The big rebound

The big rebound Top publicly traded container lines recover from 2009 losses with nearly $10 billion in operating profits in 2010.

By Eric Johnson

   As fast as the liner carrier industry sank in suffering record losses in 2009, it recovered as quickly to post massive operating profits in 2010. Last year truly was the big rebound.
   The 15 publicly traded container lines examined in this year's Who's Making Money report had collective operating profits of close to $10 billion, almost offsetting the $11.3 billion they lost in 2009. Average 2010 profit among the 15 lines examined was $660 million, though Maersk Line's industry-high $2.8 billion in profits skewed that upward. For every $1 made by the 15 lines in 2010, Maersk made about 28 cents.
   But while the liner carriers American Shipper analyzed nearly made back all the money they lost in 2009, that recovery is a bit misleading. The bounce back was not shared equally among all of the major lines.
   Only four lines ' Maersk, OOCL, Hyundai Merchant Marine and Evergreen Line ' garnered an operating profit over 2009 and 2010 combined. Most lines lost hundreds of millions of dollars over that 24-month stretch. In reality, 2009 is still reverberating around the headquarters of the world's liner carriers.
   Take two of the larger carriers whose financial performance American Shipper surveyed, Hapag-Lloyd and COSCO Container Lines. Hapag-Lloyd in 2010 turned in the finest performance in its history, netting a record $779 million. But over the two-year period, the German line still lost $114 million.
   COSCO provides an even more extreme example. The line netted a very healthy $549 million in 2010 ' its best performance since 2005. Yet China's biggest container line lost $595 million over the two-year period.
   On the other side of the coin, Maersk Line netted $732 million the last two years, despite losing $2.1 billion in 2009. The Danish line's recovery was swift and comprehensive (and it's continued into the first quarter of 2011, when Maersk posted profit of $467 million while most of the industry lost money).
   Perhaps even more impressive, given the size of its fleet relative to Maersk, was OOCL, which has earned $571 million the past two years, including nearly $900 million in 2010 profit. The Hong Kong line is as consistent a financial performer as exists in the liner carrier industry. Its 2009 loss was the first for the company in two decades, and it bounced back to record the second-biggest profit among publicly traded lines in 2010, despite having a smaller fleet than seven lines that made less money.
   An apt comparison of OOCL's fortunes over the past two years comes when the Hong Kong line is pitted against carriers with similar fleet capacity, like China Shipping, NYK Line and MOL. Those three lines lost $273 million, $151 million and $140 million, respectively, over 2009 and 2010. That means OOCL has enjoyed a $700 million to $800 million operating profit advantage over similarly sized lines through the downturn and rebound.
   A similar phenomenon emerges over the last five years, where Maersk and OOCL have averaged annual profits of about $400 million, while the chasing pack has averaged $40 million to $100 million in profits over that period. In fact, six of the lines examined have lost money over the five-year period.
   Hyundai Merchant Marine has been another steady performer, averaging $200 million in profits the past five years and enduring the second-lowest loss in 2009.

Dependent On Up Markets. If the roller coaster of the last two years has demonstrated anything, it's that individual lines perform differently depending on the buoyancy of the market.
   'People just accept that (the container shipping industry is) very susceptible to rates,' said Paul Svindland, managing director of the consultant AlixPartners Transportation Group. 'It's a big pendulum-swinging industry. But if you look at the net over 10 years, the good companies are making money.'

'People just accept that (the container shipping industry is) very susceptible to rates. It's a big pendulum-swinging industry. But if you look at the net over 10 years, the good companies are making money.'

Paul Svindland managing director, AlixPartners Transportation Group

   Stretching the examination of profits back to 2003, not a single publicly traded line lost money from 2003 through 2005. But in 2006, cracks began emerging. Five lines lost money that year, while top dog Maersk's operating profits dipped from $1.7 billion in 2005 to $125 million in 2006.
   The following year was a robust one for the container trade ' the last vestiges of the halcyon days, it appears now ' and all but the worst performing lines made hundreds of millions of dollars. But the U.S. subprime mortgage mess began to unravel in the second half of 2007 and it reflected in the varying fortunes of lines in 2008. Some made huge profits ' headlined by, you guessed it, Maersk, Hyundai and OOCL ' while others scraped by with profits of less than $50 million and many more lost money.
   Then 2009 shone an unwelcome light on the lines least prepared for a downturn in demand. Those lines sunk to huge losses disproportionate to the size of their fleets. For instance, Maersk's $2 billion loss looks massive without context, but COSCO's $1.1 billion was, operationally, worse. COSCO lost $218 for every TEU it carried, compared to a $151-per-TEU loss for
Maersk.
   In 2010, that trend held true even as rates and demand rose. COSCO made only $88 per TEU compared to $193
per TEU for Maersk. Hyundai, another strong performer, earned $206 per TEU,
best of the 15 lines American Shipper examined.
   COSCO's revenue per TEU, at $1,128, lagged that of a horde of other carriers, but it wasn't too different from OOCL's revenue per TEU, $1,260. Yet OOCL made $897 million on 4.8 million TEUs of volume, while COSCO earned $549 million on 30 percent more container volume.

