Maersk Line CEO set course for profitability three years ago and has since led carrier to $4 billion profit in low-growth, excess-capacity era.
More than three years ago, Søren Skou accepted the most high-profile position in liner shipping and laid down a challenge.
He said Maersk Line, the biggest and most publicly visible liner carrier in the world, had to be profitable and give the company’s shareholders value for their investment.
The time for a rallying cry was at hand: Maersk had lost $483 million in 2011, all of it in a bloody fourth quarter. It was a massive amount for a company that sets the standard, good or bad, for the rest of the industry.
Skou has righted the ship, and then some. Since rising to the position of chief executive officer of the liner subsidiary of the A.P. Moller-Maersk Group in early 2012, Maersk Line has earned successively growing operating profits, including $2.2 billion in 2014. That three-year stretch has netted Maersk Line roughly $4.2 billion in operating profits.
For Skou, the key to profitability has been a return to basics—stripping out cost wherever it may be and maximizing the use of the company’s sizable network, both internally and through its old and new alliance partners.
More than anything else, Skou views the performance of his company through a pragmatic lens—the roaring days of double-digit global container growth are gone and probably never coming back. And carriers that live in the past and are overly optimistic about the future aren’t going to navigate the current low-growth period well enough to be profitable.
Skou, in an interview with American Shipper in Long Beach, Calif., early March, said container lines need to learn to live in an era of dampened demand and excess capacity.
“In fourth quarter 2011, we had just lost $600 million, basically,” Skou said of his early days heading Maersk Line, when he took the reins from predecessor Eivind Kolding. “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.”
That roughly 10 to 12 percent reduction in costs doesn’t even factor in the benefits that lower oil prices may bring to Maersk’s operations. But it does include the larger ships Maersk has increasingly leaned on in its attempts to bring down per-slot costs for each sailing.
However, during a conversation at the Journal of Commerce’s 15th Annual TPM Conference in Long Beach, Skou said that it takes more than big ships to be profitable, adding that Maersk’s average vessel size is hardly different than the industry as a whole.
“Ship size is not the source of Maersk’s competitive advantage,” he said.
Rumors persist that Maersk is set to unveil another order for vessels in the “triple-E” category or larger, but Skou said during the discussion at TPM that it had no such ships on order. He did say Maersk would continue to order ships, but there would be a mix of sizes to cater to the different trades in which it operates. When asked whether he envisioned ships as large as 25,000 TEUs entering the global fleet, Skou said it was possible, but not practical at the moment.
According to the maritime analyst Alphaliner, Maersk had 157,640 TEUs of capacity on order as of March 9, representing roughly 5 percent of its current fleet. The industry as a whole has the equivalent of roughly 16 percent of the current fleet on order—historically that is a low number that has induced carriers to start ordering more tonnage.
But Skou noted two dynamics that may affect this historic ship-ordering tipping point—the base (i.e. the current fleet) keeps rising higher, and demand growth is low.
“From a historic point of view, the current orderbook 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,” he said. “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’s attempts to temper carrier expectations sound more hopeful than anything—this has long been an industry accustomed to boom and bust cycles.
Low Growth Era. “A key point to understand about the container industry is that growth is a lot lower than what it used to be,” he 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.
“The industry has to learn to live with lower growth, and a situation with permanent excess supply. 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.”
Another dynamic that has hurt carriers’ attempts to be profitable: declining rates. If it feels like it’s been a shippers’ market for most of the past five years, that’s because it’s arguably been one for a lot longer.
“Whether you look back five years, 10 years, 15 years, freight rates have been trending down,” Skou said. “One to 2 percent per year. So the implication of that is we, every year, have to find cost savings that mitigate inflation and then another 1 to 2 percent.”
There was much discussion at TPM about carriers offering differentiated services, a topic that has been broached many times in the past. But Skou referenced a service Maersk introduced in 2011, under Kolding, in which it offered guaranteed container transit times from key ports in Asia to key gateways in Europe. The service, Daily Maersk, was a success operationally, but not so in terms of profitability.
“We delivered 97 or 98 percent reliability,” he said. “But we also have to recognize, it cost us a lot of money to provide that service. Frankly, customers we’re not willing to pay for it. We can only really offer a premium service if there are customers that are willing to pay a premium rate for it. And the evidence suggests that has not been the case in the past.”
Alliance Effect. Aside from big ships, Maersk’s other major announcements in the past few years have concerned its new global alliance with Mediterranean Shipping Co., once a fierce rival but now a partner on each of the three east-west trades. The decision to form the 2M with MSC came about after Chinese antitrust regulators knocked back its attempts to form a larger alliance with MSC and CMA CGM.
The intent of the alliance is to share the burden of vessel investment and operation, and to provide broader port coverage and customer options. Aside from the 2M, the New World and Grand alliances have merged as the G6 in the east-west trades, CMA CGM pivoted to join China Shipping and United Arab Shipping Co. in the Ocean3 Alliance, and Evergreen has joined the CKYH Alliance.
