Category: Transport

The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates. 

The stock market’s roller coaster ride of sell-offs followed by rallies then reversals confirms that the market does not like uncertainty. What is the nature of the coronavirus (COVID-19)? How are governments handling testing, quarantining and medical aid? The virus has spread across the world and the World Health Organization (WHO) declared it a global pandemic. When President Trump declared a national emergency on March 13, 2020 the Dow Jones Industrial Average rose over 6% during the first 30 minutes of his news conference as markets closed for the week. Markets wanted to hear a plan and they appeared to approve of what was said and what was promised by the president and his team, many of which included public-private partnerships with some of the most prominent consumer and pharmaceutical retailers.

Global supply chains have been challenged by the uncertainty that has burdened the transportation sector since COVID-19 surfaced in Wuhan, China in December 2019. But a testimony to how mutual trust simultaneously strengthens supply chains and makes them more flexible comes in the discussion around adjusting the terms of existing contracts. If a sincere attitude is necessary in order to enter into a contract it is certainly necessary if and when it needs to be adjusted.

Unfortunately, the way not to handle this process was demonstrated by the China Council for the Promotion of International Trade (CCPIT), a government organization. By early March it had issued over 4,800 force majeure (e.g., acts of God) certificates to China-based companies holding supply contracts ranging from thousands of yuan to billions of yuan. The total contracted value translated to about $50 billion. The CCPIT claims to be helping “enterprises safeguard their legitimate rights and interests and reduce the losses caused by the [COVID-19] epidemic.” 

Referring to the legal weight this carries, the CCPIT noted that “one party of the contract may claim partial or complete exemption from the liability of non-performance, incomplete performance or delay in performance of the contract by virtue of the certificate.” This means that non-performance penalties noted in contracts are not enforceable in Chinese courts – and the duration of these certificates are for an indefinite period of time. No wonder international companies with supply chain linkages through China are worried and, by extension, so are the active stock exchange traders who, in part, influence those companies’ stock values. Such escape hatches in contracts may be legal in China but they are not the foundation of good supply chain relationships.

Narrowly considered, a contract of service is designed to protect each party’s interests. But beyond “the four corners of the contract,” which lawyers focus on, are the unwritten relationships which can flow from it. Ideally, both parties need to share a mission and develop a strategy which ultimately serves the customer at the end of the supply chain. Without the customer buying the goods or service a lot of upstream activity would not take place. Basically, transparency is not achieved when one contracted party can appeal unilaterally to the government for protection on otherwise shaky legal foundations.

Assuming the contracts between China-based and international partners even have force majeure clauses within them, it is hard to see COVID-19 as an act of God in the legal sense, especially since it was government action (or, more likely, inaction) that led to its spread within Wuhan and then far beyond. Human actions could be a source of force majeure but under common law and international law these are typically spelled out in the contract as opposed to just inserting the force majeure term as a catch-all.

Those international companies that have no choice but to deal with their China-based vendors may decide that it is simply better to maintain the relationship, hoping for an eventual and steady resumption of supply, than to take their chances in Chinese courts willing to give legal weight to the CCPIT’s force majeure certificates. A good practice in supply chain management is to let the partner better able to assume cost and risk do so. This is in the spirit of shared burden. The ugly twin of that practice is to pass along the burden to the partner least able to avoid it. 

There is a problem in thinking of transportation as a transactional function rather than a relational one. If the discussion is only about the freight rate it is merely a zero-sum game between the consignor and the carrier. But if it is a discussion about services then the result could be positive-sum. Quality of service from the carrier combined with a commitment from the consignor to purchase capacity is a win-win if it can grow out of a well-honed contract. 

China’s rapid growth since the 1990s and the international trade which grew out of it seemed to fixate both sides of the container liner market on price and not service. This is ironic since within the terms of the U.S. Ocean Shipping Reform Act (OSRA) of 1998 was the opportunity for confidential service contracts rather than the container liners sticking to freight rates formerly set by carrier conferences (i.e., cartels). Yet the container liners continued to merge into mega-alliances to try to ensure their own profitability or, in bad years, mitigate losses. 

Here, too, relational options may exist in the form of sharing and integrating digital platforms. Many players – the carriers, the consignors, the intermodal partners and the ports – are investing in digital solutions and artificial intelligence (AI). Will they share their data in the spirit of relationship-building or hoard it out of mistrust? As supply markets bounce back in China, or as buyers shift to other Far East Asia locales, new opportunities to collaborate may present themselves.

