Can shipping be fixed?......Pricing (Part I)

Shipping is broken….

There have recently been a series of articles and observations about Pricing and how shippers are ranking carriers lower when it comes to Service Delivery. Whilst the two may not seem to be directly connected at first glance, I believe that the two are inseparably inter-twined with one another.

What if we were to turn this around? How satisfied are Carriers with their Shippers? Shippers can, after all, book space on a vessel, not pay anything in advance and then not show up with the cargo. For this there are zero consequences for the Shipper but the Carrier now has unused space on the vessel.

A real world view of this is played out every week in ports such as Shanghai. Since there tends to be huge congestion at the terminal gate each week, Shippers will book their cargo on multiple vessels, with multiple carriers, that are all offering basically the same service. Once their cargo eventually gets through the gate at the terminal, it will be loaded on the first available vessel. So, if the container is booked with 5 Carriers, only one of them will actually ship the cargo and they will be the only ones that get paid for the used slot.

Such is the extent of the problem for Carriers, they will overbook their vessels, by as much as 30% to 40% in some cases, on the basis that a large percentage of the booked cargo will not show up. If all of the cargo does show up for one vessel then some Shippers are inevitably going to find that their cargo gets shut out. This leads us neatly back to Shippers being unhappy with the levels of Service Delivery by the Carriers.

So where does the fault lie? Is it the Shippers, the Carriers or a combination of both? Primarily it is down to the pricing and booking mechanism in container shipping. Since a Shipper can book on as many Carriers as they like, from the same port, they know there are no financial consequences and so they are essentially hedging their bets to ensure that their container gets shipped on time.

Consequently, for the Carrier, it may be too late to find additional cargo to fill those pre-booked slots and their vessel will sail with empty, unpaid slots. It could be argued that this is not really a problem since the Carrier could load additional cargo in later ports to fill up the vessel.

This idea runs into problems because the last port before a vessel departs a particular region, Asia, in this example, tends to be a large transshipment hub (cargo moving from one service to another). The load cargo forecasts for these ports tend to be (slightly) more reliable since the cargo is generally already onboard another vessel that is heading to that transshipment port.

Since these transshipment hub ports are particularly busy ports, berth space for vessels is at a premium and the berthing windows have to be tightly controlled in order to keep the terminal running. Even if the vessel has space available to load more cargo, there will be a pre-agreed number of container moves, cranes and berthing time slot. This will account for load, discharge and restow moves.

Unless the terminal has the capability to allow the vessel to remain alongside for longer and load more containers, and the Carrier is willing to pay for additional fuel burning in order to remain on schedule (which may, in itself, cancel out any profit made by loading those containers), we are back in the same situation as before.

In what other industry would you, as a customer, be able to reserve space, not pay for it upfront and then face zero financial penalties for not showing up? If you book a seat on a flight, you pay the full cost upfront and if you don’t show up, too bad (unless you have paid for a more expensive flexible ticket).

The flight will still have all the booked seats paid for but now there is also the opportunity to sell those same seats again if there are passengers on a waitlist. Either way, the airline doesn’t suffer any financial consequences from passengers not showing up and may even make double money on those same seats. Even if they can’t fill the seats, the plane will now weigh less, thus reducing the fuel required. It’s a win either way for the airline.

So what is preventing shipping lines from doing the same thing? Primarily it is fear. It’s a fear that if they implement a system whereby a Shipper has to pay the full costs of booking space upfront, they will drive their customers to the competition but how true is this really?

Container ships used to sail around the world at 25+ knots when the fuel price was lower than it is today. Speed was king! Container ships were specifically designed with speed in mind. However, as the fuel price crept up, the profits crept down. They were already razor thin in the first place but this only compounded the problem. Everyone knew that the solution was to slow the ships down but nobody wanted to be the first to do it because of the same fear we see today regarding pricing.

The fear of losing customers prolonged the financial pain of the Carriers for much longer than it needed to be but eventually something had to give. The financial losses couldn’t be ignored any longer and all it took was one of the major players to implement what is now known as “Slow Steaming” and, within months, every Carrier was doing the same thing. Did they lose all of their customers? No, because everyone else was offering the same service level and Slow Steaming because the industry standard practice.

There are initiatives coming into the market today, such as NYSHEX, where a shipper has to pay a small amount of money in order to secure space on a vessel, but that doesn’t resolve the problem.

To solve this, I would call on the SAS…….that is to say, Mr Skou, Aponte and Saadé. They run the three largest Carriers right now (excluding COSCO, who likely have little interest in this problem right now.). If these three gentlemen were to bring in pay up front bookings, it’s almost certain that all of the smaller Carriers would jump onboard as soon as they could.

It would definitely be a win for the Carriers and, in the longer term, the Shippers themselves since Service Levels would be much more stable.

Solving the pricing problem alone will not fix the Liner Shipping Industry. Carriers are notoriously self-destructive in their behaviour. I will cover that aspect in the next of this three part series by discussing Over-Capacity in the market.