Profit vs. Revenue Growth. A look at how revenue grew in relation to profits for certain carriers yields some interesting results. If profit growth lags revenue growth, it's an indication a line isn't as lean as it could be. It also suggests that a line's financial performance is more vulnerable to low rate environments.
   Now every line lost money in 2009 and made money in 2010, so a comparison of profit growth to revenue growth is not possible. But looking at COSCO again, the line's revenue grew 74.1 percent in 2010, compared to 38.9 percent growth for OOCL, and just 16.5 percent growth for Maersk. So COSCO's revenue grew higher in 2010, but so did its costs, hence operating profit only 61 percent of OOCL's on 30 percent more volume.
   Framing this another way: If COSCO earned per TEU what OOCL made in 2010, the line's operating profits would have been nearly $1.2 billion, not the $549 million it actually made.

Related Charts •   Changes in carrier's operating profits/losses 2006-2010 •   Available top shipping lines ranked by 2010 operating profit/loss margin •   Top carrier's average profit per TEU in 2010 •   Jones Act carriers 2009-2010

   The vast gulf in profits per TEU can't be explained away simply by the nature of the service networks of COSCO and OOCL either. Both are Asia-based, both maintain an expansive portfolio of long-haul east/west routes, and both have extensive intra-Asia networks. Both are also part of longstanding multicarrier alliances.
   Looking deeper, COSCO seems to reside at a sort of midpoint between Maersk and OOCL ' a larger fleet and more volume than OOCL, yet significantly smaller revenue and with a less extensive network than Maersk. But not as profitable as either.
   The above example isn't meant to single out COSCO, which has quietly crept into the top five biggest operators by fleet capacity, a place it is likely to occupy for some time given its ongoing fleet expansion. COSCO was the most obvious example, but a handful of lines examined by American Shipper earned below-market profits per TEU (two of Japan's lines, MOL and 'K' Line, have stopped publicly released global container volumes, making it impossible to evaluate their profit- and revenue-per TEU performance).
   The question is whether those lines that failed to fully capitalize on the recovery in 2010 will boomerang back to losses or low profits in 2011. It seems hard to imagine Maersk, OOCL or Hyundai ' despite their divergent characteristics ' succumbing to losses this year, given their track records.

CSCL Big On Volume. And yet that shouldn't detract from the resurgence of COSCO and compatriot line China Shipping in the profit tables. Both surged from the bottom of 2009's loss list to the top six in 2010.
   China Shipping's recovery was particularly eye-catching, as it stormed to a 12.4 percent profit margin, good for second-best among the 15 carriers examined.
   But bear in mind that China Shipping had a 32 percent loss margin in 2009, worst on the list, showing its business is highly susceptible to demand patterns. Yang Ming is similarly vulnerable, going from a 20.1 percent loss margin 2009 to a 12.4 percent profit margin in 2010, good for third-best.
   China Shipping's high volume strategy is different from the lines that surround it at the top. Only Maersk moved more volume in 2010 among publicly traded lines, despite the fact that six other lines have more fleet capacity. The same was true in 2009, when China Shipping's cost structure helped it lose less per TEU than all but two lines. The problem in 2009 was that it didn't turn enough business down.
   Interestingly, in 2010, China Shipping's profit per TEU was $91, far below the market as a whole. Yet the line's high volume strategy allowed it to make more than any other line outside the profit-efficient trio of Maersk, OOCL and Hyundai.

