Transactional thinking must go

Transactional thinking must go Kolding says Maersk Line will try to shrug off a torrid 2009 with a renewed focus on customers.

By Eric Johnson and Chris Dupin

      For a man sitting atop an industry projected to have lost $20 billion in 2009, Eivind Kolding seems pretty calm and collected.
      In early March American Shipper spoke to Kolding, chief executive officer of Maersk Line, the world's biggest ocean carrier, about a host of issues confronting the line. The interview occurred mere days before Maersk Line's parent, the A.P. Moller – Maersk Group, announced that the container line lost a staggering $2.1 billion in 2009.
      Yet Kolding seemed upbeat that his company and the container industry as a whole would learn valuable lessons from the previous year.
      'There's nothing better than huge losses to make people act more rationally,' Kolding said. 'We have to get away from the transactional part, and I think people are ready to push for this. I think we can do it irrespective of whether other carriers follow.'
      The interview occurred on the sidelines of the Journal of Commerce's Trans-Pacific Maritime Conference in Long Beach, Calif., where Kolding had delivered the opening keynote address. In that speech, he stressed the importance of building long-term relationships with customers as well as improving the on-time performance of carriers.
      'How come it is perfectly acceptable for rates to drop 100 percent and then increase 100 percent when the costs of transport remain relatively stable?' Kolding said in the speech. 'Is it possible to make longer-term commitments? Over time we should be rewarded for making such long-term commitments.'
      In his wide-ranging discussion with American Shipper, Kolding said that over the past five years, Maersk has changed its focus to be more customer-minded.
      'That is the way forward, and in the next five to 10 years, we will see a lot of change on this,' he said. 'Some customers are like-minded on this.'
      When asked whether Maersk has a responsibility to lead the rest of the industry, Kolding said it would try to influence where it could.
      'You need to divide those issues you can influence and those you can not,' Kolding said. 'You can't influence the market behavior, so you have to set that aside. Our primary focus has been on cost reduction (yet he added no amount of cost reductions could have matched the line's revenue drop in 2009). We have a responsibility, but also an opportunity, to lead the industry. It's good to be a leader but if no one follows ' For example, with slow steaming, we have done something that the industry can follow.'
      Indeed, Maersk set the slow-steaming wheels in motion when it announced in early fall it would slow down all of its Far East/Europe services, in effect daring its rivals to match the costs gains it could achieve by consuming less bunker fuel. Kolding, in his speech, said that though the move has environmental benefits, it is primarily a measure to control cost.
      'Slow steaming was taken as a measure primarily for cost reduction,' Kolding said. 'It has the side effect that it's taken out capacity. There are still strings where speed can come down and there are still carriers that can be more active in slowing their services.'
      That Maersk has focused singularly on cost is little surprise. Kolding said projections of a $20 billion loss for the industry in 2009 are 'fairly accurate.' Given Maersk Line's $2.1 billion loss alone, that may well be true. A crude extrapolation of Maersk's loss using its global capacity share (about 15 percent) would substantiate a projection of $13 billion or more of total losses. Much, of course, depends on how smaller carriers managed their losses.
      The hemorrhaging within the industry led most to speculate that consolidation was a must, and it's a view that Kolding and other Maersk executives have consistently taken.
      'Everyone thought it was likely we would see some mergers, some restructuring,' Kolding said in his speech. 'The top 10 carriers have about 60 percent of the market share. Fundamentally, the industry needs consolidation. We just have to realize it will take more than a crisis to push that development. It's a negative that governments have interfered in an area where free trade principles should operate. I don't believe we will see a shipping line go down.'
      Kolding pointed to enduring difficulties for non-operating owners as a measure of the industry's health.
      'Time charters are at a level where they barely cover operating costs,' he said. 'Half of the order book is held by non-operating owners, 90 percent of which are German KG houses.'

