The ocean shipping industry is still grappling with the post-Hanjin reality that another major carrier could go bankrupt, potentially stranding cargo on the water and leaving shippers, creditors, and service providers to once again pick up the pieces.
These days the ocean shipping industry is still adapting to what I would call a “post-Hanjin” world. This is not to say that the industry is still dealing with the specific fallout of the South Korean carrier going belly up last fall, but rather that shippers and carriers are still adjusting to new realities brought on by a brutal 2016.
Persistent overcapacity caused rates to plummet to below operating expenses on most trades last year, pushing almost every carrier into the red and spurring a spate of consolidation even the most cynical of analysts could not have predicted.
The most important reality of the post-Hanjin marketplace, however, is not the threat of further consolidation via M&A or shifting alliance structures, but the legitimate possibility that another major carrier could declare bankruptcy, once again leaving shippers, creditors, and service providers like ports, terminal operators, railroads and NVOCCs to pick up the pieces. It probably sounds like a no-brainer for anyone not familiar with the ocean freight industry that if a company consistently loses money it will eventually go bankrupt, but in ocean shipping this hasn’t traditionally been the case.
For most of the industry’s history, carriers have operated on minimal profits (and in some cases at a loss), propped up by government subsidies and private family wealth.
What the industry saw with Hanjin is what happens when a government finally says “enough is enough.”
In an effort to quell shipper fears about which carrier could be the next to fall, the newly formed THE Alliance vessel sharing agreement of Hapag-Lloyd, “K” Line, MOL, NYK and Yang Ming created an industry first “contingency plan” in the event one of its members goes bankrupt.
Patrick Berglund, co-founder and CEO of ocean freight rate analytics firm Xeneta, took issue with the contingency plan in a recent blog post about the financial struggles of alliance member Yang Ming, which recently reported a nearly $500 million loss for 2016, double what it lost the previous year.
“Low-priced boxes are being rolled-over repeatedly as higher-priced boxes are shipped in their place,” Berglund wrote. “Which of THE Alliance carriers will drop their own paid cargo and take a big slug of YML’s boxes without the payment confirmation of a bankruptcy court?”
This may seem controversial at first glance, but in reality, it’s just common sense.
Carriers are struggling to make money, hence the need for a bankruptcy contingency plan. THE Alliance members may have set up a fund to help ease the financial stress of an insolvency within the group, but the idea that they would stop their own revenue-generating activities to ensure that cargo belonging to their fellow alliance members is delivered without disruption or delay? That seems like more than a bit of a stretch, even in a post-Hanjin world.
Commentary: Common sense, not controversy
