Liner alliances: rationale ESPO 2014 Tim Power Director, Head of Maritime Advisors 15 th May 2014
2 Contents 1. Liner fundamentals Liner economics and the cycle Historical market growth Historical supply demand balance 2. Alliances
3 Liner fundamentals
Liner economics and the cycle 4 Liner shipping is a cyclical industry; cycles driven by cash balances and utilisation Optimism supports orders Demand for new tonnage Supply exceeds demand / trade growth slows Freight rates recover Over tonnaging Demand and Supply realign Freight rates drop Fleet growth slows / trade recovers Demand for vessels drops
Liner economics and the cycle 5 Liner economics are fundamentally challenging and promote earnings erosion Factor Economies of scale Perishability High operational gearing Commoditised service offering Fragmented industry Inelastic demand curve Effect Structural overcapacity Push for short-run contribution rate erosion Focus on price competition Limited differentiation of product; price competition No coordination of capacity development, intense competition Falling rates have a limited effect on demand
Liner economics and the cycle 6 Economies of scale are very significant 1,200 1,000 800 Round-voyage slot cost at 85% utilisation (US$/TEU) 1,044 968 882 845 828 770 736 US$/TEU 600 400 200-8,000TEU 10,000TEU 12,000TEU 13,000TEU 14,000TEU 16,000TEU 18,000TEU
Liner economics and the cycle 7 Liner shipping is fragmented 10,000 HHI Index 5,000 Wide Body Aircraft Manufacturing 4,000 3,000 Cruise Lines (2) 2,000 International Express Package (4) 1,000 Shipbuilding (1) 0 Even Competition: all competitors have equal market share No. Competitors 0 5 10 15 20 25 30 50 Highly Competitive (less than 100) Unconcentrated (100-1,000) Modest Concentration (1,000-1,800) High Concentration (greater than 1,800) Notes 1. Source: UBS Global Shipbuilding reports May-09 2. Source: Natixis, Carnival report Sep-09 3. Source: Drewry, Containerisation International 4. Source: RBC, Fedex report Aug-09 2
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Global container traffic (mteu) Annual growth (%) Historical growth 8 Growth has been rapid but volatile: very hard to match capacity growth to demand growth 210 16% 180 11% 150 6% 120 1% 90 60-4% 30-9% 0-14% Container Traffic (mteu) Annual growth
1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012 2Q 2012 3Q 2012 4Q 2012 1Q 2013 2Q2013 3Q2013 4Q2013 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Rates and profitability 9 Result: profitability has been poor and very volatile Historical development of E-W Freight Rates (US$/teu) Sample carriers EBIT (US$bn and %) 1800 1600 1400 1200 1000 800 600 400 200 0 $250 $200 $150 $100 $50 $0 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -$50-15.0% Revenue ($bn) Operating profits ($bn) Operating Margin (%)
10 Alliances
Plus ca change 11 Mogul Steamship Co Ltd v McGregor, Gow & Co 1892 Shipowners had better sell out as there is no use continuing in business if the law decides we must cut each others throats and ruin ourselves. John Swire, agent for Alfred Holt, founder of the Far Eastern Freight Conference
Joint ventures, consortia and vessel sharing agreements 12 Roles Allowed lines to develop early container services Mechanism to share capital investment Lines combine to offer service coverage and frequency Manage capacity development Mechanisms Joint schedules: vessels operated in coordinated schedules Shared capacity: lines share space on all vessels, generally in line with capacity provision Joint marketing: in certain consortia, single marketing entity in specific locations Cost pools: all operational costs pooled and shared Revenue pools: all revenue pooled and shared Supported the development of liner services and promoted stability of earnings and capacity development Note: with acknowledgements and thanks to Tony Mason and ICS
Recent developments in alliances Mega carriers and mega alliances 13 Relentless pursuit of economies of scale = ever larger ships P3 To fill these ships, carriers have to come together in alliances G6 Since 2011, the pressure for alliance size and geographical scope has intensified: Maersk, CMA-CGM and MSC in P3 Grand and New World Alliances to G6 in Asia-Europe route. G6 expanding to Transpacific and Transatlantic Evergreen joining CKYH CKYH
P3 alliance network Case study The P3 will be a powerful force and will call at numerous ports 14 15,000 Average vessel size TEU 14,000 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 G6 P3 P3 5,000 Asia-N Europe Asia-USWC Asia-USEC
P3 alliance network Case study 15 Alliance port and terminal choices involve many trade-offs for each carrier What is the effect on schedule reliability? How can the best frequency of service and transit times be obtained? Where is the cargo generated? How can the widest range of direct port calls be delivered? Is there a terminal operator in the port affiliated with the shipping line? What are the benefits and pitfalls of consolidating port calls? Can the ships physically access the port? Is the port already established in at least one loop?
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