Management consultant Oliver Wyman suggests the container shipping industry needs to focus on yield management to regain profitability.
Joris D’Incà, a partner at Oliver Wyman’s office in Zurich, said liner companies have focused on restructuring, optimization and cost-cutting—taking steps such as renegotiating port tariffs, optimizing stowage, reducing the cost of overhead structure, slow steaming and larger ships to drive down unit costs.
But these steps haven’t prevented many companies from entering what he calls the “no-value zone.”
The top 20 container lines make money “now and then,” but despite collective revenue of more than $160 billion they commonly lose money, let alone earn the capital needed for reinvestment.
By embracing larger ships as the principal tool for driving down costs, container capacity has grown at more than 10 percent per year over the past 15 years while container trade has grown 8-9 percent.
The move to bigger ships drives down TEU-mile costs, but D’Incà said those economies of scale have been largely passed on to customers in the form of lower prices.
“The next step the industry needs to take is to think harder about capacity management together with pricing,” he said.
Some shippers are willing to pay more for ocean transport, he noted.
There is a difference between small- and medium-priced freight forwarders that act as brokers to help customers find the lowest freight rates, and big retailers and other sophisticated shippers that book capacity under long-term contracts directly with carriers and have a thorough understanding of their total supply chain costs, including components such as ocean and inland transport, storage and inventory carrying costs, damage to goods, and punctual delivery.
“If you make a better differentiation of your customer base, you can target some of your customers who are not opportunistic and talk about the product and price level, which allows for value-based pricing,” rather than just reducing TEU prices, D’Incà said. Large forwarders are also more willing to discuss value pricing.
That kind of dialogue is valuable to carriers.
“You can have a different discussion where you optimize your network and vessel-turns based on their stable plan,” D’Incà said.
And if a carrier is able to cut a deal directly with a large shipper instead of a forwarder, he can gain a 10-15 percent price advantage.
Of course, shipping lines have varying levels of interest in this kind of strategy, with some more interested in engaging value-oriented customers and others more focused on capacity and prices.
Another lever shipping lines can use to improve their financial performance is differentiated services—charging a premium for faster transit times and offering discounts to shippers who are more willing to be flexible about delivery dates.
But he said shipping companies need more sophisticated processes for both management of capacity and demand forecasting. So, for example, if a carrier can make more money hauling shipping containers out of Le Havre rather than Rotterdam, it can allocate more capacity to cargo moving from the French port.
These sorts of changes are not made overnight, D’Incà said. The air freight industry made this transition about 10-15 years ago and took five or six years to accomplish.
This commentary was published in the January 2015 issue of American Shipper.