The Impact Of Container Slot Excess Capacity With Regard To Ocean Freights

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 1

THE IMPACT OF CONTAINER SLOT EXCESS CAPACITY WITH REGARD TO OCEAN

FREIGHTS

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Date

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 2

Table of Contents

Abstract ........................................................................................................................................... 6

1. Introduction ............................................................................................................................. 8

1.1. Background Review ......................................................................................................... 8

1.2. Problem Statement ........................................................................................................... 9

1.3. Research Aim ................................................................................................................. 10

1.4. Research Objectives ....................................................................................................... 10

1. 5. Purpose of the Study ...................................................................................................... 10

1.6. Research Questions ........................................................................................................ 11

1.7. Thesis Structure .............................................................................................................. 11

2. Literature Review .................................................................................................................. 12

2.1. Brief History of Liner Shipping ......................................................................................... 12

2.2. Excess Capacity in Liner Shipping ................................................................................ 14

2.2.1. Spare Capacity Statistics ......................................................................................... 15

2.3. Causes of Excess Capacity in Liner Shipping ................................................................ 15

2.3.1. Natural Monopoly ................................................................................................... 16

2.3.2. Theory of the Core .................................................................................................. 18

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 3

2.3.3. Government Policies ............................................................................................... 18

2.3.4. Economic Recession ............................................................................................... 19

2.3.5. Non-capacity Issues Facing the Liner Shipping Industry ....................................... 20

2.3.6. Volatile Freight Rates ............................................................................................. 20

2.3.7. Piracy ...................................................................................................................... 21

2.3.8. Labor Shortages .......................................................................................................... 22

2.4. Effects of Overcapacity in in the Industry ..................................................................... 22

2.4.1. Domino Effect ......................................................................................................... 23

2.4.2. Ceasing Leasing of Contracts ................................................................................. 24

2.4.3. Price Competition ................................................................................................... 24

2.3.4. Job Losses .................................................................................................................... 25

2.3.5. Financial Losses and Bankruptcy ................................................................................ 26

2.4. Cost Cutting Strategies Pursued by container Shipping Firms Arising from

Overcapacity ............................................................................................................................. 27

2.4.1. Regulate New Orders to keep Capacity Growth in Check ..................................... 27

2.4.2. Terminate or Postpone Orders ................................................................................ 27

2.4.3. Pursue Slow Steaming to Save on Bunker Costs .................................................... 28

2.4.4. Withdrawing Existing Tonnage .............................................................................. 28

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 4

2.4.5. Demolishing Older Vessels .................................................................................... 29

2.5. Conclusion...................................................................................................................... 29

3. Methodology .......................................................................................................................... 30

3.1. Research Philosophy .......................................................................................................... 30

3.2. Research Approach ............................................................................................................ 30

3.3. Research Design ................................................................................................................. 31

3.4. Research Strategy ........................................................................................................... 31

3.5. Research Methods .......................................................................................................... 32

3.5.1. Sample Size and Techniques .................................................................................. 32

3.5.6. Secondary and Primary Data Sources ......................................................................... 32

3.6. Data Analysis Approach ................................................................................................ 33

3.7. Conclusion...................................................................................................................... 33

4. Results ................................................................................................................................... 35

4.1. Descriptive Statistics for General Questions ...................................................................... 35

4.2: Type of Marine Organization ............................................................................................. 36

4.3. Effects of Overcapacity on the Industry ............................................................................. 45

4.5. Strategies for addressing Overcapacity .............................................................................. 52

5. Discussions ............................................................................................................................ 57

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 5

5.1. Causes of excess capacity in marine line shipping ............................................................ 57

5.2. Effects of excess capacity in ocean freights ....................................................................... 58

5.3. Efforts being pursued to address the excess capacity ........................................................ 58

6. Conclusion ............................................................................................................................. 60

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 6

Abstract

Introduction

Marine freight industry has been struggling with excess capacity since the onset of great

recession. As global economy recovers to match the demand before the crisis, the growth has

been sluggish almost a decade later. To this end, the reduction in global consumption have

persisted since the crisis leading to declining demand for ocean freights. However, shipping

capacity remains where it was before the crisis while more capacity continue being introduced

into the industry leading to more supply than demand. The current paper sough to investigate the

impact of the excess slots on the industry

Literature Review

The paper conducted a literature review with the key goal of evaluating literature on the

topic. The analysis that literature into marine shipping is expansive but little research existed in

the areas of excess capacity in container shipping. The review of literature investigated the

causal factors and effects of the excess capacity as well strategies best suited to address the

problem.

Methodology

The research has made use of descriptive research design to undertake the investigation.

Further, the study was descriptive in nature while survey research strategy was used to collect

data from primary sources and case studies strategy use to analyses the phenomenon in its real-

life context.

Results

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 7

The paper established that natural monopolistic nature of the industry as well investment in

large ships were the key drivers of overcapacity in the industry. Secondly, both the existing and

current research are unanimous that job losses, bankruptcy and financial losses, price

competition, and domino effects were key negative effects of the problem in the industry.

Further, the paper suggest the use of slow steaming, mergers and acquisitions, and withdrawal of

existing tonnage as the best approaches to solve the problem

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 8

1. Introduction

1.1. Background Review

Oceans freights are one of the oldest modes of transport helping to deliver a large volume

of goods into different parts of the world. Since medieval times, people have used ships space to

transport goods to overseas land over prolonged periods. Traditionally, ships were transporting

loads placed strategically to occupy spaces on the ship to maximize the returns. However, the

introduction of containers was a key revolution in the industry that largely depends on space

utilization to reduce transportation costs and increase returns. Since the introduction of

containers, shipping lines have been largely profitable with companies seeking to build bigger

and faster cargo ships with the ability to carry thousands of containers. As Sjostrom (2004)

observes, shipping lines were achieving vessel optimization through deploying the biggest ship

possible and at the highest speed prior to the financial crisis of 2007. The speed of the vessel was

essential in delivering the cargo to its destination using the least minimum time possible.

However, the financial bubble in the U.S that resulted in the economic recession of 2007-

2009 has had massive negative ramification in the shipping industry. Such have been the case as

most of the sectors that rely on shipping liners to transport their cargo are witnessing sluggish

growth with consumption remaining low in most parts of the world. Since the financial crisis,

sectors such as motor vehicles, heavy machinery, and oil industries that rely heavily on shipping

line have seen slumped growth due to reduced (Rodrigues and Vitale 2015). Further, the global

economy has been growing slowly reeling from the 2007-2009 recession whose ramifications

were being felt greatly with the credit crisis in European countries. The struggling economy

implies that people have less disposable income resulting in less demand for products translating

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 9

into reduced business for shipping liners. At the backdrop of reduced demand for shipping, liners

are excess capacity created prior to the great recession as the industry enjoyed rapid growth.

However, shipping lines are beginning to feel the excess burden of running huge ships with little

demand leading to high maritime cost whereas the competition in the industry is increasing. Such

challenges have resulted in the need for the companies to address the impact of excess capacity

as the current paper deliberates.

