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Jan.26, 2015

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BENEATH THE SURFACE 32 THE JOURNAL OF COMMERCE Gary Ferrulli JANUARY 26.2015 YEAR OF THE SHIP WHAT WILL 2015 look like for an industry that has had four consecu- tive underperforming years? There are many issues to deal with, but let's focus on the few that mean the most. At the top of the list is the lack of profitability among ocean carriers and West Coast labor and conges- tion issues that I don't see clearing up any time soon. The shift of cargo from the U.S. West Coast to the U.S. East and Gulf coasts has started and will continue for some time. Too many customers of all types have been burned and will make changes to their business models that will continue to take cargo away from the West Coast, costing ports there market share. But what about ocean carrier profitability? Is it unattainable because of market conditions, or are some lines in such bad shape that maybe, just maybe, they will take actions that will get them all in the black? Over the past two years, we've seen a widening spread in profitability, with only a handful of carriers making money. It has to have dawned on the owners or boards of the unprofitable carriers that some- thing is terribly wrong when, within a mature industry, they are losing significant amounts of money while Maersk, the market leader, is likely to report a $2 billion-plus profit for 2014 and a handful of others are making hundreds of millions. Regardless of the size of the loss, compared with a $2 billion profit, there can be no doubt that serious issues exist that haven't been evalu- ated or addressed correctly. As many have noted, attacking cost issues is one key ingredient. Carriers I deal with have addressed the issues with varying degrees of vigor and success. One carrier representative I met with recently discussed the imbalance in the trans-Pacific and the fact that the carrier's unit trains from Dallas were moving primarily empties at a pretty significant cost per unit. When you combine the inbound rates, no outbound revenue and the costs for the round trip, well, ouch! Even Maersk addressed the questionable profits in the trans- Pacific. If it's tough for Maersk, what must others be facing? Maersk has been hitting the cost issue for eight years and it works overall, but not in a vacuum. Maersk has taken additional steps, including "revenue manage- ment," something I see very few others even considering. That means walking away from specific cargoes or geographic areas because the com- pany would lose money, or saying to the customer, "We can't do it for X amount, but we can do it for Y." The carrier has made a decision: It won't lose money on the shipment. So it becomes a customer decision. Is the shipper willing to pay a higher price? Some are and some aren't. But few carriers make those types of decisions. Most seem content to move cargo at a loss and try to make it up elsewhere. Their financial results say that isn't working. They may talk about revenue manage- ment, but they don't practice it. Some will use market condi- tions, including overcapacity, as an excuse to not be more disciplined when it comes to revenue manage - ment. They think in terms of filling ships, not making money. This isn't a short-term issue that will go away quickly or even in a relatively short period of time. With more carriers finally ordering ships of up to 18,000 TEUs, overcapacity will be with us for several years. Do they plan to lose money year after year? How do they face their boards with the results when they see other companies making hun - dreds of millions or even billions of dollars? Why do the boards accept the results and whatever excuses come with them? Is this the year management of these companies wakes up to realities and acts to truly improve results? Or is it the year that some conclude they just don't want to keep throwing good money after bad and find something else to do with the capital, to the degree they have it? There are, of course, other real challenges, including the congestion issues in many parts of the world. The worst may be in Los Angeles-Long Beach because of the huge volumes moving through those ports. The Southern California terminals simply aren't geared to the volumes and big- ger vessels, exacerbated by relatively poor productivity and high costs. The truckers can't move enough loads in a day. The rails can't handle the vol- umes and the weather conditions. Some progress will be made with the opening of neutral chassis pool locations and the addition of some chassis, but it won't be enough to make the Southern California ports what they should be: models of effi- ciency and effectiveness. Hopefully, time will solve some of those issues. So what will 2015 look like? Who- ever has the real answers to that should be able to become relatively wealthy in the next year. The rest of us will have to speculate. JOC Gary Ferrulli, a 40-year shipping industry veteran, is president of Global Logistics and Transport Consulting in Chandler, Arizona. Contact him at Most carriers seem content to move cargo at a loss and try to make it up elsewhere.

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