WhoÆs (NOT) making money
Sifting through the carnage of 2009, no one line escaped a horrific year for the container-shipping industry.
By Eric Johnson
Summary of annual survey
' Every line examined lost huge amounts of money, with the top 15 public lines shedding $11.4 billion in 2009.
' Volume slid 9% but revenue plummeted nearly 40% as rates reached dangerously low levels on core trades.
' Loss per TEU carried emerged as a better measure of carrier performance in 2009.
' Lines that turned away unprofitable cargo performed markedly better than their competitors.
There are many ways to convey the gravity of the crisis the container-shipping industry experienced in 2009, but none do so more effectively than a simple number: $11.4 billion.
That's how much the top 15 publicly traded carriers, analyzed in recent weeks by American Shipper, collectively lost last year. And that doesn't even include the losses of the second- and third-biggest carriers in the world ' Mediterranean Shipping Co. and CMA CGM, neither of which is a public company, but whose combined losses could very well have topped $2 billion.
And what makes the losses stand out all the more is that the same 15 carriers collectively made $13.3 billion in profits from 2005 through 2008. What took four years to build took one year to wipe away.
In all, the industry's losses are likely to be somewhere from $15 billion to $20 billion, a simply staggering amount of money to have evaporated into the ether. For the first time since American Shipper began compiling its annual Who's making money report, there is not a single line in the black.
'It's a lot of money to lose,' said A.P. Moller Group Chief Executive Nils Andersen, when summarizing Maersk Line's $2.1 billion loss in 2009. But Andersen's words could very easily apply to the industry as a whole.
The rebuilding has begun. Some carriers turned a corner at the tail end of 2009 or the first quarter of 2010. Most lines are predicting they'll be profitable in 2010, with some forecasting substantial profits.
That 2009 was dire financially is not exactly breaking news. The top lines' performance provides conclusive evidence of how the industry was battered, but it's no eye-opener at this point.
Looking back, what is interesting to see is how the various lines managed the downturn operationally. Yes, it's true that Maersk, the world's biggest liner carrier, lost almost $2.1 billion in 2009, nearly three times the $739 million loss of APL, the next-biggest public line, in terms of boxship capacity.
Yet per box, Maersk performed a little more solidly than APL, losing $151 per TEU it moved, compared to a $160 loss for every TEU APL moved. And Maersk's huge losses might be chalked up, to some extent, to the fact that they have more boats in the water than anyone else.
But therein lies the problem. Though Maersk performed better than many of its competitors in terms of loss per box, there's no escaping the fact that it subjected itself to 13.8 million chances to lose $151 during 2009. The majority of other lines did the same.
The carriers clearly felt the need to preserve market share, and it manifested itself in a year in which there were no winners, only losers.
Best Of The Worst. No one in the industry can say they stood above the fray, because every single major international carrier lost heaps of money.
The best performing carrier, in terms of losses, was OOCL (it was also second-best in terms of loss per TEU). Long a steady performer, OOCL rose to the top of the table in 2009 predominantly because it was one of the choosiest carriers in terms of the business it turned down.
The Hong Kong-based line has long eschewed a drive to be among the world's biggest, and has instead focused on profitability. American Shipper recently profiled its advantageous position, mostly due to the sale of its terminals division two years ago, which likely gave it the ability to say no to some business ('Money in the bank,' March American Shipper, pages 30-33, or www.AmericanShipper.com/links).
Yet the champagne won't be popping in Wan Chai for heading the 2009 list. The carrier did still lose $326 million during the year (or roughly $893,000 every single day), the first time in nearly two decades OOCL showed operating losses in any year. And that was the best performing of the major lines. COSCO Container Lines, near the other end of the table, lost an average of $3.1 million every day.
To put OOCL's relatively good performance in recent historical perspective, the $326 million loss would have been the single-worst performance for any of the public container lines American Shipper analyzed from 2004 to 2008. In 2009, it was the best.
What's notable about the performance of the 15 lines American Shipper examined is how few outliers there were. Every carrier lost and every carrier lost big.
In many ways 2009 most closely resembled 2005, when every line made heaps of money, and performance loosely paralleled container volume. In the heady days of 2004 and 2005, volume simply meant profit.
In the intervening years, some lines prospered and others struggled, typically when trying to integrate massive acquisitions (like when Hapag-Lloyd sunk to a loss in 2006 after its acquisition of CP Ships). From 2006 to 2008, some lines struggled operationally, and others were more exposed to the early effects of the financial downturn in 2008. In any case, the point is the market alone didn't ensure that lines would be profitable, as was the case in 2004 and 2005.
