New CEO Skou eyes a return to profitability for world’s biggest container line.
By Eric Johnson
In a year of pain for liner carriers, the biggest of them all had its fair share.
Maersk Line succumbed to a $483 million operating loss in 2011 as market share battles and increased operating costs took their toll.
And as the line turned the page from 2011 to 2012, it did so under the leadership of a new chief executive officer, Søren Skou.
Skou replaced Eivind Kolding in January in heading the A.P. Moller-Maersk Group’s all-important container shipping division. Kolding left to become chairman of Danske Bank, of which the Maersk Group is the largest individual shareholder.
Skou, most recently head of Maersk Tankers, is not new to container shipping, having filled numerous roles in the liner division from 1983 through 1998.
He’s also been a member of the group’s executive board since 2001. Most significantly, Skou headed the Maersk Group’s cost cutting efforts in 2009 and 2010 in the wake of the global economic crisis that crippled liner carriers.
Maersk Line now focuses intently on costs, evidenced by its global hub-and-spoke operations model and a drive for scale in major trades.
|“Over the past six to seven years, the container industry has not been creating
shareholder value, and that’s a problem for the whole industry.”
|— Søren Skou, CEO, Maersk Line|
In an interview in mid-April with American Shipper, Skou said his task is to return Maersk Line to the black while sustaining the carrier’s focus on customer service.
“We have made a very clear statement that we have to get back to black numbers and not chase market share in the transpacific or any other trade until we have sustainable economics,” Skou said from Maersk’s North American headquarters in Madison, N.J. “We have to deliver our part to the shareholders. Over the past six to seven years, the container industry has not been creating shareholder value, and that’s a problem for the whole industry. We’ve taken out costs, but we’re not creating a return for our shareholders.”
As Maersk Line lies at the heart of a wide-ranging transportation, energy, and retail conglomerate, some have speculated the line’s performance is somewhat insulated, but Skou said “everyone is under pressure to deliver. Being part of a conglomerate that’s controlled by a family does give some advantages in that it allows us to take a longer view in our investment portfolio. But at the end of the day, we have to deliver investor value. I certainly feel that pressure every day.”
Skou’s predecessor Kolding may in some ways be defined by the success of Daily Maersk, a service that promises shippers daily cut-offs at four key ports in Asia and guaranteed transportation times to three ports in Northern Europe. The service started in October and has met expectations, Skou said.
“It has clearly delivered from an operational perspective,” Skou said, noting that the line has provided shippers with a 98 percent on-time delivery rate. “We clearly see we’re getting market share in these corridors. Whether it’s price-related or our customers like what we do, it’s somewhat anecdotal right now. On the cost side, it’s not more expensive for us to deliver Daily Maersk.”
Lucas Vos, Maersk Line’s chief commercial officer, said at Containerisation International’s Global Liner Shipping Conference in London in April that the line “would like to take this concept to other places as well.”
Skou called other lines’ response to Daily Maersk “significant,” adding that the groupings of other lines into four main service factions brought a level of consolidation that Maersk has been seeking for some time.
“It’s quite positive to see consolidation in the industry,” he said. “It’s a good development. The industry, at a global level, is fragmented. The top 10 carriers control 62 percent of capacity.”
When asked if the service concentration represented a step toward industry consolidation, Skou said more is needed.
“It would be helpful if we see balance sheet consolidation, i.e. mergers and acquisitions,” Skou said. “It’s surprising we haven’t seen any of this action coming out of the crisis.”
Perhaps more relevant to North American shippers are Maersk’s efforts on the transpacific.
“In 2011, the Pacific was not a healthy trade,” Skou said. “It was a trade where not only we lost money, but most lost money. In response to that, we’re starting to see the rates go up again, but we’re really only getting to a break-even situation. My expectation is that the rates will go up in the coming months and years.”
Early returns in 2012 on the transpacific are not altogether promising, with most lines seeing revenue declines on the trade in the first quarter. What’s more, annual service contract negotiations on the transpacific did not appear to net carriers the significant rate increases they were seeking, according to Bob Sappio, managing director of global professional services firm Alvarez & Marsal, and a former long-time executive with APL.
Sappio said contracts signed early in the season were a “disaster” for carriers, while those who waited until the end had mixed results.
“Once again, carriers did not get the money they said they needed,” he said during a keynote address to the Virginia Maritime Association’s annual International Trade Symposium in early May.
That might hit Asian lines harder than Maersk, which has a larger exposure to Asia-Europe, where rates appear to be trending up.
“If you’re heavy in Asia-Europe and the spot market and you hedged fuel in the first quarter, you will be alright,” Sappio said. “But if you’re heavy in the transpacific and (direct beneficial cargo owner contracts), it’s going to be tough.”
Another dynamic aiding Maersk Line at the moment is the group’s consistent focus on the growth markets of Africa and South America. On the liner side, that has meant investment and deployment of purpose-built, shallow-draft ships for those trades.
Skou said it’s natural to emphasize markets that are growing faster than the established Western markets “by a factor of 2.5 to three times.”
“As a group, we have identified 15 countries that need what we sell, both within our shipping and energy businesses,” he said. “On the shipping side, we’re interested in countries where lots of people live. We’ve had that focus for a while. From the Maersk Line point of view, it makes sense to have a strong position in countries with growth.”
He named Nigeria and Bangladesh as examples of the focus on high-population growth nations.
Could these growth regions one day rival the establish east-west trades in terms of volume and significance? Skou said it’s probably a question for the “next generation to worry about.”
“It’s a lot of growth, but from a small base,” he said. “The Asia-Europe, transpacific, transatlantic, and also intra-Asia will be the most important trades for years to come.”
Meanwhile, Skou said Maersk will continue its drive to improve customer service, building on its market-leading schedule reliability. The focus will be on “ease of doing business,” a mantra Kolding preached throughout 2011.
“It’s the mundane things, like giving pricing quotes speedily, sending documents on time and accurately, and delivering a container when it’s scheduled to be picked up,” Skou said.
Mike White, president of Maersk Line in North America, called it “a journey you never complete.”
“Customers have told us that it’s not about being wildly different,” White said. “It’s being really good at the things they need us to do. It’s about being consistently reliable.”
Skou added that “in terms of what we can measure, it seems like customers are rewarding us.”
These days, shippers are most concerned with capacity and service levels. And with carriers struggling to remain profitable, capacity withdrawals are always a possibility.
|Source: BlueWater Reporting.|
However, the percentage of the idled global container fleet fell markedly from mid-March to the end of April, so that only 3.6 percent of the fleet was shelved at that time, according to maritime analyst Alphaliner. That means lines are shying away from withdrawing capacity as peak season approaches.
“If we are to get a decent result, we
have to be more disciplined in how we deploy capacity,” Skou said, pointing to Maersk’s withdrawal of capacity on the Asia-Europe trade earlier this year as an example.
“We don’t have any immediate plans to remove capacity,” Skou said. “But if it comes to having to lay up ships, we’ll also be able to use that tool in our toolbox.”
Skou took up the position at the head of Maersk Line after serving a similar role in Maersk’s tanker division, but in that role, he also oversaw the group’s forwarding unit, Damco. Coupled with his previous stint in the container division, Skou said he has some perspective on the liner industry. But coming from a role largely outside of container shipping could have its advantages.
“You are able to ask some questions that are not so obvious for those that are involved for a long time,” he said. “I’ve looked a lot at the hard data. What I’m bringing with me is good acumen and an ability to call a spade a spade.”