Rated ?R? for dramatic scenes

Rated æRÆ for dramatic scenes    Just a few short months ago, I wrote about the vast financial wasteland that was the container shipping industry in 2009 ('Who's not making money,' www.AmericanShipper.com/links ).
   Since then, most major container lines have released their first half 2010 financial performances, and the turnaround has been quite dramatic. Both Maersk Line and CMA CGM say they made more than $1 billion in operating profits in the first six months of the year. The French line, after enduring a tough 2009, said its operating profit margin shot up to 15.5 percent in the first half, heady highs for the typically low-margin industry.
   Pick a line, and they made money from January through June. Some made heaps, like Maersk and CMA CGM, and some finally turned the red corner onto black street, like APL and Zim.
   So what gives? Yes, the container shipping industry is famously cyclical, but just as last year was historically bad, the recent rapid recovery also has to be considered historical. Maersk flipped from a near $884 million loss in the first half of 2009 to a $1.2 billion profit this year.
   Maersk Group Chief Executive Officer Nils Andersen attributed the intensity of his company's recovery to incisive cost-cutting the past two years. 'If we had not improved our cost position in the container business, it's likely we would have talked about a zero profit in this half, even with improved rates,' he said during a conference call announcing the company's first half results.
   In August 2009, when Maersk announced its $884 million operating loss, Andersen said the carrier had been undone by poor rates. But this year's $1.2 billion operating profit was not primarily tied to rates?
   CMA CGM spoke in the same terms, emphasizing its cost-reduction efforts before mentioning 'an upturn in the global economy, which drove an increase in both volumes carried and freight rates.'
   Another troubled line in 2009, Zim, reported its first positive half-year result, $3 million, since the economic crisis began. And the Israel-based line also sounded the cost-reduction gong. 'These results were achieved not only owing to the dramatic improvement in the market conditions in the container-shipping sector, but also as a result of the internal efficiency program and structural changes implemented by the company,' Zim said.
   But what the first half really showed was how the fortunes of major container lines are purely, inextricably linked to demand and rates. Maersk, CMA CGM, Zim and their competitors may focus on internal efforts to drive down costs, but a multi-multibillion-dollar industry turnaround in 12 months doesn't happen primarily through eliminating redundancies. It happens because revenue increased significantly.
   Take this note about the parent company of OOCL, from a Citi analyst report in late August on Asia's major shipping lines: 'OOIL's revenues and profits are highly vulnerable to a slowing container-shipping environment.'
   Yes, OOIL has become more focused on container shipping, with the sale in recent years of its terminal and property divisions. But you could apply Citi's appraisal of OOCL to many of the world's top container lines. Rates are the key determining factor in a line's financial performance, more than cost-cutting, customer service or capacity management.
   That's not only because increased rates lead to more profit for every container a line moves, it's also because a line will be induced to carry more containers if rates are higher. OOCL said pointedly in mid-2009 it had stepped away from unprofitable business. This year, it will have jumped back in to take advantage of strong rates. That has a two-way effect on revenue and profitability.
   Another example is CSAV, which made $49 million in the first half of 2010 after losing $423 million in the same period in 2009. CSAV has turned things around by doubling down this year, starting a host of new services (some in new or vacated trades) with chartered vessels. The Chilean line used a reprieve it earned through multiple injections of cash last year ' including some from the very ship owners it charters from ' to resurrect its fortunes this year. It was a gamble strategically placed with the expectation that rates would be robust this year.
   If anything, this year has shown just how commoditized the industry really is, despite widespread attempts by several lines to differentiate themselves on various points of service. At the end of the day, poor industry-wide rates will drag a good company down just as quickly as it will drag a bad one down.
   And a company that has performed poorly over a number of years still has the chance to make gobs of money in a high-rate year.

Reliable reliability?
   APL made a foray into schedule transparency in August when it issued its first quarterly on-time performance report, not surprising for a company that sells itself on customer service.
   The line pointed out its sterling performance since February on the eastbound transpacific lane, saying only two of 99 sailings missed their on-time window in North America, both due to fog in Asia.
   Attempting to provide this data is laudable. Only Maersk has made such a public proclamation of attempting to improve on-time performance, and it has relied upon third-party liner schedule reliability estimates, while saying it is shooting for 95 percent on-time performance.
   There will be questions about the reliability of APL's self-reporting, but the carrier said it welcomes any inquest into its performance.
   'Our service is not perfect, but it is improving,' said Ron Widdows, chief executive officer of APL's parent company, NOL Group. 'Through this quarterly reliability report, shippers will be able to measure the progress, and we welcome the scrutiny.'
   But overall schedule reliability for the industry is still woeful, a wound that has become even more raw for shippers in the face of slower transit times and higher rates. It raises the question: just what have shippers gotten for their extra ocean transportation spend this year?
   It gets back to what was discussed earlier in this column. Rates and volume drive the industry, vastly overshadowing incremental improvements in service quality. Aside from slower transit times (caused by widespread use of slow steaming that has helped carriers use their assets better) shippers had to endure a shortage of containers at precisely the moment that demand enjoyed a two-year peak.
   It's nice if a line provides new customer service enhancements. But if there are no containers available and the ships are routinely late, and rates increase despite it all, how are shippers left to feel that the industry is moving beyond offering a commodity?