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Container shipping fleet to be increased by 18% by the end of 2013, calling for urgent cost-cutting measures by carriers

In a recent report, the Boston Consulting Group called for immediate action by container carriers, in order to avoid further losses, most of which were self-inflicted, as a result of price wars and intense competition. In an interview with Hellenic Shipping News Worldwide, Camille Egloff-Ghicas, Partner and Managing Director in BCG Athens and leading the BCG Shipping practice in Hellas, mentioned that only a comprehensive end-to-end approach to bunker costs can generate the results needed. This not only entails fleet optimization, technical improvements, better voyage planning, improved procurement, but also voyage execution and pro-active capture of commercial value, e.g. with alignment of T/C contracts.
“Hellenic container carriers have been historically competitive in managing costs, voyage expenses, but also administrative costs with relatively leaner ways of doing business. However, this cost consciousness needs to be taken to the next level as traditional cost-cutting initiatives are not sufficient anymore to build competitive advantage” she noted.

Why have container shipping carriers suffered in terms of profitability during these past couple of years?

2011 marked an abrupt turnaround for the container industry: the 16 largest publicly-listed carriers suffered combined operating losses of US$5 billion, following 2010 when these carriers earned a record US$7.1 billion. This was caused by the imbalance between additional capacity (8.7% over 2010) and insufficient growth in market demand (6.5% global container traffic growth), leading to decreased freight rates (up to 60%) to ensure maximum utilization. This increase in capacity was driven by the traditional focus of carriers on increasing capacity to gain market share and on deploying larger vessels to reduce unit costs.
Adding on that, bunker prices increased by 30% between February and August 2012.

Are the business practices of yesterday no longer viable? Is the need for change so imperative?

The historical level of losses seen in 2011 seems to be a clear call for action indeed. The need for change is imperative as the market outlook is challenging. Some fundamental trends such as the renaissance of US manufacturing and the increasing Chinese domestic market, forcing Chinese manufacturers to further focus on their own market, indicate a potential slowdown in demand. Besides, even if IFO380 fuel prices declined almost by 10% in Q2 2012 vs. Q1, increased risk remains. On top of all this, geopolitical potential disruptions can influence traffic and fuel prices.

What would these changes entail? Are all companies able to implement them?

The Industry must learn to make money in a “new normal” of 5-7% demand growth and 75-80% utilization levels vs. the “golden days” of 8-10% demand growth and 90% utilization levels . It is equally clear that carriers cannot stand by and watch financial conditions further deteriorate; carriers need to pro-actively change their own course, individually but also collectively as an industry.
BCG sees ten commandments for restoring profitability:
1. Measure market share on the basis of throughput capture; stop competing on capacity
2. Be disciplined in ordering new capacity – and encourage industry-wide restraint
3. Actively manage capacity to respond to cyclical and seasonal fluctuations as well as demand shocks, idling vessels if necessary
4. Make yield management a top priority, which means a true bottom-line impact with full-cost perspective
5. Decide how to compete and where to compete at the micro level
6. Strengthen commercial management by establishing pricing as a core discipline; adapt to new reality and learn to make money at utilization rates of 70 to 80 percent
7. Demonstrate to customers the value of service offerings; monetize them
8. Go beyond the usual savings measures and rigorously optimize costs to achieve operational excellence throughout the network
9. Ensure data-driven decision making; train employees to have the right skills and capabilities
10. Exit businesses that don’t deliver economic results

Lately we’ve witnessed a “race” towards larger and more efficient vessels. Do you think that these modern “Leviathans” will be the way of the future for container shipping?

Of course scale matters in container shipping; however, scale advantage can be captured only above a certain threshold of utilization. When companies look at yield management in a true bottom-line approach with a full cost perspective, large vessels may be losing their advantage. Besides, cyclicality in the demand, seasonal fluctuations and potential demand shocks call for idling vessels, an agility that large vessels certainly don’t allow.

Which factors are in place that are affecting profitability in the sector, despite the obvious one, being price wars and fierce competition?

A softening and volatile market demand and increasing fuel costs come on top of price war and lower utilization due to increased capacity. That said, industry practices themselves do not help companies to get back on track. There is a call for a change in mindset, and a need to foster data-driven decisions across the business, be it for investment decisions, deployment of fleet, selection of routes, or management of specific trades with fully transparent, all-cost-in yield management. Besides, traditional cost cutting efforts, carriers need to take cost-cutting initiatives to the next level, in particular on fuel. But above all, revenue management seems to be the main gap today between what needs to be done and where carriers stand. Profitability cannot be restored if rates keep being sacrificed. Services need to be priced as valued by customers. This demands a full understanding of the customer needs and priorities, advanced pricing skills within each carriers and across the industry as a whole.

The container sector, together with most shipping markets has been plagued by ship oversupply issues, with heavy newbuilding ordering and a not so fast pace of demand increase, in terms of global trade growth. Do you think that this imbalance will be restored anytime soon?

We note a persistent capacity over-influx as current orders indicate a monthly increase of 150K TEU (1% of current fleet) through 2013, which totals a 18% increase. Scrapping (currently only 10% of new capacity) and idling would have to increase significantly to counter this influx. Besides, capacity has ripple effects as ultra-large vessels are deployed e.g. on FE-EUR relatively smaller vessels are deployed to trades where they will be “large”.

Where do Hellenic container carriers stand in this day and time? What do they need to do to remain competitive and profitable?

Of course a difficult market for liners is echoed in the kind of contracts Hellenic container carriers can get. In a pressured market with over-capacity, T/C are the first ones to be impacted, in particular for smaller vessels. Times of 4-6 year long term contracts seem to be over for now, and companies need to adjust to somehow shorter term T/C.
That said, Hellenic container carriers have been historically competitive in managing costs, voyage expenses, but also administrative costs with relatively leaner ways of doing business. However, this cost consciousness needs to be taken to the next level as traditional cost-cutting initiatives are not sufficient anymore to build competitive advantage. All players are engaged in reducing costs, therefore Hellenic companies need to identify their specific opportunities for improvement. Bunker is at the forefront: BCG believes that only a comprehensive end-to-end approach to bunker costs can generate the results needed. This not only entails fleet optimization, technical improvements, better voyage planning, improved procurement, but also voyage execution and pro-active capture of commercial value, e.g. with alignment of T/C contracts. BCG also sees potential in further professionalizing procurement in Hellenic container carriers, where some quick wins can be achieved, for example using e-auction platforms in some categories.
To achieve this, data-driven decision making is paramount. Companies need to further develop robust performance management systems, with the right set of KPIs and trustworthy data, driving value generation, not destroying it as some famous examples exist. In some cases, this may mean a fundamental change in the way companies operate, transitioning from a centralized owner-driven setup to a more ‘corporate’-like setup, with clearly allocated decision making and accountabilities.
Besides, an opportunity may appear for Hellenic container carriers with access to cash: in times where shipping financing is limited, cash-rich companies may be able to snatch cheap assets, an option to be considered in particular regarding fuel efficient larger vessels.

Nikos Roussanoglou, Hellenic Shipping News Worldwide

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