Adding fuel to the fire

THERE HAVE BEEN stark contrasts this

year in actions taken by transpor-
tation providers and the impacts

on ocean carriers, truckers, and
Ocean carriers either totally
misjudged the impact of rising fuel
costs, or chose to ignore it, plowing
ahead with their strategy of filling

ships and chasing market share. Al-
though not all carriers have reported

their first-quarter results, those that
have provide a view of the full year
ahead: It’s not going to be a banner
financial year for them. They’ve
signed long-term contracts with
little opportunity to recover fuel
costs that have soared 30 percent
this year and 70 percent over the
past 16 months.
Contrast that with the US
trucking industry. When fuel prices

spiked, motor carriers almost imme-
diately raised their fuel surcharges.

The supply-demand issue is one ele-
ment, because finding enough truck

capacity is a real struggle, giving
cargo interests virtually no leverage

to mitigate a rising surcharge. Evi-
dence suggests, however, that cargo

interests are accepting the situation.
As for shippers, it’s a mixed bag.
They are paying considerably higher
costs for trucking services, while
essentially paying what they have

been for their international contain-
erized ocean transport. As trucking

volumes far exceed the international
containerized moves, shippers will
pay more to move their total freight
in 2018.

The ocean carriers again are
absorbing what should be a shipper’s

cost. They have done this with sev-
eral cost factors, including terminal

charges and equipment reposition-
ing in the US. A recent report from

shipping analyst Alphaliner notes
the ocean carriers continue to chase
market share at the expense of their

bottom line, by not managing ca-
pacity. So, they find ways to impact

themselves negatively.
I’ve discussed this situation with

clients, service providers, and indus-
try colleagues, and there are some

interesting scenarios that could
occur with varying implications for
shippers and ocean carriers. I’ll only
discuss the most likely here because
of space constraints.
The likely scenario is that ocean
carriers will continue their largesse
and absorb a vast majority of the fuel
cost increases, until it reaches such a
pain point that they’re forced to act.
I’m thinking it could take several
months, and then the actions will
vary, but ocean carriers likely will

ask shippers for a surcharge, regard-
less of contracts.

If shippers agree to pay, they
move on. If they don’t, watch for a

strict interpretation of the con-
tracts, especially on capacity and

volume commitments. For a shipper
who has signed up for 5,000 TEU
— roughly 100 TEU a week — don’t
expect to be able to book beyond
that number during the summer-fall
peak season. And when space gets

tight, shippers will see their ship-
ments increasingly rolled to later


The alternative is that the carri-
ers swallow hard and watch as their

bottom lines come in considerably

lower than anticipated and budget-
ed. And we aren’t talking a few mil-
lion dollars — hundreds of millions,

even billions, are at stake industry-
wide. Can they start another six-year

industry losing streak as they did
between 2011 and 2016?

All the while there is a clamoring
for improved services — from transit
times, ports, and points served, to
new technology. Certainly, most
carriers are pursuing technology
upgrades. Faster transit times are
getting some play, and one wonders
how long it will last if fuel prices
continue to rise. The situation is the
same with ports and points served,
which are greatly impacted by
fuel-associated costs, including the
inland and repositioning costs.
These issues weave their way
into a situation in which ocean
carriers, knowingly or unknowingly,
push more cargo to third parties.

Although the ocean carriers essen-
tially signed many contracts with

no provisions to recoup significant
cost increases, my contacts in the
third-party world took a different
approach. Asked to provide the same
terms as the carriers, the replies
were generally “no.”
Non-vessel-operating common
carriers and forwarders know that
when the peak season comes, and
they are paying spot market rates
with a fuel charge, they will get
space and be able to provide that to
shippers who need it — and at their
normal margins.
How much of this have carriers
thought about? The first-quarter
results reflect decisions made in
the first four months of 2017. But
the service contracts implemented
on May 1, 2018, reflect well-known
cost factors to the decision makers,
which by all indications are going to
produce some disappointing results
to the carriers and their investors. It
all sounds eerily familiar, like 2011
through 2016, just after a good year
in 2010.
History is repeating itself