Resilience in Action: Adapting to the Crisis
In March 2020, everything came to a screeching halt. Worldwide.
The Coronavirus outbreak halted production. It shuttered stores. It led to blanked sailings. It put people out of work. And that led to a supply shock that disrupted supply chains worldwide.
Yet ocean carriers somehow managed to navigate these major disruptions profitably. And the second half of the year looks better than the first half. Though, shippers didn’t fare as well, and many are still struggling.
Let’s look at how carriers thrived while shippers only survived. Then we’ll look at the impacts and what this means for ocean freight carriers as well as shippers.
Ocean Carriers Unexpectedly Gain the Upper Hand with Intelligent Capacity Management
Against the backdrop of the worst economic recession since the Great Depression, carriers did unexpectedly well. Not all profited. But those that didn’t performed better than they did in 2019. Also an amazing fact.
Most carriers improved their performance from 2019. Some, like HMM and Yang Ming, cut their losses compared to performance year-over-year. Remarkably, they each achieved improved performance. Both ocean carriers cut their losses with reduced volumes of 22% and 15%, respectively.
Other carriers did even better.
ONE, Maersk, Hapag-Lloyd, and Cosco increased profits in the second quarter compared to the prior year’s quarter. Profits increased from a low of $167 million (ONE) to a high of $3.4 billion (COSCO).
That’s extraordinary considering the devastating effects of the Coronavirus. Typically, when carriers have excess capacity, they undercut one another by slashing prices. So this rebound is extraordinary.
Let’s look at the measures carriers employed to achieve these unexpected results.
How Carriers Thrived in an Uncertain and Volatile World
As stated above, the economic effects of the Coronavirus stemmed from a supply shock. Production came to a halt, which reduced cargo shipments. That led carriers to manage excess capacity with blank sailings. In fact, they implemented massive blank sailings. JOC.com reports that carriers blanked a record 400 sailings.
Blanking sailings had two positive effects. First, it led to matching supply or capacity with demand. Second, it put downward pressure of fuel prices. As carriers blanked more and more sailings, prices for bunker fuel declined. So carriers made fewer shipments with lower bunker fuel costs. At the same time carriers increased their rates.
According to JOC.com, Maersk increased its average freight rate by 4.5%. Hapag-Lloyd increased its average rate by 3.1% per TEU. And Zim Integrated Shipping Services increased its average rate by 7.9% per TEU.
These steps combined to enable carriers to improve their financial performance. Again, they did so during one of the worst periods in recent history. As good as this sounds, it also raises a question.
Is this model of capacity management sustainable?
The financial gains weren’t evenly distributed. Consequently, the perception is that carriers won these gains at shippers’ expense.
We’ve seen the benefits reaped by ocean carriers. Now let’s see how the carriers’ gains affected shippers.
Carriers’ Positive Steps to Manage Excess Capacity Negatively Affected Shippers
To recap, carriers benefited from reduced shipments, lower fuel prices, and increased rates. But shippers didn’t share in those benefits. Instead, they bore many of the costs expected from the pandemic-induced disruption.
Here’s how the pandemic challenged shippers during the first half of 2020.
- Lost sales – Retailers’ sales suffered due to the disruption of global supply chains. As manufacturers shut down, that had a ripple effect. Goods failed to reach markets to meet demand on time. That led to supply backups, then a pileup of stocks, and finally a reduction in sales and sales prices.
- Challenged forecasting – Uncertainty surrounding the recovery from the Coronavirus undermined forecasting. Also not knowing when factories would reopen reduced forecasting to guesswork.
- Extended delivery times – Shipping performance suffered as fulfillment rates dipped below 80%. Fluctuating fulfillment rates between 64.9% and 77.9 % made reliability elusive.
- Loss of trust with carriers – as reliability rates declined, trust of carriers eroded.
- Reduced customer service – Shippers paid increased freight rates. Yet they experienced diminished customer service as fulfillment rates decreased.
Without a doubt, ocean carrier gains came with negative effects for shippers. On the whole, operations during the pandemic skewed performance and tested carrier-shipper relations. Clearly, shippers achieved unbalanced gains.
Nonetheless, carriers did an exceptionally good job in managing excess capacity. Most notable was that they avoided the typical price undercutting that usually comes with excess capacity.
That performance, however, raises a question. It begs the question whether this model in reducing excess capacity is a viable one.
Shippers believe carriers only looked out for themselves. They believe carriers focused only on profits. That perception led shippers to believe they bore the costs of the pandemic alone.
A Better Model for Managing the Impacts of Economic and Supply Chain Crises
In fairness to ocean carriers, their gains did not come easy. Carriers achieved these gains during one of most turbulent times in recent history. They were hard won.
So what else could ocean carriers have done? Could they have matched capacity to demand and achieved a more balanced outcome?
As the pandemic took its toll, carriers and shippers could have benefited from strategic relationship-building. That is, they could have worked to improve communications and collaboration.
Carriers entered into relationships with one another to fight the pandemic’s devastation. They could have extended this by building bridges to shippers. Communication and collaboration would have been instrumental.
Direct communication might have made clearer these measures were short-term. That is, they were only temporary measures. Once again, this crisis differs from the Great Recession and the Great Depression. Both were demand shocks, whereas the current recession was a supply shock.
The current economic rebound is showing the negative effects are mainly temporary.
Knowing that carriers and shippers might be more understanding. Communicating that these extraordinary measures were only temporary measures would have helped.
Also, carriers and shipper could have collaborated with one another. Collaboration might have assured a more balanced approach and a more balanced outcome. Both could have worked to achieve a “win-win” solution.
Along with balanced solutions, they might have achieved better solutions. And that would likely have avoided the “winner-take-all” perception.
Pursuing a strategic relationship would have benefited shippers as well as carriers. Logistics is a people business. With that in mind, you can see why strategic relationships matter.
More important, strategic relationships go beyond matching capacity to demand.
Contact us at American Global Logistics today to discuss your logistics needs and challenges. As we get to know you and your needs, we can better partner with you to help you get the results you want.
At American Global Logistics, we believe logistics is a long-term venture. That’s why we seek strategic relationships. Let’s move into the future together.