October 2009 Newsletter

With Shipping Lines Raising Rates, Can Airlines BeFar Behind?

Early this past summer, while most people involved in the business of transportation were taking their annual vacations, a bomb dropped into the waters of the world. The world’s largest steamship company, Maersk, announced fairly substantial rate increases on almost all of its routes. Like loyal soldiers, almost all of the major shipping lines; Hanjin, Hapag-Lloyd, Yang Ming, APL and others followed suit with their rate increases. Shippers suddenly awoke from the summer doldrums. “What’s going on here?” they asked. “With a global recession, the most severe in seventy years, with demand for space falling like a stone, how can the steamship lines have the audacity to raise rates?”

"With a global recession,
the most severe in seventy
years, with demand for
space falling like a stone,
how can the steamship
lines have the audacity to
raise rates?”'

The lines had a simple answer, survival. Rates had been driven so low, the lines claimed, “they could no longer function as safe, reliable, transporters of goods.” Shipping lines pointed out that it cost less for a 20' container to move ex-California ports to Hong Kong, a distance of 10,000 miles, than to drive the same container from Long Island to New Jersey, less than 35 miles distant. Customers were skeptical the rates would stick. “Published rates today are pure fiction,” they asserted. “Ten minutes after they publish the new rates, their sales people will be on the phone with special discounts for preferred customers.”

With all economic reports indicating a steady but slow recovery from the deep recession, shipping lines believe their business will be not far behind and the new rates will stick. The next few months will tell the story.

Carefully watching their ocean cousins’ attempt to raise rates in the middle of a horrible downturn are the airlines. Both combination carriers and all-cargo airlines have followed much of the same recession script as the shipping lines including lowering of cargo capacity by parking aircraft in the desert, and also reducing frequency of flights on their route structures or eliminating them altogether. Some of the airlines are starting to raise rates, using the same rationale as the shipping lines. Lufthansa has led the parade with raises up to 30 per cent. KLMAir France followed. A major all-cargo airline, Cargolux, has raised its rates. On the domestic side, Delta has hiked rates as did its new “partner,” JAL. Will more carriers follow? Yes, since airlines generally move lockstep with each other. Will air shippers, as their ocean counterparts, accept the new, higher rates in face of soft demand? The next few months will provide the answers.

"Both combination carriers
and all-cargo airlines have
followed much of the same
recession script as the
shipping lines including
lowering of cargo capacity by
parking aircraft in the desert,
and also reducing frequency
of flights on their route
structures or eliminating
them altogether."

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While Boeing Languishes, Its Press Office Keeps Busy

Perhaps the busiest facility at Boeing’s Chicago headquarters is its press office. While development of the company’s “Dreamliner,” the 787, continues to languish with conflicting statements as to just when the new jet’s first flight will take place, Boeing’s press people are busy little beavers issuing all kinds of statements to the business and aviation communities in general and Wall Street in particular.

One recent statement that raised many eyebrows in aviation circles and among Wall Street’s group of analysts was Boeing’s confident prediction that during the next twenty years, almost 4,000 jet aircraft worth about $500 billion will be produced and sold just in the Chinese market. It is interesting to note that while Boeing cannot say with certainty from day to day as to future flights for perhaps the single most important aircraft in its history, it can predict with seemingly total assurance as to what will happen twenty years into the future of a very volatile country. My belief is that Boeing’s crystal ball is not only cracked, it has blown wide open. Unfortunately, no one, not even the Chinese, has a guide to the future. The nation’s rapid expansion has cooled down and there is far less passenger and air freight volume today than just a year ago.

If demand continues to slow both on the passenger and cargo side, the enormous increase in aircraft predicted by Boeing simply will not occur. Who knows what kind of government China will have twenty years down the road? While it’s highly unlikely that the Chinese will revert back to pure communism in the Mao Tse Tung style, perhaps China will change its mind about the importance of getting rich, forget Adam Smith and return to the tenets of Buddhism. On the cargo side, “old fashioned” ocean freight is taking big chunks out of air freight’s once unquestioned domain of fast, reliable transport. When a 10,000-TEU container ship can make Long Beach from Hong Kong in two weeks, air cargo’s time advantage is cut down sharply. The recent decision by Ralph Lauren, the highly successful designer, to utilize ocean for all of its international transport needs with the exception of only the most dire emergency shipments, is an ominous straw in the wind.

"It is interesting to note that
while Boeing cannot say
with certainty from day to
day as to future flights for
perhaps the single most
important aircraft in its
history, it can predict with
seemingly total assurance as
to what will happen twenty
years into the future..."

It was indeed an ironic coincidence that almost the same day Boeing made public its grandiose prediction, KLM-Air France announced it was ridding itself of the airline’s entire all-freighter fleet and turning the aircraft over to its subsidiary, Martinair. Management at the combined airline simply felt they could not make money flying all-cargo aircraft under the KLM-Air France banner. The airline’s announcement was reality; the plane maker, fantasy.

Boeing isn’t the only aircraft maker with pie in the sky predictions. Its chief rival, Airbus, also is not shy in making grandiose pronouncements about the future of aviation. The latest prediction from Toulouse; almost 25,000 new jet aircraft will be built by the year 2028. For 2010, however, the Airbus mood is much darker. It is considering a reduction in the number of aircraft produced because of the global recession.

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Julian Keeling