Maersk Line will cancel up to 140 sailings in the second quarter on the east-west trades as the carrier attempts to match its capacity with a predicted 20 to 25 percent decline in volume. It was a strategy that was successfully deployed in the first three months of the year as the coronavirus disease 2019 (COVID-19) began to decrease demand. The 90 sailings that were blanked as demand fell and the higher freight rates compensated for an increase in the price of low-sulfur fuel and allowed the carrier to report a profitable start to the year.
Yet A.P. Møller-Maersk CEO Søren Skou warned during the carrier’s first quarter results announcement that the second quarter would be heavily affected. Although visibility through the remainder of the second quarter and beyond remained low as a result of the pandemic, he said the carrier could already see volume has fallen by 20 percent in April and into the first two weeks of May.
“As global demand continues to be affected, we expect volumes in Q2 to decrease across all businesses, and it is our aim to pair the drop in demand one-to-one with reduced capacity in our network,” he said on an earnings call this week.
The decreased second quarter outlook by the world’s largest container carrier was in contrast to a first quarter performance that saw A.P. Møller-Maersk improving profitability by 23 percent to $1.5 billion. “The strong results were made during a quarter with sharp fuel costs increases derived from the industry’s switch to low-sulfur fuel and on the backdrop of a contraction in global trade due to lockdowns in most regions,” Skou said.
During the first quarter, capacity management saw Asia-North Europe rates increase by 0.3 percent, Asia-Mediterranean rates rose 14 percent, Asia-US West Coast freight rates were up 2.2 percent, and Asia-US East Coast rates rose 5.5 percent year over year.
Capacity cuts across alliances
Data from Sea-Intelligence Maritime Consulting shows the incredible number of blank sailings that have been made across the three container shipping alliances.
The 2M Alliance of Maersk Line and Mediterranean Shipping Co. has blanked 27 sailings on Asia-North Europe, withdrawing 511,940 TEU, while cutting 233,479 TEU from Asia-Med in 16 blank sailings. On Asia-US trades, 45 sailings have been blanked, withdrawing 369,432 TEU.
Ocean Alliance carriers (CMA CGM, Cosco Shipping, OOCL, and Evergreen) have now canceled 28 sailings on Asia-North Europe comprising 437,031 TEU, and 16 sailings on Asia-Med, withdrawing 152,460 TEU. Asia-US trades have seen 60 canceled sailings that have cut 578,115 TEU.
THE Alliance (Hapag-Lloyd, Yang Ming, and Ocean Network Express) has blanked 19 sailings of 297,100 TEU on Asia-North Europe, and 17 sailings on Asia-Med of 232,046 TEU. On Asia-US routes, 63 sailings have been blanked, removing 483,231 TEU.
Maersk’s total bunker costs increased 22 percent in the first quarter as the switch to IMO 2020-compliant low-sulfur fuel pushed average bunker prices up 32 percent. However, the costs were offset by bunker consumption declining 7.5 percent as a result of the extensive blank sailings and unit costs per container falling 2.3 percent.
Are these positive signals?
However, blank-sailing announcements have been waning. According to Alan Murphy, CEO of Copenhagen-based Sea-Intelligence, “Over the last week, carriers have only announced an additional six blank sailings across the main deep-sea trades, which clearly shows that we have reached a plateau, where carriers are now only blanking very few additional sailings, and for the moment are satisfied that the currently announced blank-sailings program is sufficient to underpin the freight rate levels.”
Looking at second-quarter impact, Murphy said that the Asia-North America West Coast cancellations are hitting Prince Rupert, Canada and Long Beach, California the hardest, “with both ports seeing a 20-25% reduction in port calls.” In the U.S. East Coast market, which is served both directly as well as by Caribbean transshipment terminals, they see the greatest blank-sailing impact befalling the transshipment hub in Freeport, Bahamas. “Carriers are clearly preferring direct cargo under the circumstances,” noted Murphy.
The slot utilization of the non-cancelled sailings is yet another important indicator. If, for example, 20% of the current week’s arrivals are canceled and the slot utilization on the remaining 80% is actually down versus previous levels, it would imply increased blank sailings ahead. But utilization is not falling, according to one analyst. “Most sailings are very full and rolling cargo at this point,” he stated. “Premium [ocean] products, such as fast-boast services, are gaining even more share from air.” The analyst continued that “two extra loaders were deployed on the trans-Pacific eastbound to deal with surging demand.” An extra loader is an unscheduled extra sailing, the opposite of a blank sailing.
Lag effect on import volumes
Sailing cancellations to U.S. ports inherently limit the capacity of arriving cargo ships, and by extension, U.S. imports. However, there are lag effects in terms of how ocean schedule changes translate into the number of import containers on roads and rail.
After a ship arrives, a box in a premium service with priority discharge may get from the ship to the customs gate in a day, but it could take three to five days on a non-premium service. And containers could be in the yard for weeks prior to passing through customs if the consignee doesn’t pick up the box promptly. Even after a customs declaration is submitted, it can take another four to five days before it shows up in customs data platforms.
The number of customs filings surge in late April as cargo loaded just after the end of the China lockdown finally passed through the customs system (after being unloaded from ships that arrived at the U.S. docks earlier in April). The blank sailings are now pushing the customs numbers back down, albeit with a lag effect that should make the decline more pronounced by the end of the month.
The data also shows a continued very tight correlation between U.S. countrywide customs maritime import shipments and those specifically from China, confirming just how intertwined the two countries remain.