Global container shipping industry in choppy waters, says AlixPartners

The ocean container-carrier industry has entered choppy waters following a continued demand-supply imbalance. Revenues have dropped 15% since 2011, while high-debt ratios remain a concern, pushing the industry average into distress. One way out is through consolidation — although integration remains a key ocean to bridge in some cases, requiring clear strategy and implementation to stave off disaster.

The shipping container industry has had it rough since the financial crisis struck and global demand for goods begin to decline. Over the course of 2015, container freight rates dropped considerably. Spot rates declined by more than 50% from Shanghai to Rotterdam, and more than 70% between Hong Kong and Los Angeles – both are key indicators of the health of Asia–Europe and transpacific trade lanes, respectively. The decline in spot rates reflects a continued imbalance between supply, in terms of TEU capacity, and demand – the global fleet is forecast to grow 4.6% in 2016, and another 4.7% in 2017, while demand, is forecast to grow 1% to 3% globally. The result has been a decrease in revenues for the major shipping companies from $204 billion in 2011 to $173 billion today.

A report from AlixPartners, titled ‘Container Shipping Outlook 2016: Overcapacity Catches Industry in Undertow’, explores the conditions faced by the 17 of the world’s largest publicly traded ocean container-carriers. Data, derived from publicly available sources, for the 2015 study is based on the 12-month-prior period through September 30, 2015.

Declining fortunes
While 2015 was off to a good start, with a slight increase in revenues on the back of stronger freight rates and declining fuel costs, the supply and demand imbalance made itself felt in Q3. Revenues in Q3 of 2014, relative to Q3 in 2015, were down 16%, from $45 billion to $39 billion — the quarter, in which demand peaks, is seen within the industry as relatively important for the coming year; as profits in the third quarter are to shore up their finances for the rest of the year.

The ongoing decline of the industry has resulted in a number of cost-cutting and reducing strategies being implemented in recent years, although companies have remained relatively independent from each other. These include adding initiatives such as slow steaming, vessel idling, organisational cost-cutting, and information technology (IT) modernisation. The benefits from these initiative have, in part, flowed through to a reduction in the industry’s total debt load, although divesting from noncore assets, as well as paring back capital commitments to larger tonnage and other capital projects, too have provided a means to cut debt. The result of the industry wide effort has been that debt has fallen from almost $114 billion in 2013 to almost $90 billion over 2015.

Consolidating the future
The chance of bankruptcies within the industry remains real and threatening, according to the industry average of Altman’s Z-Score. The industry remains in distress on the back of falling revenue, declining profit margins, and heavy debt loads. Some good news can be posted on this front, however, with the industry score (1.39) now the highest since 2010 – the last time it was outside the distressed zone. A score of 2.99 is considered the safe zone, a score not seen by the industry since 2007.

The continued distress of the industry and its continued poor performance will, according to the consultancy, result in further consolidation, either through M&A or through increased alliances. The arguments for such a move are sound, according to AlixPartners, as the report notes that: “Fewer competitors controlling more vessels should lead to more effective management of existing capacity and future vessel orders that would be more in line with demand forecasts. Scale can also reduce the cost of moving containers from point to point, so those carriers not actively pursuing consolidation or operational collaboration risk being marginalised or getting acquired.”

The consolidation process comes with a number of risks however, particularly in the form of the wider integration of companies. Many of the companies have operated independently and come from considerably different cultural backgrounds, while IT infrastructure integration throws additional spanners into the seamless integration of a target. Getting the integration process right, may determine the future success of both companies, as the consultancy reflects: “An increase in debt coupled with a difficult post-merger integration could spell disaster for those carriers, because combined entities may be unable to generate the returns necessary to service their debt.”