The trans-Pacific trade lane has long been one of the most troubled routes in the maritime industry. In the early '90s, double-digit growth attracted new carriers and vessel capacity. A few years later, ocean carriers were devastated by Asia's economic meltdown. Then, when the Asian and U.S. economies improved and trade volumes again headed upward, carriers ordered dozens of containerships on the assumption that double-digit growth would continue.

Last year it became painfully clear that they were wrong. The worldwide economic slowdown that had begun in late 2000 deepened, and trans-Pacific carriers saw volumes, rates and profits decline to such a degree that their survival may be in question.

Although the economy is showing signs of improvement, trans-Pacific carriers will continue to struggle as rates remain perilously low and operating costs rise. Their woes—together with a possible labor slowdown, strike or lockout at U.S. West Coast ports—could have a serious impact on their customers. With so much uncertainty regarding business in this vital trade lane, importers and exporters are finding it difficult to plan ahead with confidence for the second half of the year.

Signs of instability had been evident for some time. Carriers, buoyed by renewed growth in Asian exports to North America and Europe, ordered more than 100 large containerships for delivery between 2001 and 2003—an extraordinary increase in capacity that would be hard to fill even in the best of times. A series of mergers between some of the largest carriers also made industry observers uneasy.

When the economic bubble burst in the United States, trans-Pacific carriers felt the effects very quickly. Korea's Cho Yang Line went bankrupt and shut down last year. Another Korean carrier, Hyundai Merchant Marine, made a small profit but reported a loss due to its heavy debt load. Many carriers eliminated routes, reduced the number of ships they were operating and delayed deployment of new vessels. Two small alliances, the COSCO/K Line/Yang Ming group and the United Alliance, which were formed to share operations in order to cut costs, recently teamed up to reduce capacity and costs even further.

Virtually all of the trans-Pacific carriers are suffering financially. Powerhouse carriers like P&O Nedlloyd, APL Ltd. and OOCL have reported dismal revenue and profit figures for 2001. APL, for example, saw its profits fall 93 percent compared to the previous year. OOCL's parent company, meanwhile, reported 46-percent drop in profits.

That's not surprising. Cargo volumes fell sharply last year, and eastbound shipments—once growing at a 14-percent annual clip—rose just 2 percent at the same time that deliveries of new ships were approaching an all-time high.

The result has been a freefall in trans-Pacific rates. On average, rates have declined 15 to 20 percent for both westbound and eastbound containerized cargoes over the past nine months, confirms Albert A. Pierce, executive director of the Transpacific Stabilization Agreement (TSA) and the Westbound Transpacific Stabilization Agreement (WTSA). These two ocean carrier "discussion agreements" include most of the major trans-Pacific carriers.

Carriers have tried to impose general rate increases to restore rates to earlier levels. They've had little success except with high-volume, low-value cargoes like hay and wastepaper, where rates are just a few hundred dollars per container, says Pierce. Nevertheless, trans-Pacific carriers will try again to raise rates this summer. Eastbound rates for TSA carriers were due to increase by $300 on May 1, and WTSA carriers had slated increases for westbound temperature-controlled produce to take effect over the next three months.

Whether those increases will hold or not is hard to predict. "Carriers are looking for a [general rate increase], but at the same time, they're fighting for freight," says Bette Little, import manager for New England Pottery in Foxboro, Mass., and a board member of the Coalition of New England Companies for Trade (CONECT). She began this year's contract negotiations earlier than usual and found them to be very tough. "I had to negotiate longer than I've ever [had to] on contracts," she says.

Even for shippers that have locked in rates, the trans-Pacific trade may hold some surprises. In January, with little advance notice, carriers started assessing terminal handling charges at all major ports in China. Although the Chinese exporter typically pays these charges, the fees often are passed on to the U.S. buyer. The TSA, moreover, moved up the effective date of its $300 per-container "peak season surcharge" to June from July. And TSA carriers recently surprised importers when they instituted a surcharge of $15 per 20-foot container and $30 per 40-foot container for containers that move via the Alameda Corridor, the new rail expressway linking the ports of Los Angeles and Long Beach with inland rail terminals. (See News Analysis, page 21.)

"No one planned on that when we were negotiating contracts," says Little. "It's a problem when you think you have your rates locked in and all of a sudden there are fuel or security surcharges or the Alameda Corridor charge," she says. Such unexpected surcharges raise a product's total landed cost, she points out, reducing or even eliminating the profit that's built into the selling price.

There have been some signs of improvement since the beginning of the year. Pierce is forecasting an increase in volumes of about 5 percent this year, based in part on general U.S. economic indicators. The Port of Los Angeles reported a record increase in inbound loaded containers in February, up 52 percent compared to February 2001. In addition, carriers are restoring some of the routes and vessels that were cut last winter in anticipation of the annual peak shipping season this summer and fall.

Despite those encouraging signs, shippers still have plenty to worry about over the next few months. Several analysts have said they think the combination of historically low rates, excess capacity and a worldwide economic downturn makes the industry ripe for further consolidation.

A potential strike or slowdown by dock labor at West Coast ports also could have a major impact on rates and capacity as importers seek alternate routes in a bid to avoid the bottlenecks any labor action is likely to create. Pierce, for one, predicts those fears will result in an early peak shipping season and that competition for space will force rates up somewhat.

Little says the best way to be prepared for changes in the ever-shifting trans-Pacific scene is to keep on top of what's happening in the industry. "You have to know the market and be aware of what's going on," she advises, if you want to stay ahead of the curve.