WhoÆs making money?
Summary of annual survey
' Carrier operating profits sink nearly 65% in 2008.
' Revenue, volume growth were marginal as demand and rates swooned in the last quarter.
' Cutting capacity the major industry goal, but new deliveries will ensure a shippers' market for the next few years.
' First quarter results suggest 2009 will be historically bad.
Out with a groan and in with a whimper.
That was how the liner carrier industry transitioned from the shock and awe of 2008 to the early devastation of 2009. Rates and volume drowned in the aftermath of the global financial crisis and somehow worsened in the first quarter of 2009 to a state that few in the industry ' even longtime veterans ' had ever seen.
In an economic climate that most consider to be the worst in 80 years, the containership industry has been forced to make rapid adjustments in an incredibly dynamic environment. Costs have been slashed, ships laid up, loops suspended or canceled, ship orders delayed, vessels slowed down or rerouted. The list goes on.
The bare facts show that the second half of 2008 was particularly dire, and that 2009 will be much, much worse. But this report is about how carriers fared in all of 2008, and most fared decently. Some even prospered.
Though 2008 will be remembered for bank bailouts and failures, in the container industry, it was characterized by two endemic carrier problems ' overzealous ship-ordering and unsustainable rate-cutting
The roots of the first problem grew earlier in the decade, when carriers were caught unaware by the cargo growth China's admission to the World Trade Organization would elicit. That evolved into a well-documented cycle of ship orders that continued through the first half of 2008.
The second problem started in late 2008 and was a much more fluid situation. Certain lines cut rates in an effort to gain market share, driving rates on key east-west trades down and down for all carriers, until costs weren't even being recovered, much less any profit. Some lines flatly turned down business rather than move boxes at a loss.
It's hard to remember now, but the first half of 2008 wasn't all that bad for carriers. Rates on the transpacific were stagnant, but they were still high between Asia and Europe. It was only when the credit-induced financial crisis spread to Europe in the middle of the year that things turned sour. The subsequent collapse of major investment banks and mortgage lenders induced a spending and lending freeze that killed demand for containerized goods.
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But lines that profited off the spectacular Asia/Europe lane in the first half of the year were in a better position to handle the poor results in the last quarter.
Therefore, 2008 represents a mixed bag. A handful of lines made good money, the middle group made a little, and a small group lost big. All are likely to lose money in 2009.
Of the top five profitable lines in 2008, there are some recognizable names, including the return of Maersk Line as the world's most profitable carrier. The Danish giant's container-shipping division brought in nearly $1 billion in profits in 2008, a near-20 percent rise on 2007. But celebrations were muted, given that Maersk lost $373 million in the first quarter of 2009 and is fighting off its closest rival, Mediterranean Shipping Co., for market share supremacy.
MSC, it should be noted, is a private company for which public financial information is not available.
Where Maersk once controlled nearly 20 percent of global fleet capacity only a couple years ago, that's now down to about 15 percent, according to AXS-Alphaliner. Maersk is not alone in struggling, however. Other top lines posted staggering losses in the first quarter, like COSCO Container Lines ($490 million), APL ($245 million) and China Shipping ($177 million). If losses like those continue, it will surely reshape the landscape of the liner carrier industry for years to come.
As for 2008, 'K' Line, Hyundai Merchant Marine, Hapag-Lloyd and OOCL round out the top five, and Hyundai's ascension is particularly noteworthy. The Korean carrier, which actually carries fewer boxes than its compatriot line Hanjin Shipping, also topped the profit margin table by some distance, earning a 7.3 margin in a year when many of the top lines struggled to earn more than 1 percent.
Fuller Isn't Richer. 'Just because you fill up your ships doesn't mean you're making money,' said Brian Black, senior vice president for Hyundai, which finished eighth in profits in last year's 'Who's making money,' and 10th the previous four years.
'In the transpacific we focused on prudent decisions on pricing power,' Black said. 'We weren't going to engage in port pairs that didn't make sense for us.'
Black also said Hyundai used its strong intermodal network to gain business from other lines that scaled back on intermodal business (Maersk was the most notable to do so in 2007).
'With some carriers pulling out of the (inland point intermodal) market, on imports, it provided us an opportunity,' Black said.
Another factor that drove profits was Hyundai's investment in matching import loads with exports back to Asia. That 'match-back' analysis meant Hyundai was spending less money repositioning empty containers around North America while also tapping into the U.S. export market, which grew until the last two months of 2008.
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| Shen |
OOCL continued its steady profit path, finishing fifth (its third consecutive top-five finish and the only carrier outside of 'K' Line to accomplish that feat). Stanley Shen, investor relations director for OOCL parent company OOIL, said the Hong Kong-based line is focused on profit, not market share (OOCL also finished fourth in operating margin).