But in 2009, volume simply meant losses. No line could escape the vortex created by spiraling rate decreases layered atop steep demand drops.
Clearer Measure. Again, the best metric to judge which lines performed best last year is not necessarily operating losses. Loss per TEU (see Table 3) is a far more compelling measure of which lines were able to manage costs and discern the difference between profitable and unprofitable cargo.
There, it's clear that a few strata emerged. In the first band were lines like OOCL, Evergreen, China Shipping, Maersk, APL and NYK Line. Another seven lines hovered around the $200-per-TEU loss mark, and then at the bottom were CSAV and Zim ' both of which lost more than $300 per TEU carried.
It's a sobering assessment for Zim and CSAV, two lines that teetered near the edge throughout 2009 and were saved largely by shareholder infusions of cash. In last year's Who's making money (July 2009 American Shipper, pages 40-51, or www.AmericanShipper.com/links), both were among the small group to have lost money in 2008, and so were easy to pick as carriers that would struggle mightily in 2009.
This year, both moved their way up the profit/loss table, but that was largely because other carriers lost more money, not because of their own operational improvements.
The bitter truth is CSAV and Zim actually regressed in 2009, CSAV's losses more than quadrupling and Zim's nearly tripling. That they find themselves at the bottom of the loss-per-TEU table is more telling than their relative improvement in the profit-loss standings.
Revenue Power At Top. What the tables in this report don't show are the performances of privately owned MSC and CMA CGM. Those two, along with Maersk, form a powerful European troika threatening to run away from the rest of the table.
While focus is often on volume and capacity when measuring a line's importance, equally important may be revenue. By that financial metric, Maersk, MSC and CMA CGM hold the keys to the car. Together, their revenue in 2009 was likely about $45 billion.
CMA CGM's revenue was $10.5 billion, according to a financial statement it released in April, and Maersk's was $20.6 billion. While MSC is private and does not release financial details, its capacity falls almost midway between Maersk and CMA CGM. So a fair estimate is the Swiss line earned $15 billion in revenue in 2009.
That $45 billion in revenue equates roughly to the collective revenue of the top 10 best performing lines in 2009 (outside of Maersk). That equates to power that volume alone can't provide.
For instance, China Shipping moved more containers in 2009 than all but Maersk, MSC and CMA CGM. But its revenue ranked 11th out of the 15 carriers surveyed in this year's Who's making money.
On the capacity side, APL is the fourth-largest carrier by fleet size, according to maritime news service Alphaliner. Yet four carriers with less capacity carried more containers than the Singapore-based line in 2009. APL's revenue for 2009, however, ranked only behind Maersk, Hapag-Lloyd (and MSC and CMA CGM).
So China Shipping had high volume and relatively low revenue, while APL had average volume and high revenue. Now those losses might have stung APL in 2009 and early 2010, when the line also failed to reach profitability, but the high revenue-per-TEU ratio suggests APL is garnering a premium price for its service, something that will stand it in good stead when demand fully rebounds.
In the meantime, China Shipping, despite its heady volumes, is working on a thinner margin. The line secured only $432 in revenue per TEU it moved in 2009, compared to $1,493 per TEU for Maersk, $1,329 for CMA CGM and $1,178 per TEU for APL.
Clearly carriers have divergent operating models, but the key is that the European lines seem to have struck a hard-to-find balance between charging premium rates and merely striving for volume.
Revenue Key To Rebound? Revenue is so crucial because it provides options. Maersk's $20.6 billion in revenue allows the carrier to explore new trades and upgrade its fleet with more peace of mind, even as its operating losses look bleak. China Shipping ' whose revenue is nearly 10 percent of Maersk's, but on nearly half of Maersk's volume ' is stretched thinner with less room for error. That's most evident in the table showing operating margins, where Maersk, despite its huge losses, ranks third and China Shipping ranks last.
China Shipping's 32 percent loss margin will be more difficult to turn around in 2010 and beyond because it's not able to secure the revenue per box that Maersk or a handful of other lines do. Couple that with the fact that China Shipping has an order book equivalent to 34 percent of its current fleet (as of early June 2010) and it will be difficult for the Shanghai-based line to keep pace.
And how quickly things change. Just two years ago, China Shipping had the third-highest profits of any public line analyzed by American Shipper.
China's other major carrier, COSCO Container Lines, struggled mightily last year as well. Not only did its $1.1 billion container division loss finish as the second-worst result in the standings, its revenue languished behind five carriers whose fleets are smaller. Operationally, its loss per TEU of $218 was only 11th best and its operating margin ranked only above China Shipping.
