Maersk: Container volumes could fall 25%

container ship

Container volumes will drop sharply in the second quarter but the industry is in better position to manage the coronavirus crisis than previous downturns, according to Soren Skou, chief executive officer of A.P. Moller-Maersk (APM, Copenhagen: MAERSK-B), the owner of the world’s largest container line.

On Wednesday morning, APM reported net income of $209 million for the first quarter of 2020 compared to a net loss of $656 million in the same period last year, with ocean shipping revenues up 3% despite coronavirus fallout.

“These are indeed extraordinary times for us,” acknowledged Skou on the conference call with analysts. “We are now in the middle of a pandemic storm, but we believe we are well placed to weather this storm.”

Volume and capacity outlook

Maersk Line predicts second-quarter container volumes will fall 20%-25% year-on-year.

Skou disclosed that April volumes were down just under 20%. Asked about the implied steeper declines for May and June, he noted that the pandemic has mainly affected the east-west trades (Asia to Europe and Asia to North America) so far, but the plunge in oil pricing creates uncertainty and the potential for declines in the north-south trades (Latin America, Africa).

Maersk Line “blanked” (cancelled) more than 90 sailings in the first quarter to reduce variable costs, bringing deployed capacity down 3.5% year-on-year. Its loaded volumes fell from 3.15 million forty-foot equivalent units (FEU) in the first quarter of 2019 to 3.048 million FEU in the most recent period, a decline of 3.2%.

Maersk expects to blank close to 140 of its sailings in the second quarter, implying a capacity reduction in the high single digits. “We will take further initiatives on capacity depending on demand,” said Skou.

On an industrywide basis, Maersk estimated that global demand fell 4.7% year-on-year in the first quarter, with east-west trades down 5.7%, north-south trades down 0.6% and intraregional trades down 5.5%.

Chart credit: APM

On the supply side, Maersk estimated that the global fleet stood at 23.3 million twenty-foot equivalent units (TEU), up 3.6% year-on-year. But of that, 9.4% of the fleet (2.2 million TEU) was idle by the end of the first quarter.

Industry ownership consolidation and operating alliances have led to “greater agility in terms of adjusting supply to demand,” affirmed the Maersk CEO.

“The most important things to understand is that the three large east-west alliances [2M, Ocean Alliance, THE Alliance] make it much simpler to adjust capacity in an agile way” versus earlier crisis periods, he explained.

“In our case [Maersk is in the 2M Alliance with MSC], if we operate 13-14 service strings per week in Asia-North Europe and Asia-Med, it is obviously a lot easier to take one out as opposed to a small VSA [vessel-sharing agreement] that operates one or two strings.

“Another factor is that the industry has quite a low orderbook today and it’s geared towards a low-growth scenario. That was not the case in 2008-09 when the orderbook was massive and a lot of carriers had big blocks of capacity coming online that they had to fill,” said Skou.

Freight-rate outlook

Maersk reported first-quarter rates of $1,999 per FEU, up 5.7% year-on-year. In general, global freight rates are up in the second quarter.

Chart credit: APM

“We actually had a reasonable April from a profitability perspective,” said Skou, adding “so far, so good.”

Rates are being propped up despite plunging demand because carriers have reduced capacity via blank sailings.

“We are certainly not going to give any predictions on freight rates but what I would say is that there are a number of competitive dynamics that are different than what we have seen before, certainly [when compared to] the global financial crisis but also to 2011 and 2015 when the carrier side had quite brutal price wars.”

In addition to the liners’ improved ability to lower capacity as a result of consolidation and alliances, Skou pointed to digital products that improve pricing visibility. “With products like Maersk Spot, we are pricing based on utilization curves with upward sloping yield curves, which ensures we get better yields as a result — very similar to what airlines have successfully done for years.

“Digital products and transparency on freight rates mean we are less reliant on customer feedback and relying more on our utilization when we are setting prices,” he continued.

Across the industry, there is also less interest in pursuing volume at the expense of pricing, for various reasons. “At Maersk, we are not pursuing market share,” emphasized Skou. “We are planning to grow in line with or slightly below the market and we will do what we can to protect profitability.

“It seems to me that many other carriers are doing the same. One of the reasons could be that there are generally quite weak balance sheets in the sector,” he said, pointing out that the implementation of accounting standards “has really highlighted the operational leverage that many companies in the sector have.” Click for more FreightWaves/American Shipper articles by Greg Miller  

Chart credit: APM