'The operating philosophy will tell the difference between the carriers,' Shen said.
He pointed to the sale of OOIL's container terminals division in 2006, a sale that was criticized in some circles but that now seems prescient given carriers' need for capital. The deal netted OOIL more than $1 billion in cash.
'The more cash you have, the more money the bank wants to lend you,' Shen said. 'This time around is no different. If you have a carrier that is highly leveraged, you run into problems. Carriers that have many chartered vessels will have higher cost structures. These are long-term, and when the downturn comes, revenue does not support the charter cost.'
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| Zaninelli |
Ed Zaninelli, vice president of transpacific westbound trade for OOCL, said that unfortunately, the whole industry is often subject to the actions of a few lines.
'There are lines chasing cash, and that undercuts everything in the market,' Zaninelli said at a recent agriculture exporters' conference in June. 'They do it to hang around until they get help from their national government or a conglomerate.'
Cash Rich Is Good. When it comes to figuring out which lines are best placed for 2009, industry analysts have focused on which lines have large vessel order books, as those are the mostly likely to be overleveraged.
'Some ocean carriers are in a better position than others financially, though all are suffering,' said Paul Bingham, director of world trade and transportation markets at IHS Global Insight. 'Those that committed less to new big ship orders in the last few years will obviously be in a better position than those that bet a significant amount of capital on the big ships. There are also those that have other businesses, or state- or partial-state ownership who are in a better position to stand losses in the container market for a few years.'
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| Bingham |
Bingham said that available cash is a better indicator of future prosperity today than year-on-year profits.
'Among the carriers best positioned are those who have done well in recent years and may have retained earnings and debt levels,' Bingham said. 'It is available capital and reserves that matter for survival more than the history of steady results at this point.'
But Shen, while lamenting the herd mentality that brought rafts of orders for larger and larger ships from 2002 all the way through 2007, noted that not all ship orders are created equal.
'OOCL tried to get 10 percent organic growth every year and we ordered vessels in a down cycle,' he said. 'That means our per unit costs were very competitive. Those who ordered later, it will take longer for their ships to be amortized.'
Still, it is impossible to ignore the impact that overcapacity will have over the next few years. A collection of some of the world's most reputed carrier executives have all predicted in the past year that the world economy will recover far faster than the carrier industry can, and that's due almost entirely to an overhang of capacity that looms over carriers like the Sword of Damocles.
'Carriers, nor anyone else for that matter, didn't see the slump coming, so none can be said to be prepared for it,' said Simon Heaney, a consultant with Drewry Shipping Consultants and editor of Drewry's Container Shipper Insight. 'They all mortgaged their future on an assumption of continuous growth that vanished at the worst possible time. It really is a case of whoever has the deepest pockets and cash reserves will survive so those carriers backed either by nation states or big conglomerates should be safe for now at least.'
The Great Equalizer. Though some carriers are more vulnerable, given their debt exposure, overcapacity is, in many ways, the great equalizer. It affects service-focused carriers as well as price-focused ones. And the problem won't be solved simply by carriers folding or being merged.
'It is a mistake to think that major carrier bankruptcies will be the silver bullet that saves the industry as they won't address the big problem of vessel overcapacity and the huge order book,' Heaney said. 'How they must want to press the rewind button right now. With benefit of hindsight, ship owners would have been better off giving all those billions ordering mega-ships to a mad professor with an idea for a time machine.'
But they didn't and so now have to figure out how to minimize losses in 2009.
'For the first time, revenue is below cost in every trade lane in the world,' OOCL's Zaninelli said. 'It used to be that one trade would cover for another, but right now every trade in the world is in the negative.'
So there's literally nowhere to turn for profits, save for those carriers that are diversified in their shipping interests, like the big three Japanese carriers, or even Hyundai. Whereas the container divisions of 'K' Line and MOL (which finished 14th out of 16 carriers analyzed) are separated by 12 places and $960 million worth of profits, they both have other revenue streams, like bulk and car carrier divisions, that can balance out their bottom lines.
Lines like CSAV and Zim, which finished 13th and 16th, lack that balance.
Bottoms Up. The typical reflex when looking at the annual 'Who's making money' list is to look at the top, to see who the most profitable carriers were and how the biggest carriers fared.
But in 2008, some of the more interesting action can be found toward the bottom of the list, like CSAV and Zim, which have had to resort to desperate measures to keep afloat. Zim, which has an extensive order book, has scaled back on services and fought desperately with shipyards in the Far East to delay or cancel vessels it ordered. It has needed the financial backing of parent company Israel Corp. to survive a disastrous 2008 in which it hemorrhaged $332 million in losses.