1.2. Problem Statement

Although oceans freights starting to rise marginally as the global economy recovers from

the aftermath of the great recession, an oversupply of vessels in the shipping industry continues

to bite. A key contributor of the excess capacity witnessed in the ocean freights industry is the

preorders before the great recession of 2007-2009. Before the crisis, most shipping lines had

many numbers of pre-orders, and the industry growth was on an upward trajectory. However,

after the crisis set in, major financial institutions and U.S. carmakers were at the brink of

collapse hence hurting shipment of vehicles overseas. Since the global economy is yet to recover

fully and return where it was before the crisis, many liners are operating excess capacity that is

increasing operational costs and reducing their overall profitability. Secondly, canals such as

New Panama have undergone expansion to allow both PANAMAX Vessels and any other ship to

traverse the new expansive Canal. Such expansions at the backdrop of a sluggish global

economy imply that there is an oversupply of vessels in the freight industry reducing the overall

industry profitability. Container capacity is largely dependent on global trade. As such, when

levels of global trade remain low, freight companies are beginning to experience reduced

demand for ocean freight services. Such challenges have raised the question about the

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 10

ramification of excess capacity currently carried by ocean liners. To this end, the current research

seeks to investigate the impact to ocean liners for carrying excess capacity.

1.3. Research Aim

The key goal of the current research is to investigate the extent of the extent of excess

slot capacity in ocean freights. As the industry seeks to revamp itself against the backdrop of the

great recession, there is a need for sustainable practices in the industry regarding utilization of

space to ensure the industry operates profitably and reduce the chance of a crisis in the industry.

A such, the current paper seeks to create new knowledge that will serve as a blueprint for

shipping liner optimizing their vessel use to reduce the ramifications of operating in excess

capacity.

1.4. Research Objectives

The current research is built around three key objectives. First, the paper seeks to define

excess capacity in the context of business sustainability. Secondly, the paper will evaluate the

impact of holding excess capacity on ocean freights. Lastly, the paper will evaluate any

additional factors affecting ocean freights.

1. 5. Purpose of the Study

The study is necessary for addressing the profitability of the shipping industry that June and

Julie (2012) observes is facing bleak economic time with lower and highly volatile returns. As

such, it is essential for the ocean liner to pinpoint factors such as excess capacity that are largely

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 11

increasing the operational costs and reducing their overall returns. Further, the study aims at

suggesting cost-cutting measures the industry could leverage to return to profitability.

1.6. Research Questions

Conversant with the current purpose and objectives of the study, the research envisions three

key research questions whose answer will underlie meeting of the study objective:

i. What are the key causes of excess capacity in marine line shipping?

ii. What are the key effects of excess capacity in ocean freights?

iii. What efforts are being pursued to address the excess capacity

1.7. Thesis Structure

The remainder rest of the paper is organized as follows. The second chapter reviews

literature around the operation of excess capacity by ocean liners, factors affecting the ocean

freight industry, and strategies that ocean liners are adopting to survive in the increasingly harsh

operating environment. The fourth chapter deliberates on the methodology used in the current

research paper to collect, analyze, and draw conclusions from the analysis. The fight chapter

presents the outcome of data analysis of both primary and secondary data. Further, chapter six

discusses the findings while integrating it with literature review. The last chapter concludes the

paper is pinpointing the key lessons distilled from the discussions as well as highlighting the

limitations of study and areas for further research.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 12

2. Literature Review

This chapter reviews existing literature on shipping sector and the issue of excess capacity

has risen over the years. Specifically, the chapter gives a brief history of liner shipping to capture

its evolution over time. The chapter goes further to investigate literature on the sources of excess

capacity in the industry. Moreover, the chapter looks into the literature regarding the effects of

the excess capacity in the industry. Lastly, the section presents other key challenges facing the

industry and their role in the overcapacity and the bleak economics the industry is reckoning

with.

2.1. Brief History of Liner Shipping

Currently, seaborne transport is segmented into three key segments that include liner

shipping, specialized shipping and bulk shipping (Stopford 2009). Bulk shipping consists of a

bulk carrier whose key specialization is transporting bulk and unstructured cargo such as grains,

cement, oil, coal, and ore contained in specialized cargo holds. The first bulk carrier was

designed in 1852, and favorable economic conditions have seen a number of bulk carriers’

skyrocket to seize a 15-17% market share of the world merchant fleets. Secondly, specialized

shipping capitalizes in freighting difficult cargoes that have emerged over time due to their

structural uniqueness that make it difficult to carry pile them together as is the case with other

products. Specialized shipping transports cargoes such as cars, chemicals, liquefied gas,

chemicals, and refrigerated cargo. Lastly, liner shipping is the last segment but most important

for the current paper. The model of shipping capitalizes in transporting small parcels and general

cargo such as manufactured and semi-manufactured goods (Stopford 2009).

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 13

Liner shipping came to be in the 11

century as Rodrigues and Vitale (2015) observes.

The advent of effective and highly reliable steam ships at the time resulted in the rise of seas as a

key means of transporting goods and services over long distances. Initially, mails were the

primary cargo in most liner ships. However, towards the end of the 11

century, the metal

replaced wooden hulls in most steam ships making the ship better for transportation of freight.

Over the centuries, the increased importance of liner shipping has seen increased competition

threatening the profitability of the industry. As such, conference agreement arose as a strategy

used by ocean liners to consolidate their hold in the market and hinder new entrants into the

market. The conference agreement involves shipping liners entering into a contract to fix prices,

allocating routes, and pooling profits and revenues (Sjostrom 2004).

Traditionally, ocean liners made use of flexible cargo vessels to transport and handle

cargo. To this end, the vessels could be adjusted to create more slots for new cargo (Rodrigues

and Vitale 2015). The structure of the vessels made the process of loading and offloading labor-

intensive as well as time consuming. Big ships would go for days in ports waiting for offloading

and loading due to long queues in large port such as London. To this end, the long queues made

it even more difficult for the cargo ships in the liner segment to leverage economies of scale.

However, the Second World War demanded fast and swift cargo operations hence the need for

heterogeneous general cargo as the standard. Lessons from the world war 11 resulted to the

emergence of container shipping in 1956 after the invention of cellular ships meant to fight

competition. The container or cellular fleets become so successful that it became the standard for

liner shipping with containerization rising from just 20 containers ships in 1966 to 4,878

container ships in 2013(Rodrigues and Vitale 2015).