An example of a government working to assist with contract compliance is how it is providing relief to domestic and foreign airlines’ use of their landing slots on routes susceptible to COVID-19. The Federal Aviation Administration (FAA) took the lead on March 12, 2020 by suspending the so-called 80/20 rule through May 31, 2020. The International Air Transport Association (IATA), whose membership of 300 passenger and cargo airlines account for about 80% of the world’s air traffic, is asking other jurisdictions to follow the FAA’s example. In this case, they are asking the airports (which are mostly government owned) to consider relaxing contract enforcement. This is a far cry from the CCPIT’s extra-judicial interference in the business activities between two private parties. The European Commission (EC) followed the FAA’s lead on March 14, 2020 and proposed a relaxation of the 80/20 rule at their airports through June 2020. This will require an amendment to existing European Union (EU) legislation.

The 80/20 rule is a “use it or lose it” requirement. Air carriers must make use of the time-and-day specific landing slots they purchased at airports at least 80% of the time. Failure to do so leads to forfeiture. Naturally, with the U.S. imposing travel bans on non-U.S. residents from China and Europe, many air carriers will need to adjust their routes, times and frequencies. Relaxing the 80/20 rule gives them the flexibility to make efficient decisions as they adjust capacity in the face of lower demand for air travel. But since international routes are made up of origins and destinations in two different countries, relaxation of the 80/20 rule in one country does not count for much if a higher frequency of usage is required in another. Currently, the FAA’s blanket waiver applies to John F. Kennedy International Airport (JFK), New York LaGuardia Airport (LGA) and Ronald Reagan Washington National Airport (DCA). The FAA will also excuse COVID-19 related cancellations at Chicago O’Hare International Airport (ORD), Newark Liberty International Airport (EWR), Los Angeles International Airport (LAX) and San Francisco International Airport (SFO).

The role of government is exemplified in creating incentives for private agents to enter into contracts backed by a judicial system which will enforce them. The U.S travel ban from China and Europe is about public health and maintaining economic activity. Relaxing the 80/20 rule is an example of giving airlines room to adjust. China should not go down the road of interfering extra-judicially in contracts by, in effect, picking winners and losers.

After two months of shopping potentially all of its operating units excluding the less-than-truckload (LTL) division, XPO Logistics, Inc. (NYSE: XPO) said that it was no longer looking to sell.

In a brief 8-k filing with the U.S. Securities and Exchange Commission, the top-10 global logistics provider said, “in light of current market conditions, XPO has terminated the strategic review process.”

The news comes as little surprise given the valuation collapse in the equity markets. The market selloff began when concerns over the coronavirus intensified during the last week of February as the disease spread in northern Italy, prompting officials to lockdown several towns in the region.

Since, the S&P 500 has declined 28% and the Dow Jones Transportation Average, which includes the hard-hit commercial airlines, is off 36%. Dow Transport components American Airlines Group, Inc. (NASDAQ: AAL), Delta Air Lines, Inc. (NYSE: DAL) and United Airlines Holdings, Inc. (NASDAQ: UAL) have all lost close to two-thirds of their value in that stretch.

On January 15, XPO announced that it would entertain offers for four of its business units, retaining the advisory services of Goldman Sachs & Co. LLC (NYSE: GS) and J.P. Morgan Securities LLC (NYSE: JPM) to help them with the process. Taking only the North American LTL division off the table, the plan looked to unload two North American and two European transport and logistics businesses.

XPO’s founder, chairman and CEO Brad Jacobs said that the spinoff of the units would free up capital, eliminate debt and raise the company’s valuation as a pure-play LTL operator. At the time, Jacobs said that XPO’s stock valuation based on a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA) was being weighed down, trading as a conglomerate and at a discount to other LTL carriers.

Many industry analysts were caught off guard when XPO announced last week that it was acquiring the U.K. division of Kuehne + Nagel International AG’s (OTC US: KHNGY) contract logistics segment.

Equity research analyst Amit Mehrotra with Deutsche Bank said that the deal was “a bit of a head-scratcher optically” when it was announced on March 9. A week later, Morgan Stanley analyst Ravi Shanker questioned whether the company would continue to pursue the break up strategy.

In a note to clients Shanker wrote, “With asset valuations potentially lower given the broader market correction, and with the deal not expected to close before 2H20 per management, we would not be surprised if XPO sees a longer break up process than initially anticipated.

XPO was built through a series of acquisitions and roll-ups since Jacobs’ $150 million investment in Express-1 Expedited Solutions in 2011. The goal from day one was to take the third-party logistics provider to a transportation and logistics giant. In the brief period that followed, the company made 17 acquisitions under the new XPO banner, reaching a market cap of more than $14 billion during the 2018 peak.

Shares of XPO are off 54% in the last month.

