Freight News, Sea

Container lines in trouble, says new report

[ March 25, 2014   //   ]

The world’s container shipping lines whole face a greater risk of bankruptcy than at any time since 2010, according to a study by global business-advisory firm, from AlixPartners. It says that the industry is “beset by continued sluggish demand, a growing mountain of debt and a radically changing marketplace.” Companies in the global container shipping industry “face a greater risk of financial distress, including possible bankruptcy, than at any time since 2010, and that risk has grown in each of those past three years,” it says.

A big factor is “a so-so global economy that still hasn’t bounced back from the downturn following the worldwide financial crisis of 2008-09 the way other post-recession economies have in the past.” But there are also several structural issues buffeting the industry, including the drive to mega-ships over the past decade has steadily increased leverage across the industry and has left earnings struggling to keep up with the interest lines are paying on their debts.

Global fleet capacity that has risen from 10.9 million teu to 16.9 million teu in the decade to 2013 is a long way from being totally utilised, leading in part to more alliances in the industry. This, in turn, according to the study, is likely to create “an environment of haves and have-nots where smaller carriers in particular may face some hard choices.”

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 study recommends that shippers closely monitor the financial health of their carriers and not to over-consolidate on one line so as to have alternatives should markets brighten, consider index-linked contract options and benchmarking rates and service levels via objective third-parties.

For investors, the study recommends paying close attention to the widening chasm between the haves and have-nots, and working with experts to determine which companies are viable 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.

For carriers, the study recommends divesting non-core assets, leaving unprofitable trades and “adopting a laser-like focus on cost control” and partnering where it makes sense.

Managing director and global head of Turnaround & Restructuring Services at AlixPartners, Lisa Donahue, concludes, however: “For all the challenges facing all 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. 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.”