Managing Overcapacity

October 27th, 2014 - The sea and air cargo markets deal with slow growth in different ways.

Faced with continued low demand in world trade, airlines and shipping companies are both taking steps to manage overcapacity. So far, however, the shipping companies have been the most successful at protecting their businesses.

"The shipping companies are demonstrating that they are able to adjust prices artificially by managing capacity," says Denis Sanguinetti, sea freight procurement manager for Bolloré Logistics in Paris, France. For example, the world’s biggest container shipping companies are scrapping ships earlier than expected, idling vessels and implementing slow steaming to reduce the space offered on east-west trade routes, especially lines between Asia and Europe.

Shipping companies are also forming alliances to reduce operational costs and benefit from economies of scale through larger vessels, Sanguinetti adds.

The strategy is proving successful. Shipping container rates have risen this year despite the biggest companies continuing to add substantially to their fleets. In the period to 2016 alone, the biggest carriers such as Maersk Line, MSC and CMA CGM will add capacity of 12 percent, 40 percent and 39 percent respectively, according to estimates by the newsletter Alphaliner.

The trend towards larger ships, meanwhile, is getting stronger. Around 55 percent of new capacity delivered in 2015 and 2016 is comprised of ships with over 10,000 TEUs, notes Sanguinetti. The airlines, meanwhile, are also attempting to reduce capacity by scrapping older planes but so far this has had little impact on falling prices, says Georges Van Hove, manager of airfreight corporate procurement at Bolloré Logistics in Paris, France.

"Tariffs are down between two and three percent this year," says Van Hove.

"There simply isn’t enough growth."

European airlines such as Air France and Dutch carrier KLM as well as Asian airlines such as Cathay Pacific Airways and China Airlines are leading the move to park or scrap cargo freighters.

That's not enough, however, to make them financially strong in the face of competition from Gulf airlines including Qatar Airways, Emirates Airline and Etihad Airways that continue to add planes to their fleets, Van Hove adds. In addition, the Gulf airlines have other advantages such as more flexible labor laws and subsidies from local governments, Van Hove adds.

"The match is almost over before it’s even started," he warns. Emirates Airline and Qatar Airways, for example, enjoyed impressive market-share growth of 12.2 percent and 10.7 percent respectively in 2013 while Air France and British Airways lost 6.8 percent and 9.1 percent respectively. "It’s hard to compete with the Gulf carriers when they continue to add planes to their fleets and to bid aggressively for business," Van Hove continues.

"Measures taken by the other airlines to reduce capacity will not help them in the long term unless demand picks up substantially. They’re simply cutting off an arm to save a leg."

Key Figures
  • 20%

    More fuel-efficient for the Boeing 787 and the Airbus A350

  • 70%

    of Urbanisation is expected by 2050

  • 27

    mega-cities are expected by 2050, with at least 10 million people, compared to 1...

  • +18,4%

    of growth for E-commerce retail market in Europe in 2015

  • 82%

    of goods are moved by road

  • 1 billion

    Population in Africa

  • 60%

    of Africa’s population will be urbanized by 2050

  • 7,5%

    of growth for Indian GDP in 2014

  • 4,9%

    of growth for African GDP in 2016

  • 6,1%

    of growth for East Asian GDP in 2015, the world’s fastest-growing region

  • 19 224 teus

    transported by the MSC Oscar, the largest container ship in the world

  • 396 m

    is the size of the MSC Oscar ship

  • 120 h

    is the Non-Stop Flight Record done by Solar Impulse

  • 4,5%

    of growth in 2015 for Global Airfreight demand