Maersk Line earned $1.3 billion in 2005 and lost $568 million last year. The world's largest container carrier is determined to return to profitability, and is implementing radical cost-cutting measures that reduce inland service options and increase sailings to East Coast ports.
The restructuring, announced two months ago, won't sit well with some customers, Maersk officials acknowledge. "There will be some bits of cargo we won't be able to carry," W. Graham Love, senior director of the liner company's western region, told a recent meeting of the Los Angeles-Long Beach Propeller Club.
But Maersk said its changes extend beyond cost-cutting. The Danish carrier said it's responding to fundamental changes such as continually rising rail rates, an apparently permanent Asia-U.S. trade imbalance and the need to cut costs by simplifying a complex intermodal service network.
Maersk used to give its U.S. customers 250,000 options for moving their containerized shipments into and out of the country. Maersk's intermodal network had been rendered more complex and costly when it was overlapped with the even more complicated one it inherited from P&O Nedlloyd. When Maersk management informed its U.S. staff that the routing options would be reduced to 50,000, the news was cheered.
Many U.S. customers will hardly notice the changes that Maersk will put into effect next month. Instead of having five or six inland routing options from two or three ports, customers may have only two intermodal options from one seaport.
Other customers will see more dramatic routing changes. For example, shippers and receivers in the Ohio Valley whose shipments to and from Asia moved exclusively through the West Coast may be encouraged to route their cargo through East Coast ports. With intermodal rail rates climbing rapidly, this rerouting should enable Maersk and its customers to save on inland costs.
"We're driving out inefficiencies in our network," said Gordon Dorsey, a Maersk spokesman. "We're pairing up ports with those inland destinations that make sense."
Cargo interests and rival carriers are watching the changes closely. Maersk last year had market shares of 14.2 percent of U.S. containerized imports and 13.8 percent of exports. That, however, did not translate into profitability last year, when Maersk slashed rates to maintain market share after the line encountered difficulty digesting its acquisition of P&O Nedlloyd.
In shipping, as in other businesses, reducing unnecessary costs is often more desirable than increasing marginal revenue. A dollar saved goes directly to the company's bottom line, while a dollar earned may contribute only pennies after related costs are subtracted.
Inland intermodal costs are ripe for efficiency improvement. Love, who previously worked in Maersk's European offices, said he was amazed to find how complex routing in the U.S. is compared to inland moves in Europe.
The U.S. intermodal network, with multiple options for serving inland destinations, developed in the 1980s and 1990s when intermodal rail transportation was relatively cheap and ocean carriers were able to absorb the costs. Over the past three years, as demand for intermodal service outstripped supply, the railroads significantly increased their rates.
That has left ocean carriers with two choices: shed unprofitable routing options, as Maersk is doing, or continue to serve low-density routes but increase their rates. Some lines are choosing the latter course.
APL Ltd. is not considering any changes to its intermodal U.S. network, said Bob Sappio, the company's senior vice president of trans-Pacific trade. APL will continue to serve all of its inland destinations, but will not be "opportunistic" and cut its rates to lure business away from Maersk, Sappio said. "We want to go up on our intermodal rates," he said.
NYK Line is taking a similar approach. Peter Keller, president of NYK Line North America, said the carrier would continue to offer multiple routing options to many destinations, but will price its services at a level that is compensatory under NYK's system of operating. If certain shippers find that the price and service fit their needs, they may migrate to NYK, he said.
East Coast ports could benefit from Maersk's restructuring. It is apparent that recent increases of 25 to 40 percent in intermodal rail rates have caused Maersk to reroute some of its customers' business to East Coast all-water services from Asia rather than shipping the containers by rail from West Coast ports. An East Coast discharge with intermodal rail service to destinations in the Ohio Valley, for example, can cut the cost of inland transportation by several hundred dollars compared to the longer rail haul from the West Coast.
Other factors also are coming into play. The International Longshore and Warehouse Union's contract on the West Coast will expire in July 2008, and some shippers already are positioning themselves to avoid West Coast ports in the event of labor disruptions, said Bob Weiss, an independent administrator of the Food Shippers Association of North America. Some shippers who prefer a West Coast routing might opt to ship through Vancouver, British Columbia, but Canadian rail service has been unreliable because of weather and labor problems in recent years.
If Maersk intends to increase its East Coast discharge, it will not be able to do so with its existing all-water services from Asia. Some port and shipper sources have indicated that Maersk intends to start at least two new all-water services this year, one from Singapore through the Suez Canal and an expedited service from South China through the Panama Canal to New York with fast ships.
The latter service, with an 18-day transit from South China to New York, could start this fall and would compete with APL's 17-day mini-landbridge service through Seattle for New York textile and apparel importers.
Dorsey said it is too early to discuss any new service options that Maersk may be considering for the coming year. Maersk will certainly have the East Coast terminal capacity it will need, however, as its New Jersey terminal has unused capacity and Maersk's sister company APM Terminals will open a new container terminal in Portsmouth, Va., this summer.
If Maersk intends to retain most of its existing business, it may have to offer more attractive all-water rates to convince customers to reroute some of their shipments from the faster intermodal services through the West Coast. With most carriers or carrier alliances announcing plans to add all-water strings from Asia this year, freight rates may be under pressure on those routes if capacity exceeds demand.
Carriers also will consider their total investment when weighing the benefits of intermodal service through East Coast ports versus West Coast gateways. Although rail rates to the Ohio Valley from the East Coast are lower than from the West Coast, all-water services generally require eight vessels compared with five for trans-Pacific services, and the additional capital costs must be considered, Sappio pointed out.
Rail rates aren't the only reason for Maersk's service restructuring. Like all carriers, Maersk is attempting to deal with the large and growing U.S. trade imbalance with Asia. Shipping lines now carry 2.5 containers to the U.S. for every export container to Asia. That ratio is up from 1.7 to 1 in 2000.
By concentrating its assets on high-volume intermodal routes, Maersk will be better able to manage the round-trip movement of its containers and should be able to return more of the containers back to where they came from, which generally is China, Dorsey said.
Maersk also is restructuring its West Coast services by dropping one of its calls in Tacoma and using larger vessels on the high-density Southern California route. Maersk will continue to serve Pacific Northwest shippers by integrating its Transpacific 2 service into three other trans-Pacific services.
Maersk has abundant capacity coming on line this year, with more than 20 vessels of 6,000- to 14,000-TEU capacity scheduled for delivery. The largest vessels will enter service in the Asia-Europe trade, but the steady stream of deliveries will give Maersk additional options for West Coast services for vessels that can handle 7,000 TEUs or more. Many carriers are increasing their West Coast capacity this year, not by adding new strings but by upgrading the size of the vessels in existing services.
Dorsey said the vessel side of Maersk's business is "not unlike" the intermodal rail side as the carrier attempts to make greater use of its assets in the most heavily used transportation corridors.
The unanswered question is how customers will respond to Maersk's decisions based primarily on reducing its own costs. Customers in low-volume corridors may resist routing options that result in longer transit times or increased costs for using trucks instead of intermodal rail.
Dorsey said, however, that customers also would benefit as Maersk simplifies what had become an extremely complex and costly network in the U.S. "We don't want to pass our inefficiencies on to our customers," he said.
Bill Mongelluzzo can be contacted at email@example.com.
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