Separation Anxiety

We’re nearly halfway through 2011, approaching what is traditionally the strongest time of the year for carriers. The post-holiday drowsiness of the first two months has long since past, spring fever is fading and, there it is, the peak season is upon us! Over the next several weeks, ships will fill, revenues will rise, terminals will hum with activity, and the availability of equipment and space will tighten. It’s an invigorating time, and proof once again that hard work has its rewards.

It also will go a long way toward determining what kind of year it will be for carriers that over the last several weeks released first quarter financial reports. Based on those, as well as a continuous flow of information from speeches, presentations, forecasts and prognostications, the first quarter yielded few surprises. Volume, revenue and costs rose, but rates fell, and carriers lamented their inability to recover fuel price increases. With apologies to Major League Baseball’s Manny Ramirez and his fans, this is “the industry just being the industry.”

On closer examination, however, there’s more separation within the industry than meets the eye. First, some critical companies that in the past were willing, even anxious, to share information, are being very quiet. And I’m not talking about Mediterranean Shipping Co., the Swiss operator that has never revealed its results.

One carrier reported only volume and revenue, as though the report got cut off in the printer. Others reported annualized numbers, and although you can extrapolate the quarterly figures with a decent calculator in a few minutes, why weren’t they just included? And, of all the ocean shipping companies that have reported, only one reported a first quarter profit.

And that’s where the true separation begins, because that company is A.P. Moller-Maersk, the world’s largest ship operator, which reported a $438 million operating profit for its container shipping division. But it also warned about the outlook for the rest of the year, and CEO Nils Andersen said other carriers would likely raise rates later in the year “because our competitors definitely need it.” Although that’s logical, when has the industry acted logically, other than in 2010?

There is, I think, much more to this. It wasn’t an idle thought blurted out innocently in the course of an interview. It was part of a series of remarks, comments and announcements from a company that appears to be separating itself from the crowd. While apparently making more money in the first quarter than all other reporting lines combined — indeed, the rest may lose as much as Maersk made — the Danish company also is investing up to $3.7 billion in its core business, ordering 10 of the largest container ships ever built, with an option for 10 more. The company also plans to invest billions in oil platforms and terminal projects.

While others in the industry make headlines for their need to raise cash by borrowing and by selling assets, Maersk has the wherewithal to continue to invest heavily in container shipping and in other enterprises it deems worthy.

Is there more to this strategy than Maersk, like many entities in other lines of business, is investing in its future? Is it an effort to point out the obvious, that it’s a successful multinational, multi-industry enterprise out to impress Wall Street? Well, not so much on that front, because Maersk stock is only traded in Denmark, and at a staggering $9,644 a share — even after the markets’ recent retreat — there aren’t many who own it.

No, I think Maersk is trying to send a message to the industry and the investment community that it is different. It is in an entirely different place.

There are other signs of separation, not only with Maersk but within the industry as a whole. Take a close look at 2010’s results. While all the carriers enjoyed a very good year, there are significant differences in some key areas, one of which is margin per container. Without getting into minutiae, let’s keep it simple: Look at the gross revenues and subtract the operating costs; take that result and divide it by the number of loaded containers the carriers moved. The result is the “margin per container” before taxes, cost of capital and other expenses. What you will find is a surprisingly wide spread for 2010: one top 10 carrier at about $85 per container, and others at $120 to $165.

If you understand the issues, that’s a huge differential, and if you’re the carrier at $85 a container, you have some serious operating cost problems, some serious revenue-per-container issues or a combination of both.

Digging deeper, you’ll see other manifestations of cost problems in areas such as capital. The point is there are apparently few truly financially healthy container carriers, and in an era of competitive vessels costing more than $150 million each (and you can’t build just one!), it appears the industry is reaching a point where major structural change will occur. For more on this, check back next month.

Gary Ferrulli is president of Global Logistics Consulting in Chandler, Ariz. Contact him at

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