Navigating the Crisis

October 31st, 2013 - Shipping Groups and Airlines Seek to Boost Falling Freight Rates

An alliance among the world’s biggest container-shipping companies and new ways of calculating air fuel surcharges change the outlook for ocean and air freight.

Faced with continued overcapacity and weak demand, container-shipping companies and airlines are trying to push up freight rates through new routes such as alliances and surcharges.

It’s not clear whether they will succeed, however. “We are seeing a slight pickup in trade but rates continue to drop and that’s because of overcapacity,” warns Georges Van Hove, manager of airfreight procurement at Bolloré Logistics in Paris.

“There are lots of ships still coming into service at a time of overcapacity,” adds Denis Sanguinetti, sea-freight procurement manager at Bolloré Logistics. “That will keep prices volatile at least in the short term.”

Ocean freight rates from China’s busiest port Shanghai, for example, fell 42 percent at the beginning of October, according to the Shanghai Containerized Freight Index.

The container-shipping companies are making the biggest moves to boost prices and profitability. Most recently, the world’s three largest carriers - Denmark’s Maersk Line, Switzerland’s Mediterranean Shipping Co. and France’s CMA CGM - announced plans to join forces on the Asia-Europe, trans-Pacific and trans-Atlantic routes.

Known as the P3 Network, the alliance will combine 255 vessels capable of carrying a massive 2.6 million containers. It will give the three operators 40 percent of world container supply, offering the potential to better manage capacity, says Sanguinetti.

“Having the ability to influence supply on these three trades is a real revolution in the shipping industry,” he says. “The alliance will be in a position to deploy their fleet to better match demand.” For example, the P3 Network will be able to avoid sending three ships on the same route.

At present, the container-shipping companies are suffering one of their worst ever downturns. Growth on routes between Asia and Europe remains flat while ships are operating at just 80 to 85 percent of their capacity, estimates Sanguinetti. The capacity problems originate in the record number of vessels ordered just before the start of the financial crisis.

In the long term, Sanguinetti thinks that the P3 Network, expected to become operational in the summer of 2014, will help stabilize container freight rates. It will also force freight forwarders to examine their strategies.

“We will have to rethink our choice of shipping companies for next year,” Sanguinetti says.

The weak demand is similarly reflected in air cargo although there are signs trade could recover slightly. Bolloré Logistics expects air cargo demand on routes from Asia to Europe to rise by a modest one to three percent in 2014.

Any recovery remains fragile, however, because of overcapacity of about three percent on routes from Asia, Van Hove notes. This overcapacity is fueled by Middle Eastern carriers including Qatar Airways, Etihad Airways of the United Arab Emirates and Emirates Airlines of Dubai that continue to add planes such as the passenger Boeing 777 300s that have cargo capacity of over 20 tons. The Boeing 777 Freighters, meanwhile, have a capacity of 110 tons, Van Hove notes. 

“It will take a very strong and sustained recovery to offset this additional capacity,” he says.

The likely outcome is continued low rates, warns Van Hove. He estimates that air cargo prices have fallen between three percent and five percent on routes from Asia to Europe since the beginning of the year.

The fragile air-freight market faces further headwinds from a change in the way fuel surcharges are calculated, says Van Hove. From the beginning of November, some airlines will calculate the surcharges according to the volumetric weight of the cargo and not the actual gross weight, effectively increasing rates.

Van Hove predicts that this new way of calculating rates could double costs for companies transporting large shipments of volumetric luxury goods such as leather bags, suitcases and fashion garments on hangers and push them to switch to less expensive transport such as sea freight.

German carrier Lufthansa, Air France and Emirates are among the airlines introducing new surcharges on volume, making rate negotiations with the carriers tougher, says Van Hove.

“Airlines are in such bad financial shape that they are doing anything to survive,” he says. “Volume is money right now and a critical source of revenue.”

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

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

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

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    Population in Africa

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    of Africa’s population will be urbanized by 2050

  • 7,5%

    of growth for Indian GDP in 2014

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    of growth for African GDP in 2016

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

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

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