This story originally published on JOC.com.

Carriers began the year emboldened by improving freight rates in the wake of the tighter capacity caused by the collapse of Hanjin Shipping last autumn, but any optimism has faded as rates slid in the months since then, sapping liners' demands for higher contract rates, according to consulting firm AlixParters.

Hopes for higher rates have been undercut by continuing overcapacity, which is being fueled by the delivery of scores of large new container ships that were ordered years ago.

The carriers are trapped in a vicious circle of declining revenues and rising debt that management consultancy AlixPartners termed "grim" in its latest shipping forecast. In a March 31 webcast presented by Stifel Capital Markets, two of the consultancy's partners, Jim Blaeser and Henry Pringle, found only a glimmer of light in their otherwise gloomy assessment of the industry's outlook.

"The industry performance continues to get worse and worse, and we don't see a real recovery shaping up just yet," Blaeser said.

In the 12 months through September 2016, those carriers that report earnings recorded total revenues of $151.2 billion, a drop of 7.8 percent from the same period of 2015. In the same period industry earnings before interest, tax, depreciation, and amortization (EBITDA) of $9.9 billion was down by 42.1 percent from $17.1 billion a year earlier.

The root cause of the industry's plight is the lingering effects of overcapacity, produced by what Pringle called the "arms race" among carriers that ordered ever-bigger ships in an effort to reduce slot costs. But demand has not kept up with the growth of capacity and is unlikely to do so this year or next.

At JOC's 17th Annual TPM Conference in March, Alphaliner executive consultant Hua Joo saidovercapacity will exert significant pricing pressure on the container industry over the next two years, but 2019 could be the year the industry meaningfully turns things around. Tan said over 150 ships of 10,000 to 22,000 twenty-foot-equivalent units are set to be delivered over the next two years, and that capacity growth globally during that time will be about 4 percent annually. That growth will only add to the roughly 7 percent of capacity that is currently idled.

Although carriers have pared back orders and are scrapping Panamax vessels, overcapacity persists and continues to undermine carriers' attempts to increase rates during this year's contract-negotiating season, AlixPartners said.

"Coming into this negotiation period it was critical for carriers to keep that momentum [of higher rates] going, but what we're seeing now on the trans-Pacific lane is that the longer trans-Pacific negotiations go on, the lower those rate levels are getting," Blaeser said.

Contracting in the eastbound Pacific is progressing slower than usual this year owing to uncertainties over the services that will be offered by the restructured carrier alliances, the financial health of some shipping lines, and carrier resistance to demands by the largest retailers to drop rates below $1,000 per 40-foot container to the West Coast.

Although contract rates $1,000 and greater are noticeably higher than those in the 2016 to 2017 service contracts, they are still lower than the 2015 to 2016 rates of about $1,600 per 40-foot-equivalent unit to the West Coast and $2,900 to the East Coast, according to JOC.com interviews with beneficial cargo owners, carriers, and analysts.

The dire environment is likely to lead to further industry consolidation, which has already swallowed up seven of the top 20 carriers and brought the reorganization of many of the remaining carriers into three vessel-sharing alliances. The spate of mergers and acquisitions has already burdened the balance sheets of the acquiring carrier with new debt, suggesting that the target of any new acquisitions will be smaller carriers.

"As industry consolidation got underway last year, carriers' total debt increased by 11 percent to $100.3 million in the 12 months through September of last year, thanks in part to the new debt carriers took on to fund acquisitions. CMA CGM, for example, borrowed most of its $2.4 billion acquisition of APL, against the backdrop of its revenue falling by $1 billion over the last year, and they took a loss of $450 million," Pringle said. "Even among carriers that are not participating in this kind of activity, carriers are just not generating much cash flow to service existing debt levels."

He expects interest coverage (cash flow minus interest and capital spending) to fall from 0.5 percent in the 12 months through September of last year to zero or even negative in the same period of 2017.

There were some "green shoots" in fourth quarter 2016 when some carriers reported "slight enhancement" of their results, Pringle said. But that was not enough to rescue full-year results. "Yang Ming, for example, just reported a $500 million loss for the year, which was double 2015, so despite the fact there are some positives being seen, it is still quite a grim picture."

Other carriers, too, have posted poor results. Maersk Line reported an annual loss of $376 million for 2016. Hapag-Lloyd slumped to a 42.8-million-euro ($48.8 million) net loss in a "very challenging" first quarter from a 128.2-million-euro profit in the previous year. Cosco Shipping Holdings, the container arm of China Cosco Container Group, lost $1.4 billion in 2016.

The carriers' poor financial results have raised the risk of more bankruptcies, according to AlixPartners' analysis, which showed that the industry's z-score has fallen back to the lowest levels since the consultancy started tracking it. Even after the Hanjin bankruptcy was removed, the industry's average z-score was still only 1.0. A z-score below 1.81 is considered distressed, a level not seen since 2010. "The likelihood of bankruptcy remains strong if carriers are not able to maintain and build on improved rate levels seen in fourth quarter 2016,"AlixPartners said.

"The bankruptcy of Hanjin was a wakeup call for a number of shippers who relied on the carrier as a major partner for importing and exporting and for shippers who relied on its alliance partners to carry Hanjin boxes," Pringle said. "Their boxes were lost for months, so shippers are more and more concerned with the financials of the carriers."

"After a promising start to 2016 when carriers were able to command higher rates, we've seen the rates gradually drop back to levels higher than we saw last year," Pringle said. "Carriers are demonstrating some ability to command higher freight rates, but nowhere near as much as they would have hoped."

The delivery of ever-larger container ships that had already been ordered several years ago continues to negatively impact the entire global container industry, including shippers, charter ship-owners, port operators, and inland rail and motor carriers.

As freight rates have declined, freight forwarders have come under pressure because the margin between what they can charge shippers and what they pay carriers has shrunk. When the freight rate was $3000 and the forwarder charged $100, it wasn't as important as when the rate is $300 and the forwarder charges $100.

"Shippers we work with are beating up on their forwarders' margins," Blaeser said. "There is going to be increased leverage on the carriers to push around the forwarders in rate negotiations. While shippers are looking for lower rates, carriers may offer shippers better rates directly."

"The number of 18,000-[twenty-foot-equivalent unit] vessels will more than double over the next couple of years," Pringle said. "This will create massive pressures across the supply chain. They carry much more so there are fewer port calls and reduced frequency." This creates backlogs at ports, especially on the US West Coast, as terminal operators, truckers, and railroads struggle to cope with the sudden surge in volumes whenever a megaship calls. "This presents significant questions to shippers as to how they assign their supply chains."