Despite improvements, container shipping performance still 'unsustainable'
AlixPartners says liner carriers face "headwinds related to continued supply and demand imbalances."The container shipping industry saw modest financial improvement last year, but its “underlying performance remains unsustainable,” says the consulting firm AlixPartners.
In its annual container shipping outlook, AlixPartners said it believes carrier finances saw only slight improvements in 2014.
“Carriers looking to change their fortunes should focus on the container shipping business by continuing to divest of noncore assets and by closely scrutinizing the profitability of the markets they serve, the routes they sail, and the customers they conduct business with,” said AlixPartners.
AlixPartners reviewed the financial results from 15 carriers in the 12 months ending on September 30, 2014 to estimate results for the full year.
The research firm said earnings before interest, taxes, depreciation, and amortization (EBITDA) increased seven percent, while revenues fell three percent in that time. Operating expenses fell 4 percent and working-capital management improved.
While the rate of decline in the industry slowed, an indicator of financial distress called the Altman Z-score for publicly traded companies remained in the “distress zone” and “was only slightly higher in 2014 compared with 2013, suggesting minimal improvements in the carriers’ ability to stave off bankruptcy,” said AlixPartners.
The firm noted carriers have taken on huge debt to build larger, more fuel efficient ships at a time when “demand has languished, causing a significant imbalance that has plagued carriers looking to right their balance sheets.” But the 15 publicly traded companies whose figures it studied saw total debt decrease from $107 billion in 2013 to $91 billion at September 30, 2014.
Although the resulting drop in the debt to EBITDA ratio from 6.5 to 5.5 was a “meaningful improvement, such high leverage still poses risks, particularly for an industry that has a commoditized service and volatile EBITDA.
“Looking forward — and due to headwinds related to continued supply and demand imbalances—we expect carriers to struggle to improve financial performance. Recent decreases in bunker fuel prices are welcome but will likely not offer a permanent fix,” said AlixPartners.
AlixPartners also noted shippers are likely to pressure container carriers to "further reduce already rock-bottom freight rates, siphoning off the benefits of reduced fuel prices. Carriers have had limited success in keeping the financial benefits of cost savings away from shippers in the past.
"The benefits of slow steaming have narrowed, causing carriers to speed up their vessels to increase throughput and revenue," the firm added. "This will have a negative effect because it serves to further increase capacity in a market that’s already oversupplied. Unless carriers are going to counter the effects of increased service speed by way of reducing or idling excess capacity, this increased capacity will likely have a continued dampening effect on carriers’ ability to increase freight rates.”
Some carriers have said they do not plan to increase the speed of ships even though the price of fuel has dropped.
When it reported its annual results Maersk Line, for example, said despite falling fuel prices it has “no plans of increasing vessel speed as network and fleet adjustments require a sustained low bunker price level which is not reflected in the market forward curve.”
“Our conclusion is that it makes no sense to speed up the network,” said Nils Andersen, chief executive officer of the A.P. Moller Maersk Group. Anderson added that Maersk did not believe that speeding up ships would be an advantage to any other company either.
AlixPartners said carriers should consider increasing investment in information technology to “find the true profitability of their customers, lanes, and services portfolio.
“Carriers usually manage their business based on standard costing instead of real route costs,” added AlixPartners. This can lead to poor decision making since costs vary “thanks to bad weather, congestion, missed connections, and other factors” including customer-specific requirements.
“The data that carriers require to make smarter decisions exists, and most of it exists within their systems," the firm said. "It’s just a matter of putting all the pieces together in a way that leads to the insights required to manage commercial decisions more effectively. The challenge of putting the pieces together is not new, but to a large degree the solution is. In recent years, great advances have been made in the tools and techniques required to capture, store, and manipulate large data sets from disparate systems — a trend commonly referred to as big data.”