In addition to the illnesses and deaths associated with COVID-19, the novel coronavirus, how could this issue affect the trucking industry and the supply chain at large? Here are five likely possibilities.

1. It could hinder global movement

Conferences, sporting events and other large gatherings are rapidly getting canceled. Beyond those choices, some people reason that it’s best to stay put. 

Jacob Funk was part of a team that investigated the effect of the coronavirus on global movements, such as when people travel between countries for study, work or pleasure. 

Speaking about a potential impending deglobalization effect, he noted, “It occurs every time you have events that disrupt supply chains, and students and tourists are the people portion of supply chains. We must be clear that the coronavirus is a shock to mobility. The impact [to mobility] is very large if the outbreak is not contained [outside of China].”

If people delay plans to take vacations or study abroad, those decisions have a ripple effect on the supply chains of various industries, ranging from foodservice to hospitality. They affect American transport, as well as people-based movements happening elsewhere. 

2. It may hurt employment

Even before the coronavirus hit, the freight industry was in a recession. Cass Freight Index statistics showed that January 2020 marked the 14th consecutive month of year-over-year declines. Some American ports are particularly feeling the pinch since COVID-19 became a concern. 

Eugene Seroka, executive director of the Port of Long Beach, mentioned how one in nine Southern California jobs are port-related. He clarified, “That’s a million jobs. Less cargo means fewer jobs. The truck drivers are not pulling as much freight. The longshoremen are not being called out to work as frequently as they normally would be.”

Weston LaBar, chief executive of the Harbor Trucking Association, gets more specific: “Business is down 60% to 70% for the last week of February and into March. The coronavirus has already cost our industry millions upon millions of dollars in lost productivity and administrative costs.”

Some people in the freight and trucking industry are already getting less work. If that continues, the overall decline in employment opportunities could be vast. 

3. It could impact future production

Outside of supply chain shortages for finished goods, the coronavirus could slow down the delivery of products not yet built. 

Jack Buffington, an assistant professor who teaches supply chain management at the University of Denver, explained, “You’re seeing electronics being impacted, you’re starting to see some pharmaceuticals being impacted. The way the world’s supply chain works, people think of manufacturing as finished products, [but] they have to understand, a lot of it is components. So, this proliferates across the entire world’s supply chain.”

Any supply chain slowdowns don’t only affect consumer goods. Defense branches of the government have requirements for their contractors’ purchases, and the coronavirus could cause unforeseen consequences as parties try to fulfill those. 

4. It may curb spending

Retailers around the world temporarily closed stores to try and halt the spread of COVID-19 among communities. However, even if many shops remain open, experts anticipate a psychological shift that will make consumer confidence plunge. 

Michelle Girard, chief U.S. economist at NatWest Markets, spoke on CNBC recently about what could happen. “It’s the psychology change here as the virus begins to spread that is most worrisome for me. People just begin to pull back on their willingness to be out there and spending, and of course, in the U.S., the consumer has been the economic bright spot.”

If that happens, the people who work in warehouses to pack orders, drive them to their destinations or otherwise deal with aspects of American transport and the preparation of goods will experience negative ramifications around the world. However, companies offering deliveries to consumers’ doorsteps may see surges in business.

5. It exposes supply chain vulnerabilities

COVID-19 harshly illuminated supply chain problems, but brands must evaluate what they can do. 

Richard Wilding, a professor at the Cranfield School of Management, urges businesses to assess and mitigate supply chain weaknesses immediately. “Companies need to urgently review their supply chain to find out how exposed they are. They need to ask the question as to where their suppliers and suppliers’ suppliers are located and review other sourcing locations, which, although often more expensive, can protect from disruptive events such as this,” he said.

An impact on the trucking industry and more

It’s anyone’s guess as to when COVID-19 cases might settle down and let the world get back to as much normalcy as possible. Supply chain professionals must stay educated by doing things such as watching the Cass Freight Index and working continually to positively impact the aspects within their influence. 

President Donald Trump has extended travel restrictions to
the U.K. and Ireland, he announced today. The restrictions are identical to
those placed on 26 European countries on Wednesday.

Foreign nationals that have been in these countries in the
past 14 days will not be allowed to enter the U.S., according to the Department
of Homeland Security. U.S. citizens and their immediate families will generally
be allowed back into the U.S.

According
to reports, the White House is also considering possible domestic travel restrictions.
The Department of Defense has stopped domestic travel for all service members,
civilian employees and their families.

Homeland Security said that citizens, legal permanent
residents, and their immediate families returning to the U.S. must travel
through one
of 13 airports to receive additional screening and then must
self-quarantine for 14 days.

