Low costs pave the road to profitability
It is becoming harder for container lines to control freight rates, if it was ever possible, so all the emphasis has now moved to the bottom lines.
Bigger is better, was the message delivered by Alan Tung, the acting CFO of Orient Overseas (International) Ltd, parent of Hong Kong-listed OOCL, at the company’s annual results briefing this week.
OOCL may not have the largest orderbook in the business, but plenty of capacity arrived last year and plenty more will be delivered this year and the next.
Eight 13,208 TEU “mega” class ships and two 8,888 TEU “SX” class vessels came online last year, two 13,208 TEU and two 8,888 TEU ships will be delivered this year and the final two 8,888 TEU vessels will be delivered next year.
Tung said OOCL was placing the largest ships possible on each of the trade lanes served as the carrier worked on lowering unit costs. He even hinted at a second round of newbuilding orders, despite the excess capacity in the market that is putting so much pressure on freight rates.
The carriers are left with a choice Sophie would have appreciated. Too much capacity is driving down rates, so the container lines are focusing instead on bringing down costs. To achieve the cost savings they are ordering new and more fuel efficient vessels, which lower unit costs but of course introduces more capacity into an already flooded market.
Growth forecasts for 2014 are hardly encouraging, with the supply growing faster than demand. A bunch of analysts and banks believe the average demand this year will be 5.3 percent with supply just under six percent. Next year demand will be at six percent with supply around seven percent.
The industry is holding out for better prospects in the European Union and the US, but the cost cutting is where gains will be made. With revenue under pressure the focus is remaining firmly on the bottom line where the costs are way less volatile than revenues.
For instance, carriers are reducing strings and port calls, cancelling sailings and centralizing back office functions. The savings can add up. Tung said if 30 minutes could be cut off a berth time, in a loop with eight ships that was a saving of eight hours. With 15 sailings a year that meant 60 hours of additional sea time that could be spent slow steaming.
This can generate hefty savings, especially with bunker fuel now comprising 60 percent of the operating cost per sailing.
And that is the future. The lines can carry as many containers as they like, but with little control over freight rates those carrying the lowest costs will likely be the most profitable.