The U.S. economy, and in sympathy, the world's economy had begun slumping as much as a year ago, about the same time that most of the world's container carriers were in the middle of a buying spree for new tonnage. In fact, the investments weren't limited to vessels; they also included terminals, equipment, and systems, while international air freight carriers were acquiring planes in the meantime.

Carrier economics are largely driven by asset utilization, so when cargo growth slows and new assets are received, the impact goes straight to the bottom line.

It should be noted that world trade may have flattened, but the world's long term dependence on trade will certainly continue, in our opinion, as companies are linked to foreign sources and overseas markets.

The retailer who in the past had a source for gloves in the U.S., but instead has found a preferable source in China, may well not have the option today to go back to the U.S. glove producer.

On the selling side, international markets present not only a scale extension and market diversification, but also a necessary part of the firm's revenue strategy. So the challenge facing the lines may be one of timing more than poor buying decisions, but the current financial problem remains.

What is the outlook for the carriers in this setting? One answer is to lay up or otherwise reduce tonnage, and restore the balance between supply and demand. This would be an unusual initiative in the container trades, but certainly not in the shipping industry generally. Tankers are laid up on a regular basis, as are bulk carriers, and indeed some discussions have started concerning container ship lay-ups.

The U.S. military represents a potentially expanding market in a war effort on terrorism, but not enough of one to offset the capacity gains. On the commercial side, shippers are pressed to reduce costs, the supply-demand relationship is in the shippers' favor, and the pressure on rates will continue.

Are there costs left for the carriers to reduce? The past few years have seen some very real cost reductions by many of the container carriers, but there is a question of how much cost savings from operations remain, particularly from within a given carrier organization.

Are there cost savings to be achieved by merger or acquisition? Definitely. Mergers go where alliances can't-to collapsing the capital and asset structure of two companies into one, reducing indirect and overhead functions, and reducing the number of players in the marketplace, thereby improving the effectiveness of rate actions. Adding to favorable economics of merging, the poor year ahead in demand versus capacity, and the idea of removing a competitor from the marketplace, and the result is likely to be a consolidation in the industry, most likely before the fall peak season.

Is there an avenue for revenue enhancement? Yes. Carriers that provide value-added logistics services have an opportunity to differentiate themselves and thereby create margin. Without that differentiation, the business of carrying containers is largely a commodities game-supply/demand balance with capacity the key ingredient to the determination of price.

By adding services that separate the transportation and logistics provider, price becomes more closely connected with the value created for the shipper or consignee. And with shippers quickly gaining sophistication in the use of supply chain tools and developing quantitative measures for supply chain enhancements, the providers have a realistic opportunity to create value and get paid for it.

These value-added logistics services have another benefit to the carriers-driving more revenue and margin through the same physical plant. A warehouse may have to be rented or additional staff hired, but for the most part the underlying investment stays the same.

It should be interesting times in the year ahead in the liner shipping industry. Stay tuned.