The new bans do not include cargo, but will have an effect,
regardless. The Wall Street Journal reported
that 60% of airfreight between Europe and the U.S. flies in the belly of
passenger planes.

The International Air Transport Association (IATA) said
there was an average of 550 flights a day between the U.S. and the 26 European
countries in the initial ban.

“Given the importance of belly capacity for air cargo in
this market, clearly the measures announced yesterday will cause a severe drop
in capacity offered,” Gerard de Wit, WorldACD managing director, told the
Journal.

On Friday, Delta announced it would cancel flights from Europe
to the U.S. for 30 days, joining other airlines that have done the same. The
airline said it would continue service to London, but with the new travel ban,
that is uncertain at this time. American, Lufthansa, and United Airlines are
among those that are slashing
service globally, although not all airlines have cancelled service as Delta
has.

IATA said global air cargo declined 3.3% in January year-over-year,
as measured by freight ton kilometers (FTKs). The organization, though, said it
was unlikely that coronavirus had much to do with the reduction, suggesting
that February and March numbers may be much worse.

“January marked the tenth consecutive month of year-on-year
declines in cargo volumes. The air cargo industry started the year on a weak
footing. There was optimism that an easing of U.S.-China trade tensions would
give the sector a boost in 2020. But that has been overtaken by the COVID-19
outbreak, which has severely disrupted global supply chains, although it did
not have a major impact on January’s cargo performance. Tough times are ahead.
The course of future events is unclear, but this is a sector that has proven
its resilience time and again,” Alexandre de Juniac, IATA’s director general
and CEO, said in a statement.

North American airlines saw demand in January fall 1.3%.

In 2019, air freight saw its worst performance since 2009,
falling 3.3% compared to 2018. The U.S. saw a decline of 3.4%.

The ban on travel from the U.S. will have broad impacts on
airlines, said IATA.

“Governments must impose the measures they consider
necessary to contain the virus,” de Juniac said. “And they must be fully
prepared to provide support to buffer the economic dislocation that this will
cause. In normal times, air transport is a catalyst for economic growth and
development. Suspending travel on such a broad scale will create negative
consequences across the economy. Governments must recognize this and be ready
to support.”

The total value of the U.S.-Schengen market in 2019 was
$20.6 billion, including passenger revenue. The markets facing the heaviest
impact are U.S.-Germany ($4 billion), U.S.-France ($3.5 billion) and U.S.-Italy
($2.9 billion).

North of the border, Canada has also announced preliminary
restrictions on travel, but has not announced a ban. Transport Minister Marc
Garneau said international arrivals will have to flow through a limited number of
airports, but those have not been announced yet. He also urged Canadians to
postpone or cancel non-essential international travel.

President Donald Trump on Wednesday night announced a 30-day ban on travel to the U.S. from Europe as the worldwide spread of the coronavirus topped 120,000. The World Health Organization declared a pandemic and stock markets tumbled further Wednesday and are expected to open sharply lower today.

In a nationwide address from the Oval Office, Trump said the travel suspension would begin Friday at midnight and is an effort to contain the spread domestically. It excludes the U.K. In his speech he indicated the ban on inbound traffic would apply to cargo too, meaning that all-cargo planes and vessels would also be affected.

However, he later clarified by tweet that trade will not be affected by the travel restriction, which applies to 26 countries. The Department of Homeland Security also clarified the president’s remarks to say that the travel ban only applies to  foreign nationals who have been in certain European countries at any point during the 14 days prior to their scheduled arrival to the United States, not to legal permanent U.S. residents.

Global stock markets and airline stocks fell again after the president’s announcement. The Dow Jones Industrial Average fell 5.9% Wednesday, sending the U.S. stock market officially into bear territory following an 11-year upward ride. Overnight stock futures implied another steep drop for Thursday trading. 

The U.S. decision is another huge blow to the airline industry and companies that rely on multinational supply chains. Since late January, airlines have been aggressively pruning flight schedules and taking other steps, such as deferring capital expenses and hiring, to minimize the financial impact. The flight reductions began with China, but quickly spread to other parts of Asia and the rest of the world. 

In recent days American Airlines said it will cut international capacity by 10%, including a 55% reduction in seats for the trans-Pacific market, and 7.5% on domestic routes. Delta Air Lines announced a 15% reduction in system-wide capacity (10-15% in the domestic U.S., 5% in Latin America, 15-20% in the trans-Atlantic, and 65% in the trans-Pacific). United said it would cut capacity by 20%. Alaska Airlines in March and April will reduce its schedule by 3%, mostly on high-frequency routes.

