts of issues that tend to fall in that gray area.
   Another aspect to consider is that these loaders essentially filled capacity gaps left by carriers' slow-steaming initiatives, if not outright capacity deletions through suspensions of loops. How can shippers be expected to pay more to account for the lines' business decisions?
   If retailers pulled iPhones from shelves despite having a glut of stock, then slowly introduced them as special releases at double the price, consumers would have a fit. Apple would have a fit, too.
   But there's no upstream or downstream pressure on carriers that necessitates they provide the space needed at any given time. It's entirely up to them how much capacity they want to operate, even among alliances.
   So shippers are left with a situation where carriers can pull the rug from underneath them, then charge them a premium for the rug to be put back. Even if regulation of this practice is not possible or desirable, carriers should think twice about charging a premium for space that probably should have been there all along.

Oberstar's Buster Douglas moment
   Minnesota Congressman James Oberstar was readying himself for a true heavyweight fight, a crowning bout to cap a decorated career that had culminated in a leadership position on the House Transportation and Infrastructure Committee.
   Using that clout, Oberstar this fall had proposed a sweeping bill that would all but eliminate liner antitrust immunity in trades to and from the United States. But a funny thing happened on the way to forum. Oberstar was upset in his bid for reelection in early November (as American Shipper Associate Editor Eric Kulisch detailed, 'Oberstar upset changes transportation dynamic in House,' www.AmericanShipper.com/links).
   That upset, and the fact that Republicans have taken a sizable majority in the House of Representatives, looks to have eliminated the chances of U.S. liner antitrust immunity being repealed anytime soon. Oberstar's prospective replacement on the transportation and infrastructure committee, Republican John Mica, 'has questioned the need for a legislative solution to ocean carrier capacity and pricing fluctuations,' according to Kulisch's report.
   Carriers in the Transpacific Stabilization Agreement will be sighing a breath of relief. Not that the TSA's continued existence ensures profitability for them, but they surely weren't looking forward to the prospect of waging a long battle to preserve what the TSA does provide them.
   When might liner antitrust immunity be back on the discussion table? Not only has the bill's author been ousted, but so has the Democratic majority. It seems unlikely that a high priority of the new Republican majority would be to immediately overturn liner antitrust immunity. By the time the House is back in session in 2011, the shipper issues of 2009 and early 2010 could be long forgotten.
   It's not that the issue will go away entirely. After all, the FMC is still pursuing an investigation into how European liner regulation has affected the shipping industry. The National Industrial Transportation League and other shippers' bodies will continue to press for a freer market when it comes to the playing field in which liner carriers operate.
   But it seems we have jumped the gun in presuming the demise of the liner antitrust immunity was imminent. Everyone from the Asian Shippers' Council to the head of Maersk Line seemed resigned to just that happening.
   But then Buster Douglas, or should I say Chip Cravaack (the man who bested Oberstar), intervened. So as it goes in sports and politics, never count on liner reform before it's hatched.