Current logistics challenges a ‘perfect storm’ for shippers

4/19/2020

With logistics challenges mounting on land, at sea and in the skies, shippers are already coping with a perfect storm even as the risk of another ‘Hanjin’ grows, according to Rogier Spoel, policy manager for air freight at the European Shippers’ Council.

Spoel told Lloyd’s Loading List the logistics landscape was currently being redrawn on a daily basis by the spread of coronavirus, forcing supply chain service providers to be more than flexible than ever before.

“There is no normal now,” he added. “It’s all ad hoc. You need a tailor-made solution to everything.” 

He said hauliers faced multiple blockages within the European Union – including even between Belgium and the Netherlands, where different social distancing regimes had prompted Belgium to tighten border controls. 

“These have eased down now, but the difficulty of each EU country adopting their own rules without coordination is challenging,” he added. 

“Poland just issued mandatory use of face masks [rules] for truck drivers, while other countries do not. It is challenging to uphold all these national rules.”

Spoel said truck drivers faced multiple practical challenges across Europe including access to toilets and food while in transit and on arrival at warehouses, while the closedown of large swathes of southern Europe was presenting significant operational challenges. 

“If you transport to Spain or Italy you can take cargo but there’s nothing to return with, so you have to pay a huge sum of money for the transporter to take a full truck to Italy and an empty truck back to the Netherlands,” he explained.

Blanked sailings

Although barge, rail and ports in northern Europe are functioning smoothly, he said the on-off nature of the global container shipping pipeline was creating multiple difficulties, not least because record numbers of blanked sailings on the Asia-Europe trade made it difficult to plan export and import supply chains.

Making matters worse, “now we are also seeing more blank sailings [on the trans-Atlantic trade] due to the drop in consumer demand from the US”, he added.

The steep rise in air cargo pricing as bellyhold capacity has been withdrawn and demand for emergency shipments of medical cargoes has soared has also been problematic for some shippers “who need their cargo but don’t have the margins to pay the rates so are not importing or exporting” he said.

Ripple effect on air schedules

The shutdown of passenger networks has also had knock-on impacts for scheduled operators.

“The big problem shippers are experiencing is that the whole freight network has collapsed,” said Spoel. “Normally you would know that you would have a network of passenger flights – for example, six flights a week to JFK with a B777 carrying belly cargo – but these flights no longer exist, so freighters need to be repositioned,” he said.

With airports desperate for revenue to stay afloat, freighter operators are switching services between airports in search of the optimum route and price. This does not, however, always suit shippers. 

As a result, “nearly all air cargo flights, whether they are full freighter flights or just passenger flights carrying cargo, are now ad hoc operations”, Spoel said, making it difficult to plan ahead.

He added: “We are asking airlines and airports to give more transparency on schedules to help shippers know where capacity is offered, and help in negotiations with forwarders as to what is the right rate to pay in this market.

“Right now, shippers are going in blind, not knowing what capacity is in the market – which is a bad negotiation position.”

Hanjin fears

Overlaying all of these issues for shippers is the fear of a repeat of the Hanjin Shipping bankruptcy that caused so many disruptive waves across global supply chains over 2016 and 2017.

“Shippers are worrying about cashflow – it is really important,” said Spoel. “The lack of cargo equals lack of cashflow – which means counterparties could be in difficulties. We’ve seen ground handlers in trouble, but they are not alone.

“How can we keep ground handlers, terminals and airlines afloat, because if they drop out there would be a major issue for the functioning of the supply chain? The whole supply chain needs to be open in communication and address problems if there are any.

“We all remember when Hanjin went bust, which was a major issue for shippers. We have to deal with this situation knowing that bankruptcy liability is worse – there will be shortages of equipment, especially in Europe. 

“If demand slows down further, the crucial part of the logistical system – like terminals and ground handlers – comes to a halt. We must be aware of this and keep those parts running.”

As reported earlier this week freight forwarding and insurance sources have also highlighted increasingly concerns over counterparty risk. This takes multiple forms, from excessively late payments that threaten cashflow through to outright bankruptcies which could saddle operators with unsustainable debts or leave cargo stranded around the world, causing production and inventory disruption.

A new Alphaliner study also sheds some light on the risk of a container line bankruptcy similar to the demise of Hanjin Shipping. It found that the deteriorating global economic outlook, which has pushed container shipping lines to withdraw an unprecedented amount of capacity in April and May, will hurt carriers’ operating cashflows and further weaken already fragile balance sheets. 

Using the Altman Z-score method to measure the likelihood of bankruptcy across a selection of leading container lines at the end of 2019, Alphaliner found that seven out of the top eleven carriers had Z-Scores of less than 1.3, indicating a “very high” risk of potential insolvency.

Forwarder sources

Freight forwarders have also highlighted a number of logistics challenges facing their customers. In a Lloyd’s Loading List Advice & Insight article this week, US forwarder Flexport noted that “the global shipping challenges in the face of COVID-19 are changing frequently. Most recently, the blank sailings announced by 2M, THE Alliance, and Ocean Alliance implemented in April and into May will pose a challenge. Over 30% of capacity on the FEWB and over 15% on the TAWB has been removed from the market through the end of the month.”

It said these blank sailings could make procuring space and equipment more challenging, depending on regional demand, adding: “Consignees will have to find more options if they are still importing. Further, all of this is happening in the middle of the Transpacific contract season as agreements usually run from May 1 through April 30 of the following year.”

It said clients’ concerns were dependent on many variables, including industry, severity of regional lockdown, working capacity of their factories, adding: “For example, with air freight rates on the transatlantic and TPEB peaking alongside available capacity being reserved for PPE, many clients are exploring how to expedite their shipments, using premium (or flexible) ocean services for the first time.

“Premium ocean services can reduce transit times to about 10-12 days, and provide guarantees for delivery dates and ‘first-on, first-off’ capabilities. We anticipate this will spur demand for premium ocean services in the future, with many clients shifting procurement from air to premium ocean freight where applicable.”

Anthony Plummer, UK managing director for freight and logistics operator Ligentia Enterprise, commented: “The largest logistical challenges for supply chains is quickly adjusting to new levels of demand for different products and new or reduced routes to market. Whilst a lot of orders placed on suppliers are being cancelled, those that have been manufactured require storage either in Asia or in destination countries with some en-route being returned.

“Different countries have responded differently to Coronavirus and supply chains have been impacted to different degrees, we are seeing impacts on port operations, warehousing capacity and domestic transport to varying degrees through global supply chains with changes happening very quickly.”