Lufthansa on Wednesday said it will slash an additional 23,000 flights between late March and April 25, after last week forecasting a 50% cut in capacity in the coming weeks and the possible grounding of its fleet of 14 giant Airbus A380 aircraft.

The International Air Transport Association, which represents airlines, last week said the industry could lose up to $113 billion in revenue this year in a worst case scenario.

The stocks of major European airlines declined about 10% on Thursday after news of the travel restrictions. Deutsche Lufthansa AG’s stock has lost 40% of its value this year. The stocks of Air France-KLM and Norwegian Airlines have lost 50% and 80% of their value, respectively. American Airlines’ (NASDAQ: AAL) stock is down 50% since its mid-February high.

Flight reductions have simultaneously sucked up valuable space below deck that companies rely on to move goods, placing a premium on operators that fly dedicated freighters. Airfreight rates, especially out of China, have shot up in the past two weeks. The TAC Index reports are $3.50/kg on China-U.S. routes – $-0.30 more than reported by FreightWaves on Friday. 

The new U.S. travel restrictions will likely cause airlines to pull down more flights.

Airlines have been losing business as companies restrict corporate travel, large industry conferences and events get canceled, and leisure travelers are wary of flying. On Wednesday, the National Basketball Association suspended the rest of its regular season, the NCAA said it would play its college basketball tournament in empty stadiums and a major rodeo in Houston was canceled. 

This week, the JFK Air Cargo Association postponed its expo, scheduled for March 26. Royal Media also postponed until the fall it’s Jet Fuel Innovation Summit and Cargo Facts Asia until May 20-22. 

Airlines have tried to alleviate concerns by promoting steps to sanitize planes, including a new spray fogger deployed by Delta Air Lines for aircraft interiors, but the scale of the crisis is overwhelming their efforts.

Nonetheless, the Association of Asia Pacific airlines on Wednesday urged governments to roll back or refrain from introducing travel restrictions to prevent economic disruption, saying that the spread of COVID-19 in more than 100 countries is mostly from local transmission rather than imported cases.

It said it isn’t aware of any inflight transmission of the disease. 

“The proliferation of travel restrictions worldwide and insufficient adherence to the international health regulations are imposing enormous costs on society with little or no public health benefits. AAPA appreciates the leadership of WHO on this issue and calls on governments to fundamentally reconsider the rationale for such travel restrictions and measures, taking into account the disruption caused to people’s livelihoods and the negative repercussions to the wider economy,” AAPA Director General Andrew Herdman said in a statement.

The AAPA’s position flies in the face of warnings from medical professionals. Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases, has urged Americans, particularly older and ailing people, not to travel, and to practice social distancing. And a doctor at the epicenter of the public health response in Europe made a forceful appeal in a Newsweek commentary for people not to travel because the coronavirus is more dangerous than many assume and people have a moral obligation to help prevent its spread.

Slot Relief

Earlier on Wednesday, the U.S. Federal Aviation Administration said it is temporarily waiving minimum slot-use requirements at U.S. airports through May 31 to help airlines that cancel flights due to the coronavirus.

Under normal circumstances, airlines can lose their take-off and landing slots at congested airports if they don’t use them at least 80% of the time.

The agency said it hopes U.S. carriers will be accommodated with similar relief by airport authorities in other countries.  

The waiver of the slot usage requirement applies to John F. Kennedy International Airport and Laguardia Airport in New York, Ronald Reagan Washington National Airport. 

Additionally, at four other U.S. airports where the agency has approval authority – Chicago O’Hare International Airport, Newark Liberty International Airport, Los Angeles International Airport, and San Francisco International Airport—the FAA will give credit to airlines for flights that were canceled due to the coronavirus through May 31, as though those flights had been operated, when the FAA conducts future schedule development.

Earlier this month the trade association for international airlines requested regulators relax the slot rules as airlines cut flight schedules due to the outbreak.

Less than two months after announcing plans to divest potentially all of its operating segments, except for its less-than-truckload (LTL) offering, XPO Logistics, Inc. (NYSE: XPO) announced that an acquisition is in the works.

In a March 9 press release, the company announced that it has entered into an agreement to buy the bulk of global transportation and logistics provider Kuehne + Nagel International AG’s (OTC US: KHNGY) contract logistics segment in the U.K.

The acquisition includes Kuehne + Nagel’s operations that provide inbound and outbound distribution, reverse logistics management and inventory management. Revenue in these operations are derived from the beverage, technology and e-commerce sectors and totaled approximately GBP 500 million ($656.4 million) in 2019 ($1 equals 0.76 GBP).

