Q2 results reveal an emboldened container shipping industry

JOC 21 Aug 2020 Share
Blanked sailings, less fuel consumption, and cheaper bunkers have proved to be a winning combination for carriers through the pandemic-hit first half.

The strategy of matching capacity to weak demand as COVID-19 measures locked down major markets has been wildly successful for ocean carriers, lifting financial performance across the board.

Even carriers that have been struggling for years to find profitability have managed to brush off falling revenue and turn in dramatic improvements in first-half 2020 earnings. HMM, for instance, a long-time loss maker, ended the first half with a loss of $31 million, but that was still a 90 percent improvement year over year despite a 22 percent drop in volume in the first six months.

Another carrier that has been unable to turn around a string of quarterly and annual losses is Yang Ming, but the Taiwan-based carrier’s first-half loss of $25.49 million was a 52 percent improvement compared with last year, even with a 15 percent drop in its second quarter volume that cut revenue by 12 percent. 

Ocean Network Express (ONE) in the second quarter, the carrier’s fiscal Q1, turned in a profit of $167 million, its best result since the container divisions of NYK, MOL, and “K” Line were merged in 2018. The profitable result was achieved despite a 20 percent decline in second quarter volume, and a 5 percent drop in revenue. 

This trend was repeated across the financial reports of all the carriers that have announced their interim results. At the more profitable end of the scale, Maersk this week reported a tripling of its second quarter profit to $359 million, even though its Q2 revenue dropped 6.5 percent on volume that fell 16 percent. Hapag-Lloyd doubled its second quarter profit to $314 million with a relatively low 11 percent drop in second-quarter volume and flat revenue.

Cosco Shipping subsidiary OOCL increased its first-half revenue by 3.2 percent to $3.4 billion with a 6 percent increase in the average rate per TEU, although volume fell 2.6 percent to 3.3 million TEU. 

More than 400 sailings were cut from schedules in April and May, Sea-Intelligence Maritime Consulting data show, although carriers are slowly restoring services as demand recovers. By withdrawing huge amounts of capacity on the major trades, the carriers were able to adjust their space to the falling demand, pushing up rates while at the same time capitalizing on lower bunker prices and consumption, and reduced network costs. Hapag-Lloyd CEO Rolf Habben Jansen said last week that a canceled sailing can save 60 percent of the operating expenses of a ship, and when the advance bookings show the load factor of that ship three weeks out will be very low, it makes more financial sense for the carrier to cut the sailing rather than go ahead and sail half full.

This was clearly illustrated in Maersk’s interim results announcement, where the $634 million effect of losing 16 percent in volume was more than offset by a $305 million gain from higher rates, a $255 million saving through lower bunker prices, and lower fuel consumption and network costs from fewer sailings cutting a further $151 million in costs.

The tightly managed capacity through the second quarter pushed Maersk’s average freight rate up 4.5 percent, Hapag-Lloyd’s average rate increased by 3.1 percent per TEU, Zim Integrated Shipping Services (Zim) reported a 7.9 percent increase in rate per TEU, and ONE’s average rate per TEU was up 7 percent.

Carrier confidence returns

Being able to ride out such an extreme market disruption as was brought on by the COVID-19 pandemic and emerge with such positive financial results have filled the carriers with confidence. 

Zim CEO Eli Glickman told JOC.com this week that he was expecting further improvement in the third quarter. “Golden Week at the beginning of October has traditionally been the change from peak to low season, and this will be a test, but this quarter we will deliver even better results,” he said.

Several of the other carriers, while mindful of adding an “uncertainty” caveat, have also expressed positive sentiments in their results announcements. Maersk was bold enough to announce that it was not only reinstating its full-year guidance that has been suspended since March, but actually increasing it by $1.5 billion.

The carriers’ ability to flex capacity in response to short-term changes in demand is a strategy that has paid off handsomely for the carriers and could be a powerful factor in preventing a return of rate wars and the chasing of market share. This has been almost a default position in the past, with carriers undercutting each other on rates to fill surplus capacity and destroying profitability in the process. 

The newfound discipline will be tested over the next two to three years, as carriers will take delivery of 86 ships of over 10,000 TEU in size, according to industry analyst Alphaliner. That’s almost 1.5 million TEU, and a large portion of the vessels will be mega-ships of greater than 18,000 TEU. With the world’s economies in recession, and any recovery expected to be slow and interrupted by coronavirus outbreaks, additional capacity is not something carriers will need over the next couple of years.

While carriers appreciate the profitability that blanked sailings bring, it is not a feeling shared by their customers. When sailings are withdrawn, especially on short notice, shippers must adapt their supply chains to accommodate the delayed cargo, and that erodes trust in carrier schedules that are critical for some sectors. Global on-time performance of carriers during the first six months never reached 80 percent, with the lowest level of 64.9 percent recorded in February, and 77.9 percent in June, data from Sea-Intelligence show. That compares with an average reliability of 78 percent for all of 2019.

“If we cannot trust the carriers, we have to make decisions early and build in buffer stocks to compensate for any sailing delays, and that just pushes up our cost of inventory,” a global retail shipper, who asked not to be identified, told JOC.com. “It also brings air cargo more into the picture, and that is another high cost we are trying to avoid.

“I find there is a lack of communication, a lack of understanding of what the customer wants and what he needs, and I feel the carriers are focused on profitability rather than trying to help everyone get through a difficult time.”

JOC 21 Aug 2020