Major Industry Trends
Slump in Global Trade Devastates Industry
The fortunes of the transport and logistics industry are closely connected to the economic cycle. When economic activity is buoyant, demand for transport and logistic services is equally strong. Consumer and business demand for goods and services inevitably translates into higher demand for transport and logistic services. Thus, the slump in global economic growth that has occurred since the second half of 2008, and that has caused global trade volumes to plummet, is having a severe impact on the transport and logistics industry.
Around the world, once-busy ports and airports are reporting sharp falls in traffic. The International Air Transport Association (IATA) reported in March 2009 that cargo volumes fell by 23.2% year-on-year in January 2009, after December 2008’s 22.6% decline, the eighth consecutive month of contraction in freight traffic. Giovanni Bisignani, IATA’s director general and CEO, said: “The industry is in crisis and nobody knows that better than our cargo colleagues. Cargo demand has fallen off a cliff.”
According to IATA, air cargo represents about 10% of the airline industry’s revenues. As 35% of the value of goods traded internationally is transported by air, air cargo is a barometer of global economic health. “The continued decline in cargo markets is a clear sign that we have not yet seen the bottom of this economic crisis,” Bisignani said in March 2009.
The shipping industry has also been badly affected by the slump in global economic growth and trade. The Baltic Dry Index provides the daily average cost to ship bulk dry commodities, such as grain products or coal, around the world. It is highly sensitive to global economic activity, as the freight costs it measures move in response to demand for shipping services. The greater the demand for raw materials around the globe, the higher the index moves.
It normally takes around six to nine months for raw materials to be delivered to customers, and made into finished products. Thus the index is also a highly accurate “leading indicator” of global economic activity—in other words, movements in the Baltic Dry Index provide a very good guide to the future direction of the global economy. In 2008, the Baltic Dry Index hit its lowest level in more than two decades, presaging the global recession. Overall, the Baltic Dry Index fell by 92% in 2008. However, it began to rise again in 2009, reaching 2298.00 on March 10, up from 773 at the beginning of the year, suggesting that global economic activity should start to pick up towards the end of 2009. This augurs well for the transport and logistics industry. Despite these encouraging signs, CC Tung, chairman of Hong Kong’s Orient Overseas International, which owns the Orient Overseas Container Line (OOCL), warned in March 2009 that the shipping industry could face difficult conditions for years if government economic stimulus packages fail to revive the world economy swiftly. The shipping industry enjoyed five boom years until 2007, but the global recession has sapped demand for the transportation of Asian-made goods—much of the container shipping industry is focused on transporting manufactured goods from the Far East to markets in Europe and North America.
Furthermore, the movement of freight between Latin America and Asia has plummeted. Countries such as Brazil have been supplying many of the raw materials and commodities that have fueled Asia’s industrialization. In March 2009, a port executive in Chile told CargoNewsAsia.com that “transpacific trade from Asia to the West Coast of South America has decreased by about 30–40%, while on the return journey the fall is between 10% and 15%.”
In the same month, the Trans-Pacific Stabilization Agreement, a research and discussion group of major container shipping lines, warned that the industry faced a “potential catastrophic event” if prices on trans-Pacific routes did not increase. It said that freight rates from Asia to North America were unsustainably low. The Financial Times reported that shipping lines “desperate” to fill ships had cut spot rates on some routes to the lowest levels in the sector’s 53-year history. It added that on routes between Asia and Europe, some companies had been charging “only the surcharges normally meant to cover fuel, currency changes, and terminal handling costs.” Between Asia and North America, the newspaper reported that overall charges had fallen to only a few hundred dollars for each standard container, from more than US$2,000 in early 2008.
Recession Affects Logistics Industry
The global recession has also taken a toll on logistics firms. In March 2009, DHL reported that business had declined in the fourth quarter of 2009, with volumes dropping by as much as 30%, depending on the region. However, Frank Appel, chief executive of DHL’s parent company, Deutsche Post, believed that firms had overreacted significantly to the bad financial news. He said: “Consumer demand hasn’t dropped by that amount, so obviously, manufacturers or retail companies are drying out their supply chain, and reducing their inventory. So I would not expect that these huge double-digit volume drops will be seen for the rest of the year.”
Mr Appel added: “What might happen is that we will see a turnaround pretty fast, because it can happen that demand is picking up again after the first-quarter numbers come out, and then people say, ‘Oh, it’s not as bad as expected, therefore let’s buy supply routes now instead of waiting another three months because prices will go up.’ So that means we see a lot of opportunities in Asia, as Asia has become the place for manufacturing many goods.”
Protectionism and Environmental Laws Could Hit Transport Firms When Global Economy Revives
Some in the freight industry fear that even if global growth does revive, demand for transport services will never recover to the highs seen in 2007. This reflects concerns about a backlash against free trade, which could lead to rising protectionism in countries such as the US. In March 2009, CargoNewsAsia.com quoted Julian Keeling, chief executive of the forwarder Consolidators International, Inc, as saying: “I anticipate that a philosophy of looking after its own will re-emerge in the US. Globalization and free trade are things of the past.”