In its press release, XPO said that the deal will bolster its contract logistics offering in the U.K., adding 75 facilities and a “blue-chip customer base” to the segment. XPO plans to integrate Kuehne + Nagel’s business onto its technology platform under its pan-European network.

Terms of the transaction that is expected to close in the first half of 2020 were not disclosed.

Equity research analyst Amit Mehrotra with Deutsche Bank noted that the announced acquisition was “a bit of a head-scratcher optically,” but that the deal is likely very small in nature and affords XPO the opportunity to improve profitability on a business that has underperformed.  

“To be sure, we think this is a very small deal despite the big $500 million revenue contribution… sub-$100 million of total consideration is our best guess, which we estimate equates to a very low multiple of trailing EBITDA [earnings before interest, taxes, depreciation and amortization],” said Mehrotra.

Mehrotra said that while his firm views Kuehne + Nagel as “good operators,” he believes that this segment of its logistics business was “barely profitable,” noting difficulty surrounding a large customer contract as a headwind. He continued that this may provide XPO the opportunity to “leverage its technology and fixed cost base to re-rate margins of the business [higher].”

In a separate press release, Kuehne + Nagel stated that the transaction includes its “drinks logistics, food services and retail & technology businesses,” with approximately 7,500 employees.

Kuehne + Nagel has been exploring strategic alternatives for this business segment fo the last year.

“One year ago, we first announced the strategic review of our contract logistics business to improve profitability and focus on our core, scalable solutions. We have now reached a major milestone in this effort, having secured an agreement to sell significant non-core assets in the U.K.,” stated Kuehne + Nagel CEO Dr. Detlef Trefzger.

Kuehne + Nagel said that it was retaining its U.K. contract logistics operations serving aerospace, government and pharmaceutical customers.

As previously announced, XPO’s divestiture plan is to put nearly $13 billion of the company’s $17 billion in revenue up for sale. When announced in January, all units except for LTL were being shopped.

Shares of XPO are off more than 10%, nearly doubling the loss of broader equity markets which continue to move lower on coronavirus concerns.

The Commerce Department’s Bureau of Industry and Security (BIS) on Thursday announced in a Federal Register notice that it will extend a temporary general license for certain U.S. exports to Chinese telecommunications equipment manufacturer Huawei Technologies Co. Ltd. and 114 overseas affiliates through May 15.

The department’s current temporary general license related to Huawei was set to expire April 1.

Since May 16, 2019, Huawei and 114 overseas affiliates have been placed on the Commerce Department’s Entity List, which imposes significant restrictions on U.S. goods and technology exports to the Chinese company and requires any U.S. company or organization to obtain an export license from BIS.

The Commerce Department established its temporary general license policy for certain continued export business to Huawei on May 22, 2019. The department has subsequently extended the policy.

So-called “authorized transactions” under the temporary general license include the continued operation of existing networks and equipment, support to handsets acquired before Huawei’s placement on the Entity List, cybersecurity research and vulnerability disclosure, and “engagement as necessary for development of 5G standards by a duly recognized standards body.”.

In addition, BIS on Wednesday published a second Federal Register notice seeking public comments to “assist the U.S. government in evaluating whether the temporary general license should continue to be extended, to evaluate whether any other changes may be warranted to the temporary general license, and to identify any alternative authorization or other regulatory provisions that may more effectively address what is being authorized under the temporary general license.”

Those comments are due to the agency by May 26.

Until last year, Huawei was a large customer for the U.S. semiconductor industry. However, the Trump administration and certain congressional lawmakers have continued to demand restrictions on U.S. technology exports to the telecom equipment manufacturing giant.

“Huawei was added to the Entity List after the U.S. government concluded the company poses a significant risk of involvement in activities contrary to the national security or foreign policy interests of the United States, including by engaging, among other things, in alleged violations of the International Emergency Economic Powers Act (IEEPA), conspiracy to violate IEEPA by causing the export, reexport, sale and supply of goods, technology, and services to Iran, and obstruction of justice in connection with the investigation of those alleged violations of U.S. sanctions,” the Commerce Department said in a statement.

The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates. 

There is nothing quite like it in the world. The type of antitrust immunity granted to international containership lines is certainly not covered in business schools except in those savvy enough to offer courses in transportation operations and management. The European Commission (EC), through its Director General of Competition, proposed allowing consortia of containership lines to retain their exemption from European Union (EU) competition law. While this has been in place since 2009, the exemption was set to expire in April 2020. The proposal is for a four-year renewal. In this setting, containership lines may form consortia (i.e., strategic alliances or discussion agreements) without fear of running up against charges of antitrust activity leading to excessive market control.

