Maersk profiting in 'low growth, excess capacity' era
Maersk Line CEO Soren Skou told American Shipper container lines need to adapt to permanent overcapacity, and cited Maersk's network management as the primary driver of bumper profits in recent years.Container lines need to learn to live in an era of low growth and excess capacity, Maersk Line Chief Executive Officer Soren Skou said in an interview with American Shipper Sunday.
Skou, who has headed the world’s biggest container line since the start of 2012, has overseen three successive years of increasing profitability for the company’s liner business, culminating in the $2.2 billion in operating profit it made in 2014. That capped a three-year stretch in which Maersk has made roughly $4.2 billion in operating profits.
“In fourth quarter 2011, we had just lost $600 million, basically,” Skou said. “So it was a different time. This fourth quarter just behind us, we made $655 million. So it’s a completely different scenario. The key drivers of that are cost. In the fourth quarter of 2011, we had costs per FEU north of $3,000. Now we're $2,650 or thereabouts. So it’s a massive change in the cost structure.”
Skou also pointed to Maersk’s ability to better leverage its network.
“Probably the biggest driver has been that we have managed our network," he said. "It is better utilized. We're much quicker to adjust the network to maintain utilization. Our asset turn is up. Our bunker consumption per container is down significantly. You go back three years, we were using 1.2 or 1.3 tons of fuel per (FEU) and now we use 0.9, so it’s a 25 percent reduction. And even though bunker is cheaper now than it was back then, it still makes a big difference."
This period of profitability comes amid a backdrop of several competing dynamics: a long stretch of overcapacity for the carrier industry as a whole; slow ocean freight growth since the 2009 financial crisis; a continuation of long-term rate stagnation; and in North America, the operational issues currently plaguing ports.
Skou said the first two dynamics are governing whether carriers can be profitable or not.
“A key point to understand about the container industry is that growth is a lot lower than what it used to be,” Skou said. “If you take 2012-2014, growth has been averaging just below 4 percent. That’s a lot less than before the financial crisis, where we had growth double that or even in double digits many years. As far as we can see, it’s hard to believe that the good old days will come back any time soon.
“From a historic point of view, the current 18 percent orderbook (meaning current vessels on order are equivalent to 18 percent of the capacity of the current fleet) may sound low, but if the market’s only growing 4 percent per year, it’s four-and-a-half years of growth, minus scrapping. For the growth we have, there’s plenty of ships on order. Given the market, this is still an orderbook where most likely supply will grow slightly faster than demand. That’s at least our planning assumption.”
Skou said carriers must adapt to that reality.
“The industry has to learn to live with lower growth, and a situation with permanent excess supply,” he said. “Most industries actually live with that. We, for some reason in shipping, have a kind of culture that unless the ships are 99.5 percent full, then we don’t believe we’re allowed to make money. But we have to learn to live with excess capacity.”
One way carriers have attempted to redress this capacity issue is by forming mega-alliances and new vessel sharing agreements to augment port coverage and increase sailings available to their customers. For carriers, it allows vessel operators to “sweat their assets better,” said Michael White, president Maersk Line North America.
“With the continued process of having VSAs, which I think is here for the foreseeable future, carriers have to order and say, how does this fit the network that they’re going to deploy with other partners,” White said. “So it is a slightly different ballgame from what they would have done as an individual carrier. I don’t know if you’d call it a check (on capacity growth), you just have to bring it into the broader capacity planning in those different markets so you can fit and avoid the sawtooth (swings in capacity).”
Skou said it’s not yet clear what effect the new broader alliances and VSAs will have. Maersk joined rival Mediterranean Shipping Co. in the 2M alliance as of January after being rebuffed by Chinese regulators from forming an even large alliance with MSC and CMA CGM.
“The reality is we don’t really know because all of these alliances are just starting,” Skou said. “We actually don’t know how that’s going to play out.”
Meanwhile, Skou said it has been hard for Maersk to watch the effects of U.S. West Coast port congestion on its customers. Both Skou and White pointed to lagging port productivity as a cause for the congestion, noting that productivity and infrastructure investment has not kept pace with increasing vessel sizes.
“We’ve tried as a carrier to do what we could to alleviate the situation,” Skou said. “We ran three extra loaders to the East Coast before the Chinese New Year – the total industry ran 14. We've worked very hard to keep our customers informed of the situation in terms of both the track and trace part, but also about what’s really going on. There’s been a lot of rumors, and media points – some of it well-founded, some of it not.”
White said equipment availability has been a moving target.
“We’re giving daily updates to our customers about what was going on, and also the terminal fluidity change,” White said. “Even within L.A., certain terminals were open or closed for receiving different types of equipment on different days. The best thing we could do was arm them with information and work with them as best we could. Equipment availability is what customers are looking for. How quickly you can get it on to the rail and to its destination.”
Despite union longshoremen on the West Coast reaching an apparent agreement on a five-year contract with their terminal operator employers in late February, Skou said shippers should not expect a quick resolution to the congestion.
“The strike being averted is not going to solve the problem,” Skou said. “We've only addressed one of the issues. And many of these issues are related to underinvestment in any kind of infrastructure capacity that we need. And it’s very much related to a lack of progress on productivity in the ports. The reality is that ship sizes have probably doubled over the last seven years, and productivity hasn't gone up marginally. It’s giving us new issues. It’s about when the boxes actually get off the ship. When the ship was in port one or two days, nobody cared. Today, you have ships in port for five days, six days here. That actually matters whether your box gets off first or last.”