Air freight companies may also be affected by stricter environmental regulations, according to CargoNewsAsia.com. The website said that the likely advent of more stringent global environmental regulations “would impact not only the economics of using air transport, but would also possibly result in punitive sanctions against goods produced with environmentally questionable practices.” It added that the latter element would significantly erode the comparative advantage enjoyed by manufacturers in Asia, which have fueled the growth in demand for air cargo in recent years. These concerns appear to be shared by IATA. CargoNews Asia.com quoted the organization’s chief economist, Brian Pearce, as saying that “the cost of protectionism and deglobalization, higher taxes, and climate-change policies will all have an impact on the industry.”
Market Analysis
Aviation Industry Cuts Jobs and Capacity
The slump in global trade and, in particular, the collapse in demand for manufactured goods from Asia is hitting the airlines and shipping companies hard. Airlines are cutting capacity, routes, and jobs. The outlook is unlikely to improve significantly in 2009, according to the German carrier, Lufthansa. The head of its cargo division, Carsten Spohr, told CargoNewsAsia.com in March 2009 that, “the 2009 business year will confront Lufthansa Cargo with the biggest challenge for many years.” To offset weak demand, Lufthansa has cut working hours for pilots and ground crews in its cargo division, and has taken four cargo aircraft out of service. In the same month, American Airlines warned that cargo and other revenue is expected to decline by between 5.6% and 6.6% in the first quarter of 2009, compared with the same period in 2008.
Overcapacity Plagues Shipping Industry
The shipping sector is suffering from a combination of plummeting demand and an oversupply of ships as vessels ordered during the growth years are delivered. The shipping industry enjoyed five boom years until 2007, but the global recession has sapped demand for the transportation of Asian-made goods.
In March 2009, Port Strategy magazine quoted “experts in the Far East” as saying that a third of shipping companies faced bankruptcy. It said that, since the beginning of the global financial crisis in September 2009, at least four companies “hit by a combination of falling rates and a global capacity glut” have sought bankruptcy protection in order to keep trading, and that China’s diminishing need for iron-ore imports was exacerbating the lack of demand for shipping services.
Certainly, the news flowing out of the industry in 2009 has been unremittingly gloomy. In March 2009, for example:
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Orient Overseas (International) Ltd, Hong Kong’s largest container line, reported a 65% plunge in second-half profit (for the six months to December 31, 2008).
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Denmark’s AP Moller-Maersk, whose Maersk Line is by far the largest container shipping line, said its volumes in January 2009 were 20% lower than in 2008.
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The credit-rating agency, Standard & Poor’s, warned it might cut the credit rating of France’s CMA CGM, operator of the world’s third-largest container shipping fleet. The agency said the company would need to generate significant amounts of cash to support its high debt level.
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Two listed owners of container lines—Singapore’s Neptune Orient Lines, and Maersk—have announced that they expect their lines to be loss-making for the whole of 2009. Neptune Orient Lines, which is southeast Asia’s largest shipping company and the world’s seventh-largest container line, announced that container volumes plunged a huge 35% in the first six weeks of the year.
Container lines have responded to the downturn by taking vessels out of service, reducing the number of routes, and cutting jobs. Thus, Orient Overseas has said that it will cut capacity by 20% in 2009 by returning as many as 16 chartered vessels to ship owners. Orient Overseas has 10 new vessels due for delivery this year, and another 10 before 2011. In March 2009, Bloomberg said that 13% of container ships, or 575 vessels, were lying idle around the globe. Port Strategy said, in March 2009, that shipping lines would respond to the global slump in demand for their services by scrapping almost one-third of active vessels over the following 24 months. It said that this was because “shipping lines trying to offload vessels to reduce the size of their fleets are finding no buyers.”
On top of plunging freight rates, shipping companies were also hit by soaring fuel costs in 2008. Fuel costs at Orient Overseas, for example, rose by 53% to US$1.21 billion in 2008, with the average price of fuel jumping by 45% to US$519 per metric ton. However, Orient Overseas said that fuel costs in 2009 would be around 50% lower than in 2008, reflecting the sharp fall in oil prices that took place in the second half of 2008.
Global Economic Slump Hits Logistics Specialists
Many of the major logistics firms have also reported results that reflect the impact of the global economic slump. In February 2009, for example, TNT (the Netherlands) reported a 60% fall in fourth-quarter net profit, hit by sharp volume declines at its international express unit as well as restructuring and impairment charges. The company said that 2009 would be challenging, and that it expected volumes to remain under pressure. In the same month, the US transport and logistics giant, FedEx Corporation, laid off 900 employees at its freight unit, or about 2.6% of the unit’s work force. In March 2009, it added that it would make further job cuts, reduce network capacity at its express and freight segments, cut back working hours, and reduce compensation to non-US workers, where allowed. The company had already reduced salaries and other compensation for US employees.
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