Carriers face shifting contract dynamics
Regardless where shippers come down on the spot rate vs. contract debate, liner carrier executives acknowledge that the dynamics of service contract negotiations are changing with rates under tremendous pressure and shippers more hesitant to commit to volumes.
'A lot of shippers are not sure of their future,' said Howard Finkel, executive vice president of COSCO North America. 'People are waiting to see what will happen. No one has a crystal ball.'
Instead of being renewed at the end of April, some contracts have been extended through June.
'We are doing shorter term service contracts now, both at our request and the shippers,' said Andy Abbott, president and chief executive officer of Atlantic Container Line. 'This allows us both to stay competitive. The volume commitment becomes smaller and far less of a space-guarantee issue than it was six months ago.'
'Right now, every one of our customers is under the same cost pressures we are,' said Bob Sappio, senior vice president of APL's Pan-American trades. 'As our customers look to keep inventory lower, they need greater predictability in their supply chains. It's important for carriers to step forward with predictable service and not just talk about low rates.
'Customers are talking to carriers about predictable services, which is worth a lot more than saving a couple of hundred dollars a box on ocean freight,' he said.
Shippers are also concerned about the financial and service sustainability of the liner carriers in 2009.
'We ship from some of the most remote locales in the world. We are dependent on imported raw materials' said Timothy Brotzman, manager of international transport for McCormick & Co. 'Competitive rates are only part of the equation. Going-out-of-business rates are no good if you can't move your freight.
• Decision 2009
'We have taken the long view with our carriers,' he said. 'Many are taking a predatory, short-sighted approach. We've already seen the demise of services. Our position is to sustain support at reasonable costs.'
While rates and confidentiality remain important aspects of service contracts, Sappio believes liner carriers could do a better job at promoting to shippers their potential flexibility.
'Under OSRA (Ocean Shipping Reform Act), the contracting mechanism can be whatever the carriers and shippers want it to be, such as commitments to transit times and container and equipment availability,' he said. 'There are all types of creative and innovative opportunities under the current regulatory and economic environment. Carriers and shippers have been slow to raise the service contact to a new level.'
'In today's environment there are many new risks,' said Jonathan Yock, president of Safmarine. 'As within any industry we must pay attention to the fact that a contract agreement must create value for both parties. There is no benefit in creating multiple trade lane agreements with clients that historically do not have the ability to produce these types of volumes. As cargo opportunities diminish, contracts should naturally move towards more customized and specifically targeted packages. Most companies that have established imports or exports understand and know their limitations so if the expectations are clear and the responsibility shared, then it's a win-win situation.
'Otherwise, it is quite possible that new and innovative ideas could be developed that require actual capital to be associated with any long-term rate or capacity agreement,' Yock said. 'This would certainly apply for both parties with clear lines of accountability defined within a service-level agreement.'
'During this retrenchment period, ocean carriers and their customers must work more closely than ever to understand the short- and long-term options, the opportunities the situation has created, and the implications of this environment,' said Bill Woodhour, vice president of North American sales for Maersk.