Both lines, it appears, were battered by the particularly poor performance of Chinese exports, and the resultant drop in Chinese container volume. While other carriers battled for their reputation in the court of public opinion (due to government or shareholders rescues), there was mostly silence from China.
By another measure ' loss per operational capacity ' COSCO fared much worse than Maersk. The Chinese line lost $2,400 per TEU in its fleet, while Maersk lost $921 per TEU in its fleet.
Meanwhile, some of those lines that flirted with disaster in 2009 performed reasonably well. CMA CGM lost huge amounts of money but said it had returned to profitability by December, and is forecasting $1.8 billion in profits for 2010. Hapag-Lloyd lost $893 million in 2009 but was in the top half of the table in terms of operating margin.
Evergreen One To Watch. Then there's Evergreen. The line has been conspicuous in recent years by its complete dearth of containership orders. In 2009, however, Evergreen's most notable move was to slowly pull back capacity on its core trades, especially on the transpacific. That led to the line shedding 18.3 percent of its 2008 volume, more than all but one other line surveyed by American Shipper.
Its operating margin wasn't especially strong ' at 15 percent ' but it performed best of all carriers in terms of loss per box, suggesting the line was prudent in not chasing low-rate-paying cargo. Interestingly, Evergreen confirmed earlier this year that it's to jump on the ship-ordering bandwagon with as many as 100 new ships in the pipeline.
Aside from operations, there's the matter of debt. Most lines are carrying sizable amounts of debt coming off a year in which there was more money leaving the till than coming in.
As an example, Korean carrier Hanjin Shipping can be considered the median point of the 15 carriers analyzed in this report. The line finished eighth in operating losses, eighth in operating margin and tied for ninth in loss per TEU.
At the end of 2010, Hanjin had liabilities of $5.3 billion, and assets of $6.7 billion. However, much of the company's assets are tied up in container vessels, the value of which can fluctuate wildly. According to Alphaliner, Hanjin has more than half the capacity of its current fleet on order.
Yet with a healthy revenue per TEU of $1,368 (healthy, that is, relative to the industry in 2009), Hanjin's probably in decent shape. It's a core member of the CKYH Alliance, which has a leading market share on the transpacific trade, and would likely become one of the top seven carriers in the next few years if it takes delivery of all its orders.
Hanjin is by no means alone in carrying significant amounts of debt. The parent company of OOCL, the best performing line in 2009 and with cash from the sale of its terminals division, has $3.3 billion in liabilities. Maersk's parent company has $12.1 billion. The question is whether that debt is a burden or an insignificant detail.
Perhaps another prism through which to view the situation is stability of profits. Only a handful of the 15 lines examined in this year's report can say they've made substantial profits each of the last five years preceding the meltdown in 2009 ' Maersk, OOCL, and Hyundai are the notable ones (along with CMA CGM, which was previously included in the report).
A handful, like Hanjin, APL, China Shipping, COSCO and Yang Ming, remained profitable throughout 2004-2008, but those carriers saw their profits dip badly in 2008, presaging the troubles they were to face in 2009.
This is not to suggest that the industry didn't perform well during that period ' including 2008, when the 15 carriers in this report made $1.1 billion collectively. Rather it's interesting to see which carriers had enjoyed steady profits and which ones saw their fortunes swing.
One issue that surely impacted carriers' ability to minimize losses in 2009 was their relative exposure to charter vessels. It's not a linear relationship, but many of those who relied on chartered ships suffered the worst last year. CSAV, for example, has the highest percentage of chartered ships and was one of the worst in terms of loss per TEU.
APL's heavy losses can be chalked up, in part, to the higher fixed costs of chartering nearly 75 percent of its fleet. Same for CMA CGM.
But, as mentioned above, it's not a failsafe measurement. Zim, for instance, struggled mightily despite a pretty even balance of owned and chartered capacity, while Korean lines Hanjin and Hyundai fared relatively well despite a heavy reliance on chartered ships.
NYK and OOCL, partners on the Grand Alliance, are among the least reliant on chartered ships, and both performed well in terms of loss per TEU.
The takeaway, it seems, is that there's no financial magic bullet that provides a clear indication of how well a line is performing. A line may strive for high revenue per TEU or high volume, or it may depend on owned or chartered tonnage. It may believe in a conservative ship ordering strategy, or it may believe new ships are the key to future profitability.
By any of those measures though, 2009 was, as one liner executive put it to American Shipper, 'a chapter I'm glad to see closed.'
But look for those lines that have strong market positions in key trades, those that can secure premium rates for their service, and those unencumbered by large amounts of debt to bounce back the strongest in 2010.