Concentration At Top. Meanwhile, on the other end of the spectrum are the three biggest operators ' Maersk, Geneva-based Mediterranean Shipping Co. and Marseilles-based CMA CGM. The world's three biggest shipping lines already control more than one-third of global containership capacity, and the power at the top seems ready for more concentration once those three lines take delivery of scores of new vessels.
      The three lines have nearly 1.5 million TEUs of capacity on order, or nearly one-third of their 4.6 million TEUs of current capacity, according to maritime news service Alphaliner. Only one other line, COSCO Container Lines, has anywhere close to the amount of capacity on order than the big three.
      Yet Kolding said this kind of concentration at the top is needed.
      'If two mid-size players merge together it wouldn't affect things,' Kolding said. 'It's natural in so many other industries for the top two or three companies to control 75 to 80 percent to have stability and profitability.'
      Maersk, MSC and CMA CGM famously collaborated on the transpacific in February 2008, a move that raised eyebrows given the fierce competition at the top. But Kolding said the agreement has been successful.
      'It's actually worked well,' he told American Shipper. 'We've seen the benefits of higher average utilization. The transpacific, operationally, is not the most difficult to service, so we can keep high quality through the (vessel sharing agreement). It's more tactical than strategic.'
      Maersk made another major move in the transpacific in late 2009 when it decided to rejoin the Transpacific Stabilization Agreement after a five-year absence. Kolding said the environment, both inside and outside the carrier community, had changed in the intervening years.
      'If we can get benefits and stability out of (being a TSA member), we can certainly continue,' he said. 'That was not the case when we left. The circumstances have led carriers to be more disciplined and like-minded.'
      Maersk lost the ability to cooperate with other carriers on trades to and from Europe, and Kolding told American Shipper that it's tough to gauge what impact the European Commission's ban on liner antitrust immunity will have until the market rebounds. (For related news, see 'ELAA's sunset,' page 51).
      'The conference ban was overshadowed by the crisis,' he said. 'In hindsight, it happened at the worst possible time.'
      Yet Kolding said the conference 'obscured the market,' propping up lines who may not have been able to survive on their own.
      'I'm O.K. with the conferences not being there,' he said.

Idling Along. Chief among Maersk's concerns on the transpacific, when weighing whether to rejoin the TSA, had to be the management of capacity. Though TSA members are not allowed to discuss capacity, they have been granted the right by the Federal Maritime Commission to discuss slow-steaming strategies. And the management of the idle containership fleet, which stands at about 10 percent of global capacity, will likely determine whether rates stay firm the rest of the year.
      'How many of these idle ships will come back into service?' Kolding said in his speech. 'I don't know. It depends on the plans of individual carriers. But most idle ships are small to medium-sized ships. It still doesn't make sense to reintroduce these ships. I don't think we'll see an influx of idle ships returning. At the moment, we have a reasonably fair balance between supply and demand. But idle ships may come in faster than expected. There's a lot of uncertainty, far more uncertainty than we used to see.'
      'That the bigger ships aren't being laid up just shows how much more efficient they are,' Kolding said in response to an audience question about whether a focus on bigger ships may have backfired against major carriers.
      He added that while big ships typically work most efficiently in a hub-and-spoke model that relies on transshipment, they still offer more efficiency for shippers.
      'When you send a parcel with UPS, you're not too concerned where its transloaded,' he said. 'I don't think the answer is to reverse the development of bigger ships.'
      Kolding attributed the wide gap between supply and demand to the industry 'building for growth.' He also said the surge in demand at the start of 2010 should be viewed cautiously.
      'Restocking is the driver for volume as underlying demand has not picked up,' Kolding said. 'There's been a 13 percent increase in U.S. import volumes but only a 1 percent increase in retail sales, suggesting it's an inventory correction. It's not a sustainable upturn in front of us.'
      Hinting at how unaware the industry was about the surge, he said, 'I can't explain why all sorts of industries decided to restock at virtually the same time. We have the capacity to meet demand, but we didn't have the capability to do it in a week's notice.'
      Though the surge out of Asia may have caught carriers napping, Kolding said Maersk is quite aware of the potential of Asia to drag the container industry out of the doldrums of 2010. He pointed to more lasting strength in Asia than in the developed regions.
      'A full recovery in Asia import volumes is rebalancing trade,' he said. 'The backhaul trades to Asia and intra-Asia were strong in 2009,' a point Maersk Group CEO Nils Andersen made as far back as the third quarter of 2009.

