Maersk loses $568 million from container shipping in 2006
A.P. Moller-Maersk Wednesday put the lid on a bad year for the world’s largest ocean carrier, posting a loss of DKK3.4 billion ($568 million) for its container shipping and related activities.
That figure contrasts with a profit of DKK7.7 billion ($1.3 billion) for the segment in 2005.
The Danish group blamed the poor annual performance on lower freight rates, stagnant volumes and higher fuel prices.
Speaking at a teleconference, Jess S'derberg, group chief executive officer, said: “It is clear that we didn’t obtain the growth that we anticipated. One of the main reasons is that we rolled out new systems at the same time as integrating the global network and the whole of the P&O Nedlloyd business.”
Maersk Line’s container volumes were roughly the same level as the aggregate volumes of Maersk Sealand and P&O Nedlloyd in 2005. In 2006, the Copenhagen-based carrier transported 6.1 million FEUs, rising to 6.7 million FEUs including its African trades specialist carrier, Safmarine Container Lines.
The lack of volume growth, coupled with the downwards pressure on freight rates, resulted in Maersk’s average freight rate dropping 10 percent to $2,567 per FEU excluding fuel surcharges, and 7 percent including them.
To illustrate how the group’s net result is sensitive to changes in volumes and rates, Maersk said that, based on its expected 2007 results and “other things being equal,” a 1 percent fluctuation to the average rates will result in a $185 million difference either way, while the same increase/decrease to volumes equates to $100 million.
Maersk, unlike a number of other ship owners, conceded that vessel capacity outstripped demand in 2006, which it said rose 10 percent. “The weakening of the balance between supply and demand resulted in a decline in rates, even in services where the capacity utilization was high,” the group said in a statement.
“The lack of growth in Maersk Line’s volumes transported resulted in lower utilization of tonnage than planned and thus higher unit costs for the network. This was mainly due to difficulties in implementing a range of comprehensive IT systems simultaneously with the P&O Nedlloyd integration,” Maersk said.
To counter the rising unit costs, from the second half of 2006 Maersk made significant capacity reductions to balance a global network that was previously geared up for the volume growth that failed to materialize.
“Yield management is critical in regaining profitability in the container business,” said S'ren Thorup S'rensen, group chief financial officer. “Making sure that you put your tonnage where it is yielding the best amount of money is important. Therefore, on a continuous basis, like any other container line, you will see us adjusting our global network.”
Fuel expenses in 2006 were 26 percent, or $700 million, higher than in 2005, of which only about half was recouped through rate surcharges, Maersk said.
Container shipping related investments totaled $2.6 billion in 2006, down from $5.9 billion in 2005, although nearly half of that year’s total related to the purchase of P&O Nedlloyd.
The container shipping division’s revenue improved 17 percent to DKK150.3 billion ($25.3 billion), from DKK128.9 billion in the previous year, thanks in part to a good year for its ports arm APM Terminals.
APMT handled 28.4 million TEUs in 2006, an 18 percent rise over 2005, giving it a market share of 6.4 percent. The Netherlands-based unit recorded a net profit of $99 million, up 32 percent from $75 million in 2005. Its revenue also showed a gain, rising percent 37 percent to $2.1 billion, from $1.5 billion.
Safmarine, the group’s Belgium-based subsidiary line, increased its volumes 25 percent to about 560,000 FEUs, but likewise wasn’t immune to the lower freight rates and higher fuel expenses. “The result was positive, but below that for 2005,” Maersk said of its net result.
The container shipping sector’s final result would have been worse but for a gain of DKK1.8 billion ($308 million) from the sale of 17 older container vessels and about $600 million due to changed depreciation periods on vessels and containers.
The integration of P&O Nedlloyd was completed in the first half of last year, but Maersk said that so far it has only generated “modest” synergies, although it expects to see benefits in that regard over the next few years.
The takeover consolidated Maersk’s position at the top of the container tree, swelling its fleet capacity by about 500,000 TEUs and its staffing levels by about 11,000. The cost of the integration in 2006 was $123 million, down from $209 million in the prior year.
S'derberg said the company doesn’t regret the takeover, but admitted that the timing could have been better, coming at the start of the latest down cycle in the industry. “You have to take your opportunity when it is there,” he said.
Faced with rapid growth at its closest rivals, Mediterranean Shipping Co. and CMA CGM, the CEO said that the company would not seek to maintain its position at the top ranking via acquisitions, at least not this year.
“We are focusing this year on being profitable rather than on market share, but we will get back and we intend to keep growing,” S'derberg said. He added that he doesn’t exclude more acquisitions in the future, but dismissed the persistent speculation that Maersk is preparing a bid for German carrier Hapag-Lloyd.
For the group as a whole, profit for the year dropped 20 percent to DKK16.2 billion ($2.7 billion) on a 3 percent revenue gain to DKK267.8 billion ($8.7 billion).
Looking forward, Maersk expects to post a “modest positive result” for container shipping but below general market growth. Group revenue in 2007 is expected to rise to $50 billion, an increase of about 12 percent.