MaerskÆs ædifferential pricingÆ
Rolls out ocean priority shipment program. U.S. plan would require FMC compliance.
By Chris Dupin
Will shippers pay a premium to make sure cargo is loaded on a ship when space is tight?
Maersk Line believes they will, and began rolling out a new program, called 'Priority Product upgrade,' on June 1.
'It is driven by a need expressed by our customers to always have an opportunity to get cargo loaded, even in a situation where there may be some constraints in a given trade,' said Uffe Ostergaard, Maersk Line director.
If a shipper does not have a commitment of space from Maersk, it would be able to get on board a vessel by paying a market price premium at the time of booking to assure its cargo will get loaded.
While anywhere from 10 percent to 90 percent of the space on a vessel might be booked in advance by customers with long-term contracts or other commitments, Ostergaard explained, the remaining space previously would be sold to shippers on a first-come, first-served basis.
In some trades, 'the level of contracting and the commitment levels are pretty high, for example in Asia to North America. In other trades, many of our north/south trades, say from Latin America and Africa, typically the contractual commitments are much lower and the structure of the market is much more spot and ad hoc because the volume flows are not as regular,' Ostergaard said.
Now when space is tight, the company will seek a market price for the remaining slots on its ships. Other customers may prefer to have a lower price and wait until the next sailing, he noted.
The company emphasized it would not make room for cargo by removing other customer's cargo from a ship. Instead, when anticipating high demand, it will reserve limited space on the vessel for Priority Products.
Ostergaard said the company has been testing the concept for some time on a number of its services, and plans to phase it in fairly rapidly on routes around the world. It expects it will be available on most routes by the end of June.
One important exception: U.S. trades regulated by the Federal Maritime Commission.
'There we still have to do some tweaking and make sure we comply with the regulations in how you do your pricing on those specific trades,' Ostergaard said. 'It is something we would like for our customers.'
Maersk has not yet approached the FMC about the idea, but has its attorneys working on developing a plan that would comply with U.S. law.
'At the time Maersk approaches us with a proposal, we will give it a close look,' said Richard A. Lidinsky Jr., Federal Maritime Commission chairman. 'For all ocean carriers, I am concerned about reports of space constraints, overbooking and whether they are properly honoring their service contract commitments. At the same time, we welcome innovative solutions to these problems.'
The company is trying to figure out a way to make the dynamic pricing concept adhere to FMC regulations, which require rates to be fixed and filed 30 days in advance.
'This is something you would buy at the time of booking, and often that is not 30 days in advance,' Ostergaard explained.
Ostergaard explained how the program might work. If a shipper has a contract to move 100 containers on a voyage, Maersk would continue to honor its commitment and ship those boxes at the agreed price.
But if that shipper then had a need to move an additional 20 containers on a ship where space was constrained, it could pay a premium when the cargo is booked to make sure the cargo was loaded.
The premium would vary from trade to trade and be dependent on both demand and the revenue generated by the customer's cargo.
As the company has tested this idea of 'dynamic pricing' the premiums have varied considerably, from $200 to as much as $3,000 per container, Ostergaard said. In theory, the premium could exceed the underlying freight rate.
While a $3,000 premium might seem high in the abstract, Ostergaard said it might be quite reasonable to a shipper moving
a containerload of high-value goods like flat-screen televisions or a new line of clothing or game consoles to coincide with a major product introduction or marketing campaign. In such cases, the only alternative way to get goods to market might be an even more expensive air or sea-air movement.
If for some reason, Maersk cannot load the cargo on the planned vessel, it said it would refund the cost of the upgrade and schedule the cargo for the next available departure with a free upgrade to Priority Product.
'This is what carriers have spoken about for a long time, differential pricing,' said Peter Gatti, executive vice president of the National Industrial Transportation League, a U.S. shipper organization. He drew the analogy between variable pricing by overnight delivery companies that tier pricing according to how early in the day a delivery is made.
But he declined further comment on the idea, saying he would like to see a detailed explanation of how the program would work and if it would have any effect on customers with existing contracts.
Nicolette van der Jagt, secretary general of the European Shippers' Council, welcomed the announcement, calling it a 'positive development.
'There are shortages of containers and equipment all over the world due to the slower equipment turnaround time as a result of slow steaming and lack of building capacity,' she said. 'More and more carriers are imposing extra positioning costs. Also the practice of keeping capacity below the level necessary to accommodate the growing demand, has led to carriers creating rollovers, shutouts and increased rates. This is done at the expense of the shippers' business continuity.
'The focus of carriers is very much on increased rates to compensate for losses made. Shippers understand a need of urgency to reclaim some of the losses, but they should also realize that this focus on price is not improving on customer relationship and is creating a wedge between shippers and carriers.
'One positive development is indeed that Maersk Line is now looking at ways to offer variety of services to its customers, by offering space guarantees to higher paying customers. Plus some further differentiation depending on the commitment from shippers. This is the type of service we would want to see more by carriers,' she added.