The EC’s assessment of current market conditions led it to recommend a block exemption regulation (BER). The 2009 BER was granted just one year after the EU removed the BER on the more overt form of antitrust activity known as liner “conferences.” This form of joint rate-making (i.e., price-fixing) had been the norm since 1875 and was built into the culture of the industry.

A BER on the supply side of the ocean carrier market is not regarded well by most shippers on the demand side. The World Shipping Council (WSC), which represents the carrier side, is pleased with the EC’s judgement while other shipper councils representing consignors and consignees are not. In fact, the WSC’s 19 carrier membership represents about 90% of international carrier capacity. Other entities that deal with carriers may not be pleased either. These include freight forwarders, ports and terminal operators. At this stage of the debate, the demand side is simply hoping for some amendments to the BER since outright abolition is not the EC’s position. One suggestion from the European Shippers Council is to change the BER from a 30% threshold of trade lane activity to 25% in order to trigger an investigation by the EC into market dominance. Of course, the threshold had been reduced from 35% to 30% when the switch from conference to consortia BERs took place over 2008-2009.

Even the United States offers limited antitrust immunity to international containership lines by allowing discussion agreements among the carriers. These are filed with the Federal Maritime Commission (FMC). Business students might be surprised to hear that it is U.S. policy to grant such a degree of market protection to an industry that is mostly foreign-owned. Even as the industry moved away from U.S.-flagged vessels to flags of convenience (e.g., those granted by Liberia, Panama, etc.) the protection remained. Such is the prominence and necessity of international container shipping to the U.S. economy.

Yet in 2017 a meeting of the industry’s top CEOs in Sausalito, California was raided by antitrust officials wielding subpoenas for information. This nearly two-year investigation was ultimately closed by the U.S. Department of Justice (DOJ) in February 2019 with no charges filed. There was nothing clandestine about the meeting. It was one of the biannual meetings of the International Council of Containership Operators (affectionately known to some as the “Box Club”). Several of its CEOs are members of the WSC as well. U.S. antitrust officials do indeed sit in on these meetings to make sure that the discussions do not veer into overt price-fixing. The group can discuss pricing guidelines (i.e., methods) but not actual prices. These guidelines are also taken by the membership to be voluntary when they set their individual freight rates. Anything more than that would be akin to cartel-like behavior.

Nonetheless, the demand side of the market sometimes raises its suspicions. In other words, when do guidelines become price signals among the CEOs? It certainly is interesting that DOJ felt it necessary to open a formal investigation into an organization it immunized. It was likely in response to recent consolidations among the world’s largest container lines. Of course, the FMC approved all of these alliances in the first place and is aware of the inter-carrier discussion agreements. Thus, the regulators have quite the balancing act to perform.

This limited antitrust immunity was codified in the Ocean Shipping Reform Act of 1998 (OSRA), which prohibited carrier conferences along U.S. trade lanes. What did the carriers receive in return for this loss in market power? A lifting of the prohibition on negotiating confidential service contracts with preferred shippers. Naturally, big shippers like Walmart and Target were more than happy to leverage their ability to fill capacity on trans-Pacific routes from China as international supply chains went into high gear. The power of conferences was greatly diminished anyway due to this hybrid of carrier cooperation and competition.

The FMC is the regulatory interpreter of OSRA. It is also important to note that this limited protection applies only to foreign-flagged carriers. Jones Act carriers (i.e., those performing domestic transport) do not enjoy the protections codified in OSRA. In either case price-fixing is illegal and DOJ has successfully prosecuted cases involving international and domestic trade lanes.

A recent case involved Wallenius Wilhemsen Logistics (WWL), “K” Line Japan, NYK Japan and CSAV. Each paid fines in 2016 for price-fixing along trade lanes leading to the Port of Baltimore. In this case it involved roll-on, roll-off shipments of automobiles and trucks. WWL’s fine after pleading guilty was $98.9 million. A case in a Jones Act trade lane involved Horizon Lines, Sea Star Line and Crowley Maritime paying fines in 2012 related to price-fixing along the U.S.-Puerto Rico trade lane. Horizon Lines pled guilty and agreed to pay a $45 million fine (though it was reduced to $15 million). The complainants in this case were The Kellogg Company and Kraft Foods.

Both sides of the ocean carrier market have one thing in common – each wants certainty. Of course, each side differs on what ought to be certain. The carriers will claim that they are only discussing availability and sharing of capacity (i.e., operational issues). One can argue that this leads to efficiencies through cost control which can be passed along to the customers.