CSAV seems to be in even more dire straits, as it had to rely on German ship owners from which it charters the bulk of its fleet to reduce charter rates and back a capital infusion to pay off debts. CSAV had a similarly ambitious fleet expansion plan that now seems misguided at best. The Chilean line lost $134 million in 2008, one of only four of the top 20 lines to lose money during the year.
That Zim's and CSAV's troubled both centered on orders for huge boxships touches on another major theme of early 2009 ' delayed or canceled orders. These vessels were ordered as far back as three years ago, when demand was on a continuous rise, and lines worried that they would be left behind by competitors whose fleets would feature huge, fast and efficient ships.
With the correction in demand, there are simply too many new ships coming down the pike, but shipyards don't seem to be very interested in stopping work.
'You can't just pay a $1 million penalty and pull out of shipbuilding contracts,' OOCL's Zaninelli said. 'We've put 30 to 40 percent down and so you can't just walk away. So we're all trying to push deliveries back.'
Unclear Picture. These efforts to delay deliveries have thrown the supply-demand picture even more out of whack, since it's hard to get a true reading on when vessels will be delivered.
'The containership order book is indeed shrouded in mystery right now and our latest forecast is for a global capacity surplus in excess of 3 million TEUs by the end of 2011,' said Heaney of Drewry. 'Forecasting is never easy and as far as the order book is concerned things have been made more difficult due to the potential adjustment via cancellations or delivery slippage. In our last forecast we estimate that only some 65 percent of the 2008-2011 order book will actually be delivered on time.
'To what extent carriers can mitigate things will depend on their successes in getting shipyards to renegotiate contracts either to push back deliveries, cancellations or otherwise, and on that front, carriers with historical ties to yards stand the best chance of getting them to play ball,' Heaney added. 'Order cancellations or defaults are the best hope the industry has of curtailing the excess capacity, but for whatever reason there is a lack of visibility. I think carriers are missing a trick here as more transparency could help push sentiment in their favor.'
Heaney also emphasized that 'any 'cancellation' of boxship orders scheduled for 2010 onwards will not necessarily shrink the order book as there is always the possibility that the ships will still be completed and resold to another buyer.'
If the industry as a whole is unsuccessful at staving off deliveries, then these new ships will flood the market, forcing lines to cascade bigger ships into smaller services. Black, of Hyundai, said that means carriers will take the ships that get cascaded out and either: start new services, sell or charter the ships out, lay them up, or scrap them.
Given the dire predictions for the next two to three years, large-scale scrapping seems a good bet.
Zaninelli, for one, said that the bigger, newer ships will help the lines become more profitable once demand returns and in the meantime, they are still more efficient to operate (even half-full) than older, small vessels.
'It's cheaper to keep the larger ships running,' he said. 'Smaller ships will be laid up and everything will be cascaded down. We'll run 5,000-TEU ships as feeders if we have to.'
Another development that emerged from 2008 and the beginning of 2009 was the idea of strange bedfellows. Maersk's collaboration with CMA CGM was the most prominent, but carrier executives predict more odd partnerships to bloom.
'The thing to watch is the alliances which are morphing into different forms,' Black said. 'CMA has decided to ride with Maersk, which always went alone.'
He also pointed to the recent agreement on services between Evergreen Line and China Shipping.
'These are signals about what the industry is projecting,' he said. 'If the industry corrects itself next year, this will sort of dissolve because most carriers are fiercely independent and like to control their own destiny.'
CMA CGM, which fell from the second most profitable line in 2007 (after profits were restated in its 2008 earnings report) to No. 6 in 2008, said the partnership with Maersk allows it flexibility in an unforgiving market.
'The group was prepared, and took in due course the right decisions which will help us outlive the crisis,' CMA CGM explained in an e-mail to American Shipper. 'We are rationalizing, even merging some lines on slackening markets in order to meet the changes in demand. We have and still are developing strategic partnerships generating important economies of scale, like the recently announced joint services with Maersk on transpacific
routes and between the Mediterranean and Asia. These agreements with Maersk allow CMA CGM to reassess the best way to service some markets where our share is low, either by transshipment or by direct services.'
The French line, which relies heavily on chartered vessels, said that strategy is working because the carrier is able to return vessels or negotiate new charters in a down market.
'Due to the considerable number of vessels reaching the end of their charter period in 2009 (around 180), we are also able to adjust our capacity where needed by ending some charter agreements, and to renegotiate charter rates at beneficial market levels, which is clearly an asset in the current market conditions,' the line said. 'As an example of CMA CGM's flexibility, we have no idle vessels.'
Out Of Business. Next issue: Who will go bust?
