Wednesday, September 30, 2020

COVID-19 and The Economics of Blank Sailings


2020, the year of COVID-19, will be remembered for years to come by future generations. Production, trade, employment and economic activity by and large, all saw significant and very worrisome declines; apart from one industrial sector which, to the contrary, realized handsome profits: Liner Shipping. This was made possible by the ‘withdrawal’ of shipping capacity (20-30%) from the main trade lanes (something that has come to be known as ‘blank sailings’), which allowed carriers to maintain tariffs at profitable levels, assisted at the same time by low fuel prices.

The withdrawal of capacity from OQc to OQm, and the consequent maintenance of tariffs at the higher level Pm, rather than Pc (above graph),  does not only deprive shippers (and consumers) of a substantial part of their consumer surplus/welfare (equal to PmPcGB) but, for society too, it results in a substantial misallocation of resources equal to QmQcEG (returning ships to their quasi-bankrupt beneficial owners or anchoring them at a layup berth represent a cost and a waste).

In Industrial Economics, the distance AB is known as Lerner’s Degree of Market Power. That is, the ability of the carrier to keep tariffs above marginal costs and thus appropriate part of consumer surplus. In free competition, this distance would be zero.

The above ramifications of blank sailings would not have been possible with a more pro-active and less lenient Regulator, especially in Europe. 

The comments made above should not be taken as an attack to this most useful of institutions in shipping -global shipping alliances- but only as a criticism to the Regulator whose role is to ensure that  the whatever privileges are rightfully afforded to shipping (conference price-setting or alliance capacity coordination) are not abused by inadmissible concerted business practices, even when such practices are deemed necessary for the ‘survival’ of a sector crucial to our trade and prosperity.


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