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 14

2.2. Excess Capacity in Liner Shipping

Fusillo (2003) ponders on the issue of excess capacity in liner shipping. A key

observation that baffles the researchers is the move by ocean line operators to commit resources

in terms of excess capacity for thwarting attempts new entrants attempts to establish footholds in

the market. The issues of excess capacity in shipping liners have been discussed in the context of

entry barriers put across existent players to reduce the threat of new entrants. According to the

theory of homo economicus, existing firms should be thinking rationally to see that increased

idle capacity has cost efficiency ramifications on the shipping liners that reduce their capability

to make sufficient profits (Fusillo 2003). Nonetheless, such is the irrationality in the industry

where players are operating in over capacity of the purpose of increasing their grip on the

market. Heymann, just, Kaiser, and Mayer (2011) have similar remarks when evaluating

competition issues in liner shipping. The report points out that the industry is lowly concentrated

and regulatory barriers to entry are non-existent resulting to overcapacity for seasonal, structural,

and cyclical reasons. A key ramification is an industry grappling with low profits, high

competition, and high operating as well as capital costs. Such are the challenges compelling

shipping firms to enter into cooperative agreement in a move to reduce the number of entrants

into the industry. However, instead to achieving the goal of fostering operational efficiency and

boot profits, Stopford (2009) suggests that such agreement are resulting to overcapacity in the

industry due to core emptiness. Resultantly, most mega ships most of which voyage around the

world while they are almost half-empty as shown in figure 2.1 derived from Rodrigues and

Vitale (2015)

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 15

2.2.1. Spare Capacity Statistics

Figure 2.1: Spare Capacity on Liner Shipping Key Routes

Source: (Rodrigues and Vitale 2015) EW implies Eastbound while WB means westbound

cargo. Figure 2.1 shows the spare capacity for ships headed towards different destinations along

the major routes. It is different that the three key routes that Rodrigues and Vitale (2015))

sampled have key differences regarding loading factors of the ships operating in the routes.

However, the key unifying factor is that most of the ships sail half empty for the period under

observation. The unbalanced services along the three routes implies that he potential of making

sufficient profit is very minimal due to the excess capacity of the ships. Surprisingly, UNTCAD

(2014) data shows that mega-container ships dominate the routes putting into question the cost

effectiveness of running-megaships compared to operating small ships.

2.3. Causes of Excess Capacity in Liner Shipping

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 16

2.3.1. Natural Monopoly

Fusillo (2003) and Fusillo (2009) cite the natural monopoly nature as a key contributor of

excess capacity challenges facing the shipping industry. From an economic perspective, natural

monopoly refers to a type of monopoly operating industry characterized with high fixed and

operating costs such as the shipping industry. According to Fusillo (2003), a natural monopoly

has four core features. First, the monopoly must be located in an industry that requires offering

products and services considered essential. Secondly, the monopoly must be in possession of a

favorable location to undertake production. Further, the produced goods or services by the

company are not possible to store. Lastly, the monopoly must leverage economies of scale during

production (Fusillo 2003).

Linear shipping possesses the four core features qualifying it as a natural monopoly

operating in a market that when another firm enters the industry will result to excess capacity

challenges. First, regarding offering essential services, liner-shipping offers transport services for

international merchandise that are essential for the proper functioning of the global economy

(Fusillo 2003). For the last 50 years, liner shipping has played a central role in facilitating

international trade through offering efficient and secure means of transport for merchandise

running into trillions of dollars annually. Secondly, concerning possessing favorable location for

production, shipping services can only take place in port with facilities needed to handle loading

and unloading of cargo containers. Further, goods and services offered by liner shipping firms

cannot be stored. Such is the case since idle slots in containers results to revenue losses that are

not possible to recover. Lastly, freight services need to be undertaken in huge volumes to take

advantage of economies of scale as required of a natural monopoly (Fusillo 2003).

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 17

Heymann, Just, Kaiser, and Mayer (2011) study best captures the role of natural

monopoly characteristics in causing excess capacity challenges witnessed in the shipping

industry. The study suggests that a natural monopoly could only exists without capacity

challenges if only one firm exists or a number of firms operate with a high level of cooperation.

Since the cost function of a monopoly is sub-additive, the cost effectiveness during operations

and production will be higher when one firm is operating compared to when competing firms

exists in the same industry. Conversely, if more than one firm operates, they should form

alliances to ensure their response to increase in demand does not result to overcapacity

challenges. Such dynamic capacity challenges are resulting to overcapacity challenges in the

shipping industry and Fusillo (2009) suggests. The industry has attracted many players whose

cooperation has been limited despite move to form coalitions in the industry. Therefore, the

companies respond to incremental demand for shipping services independent of each other.

Since the capital costs are very high in the industry, increased demand for services forces

shipping companies to increase their capacity through building discreet units spread over a given

period. The move gives the shipping companies flexibility of responding to demand. Since the

installed capacity will tend to be more than demand due to choice of size of installed capacity,

many firms operating in the industry increase capacity independently leading to oversupply of

shipping capacity as is happening in the current shipping industry (Haralambides 2004).

Sjostrom (2004) had similar observation noting that in a natural monopolistic industry

such as the loner shipping industry, firms should increase their collaboration to avoid the excess

capacity plaguing the industry. The study concludes that firms should resolve to sharing

resources to reduce the tendency of the industry to supply more than the market needed. Through

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 18

mergers and resources sharing, Stopford (2009) observes that shipping industry has the ability to

address overcapacity challenges currently ailing its overall performance.

2.3.2. Theory of the Core

Fusillo (2003) uses the theory of the core to explain the sources of overcapacity challenges in

the liner shipping industry. According to the theory that became so prominent in the 1980s,

collusion among firms operating in a given industry has an underlying motivation of fixing

prices rather than address the inefficiencies caused by core emptiness. Core emptiness implies

the inability of an industry to match supply with the demand during any instantaneous period.

Core emptiness is a key cause of overcapacity challenges as it results to instability in the share of

market held by dominant firms in an industry. Pirrong (1992) undertook a research seeking to

apply the theory to shipping liners. True to the theory, the paper realized that as opposed to the

notion that collusion in industry was a revenue earning incentive the opposite was true. However,

the study established that through engaging in collaboration arrangements shipping firms were

able to address the challenge of core emptiness thereby reducing volatility in the market that

would cause volatility in freight rates and market share. Julie has similar observations noting that

costs incurred by liner companies consist of sailing schedules and lumpy capital. To this end, it

would be costly for a company to delay ship departure from a port waiting for cargo to fill.

Rather, it must dock and depart from a port using fixed schedules implying its will on some

occasions leave with unoccupied slots leading to empty capacity (Fusillo 2003; Fusillo 2009).

2.3.3. Government Policies

Fusillo (2009) suggests that government regulations are also a key cause of excess capacity

plaguing the industry. Developed nations tend to have restrictive trading policies towards foreign

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 19

countries owned shipping liners. Such is the case due to some nations owning carried while

others offers both direct and indirect incentives to local shipping liners increasing their capacity

to add more slots in their ships. Julie has similar observations noting that maritime industry

extends some desired externalities to a country hence the desire by governments to ensure that is

shipping companied have viable and strong vessels. A key externality is the ability of a

government to draw rents resulting from international trade. Secondly, Chiem (2016) adds that

since most governments consider a robust maritime industry as conferring geopolitical

advantages during crisis such as war. To this end, governments the inclination towards creating

policies that help local shipping firms compete in the market leveraging factors not controlled by

the market. As a result, overcapacity arises as firms have an external hand cushioning their losses

or minimal returns after operations.