Big 3 = Big Profits. A perennial limitation of American Shipper's Who's Making Money report is that it doesn't capture the complete financial picture of the world's second- and third-largest lines ' Mediterranean Shipping Co. (MSC) and CMA CGM ' because neither is publicly traded.
   Though CMA CGM has no requirement to file its financials, the line does issue an earnings statement each spring. CMA CGM said it had operating profit of $2.2 billion in 2010. On its 9 million TEUs of volume, that would mean income of more than $240 per TEU, which would be far and away the best in the industry.
   Family-owned MSC does not release any financial details, but it's reasonable to guess, given its fleet capacity, that the line made more than $2 billion in operating profit in 2010. Drewry Shipping Consultants pegs the number at about $2.5 billion. Combine CMA CGM's and MSC's likely profits with Maersk's and the Big 3 made in the region of $7 billion to $7.5 billion in 2010. That's more than what the other 14 publicly traded lines collectively earned last year.
   Those profits underline just how far the Big 3 European carriers have pulled away from the pack. Using another metric, container volume, the Big 3 likely carried about 35 million TEUs. That's roughly what the rest of the top 10 carried.
   So the three lines' profits surpassed that of the next 14 biggest lines, while their collective volume only equaled the next seven biggest lines. That means they earned more money on less volume than their competitors.
   Again, there are no ironclad numbers for either MSC or CMA CGM, but going by our profitability estimates, the Big 3 are using their girth to cut unit costs and perform more profitably per TEU carried than the mid-sized carriers in their wake.
   There are exceptions, like OOCL and Hyundai, carriers that have fully embraced their niche positions. But it has created a divide that will be harder for the smaller players to bridge.
   Maersk has upped the ante again by ordering 18,000-TEU vessels for delivery in 2013, while CMA CGM is reported to have changed orders for some of its forthcoming vessels to 16,000-TEU models. These ship orders, if filled, would give the top lines another order of operational efficiency, cutting fuel consumption per TEU transported as fuel prices threaten to rise.

Short Stack. In essence, the Big 3 have backed the other global carriers into what's known in poker parlance as short stack positions. Their moves force the other players with fewer chips to make harder decisions on 50-50 hands, knowing that if the Big 3 lose a hand, they're still in the game.
   Of course, containerized transport isn't poker, and lines that would have been bust in 2009 were kept in the game by creditors or shareholders. But that shouldn't distract from the fact that Europe's Big 3 lines, while large already, are pulling away from their competitors even as their competitors grow larger.
   'Right now, you have Maersk, CMA and MSC just buying freight,' Svindland said. 'They're just pricing so aggressively. Right now, they are all about market share. If the industry is commoditized, you have to have the lowest costs.'
   Svindland said Maersk, for instance, is the best in the industry at collecting bunker fees, and that the line offers attractive rates but makes sure it collects 'all those accessorials.'
   Paul Bingham, economics practice leader at the consultant Wilbur Smith Associates, seconded the notion that the top lines were going after market share.
   'The big operators are clearly attempting to grab long-term market share, mostly by taking share from smaller competitors on certain trades, such as Asia/Europe or even the transpacific, where the incrementally lower costs to the big lines can give them competitive advantage,' he said.
      'This may be part of a long-term strategy to eventually force consolidation on the industry. There have been statements from these firms, especially Maersk lately, that they want to change the liner industry paradigm on pricing and service with customers, clearly in an attempt to increase margins.'
   Bingham, however, cautioned that if the tumult of the recession in 2008 and 2009 didn't force any major lines out of business, it's hard to envision what would in the coming years.

Operational Strata. The financial data from 2010 only underscores that gap, showing how different strata have developed among the major global container lines ' one based on size, and the other based on operational ideology.
   The size gap will be hard for the rest of the industry to overcome anytime soon. Let's take APL, the seventh-biggest line by fleet capacity. With 578,000 TEUs of capacity and nearly 370,000 TEUs more on order, it's a heavyweight among container lines. But even if all of its ordered ships were delivered today, it would still have nearly 325,000 TEUs less capacity than CMA CGM and 1.4 million TEUs less than Maersk already have, excluding their own massive order books.
   The operational strata are less defined because they aren't based on size. We've already covered the profit-per-TEU focus of Maersk, OOCL and Hyundai, and the volume focus of China Shipping. There lies a middle ground as well.
   Hapag-Lloyd, for example, netted its record profit in 2010 based on profit per TEU of $157. That's not world-beating relative to Hyundai or Maersk, but it's healthy and sustainable. Hanjin and Yang Ming fall into that similar middle ground.
   China Shipping showed that a high-volume strategy can work in a high-demand year, but others were less successful. American Shipper's 2010 Top 20 carriers    report ( September 2010, pages 44-52 or www.AmericanShipper.com/links ) highlighted the rapid expansion of Chilean line CSAV, which translated into 61.5 percent volume growth in 2010 ' far and away the highest among lines examined.
   But CSAV's profitability was lower than China Shipping or COSCO ' at $75 per TEU ' and it had barely 40 percent of China Shipping's volume. Its rapid capacity and network expansion didn't immediately translate into even industry-average profitability.
   While operating profit per TEU is a key metric to view a line's performance, it's not the only significant one, Bingham said.
   'That metric should be put into the context of the actions and detailed results for the lines in any time period,' he said. 'The profitability measures are absolutely critical over time, but for any one quarter, or even a full year of profit performance, one should also look at what has happened with the balance sheet of a line.
   'Their recent performance against their own history ' i.e. are they more profitable or less profitable than their own multi-year trend line and prior-period operations. Another useful factor to consider is the relative exposure of lines to specific trade lanes, because rate competition, and thus available profitability, on lanes differs based on changes in underlying demand and competition from other carriers.'
   Bingham said one factor that had a profound impact on liner profitability over the 2009-2010 period was the level of exposure to chartered vessels at the beginning of 2009.
   'There is a dimension to liner company profitability that I've not seen anyone quantify comprehensively, but which I'm convinced was there in the 2009 period, where those lines with a greater share of chartered-in instead of own vessels in their deployed fleet were in a better position to reduce capacity, and expenses, to match demand,' he said.
   'That is because for those liner operators, when their charter terms expired, they could just not renew the leases, pushing part of the overcapacity problem back on the ship's owners. The mix of laid-up ships that were chartered versus owned shifted over the recession layup period, with the share of line-owned ships in layup falling as a percent of the total over the downturn, and the shares of ships owned by non-operators increasing.'
   Another aspect to consider is profitability as it relates to vessel sharing or slot chartering.

