Challenging waters for global container carrier industry

30 June 2015 Consultancy.uk

The container carrier industry has seen unfavourable winds and choppy seas since the start of the financial crisis, with revenues of the top 15 publically traded players dropping 16% from over $200 billion back in 2007. With heavy investment in capacity and falling demand, and with shippers cutting into bunker price reductions, the future remains mixed for the industry. For those looking for improved profitability, exploiting data to understand and streamline operations and continued focus on core-capacity are key.

In a recently released report from AlixPartners, titled ‘Finding Focus: The 2015 Container Shipping Outlook’, the management consultancy explores the fundamentals currently blowing through the industry, as well as trends mapped out that parties may be able to exploit for long term navigational significance. The report looked in particular at the financial developments of the 15 largest publicly traded carriers.

Container Shipping

Financial straights
The consultancy finds that the financial position of the industry players surveyed has improved since last year. Carrier revenue in 2014 decreased only 3% on 2013, compared to the drop of 5% between 2013 and 2012. The revenue for the top players in the industry as a whole, still remains 16% below its pre-recession high of more than $200 billion.

While revenues are declining, the response from container companies to shore up their business position has seen Earnings Before Interest, Taxes, Depreciation (EBITD) increase 7% on 2013. This increase comes on the back of cost cutting measures, whereby the industry managed to streamline operational expenses by $7.6 billion – a 4% drop – from 2013.

The report finds however that, with the EBITD margin only decreasing 4%, the cost-reductions realised are less likely to be operational improvements and more likely to be due to asset dispositions (and the associated decreases in depreciation). In other words, the picture remains less rosy than the numbers might reflect.

2014 industry EBITDA

Underlying performance remains unsustainable
While there have been some improvements to key indicators, the capital expenditures (capex) rate has seen a decrease in recent years, with investment into large projects decreasing to $18 billion in 2014 from $21 billion in 2013 and $25 billion in 2012. Improvements in capital management alongside the improvements to operating expenses have seen the cash from operations increase significantly since 2012, from $9 billion to $16 billion in 2014, or a 9.5% percentage of revenue.

These moves have seen the industry become slightly more resilient, yet still well within the distress zone, illustrated by the authors through an analysis of the so-called Altman Z-score for bankruptcy risk. The various key business indicator ratios averaged across the players tallied to 1.23 in 2014, up 0.11 points from a score of 1.12, but still a distance out of the distress zone (above 1.81) and far away from the safety score of 2.99. As a whole the studied players have not having seen safety since before 2007.

Altman Z-score publically traded container carriers

Bunkering down
One boon for the industry in recent times has been the massive decrease in bunker price, representing 22% of the total shipping container unit costs in 2013. AlixPartners highlights though that the reduction does not necessarily translate into a significant long term operating cost benefit. One reason is that shippers will likely use the reduction to pressure container operators to further reduce already rock-bottom freight rates, siphoning off the benefits of reduced fuel prices. A second reason is that bunker costs have historically been contained through slow steaming. With the reduction of the cost of energy, companies can ramp up the speed to increase throughput and revenue – yet in doing so, further increase overcapacity and the potential benefits of the decreased energy costs.

Bunker price drop

Market trends
According to the authors, while the industry’s long term outlook remains choppy, there are still considerable internal opportunities that can be leveraged, with better focus on core capabilities such as shipping capacity and serving customer demand, likely to improve overall profitability of carriers. One trend is the move toward core-business capital investment – into increasingly bigger ships – and divestment away from what is seen as non-core assets, related particularly to port ownerships.

The recent history of historic high oil prices has too seen carriers begin a programme of investing in the economies of scale – with bigger and bigger ships in both the Asia–North America and Asia–North Europe trade lane, with increases of 19% to 6,566 TEUs and 32% to 10,559 TEUs, respectively since 2010. The number of mega-vessels (more than 13,300-TEU capacity) is forecasted to double by the end of 2017, and is set to account for more than 10% of global TEU capacity.

Debt of carriers analyzed and global fleet capacity

This trend toward bigger ships and away from non-core business assets, has seen the total debt profile of carriers decrease, while their total capacity continue to increase, with debt down from $107 billion in 2013 to $92 billion in 2014 while capacity is up from 16.9 million TEU to 18.9 million TEU in the respective years.

Besides a trend toward bigger ships, the consultancy too finds that there may be considerable improvements in the understanding of customers as well as the streamlining of delivery. With continued demand instabilities and over-capacity, AlixPartners notes that carriers may need to consider focusing on route profitability, selective customer targeting, and smarter allocation of in-demand resources. While the information is already contained in the data many companies have available, they are to date insufficiently leveraged for more profitable business decisions. “Carriers struggling to find the true profitability of their customers, lanes, and services portfolio should consider increasing their investments—in terms of resources, time, and cash—in this critical piece of business intelligence that will enable them to find a focus that’s been lacking for decades”, conclude the authors.

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