2.3.4. Economic Recession

Rodrigues and Vitale (2015) deliberate on the effect of the 2007-2009 recession on the

overcapacity challenges facing the maritime industry. Before the crisis, the global economy was

at an accelerated growth driven by rise of china and the rapid growth in technology that was

driving consumerism to a higher new level. Further, job creation was higher in leading

economies such as U.S.A., Canada, and the European Union. However, after the credit bubble of

the United States, companies had a tough time in accessing finance as key investment banks

began to crumble. Resultantly, companies started downsizing, as they became cash starved

leading to reduced demand for goods transported over the seas. Job losses compelled customers

to start exercising austerity measure that had huge impact on consumption of luxurious goods

such as cars and electronics that form bulk of goods transported by ocean liners. For instance, the

car industry in the United States stared at bankruptcy due to increased unmoving inventory

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 20

forcing them to halt production. Being a key employer in the United States, the whole effect on

the word was felt everywhere as demand nosedived to decades low as car industry undertook

massive layoffs. Against the backdrop of declining demand, shipping firms could nothing to

reduce the capacity they had created before the crisis or store for future use since container

capacity losses cannot be cushioned from losses through storing the capacity (Rodrigues and

Vitale 2015).

Fusillo (2009) has similar observation noting that despite the world recovering from the

economic recession, the recovery growth rates have been quite low compared to growth rates

before the crisis. Global economy is still reeling from the credit crisis as its aftershocks have

reached the European Union later slowing the overall recovery. Such is the case with countries

such as Germany, France, and Greece that have had own credit challenges. As such, the demand

for container services has remained low though there are still efforts by companies to create

more capacity as they seek to enter the industry. Julie cites the expansion of the Panama Canal as

another initiative driving demand at the backdrop of low demand for ocean freight services. The

Canal whose expansion allows megaships to pass through the canal has added to the market

excess supply of capacity whereas the demand remains low (Chiem 2016).

2.3.5. Non-capacity Issues Facing the Liner Shipping Industry

2.3.6. Volatile Freight Rates

In maritime industry, the law of demand and supply plays a critical role in determining

prices that competitors set for their services. As Chiem (2016) observes, high demand for

services implies that the supplier have a better hand in charging a premium price sufficient to

cover their costs and leave a sizeable profitability margin. However, the overcapacity issues have

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 21

resulted to more capacity than demanded in the industry. Further, the competition in the industry

has remained high making it difficult for firms to set prices. To this end, the oversupply of

container capacity has made the freight rates very volatile making key carriers to incur negative

operating profits since the onset of great recession as Chiem (2016) observes. Such has been the

case after 2010 when freight rates have been on a downward trend in the wake of increased

competition in the industry that is driving overcapacity to new levels.

2.3.7. Piracy

Despite overcapacity challenges, piracy has emerged as a key concern affecting the

bottom-line of ocean carrier operators. Middle East is increasingly becoming a key route used by

international freight operators to transport their cargo to Europe and Asia. However, the region

has been experiencing increasing insurgency that is spiraling to the seas in the form of piracy.

Julie cites data by ReCAAP, a leading maritime body that fight piracy that placed the number of

piracy attack at 211 worldwide with 24 of the attacks being successful hijacking. A key source o

piracy in the open seas is Somalia that accounted of 21 of the 24 hijackings and 139 of the

overall incidents. The increased case of piracy has forced maritime operators to tighten their

noose by increasing security personnel into their crew hence driving costs of operations higher

on top of handling excess capacity. The conflict in the south china seas have also been a security

nightmare for freight operators as the number of attacks have increased in the region. The

passage is a key passage to the Middle East and Japan. However, China and her neighbors are

embroiled in an ownership conflict that has resulted into an instability where over 5 trillion

worth of cargo passes annually according to Rodrigues and Vitale (2015). The incidents are also

on the rise I the Caribbean as well as South America. Resultantly, the voyage routes have been

increasing for companies seeking to reduce the chances of piracy and not employ private security

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 22

guards. The lengthy voyages are increasing the cost that such companies are bearing for carrying

excess capacity. In addition, the companies have seen a rise in the insurance rates charged for

maritime vessels due to increased risk of piracy.

2.3.8. Labor Shortages

Shortage of labor primarily maritime attorneys, seafarers, and surveyors is another key

challenge that the industry is grappling with adding to its overall lack of profit and low quality of

services. Ships play a key role in international trade. However, the realization of that goal largely

depends on availability of affordable and quality labor when the industry if facing reduced

returns due to overcapacity (Chiem 2016). Seafarers are core to success of any voyage and their

shortage in the market spells doom for an industry already struggling. The reduced number of

seafarers means that the firms in the industry have to pay more for less quality labor hence

jeopardizing the quality of services. Such is evident by the drive undertaken by International

Maritime Organization (IMO) seeking to market seafaring jobs among the young people to

address the biting shortage. Such shortages are pushing maritime operators to a tight corner

where they have to pay more for labor to service halt-filled ships for the better part of overall

voyage. As such, Julie suggests that there is need to devise a solution that will address the key

challenges facing the industry before it crumbles and affect the overall international trade that

largely depend on the effectiveness of the maritime industry (Rodrigues and Vitale 2015).

2.4. Effects of Overcapacity in in the Industry

Overcapacity has resulted to a looming crisis in the container shipping market as Meyer,

Stshlbook, and Vob (2012) observes. While the industry was accustomed to no cargo shortage

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 23

before the crisis, the aftermath of the great recession has resulted to falling consumption levels in

western economy as well as declining production in the Eastern hemisphere economy

(Notteboom, Rodrigue, and De Monie 2010 2010). As such, there is shortage of freight capacity

that has resulted to a series of negative implications in the industry as depicted in the existing

academic literature.

2.4.1. Domino Effect

Domino effect in the shipping industry is the chain of cascading effects resulting from the

declining demand for overcapacity. As Notteboom, Rodrigue, and De Monie (2010) points out,

as overcapacity plagues the industry driving into a crisis, shipping line operators are no longer at

a position to pay for their chartered ships. Most liner shipping operates through chartering where

a cargo owner hires a brokers to look for a ship for transporting the cargo to a certain market at

an agreed freight rate. Many brokers leverage economies of scale through pooling a number of

charterers to fill ships. However, with the reduction in consumption and production in the West

and East respectively, few charterers are shipping goods making the brokers find it hard to pay

for their chartered ships. The reduced revenue streams have come to the disadvantage of the

chartered ship owners, most of whom have built the ships through loans and debts. To this end,

they can longer service their loans and other debts leading to bankruptcy of key maritime banks.

Such was the case with HSH Nordbank that had remained the biggest lender for the shipping

industry. As the crisis bite in 2009, the bank construction loans exceeded $45 billion. The bank

no longer recovered from the crisis as it had to be bailed by the European Union. The bank is

scheduled for sale by 2018 or wind up. Such predicaments will likely reduce lenders willingness

to finance the industry taking it into slumped growth (Notteboom, Rodrigue, and De Monie

2010).

