Maersk’s strategy U-turn since the 2009 financial crash pays dividends during pandemic crisis
Chief executive Søren Skou says the focus is no longer on market share and filling up ships, but on agile capacity management and profitability
Blanked sailings and idle ships are likely to become a feature of container shipping as carriers, such as Maersk, follow the business model of the courier companies that only operate flights in response to demand rather than keep their networks running at full capacity regardless of market conditions, which has been the default approach of most ocean carriers until relatively recently
WHAT a difference a decade makes.
At the start of 2020, as the coronavirus pandemic spread and countries around the world went into lockdown, most pundits were predicting a bleak year for container shipping, reminiscent of the meltdown that engulfed the industry during the 2009 financial crash.
Instead, ocean carriers have proved to be remarkably resilient, with market leader Maersk posting a healthy profit in the second quarter of the year when the cargo slump was at its worst, and now forecasting full year earnings before interest, tax, depreciation and amortisation of $6bn–$7bn, having suspended guidance a few months ago.
That compares with a group deficit of $1bn in 2009, as AP Moller-Maersk was dragged down by Maersk Line which lost $2.1bn. The whole industry, which had only ever seen year-on-year growth, was suddenly hit by a 10% collapse in demand, a situation which was exacerbated by a large orderbook at the time.
Although the decline in liftings has not been quite so severe this year, container lines were nevertheless expected to struggle to make money. Instead, the opposite seems to be the case, as Maersk and other carriers such as Hapag-Lloyd and Zim have demonstrated.
Maersk group chief executive Søren Skou says that much has happened over the intervening period, with new tools at carriers’ disposal to cope with changes to both supply and demand, and a change of attitude at the top.
In 2009, lines responded to the contraction in demand by cutting freight rates, behaviour that left the whole industry deep in the red. Yet price wars continued to plague the container shipping industry for many more years, made worse by the tendency to order new tonnage almost at the first sign that market conditions could be recovering.
In the run up to 2009, shipowners had embarked on a huge spending spree, with the orderbook peaking at more than 60% of the existing fleet at the time. And despite the subsequent banking crisis, the ordering lull was brief.
Maersk led the way in returning to the shipyards, signing a $1.9bn contract in February 2011 for 10 Triple-E giants, the world’s first 18,000 teu-class ships, with options for another 20.
The decision to order new vessels so soon after container shipping’s worst year on record reflected the fact the volumes picked up rapidly in 2010 as depleted inventories were replenished. But in a highly competitive industry, it was not long before most other global lines had followed Maersk by ordering ultra large containerships. The outcome was a business that has progressively destroyed shareholder value over the years.
In the case of AP Moller-Maersk, as Mr Skou pointed out in an interview with Lloyd’s List a year ago, it had gone from a $60bn company in 2011 to a $35bn company five years later.
But since then, the entire industry has been dramatically reshaped through a series of largescale mergers and acquisitions, while the Maersk group has changed out of all recognition from a shipping and energy conglomerate to an integrated transport and logistics company.
And one crucial difference from 10 years ago is that Maersk has nothing on order right now, while the industry orderbook is down to about 9% of the existing fleet.
Structural change has undoubtedly helped the Danish heavyweight navigate the unprecedented conditions that suddenly confronted the container trades in the first half of this year, and Mr Skou is confident that there will be no going back to the bad old days.
Speaking to analysts after the release of second quarter of the year results that saw the group’s ocean division post a 26% increase in ebitda to $1.4bn despite a volume drop of 16%, and revenue decline of 6.5%, Mr Skou said he was “frankly quite proud of the continued progress over the past two years when we have not had the wind on our backs”.
Despite difficult market conditions, continued trade tensions, implementation of the IMO 2020 low-sulphur rules, and now a sharp reduction in demand caused by the pandemic, Maersk has remained in the black.
Indeed, while shipping is considered a cyclical business, Maersk’s recent financial results have been counter-cyclical, “and shown that agility in balancing supply and demand… means we can meet customer needs and positively impact our performance at the same time,” said Mr Skou.
As demand slowed in the early months of 2020 to a massive slump of 20% in April compared with 12 months earlier, Maersk and other carriers avoided the usual knee-jerk response of price cutting. Instead, sailings were cancelled, and ships left idle.
“In 2009 the thinking in Maersk and the rest of the industry was that, if you had a network, you had to keep sailing and fill up the ships at all cost,” Mr Skou said.
“That approach has completely changed, and we are now operating our network in a fashion that is very similar to what the courier express and package guys such as UPS and Fedex are doing,” he continued.
“They deploy their flights where there is a demand, and that is what we have been doing through this crisis, and that will be our approach going forward. Since it has worked so well for us, why should we change?”
To some extent, Maersk did not have the ability to do this back in 2009 when the scale of its network and fleet size were considerably smaller, so that taking out a service loop would have had serious consequences for customers.
As operator of the world’s largest containership fleet, it is much simpler to remove capacity without reducing port coverage, said Mr Skou.
At the start of the pandemic, Maersk had more than 700 ships of 4.1m teu in service, but as conditions worsened, some 20% of capacity was removed.
In the second quarter of the year, 160 sailings were blanked, but since then, most voyages has been reinstated, according to Mr Skou, with capacity now 95% back to where it was prior to the start of the coronavirus outbreak.
“So we have plenty of opportunity to adjust back down again if we need to,” said Mr Skou, who expressed confidence that much had permanently changed since 2009.
“We have no plans to change our approach to matching capacity to demand in an agile fashion,” he stressed.
“In 2009, we kept the network operating for a long time and lowered prices to fill a network that was too big. Then, we went after market share, but this time we are focusing on profitability.”
And in these unprecedented times, it is the pandemic which has “strengthened that resolve.”