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Maritime industry faces obstacles to efficiency, productivity
Fuel mandates, potential carrier consolidation, and headaches for drayage truckers are among the key obstacles facing the maritime industry, according to speakers at the recent Coalition of New England Companies for Trade (CONECT) 23rd Annual Northeast Trade and Transportation Conference, held in Newport, R.I., in April. Such issues stand out among the many challenges that threaten the efficiency and profitability of every direct stakeholder and, ultimately, their customers, the experts said, highlighting the following:
New rules mandating low-sulfur fuel. Effective January 1, 2020, the International Maritime Organization (IMO) will require ocean carriers to use either expensive low-sulfur fuel or employ "scrubber" technology that will remove most sulfur from their ships' emissions. Compliance could add $10 billion to $15 billion annually to carriers' costs, said Gary Ferrulli, CEO of Global Transport & Logistics Consulting. As a result, carriers want to change the formula for applying fuel ("bunker") surcharges to reflect the actual average cost of fuel in specified markets, rather than basing it on quarterly projections, he said. Although shippers understand the necessity of adjusting surcharges, Ferrulli said they are concerned about the potentially sizable increase in their own costs.
In a separate presentation, keynote speaker Howard Finkel, executive vice president of trade for COSCO Container Lines Americas Inc., identified potential roadblocks to implementation of the IMO mandate by the deadline. These include the possibility that there won't be enough low-sulfur fuel available, the limited number of companies that are qualified to retrofit ships with scrubbers, and the fact that not all countries allow scrubbers. Finkel said that, depending on how it affects carriers' costs, compliance with the low-sulfur requirement could "make or break" carriers' profitability in 2020.
Potential for carrier consolidation. Low freight rates and elusive profits raise the specter of carrier mergers, acquisitions, and bankruptcies. COSCO's Finkel said he does not foresee any mergers or bankruptcies among major container carriers right now, but noted that any near-term acquisitions would likely involve smaller regional carriers. If carriers can continue to keep inbound and outbound capacity in reasonable balance while successfully managing the cost impact of the low-sulfur mandate, then stability is likely, he said.
Ferrulli noted that carriers on the trans-Pacific lanes have been managing capacity by withdrawing ships and sailings. Rates are about $100 higher than they were at the same point in 2018, he said, noting that his clients' service-contract rates are about 7 percent to 15 percent higher than they were last year. He cautioned that some carriers will be taking delivery of bigger ships in 2020 and 2021, which could make overcapacity an issue again. Ferrulli also questioned the financial viability of some Asian carriers that are subsidized by their national governments and therefore don't have to worry much about profits—a "flawed business model" that is not sustainable, he said. He also predicted changes in Europe: if the European Union lets exemptions that allow carriers to operate joint services and alliances in European trade lanes expire next year, "you are going to see [some] carriers in those agreements disappear," he said. His advice to shippers: Read carriers' financials carefully, understand the implications of working with service providers that consistently lose money, and have a plan to manage the disruption that will arise if carriers merge or go out of business.
Constraints on drayage truckers' productivity. The majority of drayage truckers—the carriers that shippers rely on to pick up and drop-off loaded and empty containers—are independent contractors. Others are small, local motor carriers, and some are larger regional networks. This segment of the transportation industry is highly fragmented; the 10 largest drayage carriers represent just 8 percent of total capacity, according to David McLaughlin, chief operating officer of one of those companies, RoadOne IntermodaLogistics, who addressed productivity concerns in this sector during a separate panel discussion.
Shippers typically pay drayage carriers a set rate per container. To make a living, drivers need to handle multiple round-trips a day. But congestion at some seaport and intermodal terminals and, once they get in the gate, difficulties in getting container chassis, mean that truckers serving those facilities spend too much of their day waiting in lines. This situation was exacerbated late last year and early in 2019, especially on the West Coast, when backlogs developed as shippers scrambled to bring in as many containers as possible before higher tariffs on Chinese goods went into effect. In addition, McLaughlin said, the giant ships that have increased the numbers of containers ports must handle at one time have hurt drayage productivity by contributing to congestion, delays, and chassis shortages at ports and off-dock intermodal ramps. In a bid to reduce congestion, some container terminals have moved chassis off dock, adding an additional, time-consuming stop for drivers, he added.
According to McLaughlin, the federally mandated hours-of-service (HOS) limitations on the number of hours drivers can work in a day are also having a negative impact on drayage truckers' productivity. He estimated that the drayage industry is seeing a 10 percent decline in productivity, and thus fewer container "turns" per day, as a result of compliance with the regulations. Meanwhile, railroads have been reducing the number of intermodal terminals they operate. As a result, drivers in some areas have to travel further to pick up and drop off containers, which he said reduces the number of trips they can make in a day. With big companies like Amazon, Uber, and Lyft "sucking away" drivers, sometimes at "double the rates that drayage companies can offer," already high driver turnover rates are climbing, and recruiting is becoming increasingly difficult, he said. Taken together, several speakers agreed, these challenges suggest that a shortage of drayage capacity may be in the offing.
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