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 24

2.4.2. Ceasing Leasing of Contracts

Most shipping line operators are largely brokers who contract ships from their owners. As

overcapacity issue looms in the industry, most shipping line operators have no sufficient cargo

fill the large fleet of ships they had contracted before the great depression set in ushering a crisis

in the industry. To this end, most shipping line operators are discontinuing contracts with ship

owners as the crisis continue to bite as Rodrigues and Vitale (2015) observe. Rodrigues and

Vitale (2015) cite the case of Hapag-Lloyd that discontinued its contract with shipping owners to

reduce the costs it incurred for running idle capacity in ships sailing through major routes half-

empty. Before the overcapacity crisis set in during the great recession, the German shipping line

used to operate 128 container ships with half of the leased from other ship owners. As such, the

company has already returned 20 of its 64 chartered ships to their owners with the expectation of

more ships to be released as the excess capacity ails the industry. Similar cases apply to CMA of

France and MSC of Switzerland that have failed to renew their contracts with their charterers due

to lack of sufficient cargo volume (Rodrigues and Vitale 2015).

2.4.3. Price Competition

Manders (2015) explore price competition in the line shipping industry from a game theory

perspective. The study underscore undertaking by carriers in the industry where the biggest

carriers such as MSC, CGM, and Maersk set the price and smaller carriers undercut them

through lower prices. Such happenings were common before the crisis culminating to an

investigation by European Commission that suspected that largest ocean carriers were colluding

to set high prices for the customers. However, the landscape has changed due to the decision

made by the largest carriers regarding the outsized profits they obtained during the collusion.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 25

They could either reward shareholders with increased dividends as profits rise or reinvest back

the profit to increase capacity, bring freight rates down through economies of scale, and

eventually drive the smaller players out of business. However, the handball game of investing the

profit into building bigger and larger fleet instead of lining shareholders pockets has resulted into

global overcapacity challenges in the shipping industry. Resultantly, instead of entering into

collusion to set prices, ocean carriers have dived into price war with the key goal of increasing

their market share and fill their ever large ships. To this end, the freight rate are currently at an

all-time low with most companies setting prices nearer their marginal cost as Manders (2014)

observes.

2.3.4. Job Losses

As overcapacity lead to reduced freight volumes, companies are abandoning ships in

hundreds. As the ships get laid off or returned to their owners, job losses have been inevitable as

Kalgora and Christian (2016) observe. Employment remuneration is one of the key component of

a company’s costs structure. Therefore, most firms result to laying off workers or reducing their

pay as the crisis hits the firm. Such is the path assumed by the ocean carriers’ operators as

overcapacity has dampened the shipping environment. For instance, Maersk announced plans to

lay-off 4,000 employees in the last quarter of 2015 citing declining in demand for shipping

services that have pushed the company’s revenue down. The move would help the company

reduce the costs incurred due to Sales, General, and Administrative expenses by US$ 250

million. The company also planned to reduce the capacity of its fleets to match the reduced

workforce. Jason (2012) adds that job losses have not been limited to line operators but has also

affected ship builders. As depicted in figure 2.2, ship building prices have been on a downward

trend falling by 11% in 2012 alone. Falling ship building prices have forced companies to reduce

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 26

their ship building capacity even as the demand for new ships decline as depicted in figure

2.2.Therefore, building companies are increasingly laying off workers as demand for new ships

and the prices of the demanded few continue to nosedive as figure 2.3 highlights (Kalgora and

Christian 2016).

Figure 2.2: Shipyards Data

Source: (Kalgora and Christian 2016)

2.3.5. Financial Losses and Bankruptcy

Lastly, overcapacity challenges have sardined the industry with bankruptcy and financial

losses that are destabilizing the industry. For instance, Kalgora and Christian (2016) observe that

the industry had a combined loss of 20 billion US dollars in 2009 alone. Companies such as

Germany-based Hapag-Lloyd had a cumulative loss of 300 million dollars in just the first quarter

of 2009. In 2016, the situation has worsened with several companies closing shop as excess

capacity drives freight rates to decades low. Hanjin of South Korea lead others when it filed for

bankruptcy in 2016. Since then, Ultarpetrol, capitalizing in shipping oil filed for bankruptcy in

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 27

February 2017 followed by Toisa and her 23 affiliates filing for bankruptcy over the same moth

due to the declining revenue arising from declining freight rates driven by overcapacity in the

industry (Kalgora and Christian 2016).

2.4. Cost Cutting Strategies Pursued by container Shipping Firms Arising from

Overcapacity

Vast academic literature have fronted a wide range of strategies that shipping companies

could use to address overcapacity challenges that is threatening to tear down the industry. As

Chirm (2016) observe these strategies could help the industry raise the freight rates to cover their

costs and return the industry to profitability as the paper underscores.

2.4.1. Regulate New Orders to keep Capacity Growth in Check

Manders (2017) observes that the fleet to containers ships have continued to expand at the

backdrop of falling demand for shipping services. For instance, the capacity expanded to reach

1,534 million dwt. As of January 2012. Such increment while the shipping orders are declining

implies the industry will continue to ail. As such, Samaras and Papadopoulou (2010) propose the

need for regulation of the introduction of new ships to reduce the chances of over competition

that is likely to crumble the industry. Rodrigue and Vitale (2015) had a similar suggestion noting

that regulating capacity in the industry would help remove unhealthy competition in the natural

monopolistic industry that is container shipping.

2.4.2. Terminate or Postpone Orders

Manders (2017) posits that companies should begin canceling new order for ships and

capitalize on making their ships better to reduce excess capacity problems. The study establishes

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 28

that though shipbuilders are reluctant of the move, it may prove the golden scorecard that would

turn around the ailing industry. Whereas some companies such as Maersk started reducing

number of ships ordered in since 2012, some companies continue to order even bigger ships

complicating the capacity challenge in the industry.

2.4.3. Pursue Slow Steaming to Save on Bunker Costs

Kalgora and Christian (2016) proposes that the industry could adopt slow steaming to reduce

expenses that have driven the industry profits to decades low. Before the crisis shipping

companies were investing in bigger and faster ships to decrease the amount of time it took to

deliver orders to different destinations. However, with increase in fuel prices and declining

freight rates, the practice is more likely to become unsustainable for companies that are setting

prices near the marginal costs. To this end, Kalgora and Christian (2016) proposes slow steaming

that would help ships reduce the cost of operating the ships. Such a move will allow the

companies to deploy the many ships to ensure it maintains the same demand while increasing the

capacity absorption. Resultantly, the move will allow the industry increase the occupancy of the

current idle capacity (Kalgora and Christian 2016).

2.4.4. Withdrawing Existing Tonnage

Manders (2016) suggests that there is need for companies to withdraw existing tonnage from

their service to reduce unhealthy competition from some routes and concentrate on their key

routes. Central to the overcapacity costs facing the industry is shipping firms entering every

route with bigger and faster ships resulting to price wars that are hurting the industry. Such

moves have been pursued by companies like MISC that stopped offering container services in

2012 (Kalgora and Christian 2016). Over the same period, Maersk skipped voyages to Asia and

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 29

Europe and completely stopped offering sailing services form Europe to Asia in March 2012.

