Maersk’s second-quarter earnings reveal a company delivering stronger-than-expected profits and not chasing market share, but also how far the world’s largest container line still has to go to realize its integrator ambitions. Much will hinge on whether new integrator-focused offerings, some of which have been taking shape in the US market over the last several months, connect with customers.
The strong quarter for Maersk — in spite of US-China tariffs that the carrier warned could reduce up to 1 percent of global volume next year — will strengthen its resolve in making what amounts to an existential bet that the integrator path is the best response to the commodification of ocean shipping. Reporting its fourth-straight quarter of profit ($154 million in net profit), earnings of Maersk’s ocean segment before interest, taxes, depreciation, and amortization (EBITDA) had a margin of 14.9 percent. That’s slightly better than Hapag-Lloyd’s margin of 14.7 percent for the second quarter.
The quarter’s focus on profitability was evidenced in Maersk’s volume growth of 1.4 percent in the April-June period, which “was below global market growth and hence Maersk have once more reduced their global market share slightly,” noted Lars Jensen, CEO of Sea-Intelligence Maritime Consulting.
“However, this paved the way for a slight freight rate increase [up 1.5 percent on a year-over-year basis] in a market where rates otherwise have been under pressure,” Jensen said.
Maersk’s conservative approach to capacity is in line with the focus on profitability. “We maintain that we want to stay around 4 million TEU of deployed capacity,” CEO Soren Skou said. “We will need some extra tonnage chartered in because we have ships retrofitting scrubbers, and [we] have invested a little more capacity in slow-steaming this year. But we want to remain disciplined on capacity and stick to our guidance of 4 million deployed capacity because it helps drive utilization up and unit costs down.”
Skou has set a 2023 target to make landside logistics and other non-ocean services account for a much larger share of the company’s earnings. To transform the company into a self-described integrator in container shipping, which implies involvement in end-to-end transits, change will have to accelerate. Excluding the impact of the closure of container production facilities, non-ocean revenue in the second quarter rose 2.1 percent year over year, to $2.9 billion. By comparison, ocean revenue accounted for more than $14 billion in the second quarter.
Non-ocean revenue “is an area where we in the coming quarters will aim to do better,” Skou said during an earnings call on Aug. 15
Besides return on invested capital (ROIC) after tax, Maersk said it is tracking its transformation into an integrator by measuring non-ocean revenue, gross profit growth of logistics and services, synergies realized through acquisitions, and cash return on invested capital, according to a second-quarter interim report.
Landside reach expands
In an Aug. 16 interview with JOC.com, Narin Phol, regional managing director at Maersk North America, highlighted how the company’s integrator strategy is manifesting itself in the US market, pointing to the use of terminal and landside assets to provide faster cargo delivery. New products offering faster cargo release from terminals and simplified transloading parallel new flexibility in how shippers book ocean freight and obtain support on customs compliance.
“A perfect example of the integrator vision come to life is in our Maersk Accelerator product,” said Phol, under which cargo will be delivered anywhere within a 50-mile radius of the Port of Los Angeles within 48 hours of discharge. This is accomplished by connecting APM Terminals, part of Marersk, with the carrier’s warehousing/distribution management capabilities and truck providers, which cuts average delivery times by three to five days.
Maersk in January also began offering an integrated ocean and transloading product using warehouse facilities in Southern California in which the through bill of lading will be on a single invoice. The product was originally sold through Damco, which Maersk last year restructured as a pure forwarder after incorporating logistics services on top of ocean services.
Maersk said it has already doubled volumes on its destination cargo management solution, offering large and medium-sized US retailers tracking of their shipments on the water, forecasting of discharge dates, and handling of pick-up orders to truckers in advance of the vessel arrival.
Of its non-ocean services, Maersk warehousing and distribution products, which include cross-dock and transload operations, have seen the fastest growth. Volume rose 9.8 percent in 2018 and is forecast to expand 10 to 15 percent in 2019 compared with last year. The company has expanded its warehouse footprint by 35 percent since January 2018.
As part of its integrator strategy, during trans-Pacific service contract negotiations in the spring, Maersk rolled out a four-tier ocean allocation offering, which provides so-called basic weekly allocations spread evenly over the 52-week life of the contract, to an unlimited option, giving all volumes allocation. Lastly, with the integration of customs brokerage Vandegrift complete, Phol said Maersk is winning new business due to the transparency and simplicity offered via its track-and-trace module, known as Maersk Customs Navigator.
Maersk hints more products will be available to US shippers later this year, in addition to one that penalizes shippers that fail to deliver cargo as booked online and rebates them if the carrier doesn’t keep up its end of the booking. Maersk Spot is awaiting the greenlight from the Federal Maritime Commission before it can be rolled out on US trades later this year. The product, which since its launch in June now accounts for about 8,000 TEU weekly, or 8 percent of the carrier’s total spot cargo, helps Maersk further cut costs by reducing no-shows, thus improving utilization. Maersk has shown it can cut costs; now shippers will determine whether they need the carrier to be an integrator.