Maersk profit slides, still bests peers
Maersk Line saw its first half operating profit drop 67 percent to $438 million, the line said in its interim financial statement Wednesday.
The steep decline in profit, which includes a $29 million operating loss in the second quarter, still places the Danish line in an enviable position relative to most of its competitors, who have sustained losses or secured lower profits in the first half.
The line said declining freight rates — which it blamed on the nervousness of carriers in less secure financial states — and higher operating costs hurt its performance, even as demand has risen within the 6 percent to 8 percent band it had projected at the start of 2011.
Liner revenue rose 5 percent in the first half to $13.2 billion.
Revenue for the A.P. Moller – Maersk Group (parent of Maersk Line) rose from $27.4 billion to $29.9 billion, primarily due to price increases from its oil and gas business. Group operating profit rose 20 percent to $6.5 billion, while net profits rose 8 percent to $2.7 billion.
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'Our situation is being hurt by financial pressure and nervousness from our competitors,' said Nils Andersen, Maersk Group chief executive officer. 'Our focus is to make a better margin than our competitors, so we can invest in our future when others might be struggling.'
During the first half, Maersk ordered a series of 20 18,000-TEU vessels, the largest containerships ever commissioned, to be delivered from 2013 through 2015 and deployed on the Asia/Europe trade. Andersen said the company is not concerned about the effect economic uncertainty in Europe might have on its ability to fill the ships and take advantage of its low slot costs.
'We ordered these vessels based on slow growth rates, not on a return to boom times,' he said. 'We are a leader on the Asia/Europe trade, we will fill these ships. We have big volumes today, and it would not be a problem to substitute volume from smaller vessels with these vessels.'
Maersk's order seemed to set in motion a new cycle of megaship-ordering by smaller lines, many who eschewed such large vessels before. Andersen said he was surprised so many orders were placed.
'It actually has come as a surprise,' he said. 'When you look at the financials of a player with a 2 percent global market share who believes he can place an order for 13,000 TEU-ships, unwise decisions are being made. We have a strong financial position. The pressure on rates will work on a long-term basis for us by bringing more common sense to the marketplace.'
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When asked if Maersk's large vessels were straining the capacity situation on the Asia/Europe trade this year, Andersen said the line hasn't put any such vessels into service in 2011.
'It's our competitors putting vessels into service they ordered in '07 and '08,' He said. 'Our vessels are coming into the Asia/Africa and Asia/South America trades and they are full. The vessels we have ordered will come in 2013 through 2015, and by then the situation may look very different. Everyone operating Panamax and these smaller vessels will probably have to leave the Asia/Europe trade.'
Andersen was then asked if he foresaw any consolidation given the rate pressure the industry was under.
'I think the chance of seeing a short-term failure is not that big,' he said. 'The realistic hope if we have another low period of earnings is that some of the smaller competitors will realize the big trades are not places where they should be in. Overcapacity and fragmentation has given the industry unnecessary volatility. It might be that a couple tough periods will help.'
Maersk's first half volume rose 6 percent to 7.6 million TEUs, slightly short of the global 8 percent growth in volume, which is short of the estimated 9.5 percent growth in capacity in the first half.
The line's average rate dropped 3 percent in the first half to $1,450 per TEU, while average fuel price rose 26 percent to $578 per ton of bunker.
Maersk's exposure to higher fuel costs is significantly reduced due to its extensive oil and gas business, which turned in a bumper first half operating profit of $4.4 billion (up 44 percent), due to a 44 percent rise in the price of oil.
As far as the group's other transportation and logistics activities, Damco, Maersk's freight forwarding subsidiary, had operating profit of $36 million (a 20 percent increase) on revenue that fell 3 percent to $1.4 billion. Damco's air freight and ocean freight volumes increased 11 percent.
Maersk's terminal operating arm, APM Terminals, saw operating profit fall 41 percent to $359 million, on volume that grew 3 percent to 16.2 million TEUs.
The volume rise was actually 8 percent in like-for-like volume, when eliminating the effect of APMT's disposal of some terminal assets last year, including its share of a terminal in Yantian.
APMT revenue grew 6 percent to $2.2 billion.
Andersen said he expects to see APMT contribute even more to the group's revenue in coming years, as the percentage of non-Maersk business increased from 43 percent in the first half of 2010 to 46 percent this year.
Maersk Line, meanwhile, took delivery of nine new vessels in the first half, representing 41,000 TEUs of capacity, bought two second-hand vessels (2,000 TEUs), and sold 10 vessels (36,000 TEUs) while one older container vessel (5,000 TEUs) was recycled.
In the second half of 2011, nine container vessels (accounting for 55,000 TEUs) and five multipurpose vessels are to be delivered. A total of 42 container vessels are on order for delivery in 2012 to 2015.
Maersk Line's operating costs rose 9 percent in the first half, including 14 percent in the second quarter, which Andersen pinned on unfavorable currency exchange with the U.S. dollar, rising fuel costs and higher intermodal and terminal costs.
'The issues we've had in the first half are that terminals and intermodal costs have increased, partly because of their own higher fuel prices,' he said. 'These are things that are hard to battle. The cost in other currencies is increasing. It's a tough market to control costs at the moment. We've also seen somewhat lower capacity utilization, which of course impacts the unit costs.'
Andersen said Maersk has ceded some market share, specifically in the transpacific and transatlantic trades, due to unfavorable rates. He said those trades have historically been 'unattractive.' Overall, he said rates have been flat for a couple months 'at a level that for the industry is not very attractive.
'Rate development in the second quarter was more or less in line with what we expected, maybe a little lower,' he said. 'We know we are outperforming the market, in terms of EBIT (earnings before interest and taxes) relative to turnover. We were 6 percent better than the market in Q1 and it looks like around 3 percent in Q2. We should be performing better. We're well-financed, have good vessels and we're the market leader.'
Maersk is forecasting a modest positive result this year for the liner business, which includes subsidiaries Safmarine and MCC Transport.
'The guidance is pretty vague — a modest result is not a specific number,' he said. 'We've left it that way because we don't know what the pricing development will be in the second half. We don't see any signs of a slowdown of the first half growth rate, neither for Europe nor elsewhere. We've given a little share and had less utilization than we would like because of the rate situation. If rates stay low for a while, it will be tough on everybody, but we think we will be one of the companies that get through the best. Everything is possible, but with present rate levels, we expect a modest positive result for the year.' ' Eric Johnson