Paul Bingham economics practice leader, Wilbur Smith Associates
'Lines with a greater share of chartered-in instead of own vessels in their deployed fleet were in a better position to reduce capacity, and expenses, to match demand.'

   'Such arrangements can reduce financial risk for the lines for a given level of traffic and profitability, and even boost profitability if negotiated well over a period of time,' Bingham said. 'However, such arrangements can also reduce profitability, if lines are locked into unattractive contracts where they are essentially wholesaling capacity at a discount negotiated in a previous period, benefiting their 'partner' competitors. This can occur even if a portion of the current capacity deployed is attracting direct customer business moving at higher current-market rates on a revenue/TEU basis.'
   There's another way to look at profits outside of a per-TEU ratio ' one can see what percentage of profits a line earned relative to its share of fleet capacity among other top lines. The 15 lines analyzed by American Shipper in this report have total fleet capacity of 8.8 million TEUs.
   So, for instance, Maersk earned 28.5 percent of total operating profits among the 15 publicly traded lines analyzed, and its fleet capacity accounted for about 26 percent of the total from the 15 lines, so its profit-to-fleet share is pretty much in balance.
   A look at some other lines:
   ' Hapag-Lloyd, with 7.8 percent of the profits of the 15 lines, accounts for 6.8 percent of the 15 lines' total capacity.
   ' COSCO, with 5.5 percent of the profits, had 6.9 percent of total capacity.
   ' Hyundai's profits represent 6 percent of total profit, but its fleet accounts for only about 3.5 percent of the total from the 15 lines.
   ' OOCL made 9 percent of the total profits, while its fleet is about 4.5 percent of total capacity.
   So by this measure as well, Hyundai and OOCL outperformed, while COSCO underperformed.
   Meanwhile, it's hard to attach any sort of conclusive evidence that dependence on charter vessels affected financial performance in 2010, as it had in 2009. Maersk charters about half the capacity in its fleet while Hyundai charters more than two-thirds of its capacity. OOCL charters less than one-third, while COSCO charters 42 percent.
   It's harder to ignore the impact that vessel orders will have. Carriers with large order books have a burden to remain profitable, with good operating cash flow, to secure ship financing at reasonable rates. Nine of the lines examined in this report have at least 100,000 TEUs of capacity on order, and most of those have hundreds of thousands to come.
   Evergreen, which was pointed to as one to watch in last year's Who's Making Money report, was indeed watch-worthy in 2010. It went from having an empty order book to one with 35 vessels, representing more than 300,000 TEUs of capacity. Maersk, COSCO and (as mentioned before) APL all have sizable order books to work through in the coming years, placing a premium on profitability.

Year Ahead. Looking forward, 2011 may more closely resemble 2008 from a carrier profitability standpoint, in that some lines will have good profits, some will tread water and some are likely to lose money. As such, it will be a better year to judge which lines are performing well and which lines have cut costs well enough to carve out profits.
   Aside from Maersk, first quarter results didn't look promising, but then that's a return to normal service. 2010 was an anomaly in that lines profited hugely during a period usually typified by moribund demand and closures of factories in Asia during the Lunar New Year. The hope among lines is that demand rebounds in the second half of 2011, buoying rates.
   It didn't help fourth quarter 2010 or first quarter 2011 earnings that lines failed to strip out much capacity during the winter season. They refrained from pulling loops on major east/west trades, instead selectively skipping sailing to marginally reduce capacity levels. That will invariably affect the financial performance of the industry in 2011.