Blank Sailing occurs when vessel operators cancel a part of or the whole voyage journey in the vessel’s schedule. It is therefore NOT a sailed voyage where the vessels are not carrying any cargo in its hull. There are two main reasons for vessel operators to blank sail, one is to induce more stability in the ocean freight rate in light of fluctuating freight demands, and the second reason is due to circumstances unforeseen or force majeure.
The concept of blank sailing is simple, as well as the factors that lead up to vessel blank sailing. But we did our research and found that not only it does not benefit any parties to the supply chain, but also vessel operators have unknowingly created an environment of supply overcapacity that necessitates regular blank sailing calls. In this blog post, we will share what we have learned about blank sailing, and also the conditions that led up to this inefficient disruption in our logistics supply chain.
The Rise of Containerized Vessel Operation
Although you did not come here to read about the history of the containerized vessel business, we promise that it is a piece of important information that will make us understand the occurrence of blank sailing more. So, bear with us for a while.
Ever since the discovery made by Malcolm Mclean that general cargos can be loaded more quickly and more cost-efficient if the cargo is loaded into a homogenous shipping container, the discovery made in the mid-1950s has jump-started a rush of vessel operators supplying shipping fleets that can accommodate shipping containers.
The world’s total fleet capacity mushroomed from 1.53 million 20’ equivalent (TEUs) in 1982 up to 18.9 million TEUs in 2014.
Accompanying the world’s fleet capacity growth pace is the growth of the average vessel capacity’s growth pace too.
In 1982, an average ship has a capacity of 592 TEUs, but in 2014, the average ship capacity has increased to 2256 TEUs.
To date, OOCL can boast to own the largest ship in terms of vessel capacity (21,143 TEUs), built in 2017.
The business considerations that shipping liners ruminate to “Build more”, “Build bigger”, “Build faster” are justified in the beginning.
Like all other businesses, shipping liners are guided by shareholder’s profitability and scale. With bigger ships, they can carry more per trip; With more ships, liners can capitalize and monopolise market shares; With faster ships, liners can have more voyages.
All of these endeavours are to tip the needle towards “More Profit” for the shipping liners and its shareholders.
We are not trying to convey tone of anti-capitalism, on the contrary, much of this capitalistic approach in shipping is one of the main reasons why international sea transportation has become affordable for large, medium and even small enterprises.
To drive our point across, here is a graph indicating the growth rate of fully cellular container ships (FCCs), which are special-built ships that are designed for containerized cargos.
Dwindling Freight Demands and Vessel Overcapacity
The rise of containerized shipping vessels has been well documented by many research papers. But on the flip side, we asked ourselves the question; Are the vessel capacity growths justified?
Though we are not statisticians or economists, we generally understand that a GDP (Gross Domestic Product) growth rate is a general indicator of a country’s prosperity, by measuring the economic output of a country.
Although it takes into consideration any household consumption, investments, and government spending, we believe that it is a strong measure of international trade growth.
Base Year GDP = 1980
Base Year Vessel Fleet Capacity (mTEU) = 1980
From what we noticed when we comparing GDP growth rate and the vessel fleet capacity growth, the growth rates of both are matched up to the 1990s. But by 2014, the growth rate of GDP is outpaced by the fleet capacity by 100%.
In other words, with our findings, there is a general indication that for every 1 extra container the world produces, shipping liners expand their capacity to accommodate 2 extra containers.
Of course, our findings are not sophisticated, it does not take into account the true production output of the world. It also does not take into account the added savings from the economies of scale from operating a larger vessel with a larger capacity.
Nevertheless, this ongoing trend of supplying more capacity than is needed is apparent from what we gather.
Shipping Line’s Temporary Solution: Blank Sailing
We’ve set the stage of the overall supply and demand of the sea transportation industry.
Additional Reading: How Does Global Logistics Work
On one hand, the rapid expansion underwent by shipping liners requires significant capital investments, on the other hand, new investments in vessels are larger than before.
Here are the recently built mega vessels, with the TEU capacity of more than 19,462 TEUs and more.
High capital interest obligations, mega vessels, and average low freight demand. All these variables put shipping liners on a knife-edge, a small swing in circumstances may tip a shipping liner from a profitable company to a company bound for chapter 11.
As evidenced by the low-profit margins we can gather from publicly listed shipping liners. CMA-CGM (the third-largest operator, Maersk Line (the largest), OOCL and Wan Hai were the most profitable, their profit margins were 5.2%, 1.5%, 6.3%, and 6% respectively.
Shippers and Consignees receive vessel schedules months in advance, but when shipping liners are operating on a knife-edge, a seasonal dip in freight demand will render a voyage trip unprofitable or unsustainable.
In competitive market conditions, where each shipping liners are operating separate from their competitors, the rational decision is to lower the ocean freight rates to at least cover the cost of the voyage.
But in an oligopolistic market condition, which the shipping industry is, shipping liners tend to cancel voyage sailings or blank sail. Whether it is part of its multi-port voyage, or the whole voyage entirely.
On one hand, it reduces the overall supply the same way DeBeers reduce the output of Diamonds to keep its perceived value. And on the other hand, the following freight rates (which were not reduced) are to cover the opportunity costs of a blank sailing.
After all, blank sailing announcements commonly occur when the vessel booking has been secured. Shippers will have no choice but to accept the vessel operator’s blank sailing and roll-over its shipment to the next available vessel calling.
Shipping Alliances Makes Blank Sailing More Effective
Perhaps its no secret that the shipping industry is oligopolistic, but it is exacerbated by the fact that the shipping industry forms shipping alliances, with the same reason why the airline industry form alliances as well.
A whopping 80.6% of the world’s freight is arranged by 3 major alliances; A real Pareto principle example.
Effectively speaking, we are dealing with 3 major carriers instead of 10 for 80% of our sea transportation. With that in mind, blank sailing is more easily implemented as it becomes a coordinated effort.
The most apparent period of the year where blank sailing is called is during the Chinese Lunar New Year. During that period, Chinese manufacturers are closed for 2-3 weeks, rippling to the shipping industry where there are less than planned cargo freight from China.
Despite blank sailing being announced by individual shipping liners, you will notice that the blank sailing concurrently occurs with liners within the same alliance’s umbrella.
Here are some examples: –
Other Reasons for Blank Sailing
Apart from the strategic reduction of supply from the shipping liners as a reason to call for a blank sailing, there are many other justified reasons why blank sailing occurs.
- Unfavorable weather conditions for vessel berth;
- Vessel delay during a multiple-port voyage;
- Port State Control Officers deem the vessel unseaworthy and detains said vessel.
Blank sailing puts everyone in a lose-lose situation. For shippers and consignees, it is the stem for added vessel delays, added handling costs, and added production costs from the delay.
For the container shipping liners, they are already in a precarious condition where they need to maximize the vessel’s utilization, and at the same time try to reduce the volatility of ocean freight rate.
Businesses prize sustainability and predictability, but with the continued trend of expansion large corporations undertake, only to gain more market share. It will only aggravate their current “too big to fail” status as a company. Moreover, the bigger the company, the harder it falls, and the bigger the ripple effect.
Nguyen Khoi Tran, Hans-Dietrich Haasis (2014). An Empirical Study of Fleet Expansion and Growth of Ship Size in Container Shipping Line, International Journal of Production Economics. DOI: 10.1016/j.ijpe.2014.09.016
Nam Kyu Park, Sang Cheol Suh (2019). Tendency Toward Mega Containerships and the Constraints of Container Terminal, Journal of Marine Science and Engineering. 7, 131; doi:10.3390/jmse7050131