AlixPartners: Container shipping industry caught in an undertow

Consolidation among ocean carriers is needed if the industry is to right itself, and even that might not be enough to save some companies, according to a new study from consulting firm AlixPartners.    The financial woes of the container shipping industry are expected to continue this year, according to consulting firm AlixPartners.
   Last year “nearly all key financial indicators declined from 2014,” the company says, adding that “all signs point to a continuation of that theme into 2016 and beyond.”
   AlixPartners’s annual review of container shipping of container shipping found “growing vessel supply, led by the ongoing introduction of giant megaships, coupled with demand that shriveled in the second half of last year leaves the  industry with massive overcapacity, falling profitability and precarious cash-flow levels.”
   “Companies with M&A on their minds need to be proactive if they hope to reap the kind of rewards winners in consolidated industries enjoy — or to prevent becoming acquisition targets themselves,” the report suggests.
   “Massive overcapacity points to a continuation of poor financial results in 2016, following a 2015 in which nearly all key financial indicators declined.”
   Alphaliner, for example, estimated on Jan. 1, that container capacity increased 8.5 percent in 2015 to reach 19.9 million TEUs, and it will increase a further 4.4 percent in 2016 and 5.6 percent in 2017 after scrapping and delays in ship deliveries.
   But AlixPartners expects demand for container transport to increase just 1 percent to 3 percent in the coming year.
   The firm said in its report profits in the container liner industry “as measured by EBITDA, fell 7 percent in the latest 12-month period, including a 35 percent decline in the all-important third quarter.” The study reviewed the financial results of 17 publicly-traded ocean container-carriers. Data for 2015 in the study is based on the 12-month-prior period through Sept. 30, 2015.
   “Cash from operations declined by almost twice as fast as EBITDA — by 12 percent — indicating that carriers face working-capital challenges.”
   If carriers do merge, AlixPartners says that “given low profitability levels, merging companies need to retain combined customer bases and realize substantial cost synergies to successfully service debt burdens.”
   Hapag-Lloyd completed its merger with the container operations of CSAV in 2015, while CMA CGM and APL plan to merge in the coming year and COSCO and China Shipping have recently officially combined operations at the behest of the Chinese government.
   “For the first time in recent memory, the container-shipping industry is seeing the beginnings of the kind of consolidation that has brought increased and sustained profitability to winning players in other industries for years,” said Foster Finley, managing director at AlixPartners and co-head of the firm’s maritime practice. “However, further consolidation and operational overhauls will be necessary if players in this industry, which as a whole remains deeply troubled, wish to reap the kind of benefits enjoyed in other industries. In addition, these uncertain market conditions are casting a long shadow over the annual rate-negotiation cycle kicking off between major importers and their carrier bases.”
   The study says the industry as a whole is in the “distress” zone, according to an Altman Z-score analysis, a formula for predicting bankruptcy. The industry has been mired in this lowest zone for the past five years, and hasn’t been in the “safe” zone since 2007, it notes.
   “Players need to be wary both of the costs of consolidation, particularly if fueled by debt, and of the difficulties of effective post-merger integration,” said AlixPartners. “Given today’s low profitability levels…it’s imperative that merging companies retain combined customer bases and realize substantial cost synergies — from fleets to IT systems — to successfully service debt burdens.”
   “In an industry now facing ‘gale-force headwinds’ and one in which where everything from piecemeal cost-cutting to vessel-idling to slow-steaming has failed to yield truly transformative results, merely adhering to the status quo is likely the most dangerous strategy of all,” it added.
   “The container shipping industry faces extreme market pressures and appears on the cusp of transformative consolidation,” says AlixPartners, and in order to survive the transition, carriers should take vital measures and:
     • Scrutinize balance sheets, reduce liabilities, and continue to divest of noncore assets so as to reduce debt burdens;
     • Exploit the ability to continually lower slot costs in order to grow margins in core liner businesses;
     • And uncover opportunities: internally through cost-cutting initiatives and externally through collaborative partnerships.
   Consolidation of the U.S. airline industry is a possible template for the container shipping industry, the report suggests.
   “Container carriers’ top management should see parallels in the events that played out in the consolidation of the US domestic passenger airline business during the past 20 years,” says AlixPartners.
   “In many ways, the recovery playbook for the container carrier industry has already been written by the airlines, and the benefits are clear. Tight control over capacity, combined with disciplined — and sophisticated — commercial management, has turned industry profitability around. But the potential pitfalls, too, are painfully clear, as the largest network airlines battle lingering challenges such as IT glitches and labor sentiment.”