GLOBAL LiNKS
B Y PAT R I C K B U R N S O N
Financial Distress in
Container Shipping Industry
Rises for Third Straight Year
Continued sluggish demand, a growing mountain of
debt, and a radically changing global marketplace
has the ocean container shipping industry reeling, say
financial analysts.
S
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Supply Chain Management Review
•
May/June 2014
Global Fleet Capacity (Million TEU)
Debt ($Bn)
Patrick Burnson is the
executive editor at
Supply Chain
Management Review.
He welcomes comments
on his columns at
pburnson@peerlessmedia.com
upply chain managers are justifiably vessels,” and fill key trade lanes with these
concerned about the recent consoli- new ships. This represents a trend that over
dation of ocean carrier services, but the past decade has steadily increased leveran even greater threat to their operations age across the industry and has left it with an
may be lurking ahead. According to a new average EBITDA interest-coverage rate of just
AlixPartners study, many of the major inter- 4.9. This is less than half the rate it was in
national players face more financial dis- 2011 (10.8) and less than a third of what it
tress—even possible bankruptcy.
was in 2010 (15.0).
Esben Christensen, director of the busiThe study notes, too, that while global fleet
ness advisory firm, says that listed companies capacity in the industry has risen steadily in
have been troubled for the past three years.
the past decade, to 16.9 million TEU (twenty“Our analysis suggests that the number foot equivalent unit) for the 12-month period
of parties controlling containerized transpor- ending September 2013, up from 16.3 million
tation on critical trades is shrinking through TEU in 2012 and from 10.9 TEU in 2007,
operational alliances and—potentially in the that capacity is a long way from being totally
future—through carriers exiting the busi- utilized. This has led to more alliances in the
ness,” he says.
EXHIBIT 1
Contributing
mightily to this situation, says
Debt of Carriers Analyzed and Global Fleet Capacity
the study, is a so-so global
$120
16.9
18
16.3
15.4
economy that still hasn’t
16
14.3
100
$105
bounced back from the
13.1
14
$99
12.4
$91
downturn following the
80
12
10.9
$80
worldwide financial cri$77
10
60
sis of 2008-2009 the way
$63
8
$54
other post-recession econ40
6
omies have in the past.
4
However, the study also
20
2
points to several structural
0
0
issues also buffeting the
2007
2008
2009
2010
2011
2012
2013*
industry. These include *2013 Figures are trailing 12 month to end of September 2013, all other figures are full year.
Source: Publicly available data and AlixPartners analysis
a drive to build “mega
www.scmr.com
GLOBAL LiNKS (continued)
industry and will likely create an environment of haves
and have-nots where smaller carriers will face some
hard choices in the future.
Structural Changes
On top of all that, the study asserts that other structural
changes that will challenge companies this year include
changing trade routes in some parts of the world, with
cost increasingly trumping transit time, and a newfound
pressure on the part of some of the stronger lines to
squeeze, or even totally bypass, non-vessel-operating
common carriers (NVOCCs), giving those lines more
advantage over the have-nots of the industry.
“The container shipping industry as a whole continues to face stiff challenges, and for many companies in
the industry those challenges could be existential if not
addressed,” says Lisa Donahue, managing director and
global head of Turnaround and Restructuring Services
at AlixPartners. “These challenges also have, and will
continue to have, a big effect on shippers and investors
as well.”
There’s likely to be even more disruption in the
ocean cargo carrier arena.
For shippers, the study recommends closely monitoring the financial health of the carrier base, not “over-
I
Supply Chain Implications
n an exclusive interview, Supply Chain Management Review
(SCMR) asked AlixPartner’s Esben Christensen for a few
more details on supply chain implications.
SCMR: Do you anticipate any sudden shift in rates?
Esben Christensen: AlixPartners’ analysis suggests that
the number of parties controlling containerized transportation on critical trades is shrinking through operational alliances and—potentially in the future—through carriers exiting the business. This would have a profound impact on the
supply chain managers who rely on these services, in that
the consolidation often brings with it less choice and higher
prices. In the longer term, however, the change that’s on the
horizon could be largely positive for the carriers who survive
with more efficient ships and greater pricing power. In the
shorter term, though, shippers should probably expect rates
to remain at low levels as the market sorts out all of these
changes.
SCMR: How should supply chain managers mitigate risk?
Christensen: The report suggests that supply chain
managers can mitigate the risks related to financial distress
amongst the carriers by closely monitoring the health of their
providers, contracting with groups of carriers representing
www.scmr.com consolidating” the carrier base (so as to have alternatives
should markets brighten), considering index-linked contract options, and benchmarking rates and service levels via objective third-party resources. For investors, the
study recommends paying close attention to the widening chasm between the leaders and the laggards, and
working with experts to determine which companies
have viability and which may not—while also keeping
an eye out for attractive asset sales, as many lines may
move to divest themselves of assets, especially non-core
ones, in the future.
Meanwhile, for carriers themselves the study recommends divesting non-core assets, exiting unprofitable trades, adopting a laser-like focus on cost control,
reassessing all value propositions, and partnering where
partnering makes sense.
“For all the challenges facing all of the players in the
container shipping industry today, there are also a lot
of opportunities, including the promise of the much
greater profitability that a streamlined, resilient industry
might bring, as has been the case in many other industries,” says Donahue. “But to make the most of those
opportunities will take insightful analysis and then firm,
decisive action. It’s been done in other industries, and it
can be done in this one as well.” jjj
diverse alliances (as opposed to over-consolidating their
volume with just a few carriers or alliances), and keeping at
least one non-vessel operating common carrier in their provider base. In the shorter term, these important steps should
help allow supply chain managers to proactively direct their
volume to healthy and stable partners, sustain a disruption
without it reaching catastrophic scale, and tap extra capacity
as need dictates to address contingencies. In the longer term,
savvy supply chain managers should probably also consider
the merits of index-linked contracts that could protect them
against wild price movements.
SCMR: Finally, will the financial distress in the container
shipping industry lead to greater reliance on air cargo, even
though it’s more expensive?
Christensen: Probably not in a structural sense. There
may be some freight that moves to air to compensate for
disruptions, but our study does not anticipate a reversal of
the long-term trend of air cargo moving to slower, cheaper
modes. Rather, in the longer term it is likely that more container capacity in fewer hands will lead to more reliable sailing schedules, which, in turn, could bite further into the air
cargo volume.
Supply Chain Management Review
•
May/June 2014
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