Next up: consolidation

What does it mean if the largest container line in the world is making money while most of its peers are less profitable or struggling? Where will it lead?

A gradually emerging theme during the past two years is that Maersk Line is achieving profitability while many of its smaller competitors are struggling. “Maersk’s core EBIT margin of 8.2 percent is expected to be one of the highest among the carrier’s peers, as Maersk continues to outperform the rest of the market,” maritime research firm Alphaliner said in a recent report. “It’s been the same story since 2012.”

Maersk Line says it’s had a 5 percentage point advantage in terms of EBIT margin compared to the rest of the industry for seven consecutive quarters, and has now widened the gap to 8 to 10 percentage points. This is essentially because Maersk has led the industry in an all-out scramble to cut costs at the expense of virtually any other consideration.

By building bigger ships that lower unit costs, improving port productivity and other operations, selling off non-core assets such as buildings and slow-steaming to reduce fuel costs, carriers led by Maersk have taken control of the cost side of their businesses. It’s a horse race to become the lowest-cost carrier that enables the winners to better withstand the inevitable onslaught of rate volatility.

It’s now largely accepted that rates are going to wander wherever they may go based on the realities of supply and demand in any given trade lane, at any given time. So, as a carrier CEO, the best you can do is to be better prepared than the next guy when the market turns against you, as it eventually will. And that means having a lower-cost base, because if you don’t, and you incur losses, you have to turn to bailouts or asset sales that eventually can threaten the business. 

“We are now seeing many other Top 20 carriers following Maersk Line’s example in an attempt to reduce costs through optimization of core processes,” SeaIntel Maritime Analysts wrote in its weekly Sunday Spotlight on Aug. 24.

Where this gets interesting is that, where Maersk can be expected to gain further cost advantages if it can implement its 2M vessel-sharing agreement with Mediterranean Shipping Co. on the east-west trades, which is planned to begin in early 2015, other carriers appear to be running out of options for further cost-cutting. Maersk will get access to MSC’s largest ships, and vice versa, so by putting their customers’ containers on larger ships versus the smaller ones they use today, they will gain economies of scale through lower bunker costs.

But other carriers are showing signs of stress in their efforts to keep pace with Maersk on the cost side. Veteran industry sources believe most of the success carriers have had in cutting costs have been tied to fuel — that is, through slow-steaming. But that is a one-time benefit that, once implemented, is banked.

MOL, a Japanese carrier, saw gains in cost-cutting through slow-steaming, larger ships and by joining the G6 Alliance. But in its quest to adequately defend itself against rate volatility, it’s hitting a wall. “Regardless of how strenuously costs are reduced, however, there will be little improvement in earnings if more of the savings are lost to falling freight rates,” MOL President Koichi Muto said on July 30 in conjunction with release of its full-year earnings, showing a $105.8 million loss for the container division in the year ending March 30, a loss bigger than the previous year. A decline in average freight rates from 2012 to 2013 “erased all gains from cost-cutting, the weaker yen and lower bunker prices,” Muto said.

“The less-competitive companies have reached a point where they cannot bear any further decreases in freight rates,” said Toshiya Konishi, MOL’s managing executive officer.

Maersk Group CEO Nils Andersen echoed this point in the company’s second-quarter earnings call on Aug. 19. “I continue to believe that, with the whole industry on average being very close to a zero EBIT margin, rates are low for the industry as such, and at some point the customers will have to accept rate increases. And I think this — the poor results of most of the industry — reflects this situation. There is just not room for cutting rates any further.”

The inescapable conclusion is this: Rates can fall further if the market dictates. Carriers can’t make rates rise. They can’t convince customers to make rates rise. They can’t adjust supply and demand to make rates rise. And with no freight rate recovery on the horizon possibly for years, weaker carriers are boxed into a corner. Nor can alliances get much bigger. That’s why I think the industry is beginning a new phase of consolidation. Hapag-Lloyd and CSAV, and Hamburg Sud and CCNI is just the beginning.

Contact Peter Tirschwell at ptirschwell@joc.com and follow him on Twitter: @petertirschwell.

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