Carriers’ Sunken Treasures

If this were a boxing match, the bout would be stopped for excessive bleeding.But it’s not, and for the liner operators issuing their latest round of financial reports, the suffering will continue until their aggressive rate hikes and cost cutting reverse the tide — or the final bell rings.

“Third-quarter carrier financial results prove that although lines have been cutting costs through slow steaming, vessel layups, vessel operation sharing and staff culling, these are having a relatively small impact on overall profitability,” said Neil Dekker, editor of Drewry Shipping Consultants’ Container Market Quarterly.

“It seems that the only way carriers can get back in the black is to focus on rates. There have been some encouraging signs on this rate front, but there is a long way to go before these are at the break-even level on some key trades,” Dekker said.

Some of the liner companies issuing reports for a variety of time frames in the past two weeks said rates and volume are improving and that their losses had bottomed out. Others warned it’s too soon to tell and the outlook will depend on the price of bunker fuel and consumer demand for the full year and beyond.

Neptune Orient Lines, which posted a third-quarter loss of $139 million compared with a $35 million loss a year earlier, said it expects “adverse business operating conditions” to continue. “In view of the severity of the downturn in container shipping, the company expects to incur significant losses in the fourth quarter of 2009 and at least through the first half of next year,” it said in its earnings announcement.

It’s a familiar refrain throughout the global supply chain, starting with international carriers on whose ships freight transportation originates and ending with the trucking companies that most often deliver the goods to their destinations — and everyone in between.

Evergreen Line, saying it got hit by a “financial tsunami,” posted a third-quarter loss of $269.7 million, compared with a profit of $45.5 million a year earlier.

Despite its net third-quarter loss of $338 million, compared with a year-earlier profit of $26.8 million, Hanjin Shipping said it believes rate-recovery attempts in the Europe lanes and bunker adjustment charges in the trans-Pacific will yield positive results.

But all three Japanese carriers cut their forecasts for their full fiscal years as earnings for the six months ended Sept. 30 fell below earlier forecasts. NYK Line and “K” Line forecast continuing losses for the full year, while MOL still forecast a full-year profit, albeit much lower than its previous forecast.

The litany of losses continued with the other carriers that report their results. Based on the evidence presented, it seems logical that the lines that don’t report results, including privately owned Mediterranean Shipping Co. and CMA CGM, are experiencing similar pain in their bottom lines, although the French carrier said it expected to break even in December and would be profitable next year.

The 800-pound gorilla on the high seas, of course, is Maersk Line, which lost $539 million in the third quarter ended Sept. 20, compared with a profit of $179 million a year earlier. The Danish carrier’s losses for the first nine months of the year totaled more than $1.5 billion, leading its parent, A.P. Moller-Maersk, to forecast it will lose more than $1 billion for the year as a whole.

In the face of these losses, Maersk Line cut costs this year by eliminating 2,000 jobs, laying up 10 percent of its global fleet, taking 3 percent (53,000 TEUs) out of service, and scrapping eight older vessels. It cut total fuel consumption by 13 percent through the third quarter and achieved further capacity reductions by slow steaming.

But these measures were not enough to offset the decline in revenue, which fell 32 percent to $15 billion in the nine months through Sept. 30 from $22 billion a year earlier. The main problem was low rates, which were down 30 percent in the first nine months from the same period last year and 32 percent in the third quarter.

“Volumes are not the problem,” Nils Smedegaard Andersen, CEO of A.P. Moller-Maersk, said in a conference call with analysts. Volumes were down 5 percent in the first nine months, but only 3 percent in the quarter from a year earlier, which Andersen said was “not too bad,” in view of the global recession.

Maersk’s volume increased sequentially in the third quarter, thanks largely to backhaul volume (from Europe and the U.S.), which were up 35 percent, while head-haul volume (from Asia to Europe and the U.S.) fell 6 percent.

“The major headache for carriers is the head-haul trans-Pacific trade, where there is no way of improving contract rate levels until mid-2010,” Dekker said. “While we may have seen the bottom of the market, and Drewry is forecasting a better rate environment next year in the east-west trades, carriers will continue to face a very challenging 2010.”

Andersen said container rates rose off their low levels at the start of the third quarter, but are still running below the average for the first half of the year and significantly below the levels at which they started the year.
“They have fallen a long way,” he said, “and there’s a long way back until we reach a level where container companies can make money.”

Contact Peter T. Leach at pleach@joc.com.