The month of August is nearing its end and many people and companies are still running in vacation mode. Not much is happening beyond the ever growing fleet of new builds and swelling capacity, so may as well fill up the columns with something spicier. And “something” it is: one company is again for sale, two others are again merging, one is again denying that is looking to buy another.
As if we didn’t have enough of cyclical booms and busts, you would think that this year the industry has punched through a bottom of a bust. The shipping news continues to be filled with some doom, some gloom, and barely a sprinkle of hope. The global economic activity is not recovering equally across all markets, making recovery in shipping equally unbalanced.
Operationally, for many lines, 2015 is mostly just about the survival until upturn: fill’em up, don’t worry about the profit (too) much. Hardly anybody can turn around and take advantage of irrational, unpredictable upticks in box rates seen sporadically throughout the year.
The mid-term and long term planning offers more interesting opportunities to act. Looking out 3-12 months, planners need to take into consideration how to maneuver the business around the inevitable trends affecting demand and supply of capacity. What is certain, there will be more ULCV capacity. MOL started taking delivery of their new 19.000 TEU vessels, CSL placed more orders, and others are mulling over their own investment strategies. The speed with which the ULCV can be built today could be a cause for celebration of marine technology, if not for the fact that the market is facing nearly 15 ULCVs delivered this quarter alone. That is a serious expansion of capacity.
At the other end, companies are not scrapping older, smaller vessels equally fast. With the average headhaul capacity utilization hovering around 80%, these tactics will sure cause more bleeding across the networks. The strategy of “if you can’t beat them, join them” has now taken firm hold amongst the carriers with the pops of the champagne corks at the ULCV shipyards (the profitable ones) clearly audible in the background.
The demand side will trend up in the very near future due to continuous expansion in the US, persistent signs of recovery in Europe (the situation in Greece notwithstanding), and steady growth in Africa. However, forecasting this demand in mid-term will be incredibly difficult, because forecasting statistics requires 4-5 years of solid data to determine seasonalities. This start & stop recovery seen over the last 12 months has no precedent in the past, so forecasters will have to be very clever about how they look at data from the past and figure out its usefulness for reasonable predictions of the future.
Let’s accept that a chronic overcapacity is the new normal. Since the demand for capacity is not picking up to match the pace of capacity growth, the next few months will simply lead to more aggressive commercial offerings. The tit-for-tat actions of the game theory will be on full display and the only result will be downward spiral of prices – to the applause of the customers. How far down and for how long will this continue, is anybody’s guess.
This situation provides good reasons to think about deploying countermeasures. Since voiding of sailings can only go so far and rapid realignments of the networks are not possible, what’s left? Think processes and technologies in the area of yield management. Surveying the liners, it appears most of them are sticking with minimal changes in the way they estimate and manage yield from their networks. Change is hard due to sticking with old processes and technology solutions separating forecasting/demand planning from network optimization. Surprisingly, some of the liners are still separating network optimization by planning movement of laden and empty containers in two separate areas using two different optimization methods. Judging from my discussions with liners’ management teams throughout Asia, they need new thinking across the whole problem, not individual puzzles, of yield optimization. But acting on the need is another matter and the problem is not only inertia in the business. Having outdated technologies hinders introduction of any new business thinking and stymies aggressive steps to design, deploy and use the countermeasures. Something that no container company can afford to happen over the next few years. Unless of course they want to be merged or allow themselves to become honorary mentions in the shipping history books.