High rates and low efficiency: are carriers abusing the current market situation?
Over the past months shippers have reported a combination of record-high rates and record-low service from carriers. This has led to unprecedented levels of animosity between two the parties. Let’s take a closer look at carriers’ behavior and check if the accusations are fair.
Are carriers to blame for capacity shortages?
In the first half of 2020, the major carriers, in order to offset a massive drop in demand, artificially reduced capacity. This “synchronous” action of the major carriers set a bad precedent and instilled fear that it might be repeated once the market started to turn in shippers’ favor again.
However, when demand did start to grow again, carriers reacted adequately and fully deployed the currently available fleet. Thus, in the present situation — despite persistant accusations —carriers cannot be held responsible for the current shortages.
Strong consumer demand during the pandemic have boosted European imports, while the labor force at ports was reduced due to implemented COVID-19 measures. This created bottlenecks at terminals at origin and destination ports, and vessel schedule reliability at European hubs hit record lows.
Due to high port congestion, especially on the US West Coast, and scarcity of empty containers, shipping is operating at reduced efficiency. Even fully deployed ships (especially on the Transpacific) contributed less available box movements than pre Covid.
Are carriers doing their best to improve the situation?
While each carrier does its best to maximize its individual efficiency, overarching initiatives (and an incentive for carriers to pursue them) are lacking. We even see counterproductive moves as carriers increasingly operate East West loops outside alliances.
Are rate increases driven by increasing carrier costs?
Can increased fuel and charter costs be the reason for massively rising rates? A simple look at carriers’ current profit margin of above 20 or even 30% clearly demonstrates, rates have increased far more than costs and the current situation is very comfortable for carriers.
Are carriers unfairly profiting from the current market situation?
Despite carriers’ poor on-time performance, rates are extremely high. Shippers also claim carriers are unfairly profiting by unilaterally cutting allocations and adding surcharges within contracts.
There is truth to this. While rising prices for spot and new contracts are market-driven and unavoidable, carriers could honor most existing contracts if they would be willing to forego more profitable cargo.
Carriers have room for improvement here, but it should be also remembered that shippers have historically handled contracts laxly, too, and adding enforcement mechanisms to contracts will be a joint effort.