Soren Skou, chief executive officer of Maersk Line, outlined plans to improve service to customers on Monday during a keynote speech at the Journal of Commerce‘s 13th annual TPM conference in Long Beach, Calif.
Skou said the company is taking steps to improve revenue and reduce costs, telling the audience he expects freight rates in the transpacific trade to be higher in 2013 than in 2012. “It probably says more about where the spot market was last year than it says anything about 2013,” he said.
Skou also said his company is for the moment not placing orders for additional ships or refrigerated containers. (However, Maersk has a number of ships on order, notably the 24 largest containerships ever designed, its 18,000-TEU “Triple E” vessels. Five of those ships will be delivered this year.)
“But it is my hope and expectation that we will get profitablity back to a level where we can continue to grow and invest in this business we all love so much,” he said.
Skou noted the company has had a sharp financial turnaround in the past year—in the first quarter of 2012 it was losing money at the rate of $8 million per day or $250 million per month. But by increasing rates and reducing costs, it reported a modest profit for the year.
“We have to fight to make this a more sustainable business, and I am sure we can do this with the help of all the partners and customers we have,” he said.
Skou outlined plans to improve customer service, announcing a “customer charter” that he said was developed after consultation with about 1,000 customers. Skou said the company will make these improvements for all customers, not just a select few.
The charter targets improvements in eight areas:
- Time to book cargo. The company seeks by the end of 2013 to confirm 100 percent of all bookings within two hours. Today, the average is nearly three hours.
- Documentation. The company wants to reduce turn time and improve the accuracy of documentation. Skou said the goal is to have 95 percent accuracy and turn documents in eight hours compared with the company’s current global performance which is 92 percent accuracy within 12 hours. “Of course we should be at 100 percent, but we are setting a target which will mean a significant improvement,” he said.
- Amendment turn time. He said the company seeks to reduce turn time on amendments to one hour. Currently 96 percent of amendments are completed within three hours.
- Prearrival notification. Skou said the company provides prearrival notices today 99.98 percent of the time within 24 hours globally, but wants to be at 100 percent. In the United States, he said for longer voyages, notification is provided more or less five days in advance 100 percent of the time.
- Invoicing. Skou said invoicing has been the biggest customer issue for Maersk, with only 88.3 percent accuracy today. By the end of the year, he said the company seeks to raise that accuracy level to 92 percent by the end of the year. Skou said “Frankly, for me personally as the CEO of a $27 billion company it is downright scary to know that 12 percent of our invoices are not correct.” He added the company’s goal was “not nearly good enough, but it is a first step on a journey that hopefully brings us to 100 percent invoicing correctness.”
- Dispute resolution. Maersk wants to shorten the time for dispute resolution from the current average of 9.6 days to seven days.
- Accessibility. Skou said most business is conducted with computers, but said the company must still be accessible by telephone. Maersk is installing new telephone systems in North America and globally that will allow it to measure how quickly calls are answered. While the company does not have statistics on its performance today Skou said its goal is to have all phone calls answered within 30 seconds by the end of 2013.
- Service recovery. Skou noted that weather, strikes and other events can disrupt service. The company wants to reduce service recover turn time – the time it gives itself once it knows there’s a problem to the time it gets back to customers with a plan – from its current average of 54 hours to 12 hours by the end of the year.
Skou said he expects carriers to change the routing of transpacific services between the U.S. East Coast and East Asia so that they use the Suez Canal rather than the Panama Canal. Maersk recently announced plans to change its TP7 service from Panama to a Suez routing.
“It’s a real trend,” said Skou, who noted while 90 percent of all transpacific services to the U.S. East Coast went via the Panama Canal in 2008, he expects that share to drop to 60 percent by end of this year. (This issue is the subject of an article, “The other way around,” in the March issue of American Shipper.)
“We can’t figure out how to make a profitable service from Asia to the U.S. East Coast via the Panama Canal,” he said.
While the industry has been able to take advantage of big ship economics on services calling the U.S. West Coast, he explained that has not been possible because of the size restriction on ships using the Panama Canal. He also noted that it takes about three times as much bunker fuel to move a container to the U.S. East Coast on an all-water service when compared to a service to the U.S. West Coast.
Skou said he expects 30-40 ships currently trading between Asia and Europe will be displaced into Asia-U.S. East Coast routings as even larger ships are put into the Asia-Europe trade land.
He also said some of those ships currently used in Europe-Asia services may be put into other long distance trades, for example on routes from Asia to South America via the Cape of Good Hope.
Skou said the shipping industry has done a good job of reducing costs, adding rates since 2005 have remained stable, as carriers have absorbed general inflation and dramatic increases in bunker costs by building larger, more fuel efficient ships, implementing slow steaming, and taking costs out of their organizations.
He said the industry did a remarkably good job of managing capacity in 2012. He estimates capacity grew 8 percent last year, but headhaul capacity grew only 2 percent. The industry was able to cope with that 6 percent gap by effectively reducing demand 3 percent through slow steaming and 2 percent by scrapping ships and 2 percent by idling ships, putting them into layup. He expects demand this year will grow 4-5 percent, capacity about 10 percent, and that similar tools—slow steaming, scrapping and idling will be used to bridge the gap.
“We have to deliver slightly lower cost each year to fight inflation so we can continue to provide a competitive freight cost to the market,” he said.
Skou said the industry has done a good job of managing short-term changes in demand, noting carriers cancelled 31 sailings between Asia and the United States due to reduced cargo volumes because of the seasonal slowdown around Chinese New Year.
“It is an really important and quite sensible strategy by the industry because it allows us to save costs, because we are not sailing half-empty ships, we are filling up some ships and not using others and saving the fuel cost,” he said.
Skou noted shipping rates go up during the peak season, but fall during the slack season, but that those lower rates do not attract additional cargo.
“We do not create any new demand by lowering prices. We are just making the cake smaller,” he said. He said Maersk will seek to keep a steadly level of freight, and use capacity to manage cost going forward.
Skou said since 2005 the average EBIT (earnings before interest and taxes) margin of the overall container industry has been about 1 percent and is not sustainable.
“What it means is our shareholders don’t want us to invest any more money in this business,” he said, adding banks that have traditionally lent to shipping are saying they will have to increasingly rely on bond financing.
And he pointed out that many German KG companies and other ship chartering companies are struggling financially.
“I’m not saying all this because you should feel sorry for us. As I says to my team when we complain about freight rates, look at the contracts—it has two signatures the customers and ours,” said Skou, a line that brought a wave of laughter from the conference’s audience. “I’m just saying this picture is not sustainable.”
He said investment in the industry is slowing, with the orderbook falling from a peak of over 60 percent in 2007 to just about 20 percent today. He said this reflects a slowdown in container growth.
Skou said the company has announced plans to increase rates, noting many reefer customers are fighting hard against the company’s announcement last year that it would raise rates by $1,500.
“We are willing to lose some business on this because we cannot continue to provide the level of service and invest in the equipment if we don’t have a reasonable return,” Skou said. – Chris Dupin