Looking at the profitability table, it's easy to suggest that those that lost significant amounts in 2008 and aren't government- or conglomerate-backed are in peril. But most agree that no one substantial will fail this year. That's in part because, who's in a position to buy?
'I don't believe any lines will go out of business in 2009,' Zaninelli said. 'There are too many Catch-22s.'
Shen agreed.
'Mergers and acquisitions are probable, but with any of the big guys, it's unlikely,' he said. 'There are no free agents.'
Bingham, meanwhile, said that financing such a takeover would be next to impossible.
'It is possible that some firms with (large vessel) orders fold, though we are skeptical about acquisition, given so many existing ships are available at such low rates directly already,' he said. 'Most of the large liner companies are unlikely to either fail outright or be sold, as lining up financing for a takeover would be difficult, even if sale prices are low, and many of the larger companies with state ownership interests are unlikely to be permitted to fail.'
Until then the lines will focus on cutting costs, increasing revenue and keeping customers happy.
Better Rates Please. Nearly every major line, as well as the Transpacific Stabilization Agreement, has attempted to introduce general rate increases into the major trades, but those seem to be falling on deaf ears. Shippers know that rates are rock-bottom and aren't willing to pay what carriers consider to be sustainable rates.
'Roundtrip rates do not cover costs,' said Brian Conrad, TSA's executive administrator. 'You can't keep a business going when every box you're moving is a loss. A lot of the revenue growth for carriers last year was due to bunker recovery. Core revenue remained pretty flat.'
Shen said the downturn has prompted the curtailing of what he called 'non-stop flights' ' i.e. express services with few calls offering fast transit times between major hubs.
'In order to cope, carriers are having to add ports of call and they're having to reduce the overall number of loops,' he said.
OOCL and Hyundai both said the key ' now more than ever ' is focusing on long-term customer relationships.
'You depend on the customers you're working with,' Shen said. 'Direct customers take a long-term view. They want the market rate, but they want to know that you'll be around. Forwarders look at the spot rates. We're looking at our customer base and looking at who is having financial problems themselves, so it goes both ways.'
Black said the more experienced and knowledgeable customers know that rates are getting too out of whack.
'They're getting a little wary when the ocean cost from Hong Kong to Los Angeles is less than the rail from L.A. to Dallas,' he said. 'The ocean transportation piece is a bargain and getting better.'
Black said about 55 percent to 60 percent of customers 'totally understand' the problems that fuel price volatility brings to carriers and are willing to share the fuel costs.
And he also sounded a note of optimism.
Things Looking Up? 'I know it sounds strange to say, but things are not as bad as they were three months ago,' Black said. 'First quarter exports (from North America) were not as strong as last year or the first quarter of 2007, but they weren't necessarily bad. Those raw materials are going to come back to us in some form at some time. And we probably could have sent more exports, but imports were down to such an extent that there was a lack of equipment.'
Black said he doesn't envision a peak in inbound to North America this year, but that there will still be a traditional Christmas season.
'People will buy gifts at Christmas,' he said. 'The high-end and low-end retailers should do O.K. The guys in the middle will be hit, but I think they understand this is a short-term problem.'
As for 2009, everybody is predicting doom and gloom.
MOL is forecasting losses in 2009 similar to what they saw in 2008, though on three-quarters of the revenue they had in 2008. In its 2008 annual report, 'K' Line projected a 24 percent drop in revenue for 2009 and an 80 percent drop in profit, which already slid 43 percent in 2008.
Maersk is also forecasting a loss.
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| Kolding |
'More likely than not we will see all liner companies in red territory in 2009,' Maersk Line Chief Executive Eivind Kolding told Reuters in March. 'Most likely, some liner companies will have to cease business if freight rates do not come up. I have no idea who that will be, because we are all different, but it will not be Maersk.'
Drewry is projecting huge losses for the industry, and has suggested that carriers have not laid up nearly enough capacity to account for falling demand.
'One scenario that we have put forward would see revenue in 2009 down by as much as $65 billion based on a 7.5 percent decline in global volumes and a 20 percent reduction in freight rates,' Heaney said.
'If these circumstances materialize, the industry-wide operating loss this year could be as much as $32 billion, given an operating margin of -17 percent. Clearly, this is not a sustainable situation and eventually there has to be a point when even governments and major shareholders decide after yet another quarter with multimillion-dollar losses that enough is enough. If things continue as they have been it is just a matter of time before a big carrier hits the wall, although quite what the reverberations will be is hard to say.
'One thing is for sure, the ordering frenzy of 2007 virtually guarantees a shippers' market for the foreseeable future,' Heaney continued. 'That gamble has seriously backfired and will shape the fortunes of the industry for quite some time.'