The need of the hour is consolidation of container ship lines order to regain profitability and to overcome financial struggles, consulting firm AlixPartners says in a new report.
The report says that an increased supply of vessels, coupled with the introduction of giant ships, had met with a dwindling demand in the second half of last year resulting to overcapacity, low profitability and reduced cash flow.
The shippers with “M&A on their minds need to be proactive” if they hope to reap the kind of rewards winners in consolidated industries enjoy—or to prevent becoming acquisition targets themselves, the consultants suggested, pointing to the successful consolidation of the US airline industry as a possible template to follow.
"For the first time in recent memory, the container-shipping industry is seeing the beginnings of the kind of consolidation that has brought increased and sustained profitability to winning players in other industries for years," said Foster Finley, managing director at AlixPartners and co-head of the firm's maritime practice.
Foster said: "However, further consolidation and operational overhauls will be necessary if players in this industry, which as a whole remains deeply troubled, wish to reap the kind of benefits enjoyed in other industries. In addition, these uncertain market conditions are casting a long shadow over the annual rate-negotiation cycle kicking off between major importers and their carrier bases."
According to the report, in part due to the continued introduction of megaships—vessels capable of carrying more than 18,000 twenty-foot-equivalent container units (TEUs)—industry capacity globally is expected to jump by 4.5% in 2016 and another 5.6% in 2017, while demand is expected to increase just 1% to 3% this year.
Ironically, says the study, the resulting overcapacity—and corresponding negative effect on profits—is in part the result of the industry's drive in recent years to correct its chronic supply-and-demand imbalance by building these more-efficient but mammoth ships.
Moreover, says the report, this new capacity in major trade lanes is likely to continue to distort the supply-and-demand balance globally, as the slate of vessel deliveries scheduled for 2016 and 2017 remains robust while vessel-scrapping activities remain muted.
Given the already-challenged state of the industry and the turn for the worse of late of several key industry barometers, the AlixPartners study forecasts continued poor financial results for at least the remainder of 2016. However, it also provides a possible consolidation template for industry companies not willing to live with what the study calls a "new normal" of anemic results.
According to the study, recent multibillion-dollar mergers such as Hapag-Lloyd A.G.'s acquisition of Compania Sud Americana de Vapores S.A. (CSAV), CMA CGM S.A.'s purchase of Neptune Orient Lines Ltd. and the combination of China Shipping Container Lines Ltd. and China Ocean Shipping Co. (COSCO) are signs that, after a decade of muted M &A inactivity, the container-shipping industry could be ripe for a long-deferred consolidation—something, says the study, that could greatly benefit ambitious carriers and financial sponsors.
As a possible model, the study points to the consolidation of the U.S. airline industry, also an asset-intensive industry once plagued by rampant overcapacity, cut-throat pricing pressures, complex alliances, disparate fleets and hubs, and persistent financial losses—until individual companies and financial backers finally took consolidation actions, resulting in a much stronger industry today.