Global container shipping industry in choppy waters, says AlixPartners

27 June 2016

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.

Revenues of container shipping industry

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.

Debt and fleet in container shipping industry

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.

Altman Z-Score in container industry

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.”


How data insights helped Network Rail improve the South-East route

11 April 2019

Amey Consulting has leveraged data insights to assist Network Rail with the improvement of its South-Eastern route. Using the Quartz tool, which monitors train movement, Network Rail will now be able to commit to data-enabled interventions to quickly improve underperforming train stations.

With rail services in the UK coming under strain from the demands of modern commuter life, while the infrastructure and service delivery of the nation’s railways has come in for sustained criticism in recent years, a period of regeneration is on the cards at last. Network Rail is the owner and infrastructure manager of most of the railway network in Great Britain, and has subsequently tapped the consulting industry on a regular basis to help find areas of improvement.

The group recently drafted in consultancy BearingPoint to conduct a thorough organisational evaluation and advise Network Rail (High Speed) on attaining a ‘fit for purpose’ organisational standard – for which the consultancy was nominated at the 2019 MCA Awards. Meanwhile, ArupArcadis and Aecom have been contracted to help Colas Rail and Babcock Rail implement a decade-long framework for Network Rail, aimed at supporting the delivery of the next generation of rail systems, with the contracts said to be worth as much as £5 billion

How data insights helped Network Rail improve the South-East route

As Network Rail further aims to improve its performance and customer service offering, another area it has sought help from the consulting sector for is its South-East route. The network of railways connects London with the southern parts of the country, as well as with Europe, making it the busiest in the country, with more than 500 million passenger journeys per year. This crucial expanse of rail was plagued with small minute delays, which were impacting millions of passengers every day, while reducing the efficiency and capacity of the overall network – something Amey Consulting was selected to help solve.

Amey Consulting soon determined that with the sub-threshold delays to services only lasting for 1 or 2 minutes, most were not the subject of detailed root cause analysis, and this made their corrections almost impossible – with dire consequences. Without addressing these delays, passenger satisfaction would fall, while the capacity and efficiency of the network would be reduced, stinging the income of Network Rail even before a host of delay-related fines would hit the company.

In order to help the client gain a better understanding of where, how, when and what these small delays occur, Amey Consulting looked to demonstrate the value of data-led consulting, with a significant reduction in delays within the first month of rolling out changes to key stations. The consultants embedded themselves in Network Rail’s team, helping them learn the key skills needed to support and apply data-driven solutions.

Agile transport

This involved the deployment of the Quartz tool. The system utilises to-the-second train movement data to present the performance of individual stations across the South-East route. It allows users to effortlessly understand station performance with a high level of detail, and use this information to identify losses caused by small-minute delays. The granular data allows for targeted actions to drive efficiency savings and performance improvements. More importantly, it allows users to understand the impact of small process changes on performance. 

Steve Dyke, an Executive Partner at Amey Consulting, said of the project, “We looked to identify the physical root cause on the infrastructure, building a case for change then managing that project implementation and tracking the benefit/value.  In doing so we are working to define a data performance improvement service to the operational and infrastructure owners.”

Just as important for the project as the technology, however, was teaching the Network Rail team how to leverage it after the consultants were gone. The Amey Consulting team worked to develop an agile working culture within Network Rail’s South-East division, helping staff to be confident in using data to improve the journeys of millions of people per year by attacking the problem from the ground up.

Dyke concluded, “This is less about the tools and about the approach to managing performance.  It meant using by-the-second analysis, data science, and then agile development to visualise and identify areas where improvements can be made.  We then worked with NR to change the way they approached the management of the infrastructure changes.  So rather than pass the information down the value chain, any of which could have been missed, we managed the change end-to-end.”

The project was so successful that Amey Consulting was also among those honoured at the recent MCA Awards. The firm scooped the Performance Improvement in the Public Sector prize for its work with Network Rail, at the 2019 ceremony in London.