Skou said it’s not yet clear what effect the new broader alliances and other new vessel-sharing agreements will have on the industry.
“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.”
But Skou did say the alliances are improving Maersk.
“The alliances that we are a part of improved the product our customers are offered, in terms of frequency, in terms of port coverage,” Skou said. “Our service, in particular on the transatlantic, is significantly better than what it used to be in frequency and coverage. For me, I’m certain from a physical product point of view, we continue to improve the product we sell to our customers. I also think from a service point of view, we’ve in the last three years worked hard to upgrade what we’re doing.”
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.”
Michael White, president of Maersk Line North America, said the alliances have also been about helping carriers balance their capacity with demand, to better “sweat their assets.”
“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].”
Customer Focus. Two years ago at TPM, Skou laid out a so-called customer charter for Maersk, focusing on its interactions with shippers and freight forwarders. He said the line has come a long way since then.
“There’s not a lot of magic to [our customer charter],” Skou said. “But we really did it because we wanted to have a vocabulary around what does customer service really mean. We always talked about being easy to do business with, but it meant something to me and something else [to another person]. We said, ‘okay, let’s take something we can actually measure.’ In our company, what we measure, we actually do.
“We have, in the last three years, made significant improvement. One issue we had that we were quite open about was our invoice quality, which was just really, really poor,” he explained. “While we’re not perfect, we’re now certainly on par with the rest of the industry. We’re now able to confirm 96 percent of our bookings within two hours, and actually 77 percent within 15 minutes. Accessibility too—just such a simple thing as picking up the phone when the customer’s calling.”
One thing carriers have wrestled with over the past decade is offering technology to their customers. The question is, where does a carrier fit in, what with shippers sometimes developing internal systems, 3PLs offering their own technology, and software companies providing third-party solutions?
“The key issue is not so much building the IT, the key is the lack of standardization of anything in the industry,” Skou said. “There are standards for nothing, and that means that every carrier has solutions, and every freight forwarder or 3PL has their own solutions. There’s not one standard way of building a price. And on top of everything else, we have an industry where we have a culture where everything is up for negotiation—every single parameter of a freight move is negotiable. You can negotiate the freight, you can negotiate all the surcharges, payment terms, credit, currency.”
Skou said there’s a place for carriers to help with technology.
“It’s impossible to automate complexity,” he said. “We’ll continue to provide technology. One thing is the freight rate and the service, but another thing is their own productivity. Almost every customer has a vision to grow their business 5 or 10 or 15 percent every year. But nobody has the ambition to add 5 or 10 or 15 percent more people. They are also concerned about productivity, whether they’re BCOs or freight forwarders, we’re looking to improve the number of files that an operator can handle in the course of a day. But we’re only going to be able to improve productivity in the industry if we start standardizing. And then automating. The issue is not building the IT, it’s the business practices.”
Port Congestion Hangover. 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 productivity and infrastructure investment have not kept pace with increasing vessel sizes. It was a theme he emphasized in his discussion at TPM.
“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,” he 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.”
As terminals come to grips with larger vessels, White stumped for the idea of rewarding carriers that regularly meet their berthing windows.
“There’s one other dynamic here—as an industry we talk about trying to sweat our assets better and get better productivity, but what we’ve talked about internally is that if berth availability is always important to the carriers, and terminals want to get their utilization up and want to have a more efficient terminal, they need to reward the carriers that [meet] their berth windows, because that makes everything more fluid,” he said.
East Coast Shift. In talks with customers, Skou sees them eyeing up a more diverse allocation of volume to U.S. East Coast ports or other North American gateways.
“Clearly this has been an experience for a lot of customers and putting your eggs in one basket is seen as the less obvious strategy right now,” Skou said.
White said those shippers that have the biggest challenges were the ones that didn’t have contingency plans going into 2014.
“What we saw after 2002 was that a large portion of volume that moved to the East Coast went back to the West Coast, but there was a portion of that volume that stayed,” he said. “And I think you’re going to find the same thing. And from what I’m hearing from customers, is that, of course, you’re never going to obviate the need of having a Pacific Southwest gateway. But there are alternatives, and for the portion of freight that can move otherwise. If you have a regular weekly supply chain, once you get into the cadence of the weekly system it doesn’t actually disrupt your supply chain that much out of an alternative gateway.
“I think the West Coast probably did itself a disservice by having this lower value service for such an extended period. I don’t think it’ll be cataclysmic, but I do think there will be an impact for sure, and I think customers have to look for more dynamic and better contingency planning,” White added.
Research in February by American Shipper found roughly half of shippers that already use ports on both coasts plan to shift cargo long-term to the East Coast. And nearly a third of those shippers say they will build or relocate to distribution centers on the East Coast.