MSC followed suit in June the same year ceasing its services along the same route. Such moves

has helped rump up demand along the struggling routes of Asia-Europe and Europe-Asia

(Kalgora and Christian 2016).

2.4.5. Demolishing Older Vessels

Lastly, preceding research suggests that shipping companies should do away with older

vessels to reduce capacity challenges in the industry. Scrapping of old ships, Heymann, Just,

Kaiser, and Mayer (2011) suggest, will help remove unneeded capacity while minimizing losses

since older ships have already recouped the initial investment. Scarping the old vessels will help

companies benefit from newer ships that are more efficient in the use of energy and running

costs are down. Though the industry has been reducing the average life span of a ship that

declined to 18 years in 2016 compared to 23.5 years in 2011.

2.5. Conclusion

The chapter has reviewed existing literature to pinpoint the current research surrounding

excess capacity in the marine industry, its key causes, impact on the overall industry bottom-line,

and the solution approaches proposed by the current research. Though the existing literature

gives a variety of reasons regarding the implications of the excess capacity in the industry. There

is need to undertake the research to evaluate the validity of the proposed approaches by

undertaking the cases in its real-life context.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 30

3. Methodology

The current research seeks to understand the science behind overcapacity challenges in the

shipping industry. As, there is need to make use a methodology that will help in systematically

investigating the topic. Several approaches exist that one could use to structure their research

proposes. However, the research onion model by Saunders, Lewis, and Thornhill (2012) is

largely employed in the current paper as it falls under the category of business research. The

onion model contextualizes business research in the realm of Meta science that categorizes

research according to key dimensions such as research philosophy, research approach, choice of

data, and research strategy. The four categorization are adhered to in the current research as

discussed in the current methodology.

3.1. Research Philosophy

Research centers on creation of new knowledge. Research philosophy seeks to guide a

researcher in their endeavor to create new knowledge. The current assumes a positivist

philosophy to while undertaking the current research. As Wilson (2014) observes, positivist

philosophy relies on the ability to employ objectivity in observing and describing reality. To this

end, the current research takes a neutral position in observing the excess capacity challenges in

the shipping industry, establish general relationships, discover new theories and test them

through collecting and analyzing data.

3.2. Research Approach

The current paper makes use of deductive approach. The inductive approach seeks to move

from general observations and specific generalizations that can be applied across board. A key

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 31

undertaking of the current paper is to leverage primary and secondary data to make observation,

find patters, create a hypothesis, and form a theory out of the hypothesis.

3.3. Research Design

The current paper makes use of descriptive research design to analyze and deduce

conclusions from the collected and analyzed data. Descriptive research key goal is to give an

accurate portrayal of situations as Bryman and Bell (2015) underscores. Further, Saunders,

Lewis, and Thornhill stresses that the prior to undertaking a research using descriptive approach,

understanding or having a clear picture of the study phenomena is essential. The current paper

key goal is obtain data, analyze, and synthesize to draw conclusion regarding the effects of

excess capacity in the shipping industry. Therefore, while the study is primarily descriptive in

nature, it will be precursor by explanation design forming a hybrid design that Saunders, Lewis,

and Thornhill (2010) refer to as descripto-explanatory study.

3.4. Research Strategy

A research strategy underlie the goal of the research, procedures used to drive research

results, and techniques used to implement the procedures. The current paper make use of both

case study and survey research strategies to answer the research questions. Survey research is

primarily for collecting raw primary data. The strategy is instrumental in business research due

to its simplicity in undertaking due to its simplistic yet reliable nature. As such, the current

research makes use of survey research due to the limited timeline of undertaking the study as

well as cost limitation. Further, the survey approach helps to reach a sizeable population in a

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 32

short time hence creating sizeable data. Further, the paper also utilizes case study approach to

undertake an empirical investigation of the excess capacity in its real life context.

3.5. Research Methods

3.5.1. Sample Size and Techniques

The current sample comprised of 150 respondents from 15 ocean carriers operators taken

from different continents. Ten employees in each of the fifteen firms were targeted for taking

part in the interview. All communication with the management to gain permission to undertake

the research were achieved through the use of emails and phone calls since distance barriers,

time limitation, and cost of travel made it impossible to present oneself in the selected companies

to conduct the surveys in real-time. Random method sampling were used to choose the fifteen

firms as well as the participants to ensure the collected data was normally distributed. The survey

questions were presented in form of a questionnaire outlined in appendix 1. The questions

comprised of general questions or specific questions. The questions were semi-structured into

open ended questions to allow the researchers speak their minds.

3.5.6. Secondary and Primary Data Sources

Both primary and secondary data served as source of information for the current paper.

Survey questionnaires were used as the primary means of undertaking the current research as

discussed in the sampling section. On the other hand, data from secondary sources was collected

by reviewing the existing literature, journals, academic blogs, and regulatory bodies’ data to gain

a deeper understanding of the impact of excess capacity in the shipping industry on the

participating firms.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 33

3.6. Data Analysis Approach

SPSS was used in the whole process of analyzing the data to obtain the necessary descriptive

statistics that underlie the characterization of the current research. The first step in the analysis

involved coding the interview questionnaires, before reducing and displaying the data using

appropriate charts. Data tables and graphs were used to illustrate the data with the key goal of

identifying patterns and relationships between the studied elements. The starting point of the

analysis involved selecting potential impacts of excess capacity in ocean freight from existing

literature. Nonetheless, there was hypothesis for the study as the current research key goal was

not relational in nature but sought a greater understanding of the effects of excess capacity in the

shipping industry.

The Analysis made use of both the cross-case and within-the-case analysis. Both analytical

queries and techniques were used in this phase to undertake the analysis helping robustness and

improve the quality outcomes of the research. At this level, within-the case analysis helped to

improve the familiarity with the impact factors as standalone entities. To this end, it became easy

to develop unique patterns and relationships applicable to a given causal factor making it easy to

undertake cross-case analysis.

3.7. Conclusion

Research methodology is key to ensuring that the research follows a structured approach with

which to undertake the study. The section has outlined the methodology used in the paper

ranging from research philosophy, research approach, research design, and the method of

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 34

sampling and data collection. The paper seeks to follow the structure to present quality and

replicable results.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 35

4. Results

This section presents the outcome of the questionnaire analysis undertaken using SPSS.

Descriptive for each survey questions are used to present the research outcomes whereas data are

derived from the study. Since the research was not centered on testing hypothesis, conclusions

are directly drawn after interpreting the data. The questionnaire carried a total of 20 questions.

Each answer was rated using the Likert scale with 1 representing strongly agree and 4 strongly

disagree. Descriptive statistics are prepared for each question and descriptive for each question

from where the conclusions are draw.

