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Transport capacity is vacant. How quickly will this change?

We often discuss the issue of transport rates on our pages and frequently analyze the macroeconomic situation to draw conclusions about the demand for goods and, consequently, the demand for transport. So, what is the current availability of transport? This question has frequently troubled freight forwarders and importers, keeping them awake at night as they grapple with prolonged delays in deliveries to ports and a shortage of drivers essential for managing all orders, especially during the pandemic.

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In maritime transport, a significant concern regarding the supply of available transport capacity is the vast order book for new container ships.

As estimated by Transport Intelligence (TI) in the 2024 Supply Side Outlook by Transport Mode” report, the current total capacity of the ordered ships stands at 7.5 million TEU (Twenty-Foot Equivalent Units), which is about 30% of the existing fleet’s capacity.

These orders were placed during the pandemic-induced boom between 2020-2022. A record number of new ships are currently leaving shipyards, a topic we recently covered. However, the surge is far from over, with the bulk of new vessels expected to be launched in 2025-2026.

Typically, a surge in ship orders triggers a replacement cycle for older vessels, which are then considered to be on their last legs. However, in recent years, a relatively small number of ships have been scrapped.

This trend is partly because, during the COVID-19 pandemic, the high demand for transport services and the limited availability of transport capacity, exacerbated by port congestions, rendered every vessel, including the older ones, invaluable. Despite the lack of complaints from shipowners about the shortage of new ships, they remain cautious about discarding older vessels.

TI anticipates that more older units will be scrapped due to their inefficiency in fuel consumption, leading to higher operational costs. Moreover, there is a growing preference in the market for vessels powered by LNG, methanol, or ammonia.

Another crucial aspect of the available transport capacity in maritime transport is the availability of containers. During the 2020-2021 pandemic boom, the industry faced a shortage of free containers, which were either stranded on ships waiting in line to dock at ports or left unattended on the quaysides. The subsequent increase in the production of metal crates has significantly mitigated this issue, ensuring a more stable supply of containers in the medium term.

Access: the weakest link

One often overlooked factor influencing maritime transport capacity is the role of terminals and the transport infrastructure leading to and from them. During the 2020-2022 pandemic, terminals in North America and Europe experienced severe congestion.

The connecting infrastructure, including railways and inland transport in Europe, struggled to handle the cargo volume. According to the report’s authors, this problem persists and may impact rates due to the infrastructural inability to handle unloading at ports efficiently.

Infrastructure lagging behind nearshoring

The diversification of supply sources has led to increased congestion, delays, and higher transport costs. Over the past decade, many industrial plants have relocated from China to other Asian countries or to Central America. However, this shift has not always been accompanied by corresponding infrastructure development.

For instance, Bangladesh, now one of the world’s largest clothing producers, still has its largest port under expansion to meet global demand efficiently.

Bottlenecks in maritime transport

The capacity of the two main maritime transport canals, Panama and Suez, has faced consistent issues in recent years. While some challenges, like the drought in Panama or the crisis at the Suez Canal’s Red Sea entrance, are beyond the control of these waterways’ operators, other incidents, such as the blockade of the Suez Canal by the container ship Ever Given, could have been averted with the appropriate investments.

Passenger flights bolster air cargo

Similar to maritime transport, the air transport capacity was significantly impacted during the COVID-19 pandemic. The suspension of passenger flights, which constitute a substantial portion of air transport capacity, coupled with a spike in demand, particularly from the pharmaceutical sector, caused air freight rates to soar.

The resumption of passenger flights has improved the situation. In January this year, cargo transport capacity on passenger planes was 25% greater than in the previous year, thanks to a more than 16% increase in passenger traffic during the same period.

The availability of passenger aircraft capacity is crucial for air freight, influencing freight rates not only because it represents a significant share of the total capacity but also because its availability is tied to passenger traffic demand, not just cargo demand.

Couriers scale down fleets

The dynamics are different for cargo planes. Courier giants like FedEx and UPS have taken steps to scale back or limit the expansion of their fleets in response to the downturn in e-commerce revenues in the American market.