Moving Away From Transactions. But in both his speech and interview with American Shipper, Kolding kept returning to the theme of being more customer-driven.
      'How do we get away from being transactional?' Kolding said. 'It's not a solution to fight for market share. In 2009, shippers and carriers operated in a way that neither side was all that proud of. Rate levels are still only at breakeven.'
      Part of that move away from transactions is creating more recognizable segments in the industry that focus on service versus price.
      'I don't mind that we see this segmentation' in service levels, Kolding told American Shipper.
      It was a theme reiterated by Andersen on March 4 as the company announced its results: 'We don't see our liner business as a commodity business. We believe there is space for a liner company that gives superior service and is focused on consumer business.'

'I can't explain why all sorts of industries decided to restock at virtually the same time.    We have the capacity to meet demand, but we didn't have the capability to do it in a week's notice.'

Eivind Kolding Chief executive officer, Maersk Line

      That Kolding spoke mere days before the company's financials were released can be chalked up as a coincidence, but Maersk Line's losses were so severe they weighed down on the whole group, which for the first time ever posted a loss (of $1 billion).
      'It's a lot of money to lose,' said Andersen, attributing the loss to an 'extraordinary year with historically low rates and low demand.'
      'The container industry as such had a significant volume decline, but really what made the most negative effect for the industry was our willingness and capacity to take rates down below cash operating cost and do it very fast, and that resulted in a very poor rate situation,' Andersen said. 'That is the main reason why we lost the amount of money we lost.'
      He noted the company had limited the loss by saving around $2 billion, in addition to savings related to lower bunker prices. Those savings will strengthen the company's competitiveness, said Andersen who added, 'we expect to return to modest profits in 2010.'
      Market volume was down 13 percent in 2009 compared to 2008, but Andersen said the industry was hurt 'first and foremost by a decline in rates.'
      Maersk container volumes were down only 1 percent, while the company said its average rates were down 28 percent. That Maersk lost so little volume compared to the industry as a whole might open the company up to questions about whether it went after market share in 2009. Andersen said at various times in 2009 that Maersk wouldn't allow competitors to price them out of markets.
      'We have gained some market share last year,' he said. 'It looks a little bit more dramatic than it is. And it was not our strategy to gain market share, but there are three things coming together: one, we have grown our backhaul business quite well last year. We were underrepresented on backhaul, and that we corrected somewhat, and also at lower rates, which is normal for backhaul versus head-haul. Second, we have grown our business intra-Asia, which is a relatively small business, but they have done well simply because the market is better there, and we have also taken a bit of the share of the market. And the third effect is probably some customers have chosen to ship more with us as they considered us to be a more safe choice.'
      Maersk saw volume declines in the transpacific, transatlantic, Africa and Latin America trade lanes, but increases in the Asia/Europe, Oceania and intra-Asia lanes. Andersen noted that increases in some cases were on the backhaul, where rates are lower. For example, in Asia/Europe, head-haul volumes were down 2 percent, but volumes were up 25 percent on the backhaul. Intra-Asia volumes were up a whopping 35 percent for the company in 2009, but rates were down 19 percent.
      Talking about the outlook for the container-shipping industry generally in 2010, Andersen said Maersk was estimating there would be a 7 percent to 10 percent increase in capacity, compared to a 6 percent increase in 2009.
      He noted that in 2009 capacity was effectively reduced 5 percent because of slow steaming. Maersk expects that trend to continue in 2010, with another 2 percent decrease in capacity resulting from the further spread of slow steaming in 2010.
      'This is not something we expect to return to the market because the container lines are still very loss making, most of them, and the rates we are seeing now cannot really sustain an increased cost level, and slow steaming saves significant amounts of bunker oil, so we do not expect that to change in the future,' Andersen explained.