The Over-Capacity Challenge

July 22nd, 2015 - Volumes rise in both air and sea freight in a context of increasing capacity excess.

Activity in the air and sea freight markets continued to grow into the middle of 2015. However, over-capacity and timid macro-economic expansion has freight players scrambling to maintain price and profit levels.

“What we’ve seen is a classic imbalance of supply and demand, which is likely to remain challenging and continue forcing freight businesses to innovate through 2015,” says Anne-Sophie Fribourg, sea freight procurement manager for Bolloré Logistics in Paris.

She says that despite falling volumes in the early months of the year, global activity should advance by around 5% in 2015 – similar to 5.2% in 2014.

“Despite the fall in oil prices and lower euro, European economies continue struggling, and not exporting as much as they could,” Anne-Sophie Fribourg says. “China’s economy has also cooled, which is slowing its import rate. With the U.S. economy doing well, though, freight activity on the Transatlantic is somewhat stronger.”

Across the wider sector, however, shipping companies battling over-capacity won’t be getting a respite soon, as new 20,000 TEUs ships are set to be delivered to freight companies this year. Around 1.14 million TEUs of increased capacity has been added so far this year, with over 95% of that in ships over 10,000 TEUs.

The arrival of huge ships on the leading trades of Asia Europe and Transpacific creates a cascade of ships on medium size trades, and consequently overcapacity.

The main effort to face that surplus has come with companies reducing frequency and forming alliances – or both. Anne-Sophie Fribourg says the “Ocean 3” alliance between CMA CGM, CSCL and UASC is considering reducing traffic on Asia Europe routes by around 12% during 20 weeks of the year in an effort to lift prices – and per-ship profitability. But she thinks such move may have limited impact.

“Even a 4% decrease in total capacity on Asia Europe routes won’t be enough to considerably increase prices,” she says.

“Such massive arrival of capacity has consequently brought more volatility on the spot market, reaching historical low levels in June.”

Activity has also remained positive in the airfreight sector.

After flattened activity in the first quarter, air cargo volumes have increased to 2014 growth levels of 4.5%, with sharply contrasting increases per region – European airlines seeing a mere 1% rise, for example.

Claude Picciotto, airfreight procurement manager for Bolloré Logistics in Paris, France, says forecasts for the entire year call for air cargo activity to grow by 4.5% to 4.7%, a bit higher than in 2014. But the air shippers have to respond quickly to both rising capacity and innovation by surging Gulf airlines that other players must adapt to.

“Virtually every Gulf airline except Etihad uses all-in pricing, and everyone else is under pressure to follow that lead to prevent the market from being fractured by contrasting practices,” Claude Picciotto says. “The result is that while even if most other airlines and cargo companies say they won’t offer all-in, they all now provide discounts and concessions that, in the end, amount to all-in arrangements.”

Though he says he expects increased activity in the second half of 2015, rising capacity will limit per-flight pricing and profits. Many companies have matched deliveries of wide body capacity by retiring aging planes; however, total wide body capacity in service in Q2 of 2015 was the highest in nearly a decade.

Freight load factors are slipping as a result, which may continue into the year as greater onboard capacity is compounded by increased flight frequency.

“Emirates airline has two cargo pure freight flights and five passenger flights a day to French destinations each week alone,” Claude Picciotto says of the growing competition and capacity level. “Russian AirBridgeCargo Airlines will be operating five flights per week, and Chinese carriers are also looking to increase cargo hauls to five per week. And that’s just traffic into France. Think about that over the entire globe.”

The good news for both sea and air transporters, however, is macroeconomic forecasts are looking brighter in most regions, and should bring increased trade.

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