The demand side counters that covert price-fixing (rather than innocent sounding pricing guidelines) serves to keep freight rates higher and not lower. Also, as some claim, carrier operations can involve an alliance speaking as one group when negotiating contracts with tugboats, port operators, etc. A more mercantilist argument may also suggest that foreign-based carriers, to the extent they do try to lower rates, do so only for the purpose of squeezing out non-members in a given trade lane. So, the argument would go, the alliances would be good for customers only in the short run.  

The EC and the FMC regulate an industry with a past legal practice of price-fixing. More of the carriers are foreign and they are further consolidating. Just three alliances control 80% of the world’s container vessel capacity. Their dominance is centered in Europe-Asia and Europe-U.S. trade lanes.

The 2M Alliance is made up of four lines of which Maersk and MSC are the world’s two largest. The Ocean Alliance’s six members include OOCL and CMA-CGM, the world’s third- and fourth-largest. Finally, THE Alliance’s six members includes Hapag-Lloyd, the world’s fifth- largest.

Despite this the industry is characterized by over-capacity. Also, an increase in Triple-E class vessels promises to exacerbate this problem in the years to come. These large vessels of more than 18,000 TEUs provide economies of scale and lower costs per TEU. But the supply chain effects are not always positive. Since liners need fewer vessels when switching over to the largest ones, this means that it takes longer to load and unload them at those ports able to handle them. Thus, from the perspective of the demand side of the market, response time and flexibility are diminished. Only the mega-consignors are able to easily adjust to mega-vessels.

Take an industry with huge capital costs, long lead times in acquiring vessel capacity and couple that with the uncertainty of global market conditions over that long time period. In this context it probably never seems like a good time to invest in fleet size. But periodic investment must take place and it is always a risk-taking exercise. Unless the EU and the U.S. have the stomach for regulating international containership lines like public utilities, the current model of limited antitrust immunity may be the only way to stabilize an inherently unstable mode of international transportation. It is quite the regulatory balancing act.

Less than two months after announcing plans to divest potentially all of its operating segments, except for its less-than-truckload (LTL) offering, XPO Logistics, Inc. (NYSE: XPO) announced that an acquisition is in the works.

In a March 9 press release, the company announced that it has entered into an agreement to buy the bulk of global transportation and logistics provider Kuehne + Nagel International AG’s (OTC US: KHNGY) contract logistics segment in the U.K.

The acquisition includes Kuehne + Nagel’s operations that provide inbound and outbound distribution, reverse logistics management and inventory management. Revenue in these operations are derived from the beverage, technology and e-commerce sectors and totaled approximately GBP 500 million ($656.4 million) in 2019 ($1 equals 0.76 GBP).

In its press release, XPO said that the deal will bolster its contract logistics offering in the U.K., adding 75 facilities and a “blue-chip customer base” to the segment. XPO plans to integrate Kuehne + Nagel’s business onto its technology platform under its pan-European network.

Terms of the transaction that is expected to close in the first half of 2020 were not disclosed.

Equity research analyst Amit Mehrotra with Deutsche Bank noted that the announced acquisition was “a bit of a head-scratcher optically,” but that the deal is likely very small in nature and affords XPO the opportunity to improve profitability on a business that has underperformed.  

“To be sure, we think this is a very small deal despite the big $500 million revenue contribution… sub-$100 million of total consideration is our best guess, which we estimate equates to a very low multiple of trailing EBITDA [earnings before interest, taxes, depreciation and amortization],” said Mehrotra.

Mehrotra said that while his firm views Kuehne + Nagel as “good operators,” he believes that this segment of its logistics business was “barely profitable,” noting difficulty surrounding a large customer contract as a headwind. He continued that this may provide XPO the opportunity to “leverage its technology and fixed cost base to re-rate margins of the business [higher].”

In a separate press release, Kuehne + Nagel stated that the transaction includes its “drinks logistics, food services and retail & technology businesses,” with approximately 7,500 employees.

Kuehne + Nagel has been exploring strategic alternatives for this business segment fo the last year.

“One year ago, we first announced the strategic review of our contract logistics business to improve profitability and focus on our core, scalable solutions. We have now reached a major milestone in this effort, having secured an agreement to sell significant non-core assets in the U.K.,” stated Kuehne + Nagel CEO Dr. Detlef Trefzger.

Kuehne + Nagel said that it was retaining its U.K. contract logistics operations serving aerospace, government and pharmaceutical customers.

As previously announced, XPO’s divestiture plan is to put nearly $13 billion of the company’s $17 billion in revenue up for sale. When announced in January, all units except for LTL were being shopped.

Shares of XPO are off more than 10%, nearly doubling the loss of broader equity markets which continue to move lower on coronavirus concerns.