Ownership consolidation, operating partnerships keeping shipping afloat

The second quarter of 2020 sees the COVID-19 pandemic taking its toll on shipping, with an estimated 25 per cent decrease in container volumes worldwide, according to freightwaves.com, publishers of the online market research journal American Shipper. Despite this dramatic decline, however, Soren Skou, chief executive officer of A.P. Moller-Maersk (APM, Copenhagen: MAERSK-B), the owner of the world’s largest container line, asserts that “we are now in the middle of a pandemic storm, but we believe we are well placed to weather this storm”.

A recent article appearing in American Shipper reported Skou as stating that industry ownership consolidation and operating alliances have led to “greater agility in terms of adjusting supply to demand”.

That same article, by Greg Miller, senior editor of American Shipper, revealed that APM recently reported net income of $209 million for the first quarter of 2020 compared to a net loss of $656 million in the same period last year, with ocean-shipping revenues up three per cent despite coronavirus fallout. The APM CEO said that this performance results from matching ship capacity to reduced demand.

APM disclosed that April volumes were down just under 20 per cent. Asked about the implied steeper declines for May and June, Skou noted that the pandemic has mainly affected the east-west trades (Asia to Europe and Asia to North America) so far, but the plunge in oil pricing creates uncertainty and the potential for declines in the north-south trades (Latin America, Africa).

On an industry-wide basis, Maersk estimated that global demand fell 4.7 per cent year-on-year in the first quarter, with east-west trades down 5.7 per cent, north-south trades down 0.6 per cent, and intraregional trades down 5.5 per cent.

“The most important thing is to understand is that the three large east-west alliances [2M, Ocean Alliance, THE Alliance] make it much simpler to adjust capacity in an agile way” versus earlier crisis periods, he explained.

COMPETITIVE DYNAMICS

In the article appearing in American Shipper on May 13, Skou is reported as saying: “We are certainly not going to give any predictions on freight rates, but what I would say is that there are a number of competitive dynamics that are different than what we have seen before, certainly [when compared to] the global financial crisis but also to 2011 and 2015 when the carrier side had quite brutal price wars.”

In addition to the liners’ improved ability to lower capacity as a result of consolidation and alliances, Skou pointed to digital products that improve pricing visibility. “With products like Maersk Spot, we are pricing based on utilisation curves with upward sloping yield curves, which ensures we get better yields as a result – very similar to what airlines have successfully done for years.

“Digital products and transparency on freight rates means we are less reliant on customer feedback and relying more on our utilisation when we are setting prices,” he continued.

Greg Miller reports that across the industry, there is also less interest in pursuing volume at the expense of pricing, for various reasons. “At Maersk, we are not pursuing market share,” emphasized Skou. “We are planning to grow in line with or slightly below the market, and we will do what we can to protect profitability.

“It seems to me that many other carriers are doing the same. One of the reasons could be that there are generally quite weak balance sheets in the sector,” he said, pointing out that the implementation of accounting standards “has really highlighted the operational leverage that many companies in the sector have”.

Readers interested in viewing the full article by Greg Miller in American Shipper can go to https://www.freightwaves.com/news/maersk-container-volumes-could-fall-25.