4.1. Descriptive Statistics for General Questions

4.1: Experience in the Maritime Industry

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 36

The data shows that most of the respondents were young in the industry with bulk of the

respondents having just two years of experience in the industry. Such is expected of a normal

working environment where few older employees exist as compared to the long serving workers.

4.2: Type of Marine Organization

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 37

Figure 1: shows that most of the respondents were from private organizations showing that

marine industry has little government involvement in offering shipping services. The sizeable

amount of respondents from the public organizations shows that that a good number of

governments own shipping firms.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 38

Figure 4.3: Position in the Organization

A bulk of the respondents were mainly seafarers who also happened to have spent the least

working experience. Captains were also high representing more than 50 percent of the

respondents showing that most employees in the shipping industries had their work limited to the

ship.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 39

4.2. Causes of Overcapacity in the Marine Industry

Figure 4.4: Natural Monopolistic Nature of the Industry

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 40

The data shows that most respondents strongly agreed that the natural monopolist nature of the

marine industry were a key cause of overcapacity in the industry with 70 of the respondents

pointing out that they strongly agreed and 55 replying that they agreed.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 41

Figure 4.5: Industrial Collusion Causing Inefficiency in the Industry

Figure 4.5 shows that majority of the respondents disagreed that the industry had any collusion

that was making the industry inefficient leading to overcapacity challenges. Seventy eight out

150 respondents disagreed while 58 opposed strongly.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 42

Figure 4.6: Regulation by the Government

Most respondents felt that government regulation were not a cause of overcapacity challenges in

the industry with over 95 respondents disagreeing with the factor and 20 disagreeing. Only about

35 respondents replied to the affirmative.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 43

Figure 4.7: Excessive Investment by Large Players

Whereas a sizeable number of respondents replied to the affirmative with 50 people agreeing,

most respondents disagreed or strongly disagreed with 65 and 35 of the respondents. Such shows

that industrial players are no longer investing in larger ships as crisis loom.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 44

Figure 4.8: New Entrants into the Industry

Figure 4.8 shows that most people in the industry did not consider competition as the key cause

of overcapacity in the industry. Most participants either disagreed or strongly disagreed showing

a gap between literature and the real-life context of the phenomena.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 45

4.3. Effects of Overcapacity on the Industry

Figure 4.9: Reduction in Ship leasing and contracting

Most of the respondents strongly agreed that their firms were slowly reducing their ships leasing

and contract agreement with 80 of the 150 respondents replying to the affirmative and 58

agreeing that the practices was becoming widespread.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 46

Figure 4.10: Scrapping Old Vessels

Figure 4.10 shows that most of the participants agreed that their firms were scrapping their old

ships as a means of reducing their overall capacity. Close to 100 respondents strongly agreed that

the approach was becoming widespread in the industry and another 40 agreed. Only about 10

employees applied to the contrary.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 47

4.4. Effects of Overcapacity in the Industry

4.11: Dominion Effect

Most of the respondents strongly agreed or agreed that overcapacity in the industry resulted to

domino effect. While sending the survey questionnaires, the term was expounded in the appendix

section to ensure that those not conversant with the term learned of its meaning before

responding.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 48

Figure 4.12: Price Competition.

Almost the same number of participants agreed or disagreed with the existing literature assertion

that overcapacity had resulted to tough price completion in the industry that has nosedived

freight rates and sent some players in the industry home.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 49

Figure 4.13: Financial Losses and Bankruptcy

Most respondents also agreed or strongly agreed with the fact that bankruptcy and financial

losses has almost become part of the operational aspect in the industry. With about 68 of the

respondents strongly agreeing and 65 agreeing, it is evident that industry is already feeling the

heating of operating within thin margins.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 50

Figure 4.14: Job Losses

Most of the respondent who have been lucky enough to retain their jobs strongly agree that job

losses have become prevalent in the industry with 80 of the respondents agreeing and 55

agreeing. As such, job losses are starting to become a key worry for most of the remaining

employees as overcapacity bites.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 51

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 52

4.5. Strategies for addressing Overcapacity

Figure 4.15: Postponing or Terminating Orders

After being asked to rate the overcapacity addressing strategy with regard to its application in

their organizations, most respondents contravened suggestions by literature that postponing

orders was a key strategy to solving overcapacity woes. Rather, 95 of the respondents disagreed

while 25 disagreed, only 30 and 10 respondents agreed or strongly disagreed showing that only

some industries were taking the precaution at the firm level not at the industry level.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 53

Figure 4.16: Regulating New orders to Reduce Capacity Growth.

Also few of the respondents agreed or strongly agreed that regulation could help address

overcapacity challenges in the industry. However, most disagreed or strongly disagreed that the

move could help address the excess capacity challenges.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 54

Figure 4.17: Leveraging Slow Steaming

Most respondents approved that slow steaming could help address overcapacity challenges in the

industry with more than 95 of the respondents strongly agreeing and 45 agreeing to that notion.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 55

Figure 4.18: Withdrawing Existing Tonnage

Most respondents were neutral regarding withdraw of tonnage as a means of addressing

overcapacity challenges. However, 49 respondents strongly agreed and 39 agreed. Also, about 48

respondents agreed and the rest disagreed showing mixed reaction to the approach in the

industry.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 56

Figure 4.18: Mergers and Acquisition

Lastly, most participants were of the idea and mergers and acquisitions were formidable tools

that would help address overcapacity challenges in the industry. Only less than ten participants

disagreed with the idea with the rest agreeing or strongly agreeing.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 57

5. Discussions

The current research had four key research questions. One of the research questions was to

investigate the causes of excess capacity in the marine shipping industry. Further, the result

sought to answer question on effects of the excess capacity on the industry. Lastly, the research

to answer the question on strategies being employed to solve the problem. To this end, a survey

research and case study analysis of existing literature was undertaken followed by an analysis

employing descriptive statistics to estimate whether there is harmony between existing literature

and the general landscape in the industry as this section discusses.

5.1. Causes of excess capacity in marine line shipping

The research fronted five questions to the respondent regarding what they considered as key

causes of overcapacity in the industry. The five questions were drawn from the existing

literature. Some of the key questions were the natural monopolistic nature of marine shipping to

which most respondents agreed with Fusillo (2003) study findings. However, most respondents

disputed the proposal by fusillo (2009) study that concluded that that there was collusion in the

marine industry that had resulted to inefficiency in terms of overcapacity. Similarly, majority of

the respondents disagreed that government intervention though polices were causing

overcapacity challenges in the industry, which is contrary to Julie and Heymann, Just, Kaiser,

and Mayer (2011) study findings. Lastly, the research collaborated June and Jade (2013) research

that observed that excessive investment by large player in industry had caused excess capacity in

the industry. Further, an ideal fronted by Meyer, Stahlbock, and Voß (2012) that competition in

the industry were a key cause of overcapacity in the industry was contradicted by the research

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 58

findings. More than 70 percent if the respondents did not consider the factor as instrumental in

causing capacity challenges.

