Scale of Change

For four of the most tumultuous years many of us have seen in the past half-century in terms of economic activity, consolidation in the transportation world has been like the weather, to borrow a phrase — everyone talks about it, but no one does anything about it.

MISC Berhard, the relatively diminutive Malaysian ocean carrier, may not be a trendsetter in the bare-knuckled competition for shipping business in the Pacific, but in announcing its impending withdrawal from container business, the carrier made two important statements about the direction of the shipping industry.

First, the company demonstrated that the potential for consolidation didn’t end with the sudden end to the global economic downturn in 2010.

In fact, in different parts of the world and in different ends of the transportation market, MISC and American Airlines, with its entry into Chapter 11 bankruptcy protection, demonstrated that the troubles on balance sheets that have piled up in recent years can’t be wiped away easily.

MISC’s worries, like American’s, have been building over time, and the profit the ocean operator reported earlier this year didn’t change the weak underlying fundamentals.

In retreating to what the company believes is a more financially viable business serving the energy segment, MISC is demonstrating that consolidation may not occur on a grand scale but may come instead in the varied choices smaller carriers make in specific services, port calls or frequency.

Shortly before MISC’s announcement, Horizon Lines said it would pull out of the trans-Pacific arena and the three-carrier Grand Alliance said it would drop one of its four Asia-Europe loops. Those moves don’t have the sweep of the rumored consolidation of the three large Japanese carriers, but they will diminish capacity just as effectively as a big-splash merger of ship operators.

But the more important statement in MISC’s withdrawal is the demonstration of clearheaded, rational business principles in its business decision. We’ve seen many carrier executives in recent months clearly dismayed at the apparent chaos in their markets and their seeming inability to halt the irrational pricing that is eroding their financial stability.

MISC isn’t lamenting the state of the industry, saying instead it is acting on the basic expectations of the return on investment it can expect in a business that is in the midst of fundamental change.

“The radical change in the operating dynamics of the liner industry, which is driven by high operating cost and rapid changes in global trade patterns, is challenging the validity of today’s operating models,” the company said. “With the pursuit of size being the center of this change, leading operators are now testing the size limits of vessels in order to maximize economies of scale and realize greater cost efficiency.”

For MISC, “the cost to remain relevant in the liner business is untenable.”
Remaining relevant means achieving scale, because scale, and the economic efficiencies it brings, clearly is becoming the governing principle of shipping economics.

Paul Page is executive director of The Journal of Commerce. He can be contacted at 202-355-1170, or at ppage@joc.com. Follow Paul Page on Twitter, www.twitter.com/paulpage.

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