People make money on container shipping, not in it. The business provides consistent profits for terminals, equipment lessors and non-asset intermediaries, but seldom for liner carriers.
Soren Skou says this situation “is just not sustainable.” The CEO of Maersk Line says the world’s largest container line is determined to improve service and “get a reasonable share of the value this industry is creating.”
Skou isn’t the first liner executive to lament carriers’ chronic failure to earn a consistent return on investment. Even when they could legally fix rates, liner operators struggled with profitability. They’ve endured decades of boom-and-bust cycles that tend to have shorter booms than busts.
True, carriers have created many of their own difficulties. They have a record of cutting rates needlessly, often without being asked. In their defense, they’re in a tough, competitive business that requires heavy capital investment years ahead of unpredictable demand.
Container shipping also is a business in which scale matters. That’s a big reason carriers place so much emphasis on bigger ships and increased market share.
Often the pursuit of market share comes at the cost of profit. How else can container lines’ $6 billion in losses in 2011 be explained?
Competitors pinned much of the blame for last year’s rate wars on Maersk. The largest container line increased its box volume 11 percent and achieved a 15.5 percent market share last year, but lost $602 million after a record profit of $2.6 billion in 2010.
In an interview, Skou said Maersk accepts some, but not all, of the responsibility for last year’s price war. With rates recovering, he said Maersk is determined to continue its newfound pricing discipline “and change the dynamics going forward.”
Container lines have created value for customers by enabling shippers to build supply chains around low-cost international production. He said sophisticated shippers value reliability over price. They don’t want to pay more than competitors, but would like more stability, Skou said.
“I think many customers are as frustrated as we are with the volatility in rates,” he said. “It’s really not helpful to anyone. It’s difficult to explain. One year it’s one way; next year it’s the other way. I think for everyone it would be helpful to have a more disciplined approach.”
Skou said Maersk is determined to take a disciplined approach by emphasizing profitability and a company theme of “back to black.” Maersk has declared it won’t seek to further expand market share, but will defend its current share “at all costs.”
Will competing carriers be satisfied with Maersk’s cease-fire term? Or will they seek to boost their own market shares by trying to grab a piece of Maersk’s?
The answers, and Maersk’s response, will show whether carriers can make money in container shipping.