For some time, Supply Chain Matters has brought attention to the building overcapacity situation that is occurring across global focused transportation sectors. This includes ocean container shipping as well as airfreight. As carriers continue to report on Q1 earnings performance, the scope and degree of the capacity problem becomes more evident.
A.P. Muller-Maersk, the parent of industry leading Maersk Line reported Q1 financial results this week. Overall the diversified shipping line reported an 86 reduction in net profitability although the firm was able to deliver some profit.
For the Maersk Line ocean container shipping segment, earnings were $32 million vs. $710 million in the year earlier period. Volumes were reported up 7 percent. With the China Containerized Freight Index declining 30 percent in Q1, Maersk’s volume increase strongly implies that the line is taking market share from other lines. Thus, shipping alliances among dominant lines are having an impact on other smaller industry players.
Overall, Maersk noted a 26 percent decline in freight rates during Q1. That was beneficial for shippers, not so great for the shipping industry and the mounting pressures for further consolidation. The Wall Street Journal described shipping industry executives as describing the most bruising three months since the 2008 financial crisis. Current freight rates are barely covering fuel and other operating costs. There are ongoing reports of financial issues with the two major shipping lines in South Korea and other financial related challenges for lines based in Japan.
Turning to the air freight segment, Deutsche Lufthansa reported a significant decline in revenues related to the carrier’s air freight segment. Cargo yields were down 15 percent year-over-year in Q1, and citing “sizable overcapacity in the market.”
We as well as supply chain media have brought attention to Amazon’s ongoing efforts to lease and operate the online retailer’s own air transport fleet. The opportunity to add to that resource base on a broader global basis may now be more opportune since some air freight carriers may need to shed assets more quickly than anticipated.
Supply Chain Matters continues with our counsel to transportation, logistics and related procurement services professionals. While the rate picture continues to look very advantageous in the short-term, overall industry dynamics will obviously have to undergo continued structural changes in the months to come. For carriers, it is about preserving profitability and the ability to cover operating costs, regardless of the impact on shippers. The real test comes later this year when Asia to Europe and the U.S. shipping volumes once again ramp-up to support the holiday period.
While logistics and transportation costs are trending favorable, insure that senior management is aware that structural industry change is foreseeable, and that will have future impact on global sourcing and transport lead-time and service costs in the long-term. Current advantageous global transportation rates should not be presumed to be sustaining. Global trade and declined global production levels particularly from China are fueling continued shakeout and where the end state lands may be anyone’s guess right now.
And then, consider what industry disruptors like Amazon can do to leverage an industry challenge to an individual opportunity.
Thus, logistics, transportation , procurement and third party logistics firms need to stay current with industry intelligence, ongoing developments, along with their implications.
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