Shippers wait to see whether other carriers will follow Maersk’s lead in restructuring inland network

Carriers determined to raise rates above and beyond higher rail costs

Maersk Line’s decision to streamline its inland network is causing heartburn for shippers such as Dave Panjwani, but the restructuring reflects the enormous cost of intermodal service to Maersk and other carriers.

Gordon Dorsey, a spokesman for Maersk, said the inland portion of shipping a container from Hong Kong to destinations in the U.S. interior accounts for about two-thirds of the total cost.

“What we’re trying to do is to drive out inefficiencies,” Dorsey said. Maersk is doing that by incorporating the total round-trip cost of moving a container into its rate and service structure.

According to Dorsey, only a small percentage of the carrier’s customers will be affected by its action, but one of them is Panjwani, manager of international logistics for Deere & Co. He has been using Maersk’s Minneapolis rail ramp for containerized shipments of farm equipment, which Deere makes at a plant in Valley City, N.D.

After learning about Maersk’s decision to drop intermodal service from Minneapolis, Panjwani began shopping around. Other carriers that Deere could use for its Minneapolis traffic include Hapag-Lloyd and OOCL, both of which still offer a Minneapolis bill of lading, Panjwani said. But if shipping with them is not viable, “we will absorb the extra cost of shipping it to Chicago,” he said.

Maersk spokeswoman Jessica Kubacz declined to say where it is terminating inland service. But, she added, “we have contacted our individual customers and have gone through their overall plan for shipping from factory to final destination. As we continue to assess the situation, locations may change or adjust.”

Besides revamping its inland network and consolidating some of its worldwide liner services, including trans-Pacific and trans-Atlantic routes, Maersk is seeking hefty rate increases this year, as are most other carriers. While that will be the main subject of contract negotiations between shippers and carriers over the next two months, Maersk is getting an early jump.

Hu Huang, director of international logistics and customs compliance for Cleveland-based Kichler Lighting Group, a leading supplier of lamps and lighting fixtures for the home, said that just before Christmas, Maersk informed one non-vessel-operating common carrier that it was raising its rates to Cleveland by $300 to $400 per 40-foot container.

Huang said she had been using the NVO because it was getting a low rate from Maersk, which was eager to fill extra space on its inbound vessels from Asia. But when she heard the news, she promptly dropped the NVO. He then came back to her and said he would be able to get Maersk to lower its rate, but Huang never heard back from him.

In the coming months, other Midwest shippers and NVOs will face choices similar to those encountering Panjwani and Huang. An informal survey of shippers, carrier executives and forwarders conducted in mid-February found that no other container lines had yet decided to revamp their inland networks as Maersk is doing, but it’s clear that carriers are determined to pass along the higher intermodal rates demanded by the railroads.

“We’re running a business. We need to recover all of our increased costs,” said Bill Rooney, president of the U.S. subsidiary of Hanjin Shipping.

The main cost driver for all carriers this year is the cost of rail and truck intermodal service, said Lamont Petersen, vice president of marketing for Hyundai Merchant Marine. “It’s a huge concern, even bigger these days than fuel. The major east-west railroads are raising intermodal rates by up to 30 percent.”

According to Petersen, the rates charged by the container lines were not remunerative even before the railroads hiked their prices. “Something has to give. We have to have some cost recovery or it will be difficult to continue to provide these types of services,” she said.

Petersen said Hyundai is not now contemplating taking action as drastic as Maersk has done. But, she added, “we’re watching with interest what Maersk is doing. I’m certain that Maersk has put a lot of thought and study into its action. I’m sure it is doing the right thing for its operation.”

Free time reducedBesides the higher intermodal rates charged by the railroads, ocean carriers face higher costs for chassis and for repositioning empty containers, said Peter Talbot, vice president for operations and information at China Shipping NA Agency Co. In addition, railroads have slashed free time at their inland ramps from four or five days down to just one or two days, he said.

That has enabled the railroads to move more freight over the same tracks, but it has forced carriers to move containers to off-ramp facilities, most of which don’t have lift-on, lift-off capacity, Talbot said.

“Consequently, any containers there have to sit on chassis. That increases the pressures on chassis pools and chassis fleets and increases the daily charge that carriers must pay for their pools of chassis,” Talbot said.

Because carriers can’t hand containers over to their customers until Customs releases them, the lines have to take them to bonded facilities, which are more expensive than truckers’ yards, he said.

“There’s a domino effect of costs. It’s a snowball,” the China Shipping executive said.

All of those costs have combined to make intermodal, which was already either unprofitable or at best a low-margin business for the carriers, even less palatable.

“The bleeding is really bad. It would be easily proved that carriers are losing money on rail service,” Talbot said.

Nonetheless, China Shipping is not planning any retrenchment of its inland services. “We think we’re the right size,” Talbot said.

Nor is Hanjin following Maersk’s lead by restructuring its physical network, according to Rooney. But, he said, “we will price our service in a way that satisfies our financial requirements.” That way, it will be up to its customers to decide whether to book intermodal cargo with the Hanjin or make their own arrangements, he said.

As customers find that intermodal service via the West Coast may be getting too expensive for them, Hanjin will be placing more emphasis on all-water services to the East Coast, Rooney said. “We already have a significant presence there and that presence is going to grow,” he said. Hanjin currently has five all-water services via the Panama Canal, and it just launched one via the Suez Canal.

The Hanjin executive said the company will be pushing the all-water services in its contract negotiations with shippers not only for destinations along the coast, but also for points east of the Mississippi, such as the Ohio Valley.

“We want to have a dialogue with our customers that examines all those possibilities,” he said.

That dialogue will begin in earnest in March, and higher rail intermodal costs will be at or near the top of carriers’ lists of talking points.

“It’s not a secret that the carriers are all facing double-digit increases and that they’re going to try real hard to pass them on,” said Gale Speanburg, DHL Global Forwarding’s regional trade director for trans-Pacific ocean freight.

Rooney said he is more optimistic than last year about the carriers’ prospects for winning rate increases. It won’t, however, be a cakewalk. “We run a competitive bidding process every year,” said Panjwani of Deere. “We look at all our partner carriers in the same way and put them on the same plane.”

One advantage he has is that Deere ships both exports and imports, with most of its export cargo moving through East Coast ports. Tractors and other roll-on, roll-off cargo are shipped on rail flatcars from its plants in the Midwest to the ports.

All-water servicesThe prospect that carriers will be able to push through substantial rate increases because of carriers’ higher intermodal costs is prompting shippers to take a closer look at all-water services.

Huang of Kichler Lighting last year switched all freight bound for the company’s distribution center in East Hartford, Conn., to “K” Line’s new all-water service from China and Hong Kong direct to New York. Not only is it cheaper than landbridge services via the West Coast, but the transit time is four or five days shorter, she said.

Huang uses a combination of landbridge and all-water services for shipping cargo to Kichler’s distribution center in Atlanta, and now she’s weighing the possibility of using all-water service to move cargo to the company’s distribution center in Independence, Ohio.

An increase in Suez services is prompting more interest from shippers and forwarders, as an alternative to the landbridge route and services via the Panama Canal, which is bumping up against capacity. “Suez services are a good alternative if you can handle the transit time,” Speanburg said. But she does not use them for Midwest cargo.

Like other shippers, forwarders and carriers, Speanburg is optimistic that there will again be no repetition of the bottlenecks at West Coast ports and on the western railroads that created massive disruption to supply chains in 2004. DHL offers its customers contingency plans in the event of another meltdown. But, she added, “we’ve convinced customers that cargo moves through Los Angeles and Long Beach normally.”