5.2. Effects of excess capacity in ocean freights

The current study and much of the effects of overcapacity proposed in the existing literature

are unanimous on the effects of overcapacity on the industry. Most respondents either agreed or

strongly agreed with the idea that shipping firms were reducing their shipping leases confirming

the assertions by a study made by Notteboom, Rodrigue, and De Monie (20110). Similar results

were obtained for scrapping of older vessels with majority of the respondents confirming that

their firms were increasingly doing away with their older vessels as crisis looms confirming the

research suggestion by Kalgora and Christian Jane (2016). Further, job losses, price competition,

and financial losses were greatly regarded as the negative effects that overcapacity has rendered

to the industry confirming the study findings by Haralambides (2004), Fusillo (2009) and

Samaras and Papadopoulou (2010).

5.3. Efforts being pursued to address the excess capacity

Lastly, the research sought to investigate the strategies that the industry considered to be

more likely to address the excess capacity problem in the industry. While Fusillo (2009) and

Kalgora and Christian (2016) had proposed for regulating new orders for ships and postponing or

cancellation of bids to build new ships, the respondents did not consider the move as likely to

take foothold given the market is largely free. Most respondents either agreed or disagreed as

depicted in the results section. However, more than eighty percent of the respondents either

agreed or strongly agreed the slow steaming, withdrawing exiting tonnage, and mergers and

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 59

acquisitions would help address the excess capacity challenge facing the industry supporting the

research outcomes by Heymann, Just, Kaiser, and Mayer (20110, Meyer, Stahlbock, and Voß

(2012), and Rodrigues and Vitale (2015).

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 60

6. Conclusion

The current paper has sought to bridge the gap between theory and the real-life context of

excess capacity problem in marine shipping industry. As the problem ails the industry, it has

increasingly began attracting scholarly. The current paper sough to investigate what the existing

literature considered as the causes, effects, and the best way to address the problem. Key causes

of the problem according to literature include the natural monopolistic nature of the industry,

collusion leading to inefficiency, government regulation, excess investment on larger ships, and

many new entrants on the industry. However, after conducting a survey, only monopolistic

nature of the industry and investment on larger ships are considered compelling causal factors of

the problem. It emerged that due to the natural monopolistic nature of the industry, too many

competitors seeking to acquire a size of the market were resulting to higher supply of capacity

compared to a rise in demand. Ideally, shipping companies can only respond to rise in demand

through investing in a given capacity that could also cater for future rise in demand. As such, a

rise in demand for the largely non-consolidated market implies that most shipping companies

were installing capacity for the same rise in demand leading to excess demand that cannot be

stored.

Secondly, the study set out to investigate the effects of overcapacity on the industry.

Surprisingly, the current research and the industry perspective are unanimous that loss of jobs,

price competition, reduction in ship leasing, scrapping of older vessels, financial losses and

bankruptcy, and domino effect are the key ramification of the problem in the industry. Loss of

jobs is making the industry less likely to attract the best talent as rewards dwindle and the

chances of getting a job diminishes. Such is evident by the shortage of seafarers in the industry

hence the need to address the problem. Further, as shipping companies reduce contracting other

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 61

ships and ordering for new ships, the overall appeal of the industry and its ability to attract

investors is fast diminishing. To this end, the whole industry may become inefficient leading to

exit of key players that will later lead to crumbing of the industry hence negatively impacting on

international trade. Further, as the paper has established, most companies in the industry are

operating close to the margin implying profits are all-time thin while other companies are

operating at high losses. Lastly, the combination of the negative effects are causing a domino

effect as established in the paper. To this end, there need for the industry to consolidate and

reduce the negative implication of excess capacity on the performance and profitability of the

industry.

Lastly, concerning the most appropriate strategies, the research finds out that some of the

theoretical approaches lacks an appeal in the industry with most respondents considering

postponing or canceling of new order for ships and regulation to reduce capacity growth as likely

approaches to addressing the problem. The research has established that companies are

continuing to buy new ships while others are placing new orders to cater for their different needs

that may range from improving the existing ships to renewing fleets. Therefore, regulating new

ships order or building new ships will not solve the problem. However, low steaming,

withdrawal of existing tonnage, and mergers and acquisition are considered key strategies that

could help address the problem. Withdrawal of existing tonnage form poor performing routes

will help reduce the overall unneeded capacity and shift operators’ attention to improving their

performance in the routes they currently prosper. As such, it is the role of industry players to

devise a strategy that will leverage the research information to address the excess capacity

challenge before it renders the industry un-functional hence affecting international trade.

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 62

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The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 65

Appendices

Appendix 1: Questionnaire

Questionnaire

QUESTIONNAIRE

Introduction

Maritime shipping has remained a key means of transporting goods over different continents

at an affordable price. However, the industry has been facing numerous challenges that

threaten to crumble the instrumental industry. A key challenge facing the industry is

overcapacity challenges that has driven the freight rates so low pushing some competitors out

of the market. The key aim of the current research is to investigate the effect of the

overcapacity in the industry. The current questionnaire seeks to gain industry stakeholders

view on what they consider the causes and effect of overcapacity in the industry.

Direction

Kindly respond to all questions

General Questions

1. Experience in Maritime Shipping

1. 2 years

2. 3 years

3. 5 years and above

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 66

2. Type of Marine Organization

1 Public

2 Private

3. Position in Marine Organization

1 Senior Manager

2 Manager

3 Captain

4 Seafarer

Capacity Expansion Factors

What would consider the primary reason maritime firms are expanding capacity

1. To increase market share

2. To leverage economies of Scale

3. To take advantages of growing demand

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 67

Excess Capacity in Marine Shipping

1. How would you rate the following factors as contributors of excess capacity in Marine

shipping

Causal Factor

Rating: #1Strongly Agree, #2 Agree, #3 Disagree,

#4 Strongly Disagree

Ratings

Natural Monopolistic Nature of Marine Shipping

Industrial Collusion making the industry inefficient

Regulation by the Government

Excessive investment by key large players in the

Industry

Many new entrants in the industry

2. How would you rate the following factors as key effects of excess capacity in Marine

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 68

shipping

Effects Factor

Rating: #1Strongly Agree, #2 Agree, #3 Disagree,

#4 Strongly Disagree

Ratings

Domino effect

Price competition

Reduction in ship leasing and contracting

Financial Losses and Bankruptcy

Job losses

3. How would you rate the following factors as some other factors ailing the marine

freight industry?

Other Factors

Rating: #1Strongly Agree, #2 Agree, #3 Disagree,

#4 Strongly Disagree

Ratings

Volatile freight rates

Piracy

Labour Shortages

The Impact of Container Slot Excess Capacity With Regard To Ocean Freights 69

High oil prices

4. How would you rate the following strategies as efforts companies are pursuing

to address capacity challenges

Solution Strategies

Ratings

Rating: #1Strongly Agree, #2 Agree, #3 Disagree,

#4 Strongly Disagree

Postponing or terminating orders

New orders regulation to reduce capacity growth

Leveraging slow steaming

Withdrawing Existing Tonnage

Mergers and Acquisition

Scrapping older Vessels

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