There are no sure bets in shipping, but container leasing comes close. Box lessors profited throughout the recession, boosted their returns during last year’s recovery and expect to thrive even if demand slumps again.
Publicly traded lessors reported solid second quarter profits and say they expect growth to continue despite a soft peak season. Lessors’ utilization rates exceed 98 percent as capacity remains tight and financially strapped carriers rely more heavily on leased containers.
“I think the industry is still in the early stages of a strong demand period,” Timothy Page, chief financial officer at lessor CAI International, told a recent conference sponsored by investment bank Dahlman Rose. “In the worst recession in the last 50 years, we still had healthy margins and positive cash flow. It’s a great business from a credit perspective.”
CAI’s second quarter operating earnings before interest and taxes more than doubled to $16.9 million. Textainer’s rose to $81.3 million from $41.2 million. Bermuda-based TAL International’s adjusted pretax income soared to $51 million from $22 million.
The lessors’ sunny outlook contrasts with the up-and-down performance of their main customers, ocean carriers. Container ship lines lost more than $15 million in 2009, recouped much of their loss in 2010, but are sinking back into the red this year.
Unlike carriers, which order ships with useful lives of 25 years but price most of their services under one-year contracts, leasing companies buy equipment with a 12- to 15-year lifespan and match their investments with comparatively long-term revenue streams.
Lessors contract with customers for a variety of rental deals, primarily long-term leases that typically are five to eight years. They also manage third parties’ fleets for a fee, and provide per-diem leases in which a user pays a premium rate in exchange for freedom to return a box when it’s not needed. Used containers eventually are sold for prices that currently are about half the cost of a new box.
It’s a business model that yields steady results. Textainer, whose nearly 18 percent share of the leased-container market makes it the largest lessor, has been profitable for 25 consecutive years.
“Ship lines have a long asset cycle and a short revenue cycle. We have a short asset cycle and a long revenue cycle,” said Brian Sondey, CEO of TAL International. “We’ll never have the kind of profits the carriers had in 2010. But by the same token, we’ll never have the kind of losses they had in 2009.”
Stock prices of publicly traded lessors such as TAL, Textainer and CAI have slipped in recent weeks amid concerns that soft cargo demand will reduce carriers’ need for leased boxes. Some carriers, such as CSAV, have returned surplus equipment to lessors.
One possible cloud over lessors’ futures is the risk that a troubled carrier may go belly-up. But Sondey said lessors tend to be paid during carrier restructurings, partly because carriers need leased containers to operate. For most ship lines, he said, leased containers account for only 2 to 3 percent of operating costs.
Carriers are relying more heavily on leasing companies. Since the recession began, carriers’ traditional 60-40 ratio of owned-to-leased containers has slipped below 55-45. Lessors supplied 65 percent of new boxes in 2010 and are expected to account for more than 60 percent of orders this year.
Lessors don’t expect a quick return to carriers’ traditional ratio of owned-to-leased boxes. “I believe their thinking has changed,” Sondey said. “I think these guys are realizing how important money is. They’re directing their scarce capital toward financing their ships.”
High prices for new boxes have contributed to carriers’ lack of enthusiasm for container purchases. Box manufacturers’ prices peaked early this year at nearly $3,000 per dry 40-foot container. In recent weeks, they’ve retreated to about $2,400, but remain well above the $1,800 to $2,000 of a few years ago.
Used-container prices are about $1,400 per 40-footer. Most secondhand equipment is used for storage or for one-way shipments to remote locations from where the container isn’t likely to be returned.
Prices for new equipment spiked after a dearth of orders forced Chinese container factories, which produce almost all new boxes, to close during the recession. Shippers and carriers encountered container shortages last year when cargo demand revived faster than container production.
Production has returned to an estimated 3.5 million 20-foot equivalent units this year, close to pre-recession volumes. Current production, combined with factories’ inventories, is expected to keep pace with expected demand during the next two years, ocean shipping research analyst Alphaliner said in a recent report.
When cargo demand slackened and box manufacturers’ inventories rose this summer, leasing companies quickly reduced orders for dry containers. Textainer didn’t order any dry cargo containers between July and September.
Lessors continue to add refrigerated containers. SeaCube has ordered $400 million in new equipment, mostly reefers, this year. Carriers and lessors expect demand for refrigerated containers to grow as conventional ships are retired and emerging nations develop appetites for meat and fresh produce.