In August of 2010, we posted a commentary on the novel economics in ocean container shipping, namely that key shipping lines were finding novel ways to boost revenues in the wake of gross excess capacity while simultaneously initiating efforts to reduce operating speeds in order to reduce overall operating costs. Slower transit meant that container space per ship became a premium for time sensitive shippers, and all of this was in the wake of fairly dismal on-time reliability to begin with. Only about a half of ocean containers arrive to port destinations on time, and in-transit visibility is even worse. The industry was in-effect, ignoring the needs of shippers in favor of their own profitability concerns.
Flash forward 15 months and changes spurred by industry leader Maersk Line have caused remaining competitors to cry foul.
To respond to a groundswell of shipper concerns, Maersk launched a customer-focused innovation program in October. A November 7 interview with Maersk CEO Nils Andersen published in Fortune magazine specifically made note of this initiative. It included the launch of daily ship sailings from Asia to Europe, one of the most active routes, coupled with penalties to Maersk if the ship arrives late. This initiative was a response to customer feedback that indicated that customers wanted more frequent service as well as more on-time reliability. Instead of arranging large shipments of containers filled with inventory to coordinate with scheduled weekly sailings, daily service would allow shippers the flexibility to have smaller, more frequent shipments along with skin in the game for on-time reliability.
This week came the announcement of Maersk Q3 earnings, and in a report published in the Financial Times, (paid subscription of free metered view) notes that while revenues increased 9 percent, profits declined by 78 percent. Of more significant interest, shipment volumes on Asia to Europe routes increased 24 percent, but the carrier earned 26 percent less per container. On a worldwide basis, volumes spiked 16 percent but again, revenue per container decreased by 12 percent. The carrier in essence took a financial hit in its response to customer needs for more on-time reliability.
In the FT article, the carrier acknowledged that the new daily service has created “a little bit of panic” among industry competitors. Supply Chain Matters emphatically states: good! What’s wrong with healthy competition and economics that favor shippers?
Competitors accuse Maersk of slashing rates to gain market share, and that these trends will lead to unsustainable levels of return. Again, this in the context of an industry that still has lots of excess capacity to deal with, with even bigger ships coming on-line.
Supply Chain Matters commends Maersk for listening to its customers and taking positive actions to change the economics of the industry, in favor of shipper needs. If the carrier gains more market share, so be it. Instead of panic, other carriers need to focus on the one thing that always matters, on-time reliability at a competitive cost. The best that can happen is that the industry joins Maersk in programs that feature more frequent service and lower costs for both shipper and carrier. In the end, the entire industry will benefit.
What’s your view? Do you view Maersk’s new service initiatives as beneficial to the industry?
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