Hapag-Lloyd pledges better service, profitability

Hapag-Lloyd pledges better service, profitability

Hapag-Lloyd has made public its Strategy 2023 that the carrier believes will simultaneously improve its profitability and service levels. Photo credit: Hapag-Lloyd.

Hapag-Lloyd unveiled its five-year strategy today, prioritizing profitability, service, and cost savings in a container shipping environment offering diminishing scale returns and rate levels undermined by steadily rising operating costs.

The German carrier expects its Strategy 2023 plan will bring cost savings of $350-400 million by the end of 2021 through a focus on improving quality for customers, selective global growth, and a targeting of customers prepared to pay more for better service.

Rolf Habben Jansen, CEO of Hapag-Lloyd, said the industry was at a tipping point. “Size is not the name of the game anymore, but customer orientation. It is obvious that customers expect more reliable supply chains, so our industry needs to change and invest more,” he said at the Hapag-Lloyd capital markets day.

“At the same time, we know that people are prepared to pay for value. Going forward, delivering value to get the most attractive cargo on board is at the heart of our new Strategy 2023. To be number one for quality is the ultimate promise to our customers and a strong differentiator from our competitors.”

Service quality

Hapag-Lloyd research found that service quality mattered to more than half of its market. This is hardly surprising as the service levels provided by container shipping lines fell to woeful levels through the peak season. September’s schedule reliability tumbled to the mid-50 percent level on Asia-Europe and into the 40 percent range on the trans-Pacific.

Asia-North America West Coast schedule reliability was found by SeaIntelligence to have decreased by an incredible 23.3 percent year over year in the third quarter, falling to 54.3 percent in August and 44.2 percent in September. Asia-North America East Coast reliability dropped by 6.2 percent over the two months to 65 percent.

This was supported by CargoSmart data that revealed schedule reliability of carriers on the trans-Pacific fell from 61.2 percent in August to 44.1 percent in September.

To address the service concerns and provide a more consistent service, Hapag-Lloyd’s Strategy 2023 will identify customers that are willing to pay more for the better quality service and try to bring in more of those shippers to improve the customer mix.

This “optimized revenue management” is aimed at ensuring the most attractive cargo gets on board. Hapag-Lloyd will offer a premium product to customers whose needs are not addressed by the base product, with the service levels offered matched by premium prices.

It is a strategy that appears to be working for APL’s Eagle Guaranteed service that has been expanding from the trans-Pacific to other trades, although the exact number of containers that are moved and the revenue derived from this segment is not clear.

Maintaining service quality while managing capacity

However, improving service levels while at the same time actively managing capacity on the major east-west trades to better match supply and demand could be tricky. Maersk Line chief commercial officer Vincent Clerc said in the carrier's third-quarter earnings call last week that deployed capacity was constantly under review.

By "right sizing the network for lower demand," Maersk, like Hapag-Lloyd, is also prioritizing profitability in the years ahead. “If we feel demand is not strong enough, we will withdraw capacity. If not, we will not … we have to have that flexibility to improve the asset utilization and keep the costs as low as possible,” he said.

As Hapag-Lloyd embarks on its 2023 strategy, the carrier said it would be trying to turn itself into a more agile, dynamic, and analytically driven organization, with greater investment in digitalization and automation. As an example, the carrier announced a plan to increase the share of its online business via the web channel to 15 percent of overall volume in the next five years.

Financial targets by 2023 will focus on generating economic value by delivering a return on invested capital that is higher than the weighted average cost of capital. This implies an earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of approximately 12 percent.

Contact Greg Knowler at greg.knowler@ihsmarkit.com and follow him on Twitter: @greg_knowler.



Comments

But what is "quality service" and how much more does it cost? And what guarantees are there that it actually will be better than the lowest-cost service? This is the problem that I run into constantly with my colleagues. We all say that we want to prioritize "quality service" over cost, but ultimately we pick the lowest cost and then complain when that lowest cost service doesn't meet the need. Then we demand that our service requirements be met at the lowest cost. We struggle with this every day.

Two things here, engineer-326 that is the lifelong dilemma in the business, shippers say they want better service and they are rarely willing to pay for it. And quality service is what you define it as, be it transit time, on-time schedules, space and equipment availability, digitized order to cash processes, customer care with knowledgeable humans to quickly and easily resolve issues - you define those and determine what you are willing to pay for it. Then the decision making comes into play, your organization always pressuring you for lower costs? or improved services? if both, then a lengthy realistic discussion has to take place. Second issue is how does Hapag, in an alliance with Yang Ming and ONE, neither of whom are top tier service providers, become one?