While FedEx recently retired 29 aircraft, with plans to add 26 new ones to its fleet in the next two years, UPS sent a significant number of pilots into early retirement last year. Concurrently, passenger aircraft that were repurposed as cargo planes during the pandemic are being reconverted to accommodate passenger transport again.

New competitors emerge in air freight

New formidable competitors, such as Amazon, have emerged, challenging traditional air cargo operators. Amazon has achieved comparable volumes to FedEx or UPS, developed its own airline fleet, established airline hubs, and made it clear that it is willing to expand its aviation operations beyond servicing its own orders, potentially becoming a formidable competitor to these established players.

Furthermore, the largest shipping companies are also venturing into the air freight market. CMA CGM has initiated a collaboration with Air France and KLM to develop the airline division of the shipping company.

Currently, CMA CGM owns five aircraft, with three more expected to join the fleet in 2024, and an additional four after 2026. Moreover, the company has acquired minority shares in both airlines, underscoring the alliance’s long-term commitment.

Maersk, the world’s second-largest shipowner, has expanded its air fleet to 14 aircraft, with plans to add another five in the near future. In 2022, MSC, the leader in ocean freight, established an aviation division. These shipowners, buoyed by substantial profits during the pandemic, are rapidly expanding their air fleets and diversifying into market segments beyond maritime transport.

Abundance of space in air transport

At the end of January 2024, the load factor, which measures the utilisation of available cargo space, was only 45.7%. However, there was a noticeable increase in this metric, potentially driven by a surge in interest in air transport due to delays in sea freight, particularly those caused by the crisis in the Red Sea.

This trend towards increased space utilisation is beginning to mirror the pre-2020 situation, where an oversupply of cargo space existed despite a larger fleet and more passenger flights. Nevertheless, the current expansion of the fleet is encountering slowdowns, partly due to production issues at Boeing.

Despite occasional spikes in demand, such as during the Red Sea crisis, the overall demand remains subdued due to the economic slowdown, resulting in an oversupply in the aviation segment. Consequently, significant price increases are unlikely in the near term.

The persistent shadow of the driver shortage

In comparison to maritime and air transport, the supply of road transport capacity in Europe and North America is now much more stable and less susceptible to fluctuations. Road transport, even on an international scale, maintains a predominantly regional character and is less affected by changes in international trade.

We often discuss the dynamics of demand and supply in the road transport market. A perennial issue is the driver shortage, which became particularly acute during the pandemic. Various studies indicate a shortfall of approximately half a million drivers in Europe, with Poland alone accounting for 120-140 thousand of this deficit. This problem is expected to worsen due to the demographic composition of the trucker workforce.

However, 2023 witnessed an improvement in the availability of transport capacity, not due to a sudden influx of new drivers or the introduction of numerous new trucks, but rather due to a decrease in demand.

Logistics operators like DSV and Kuehne + Nagel have noted that the previous year’s decline in revenues and profits in the road segment was largely attributable to reduced volumes and rates. For instance, DSV’s road division experienced a more than 6% drop in revenue, while the Swiss group Kuehne + Nagel saw an 11% decrease annually.

While the start of 2023 was characterised by driver shortages and limited supply, the situation shifted significantly towards the year’s end. DSV has even mentioned an oversupply of transport capacity,” which intensifies competition among carriers during periods of low demand, leading to reduced rates.

However, DSV has managed to maintain profitability, benefiting from the business model prevalent among large operators, which typically do not own their fleets but rely on subcontractor services. The rates charged by these subcontractors have fallen more sharply than the rates DSV charges its clients, as highlighted by TI experts.

The looming challenge of driver shortages

In the short term, particularly this year, the road transport market is likely to continue meeting the subdued demand with a plentiful supply of carriers, suggesting that rate increases will remain minimal. However, in the medium term, as the economic recovery gains momentum and demand rebounds, the latent issue of driver shortages will become increasingly prominent.

The reluctance of younger individuals to enter the profession and the high proportion of drivers nearing retirement age compared to the broader economy underscore the severity of this challenge. Consequently, competition for drivers, including efforts to attract immigrants, is expected to intensify across various countries.

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