NOVEMBER 11, 2015 Carrier Mergers Could Benefit Shippers Despite Rate Rises



If the ocean container shipping industry is on the cusp of a wave of new acquisitions and mergers, the eventual outcome could be positive for carriers and shippers alike, industry participants say. Several carriers are in various stages of talks aimed at consolidation, including NOL with both Maersk Line and CMA CGM, Cosco and China Shipping Container Lines,    and Hanjin and Hyundai Merchant Marine.


Even if all of these talks result in one or two mergers, it does indicate that their  investors  have  tired of  ordering   more mega-ships only to wind up subsidizing ongoing losses caused by vessel overcapacity. Some owners don’t foresee an    adequate return on capital over the long term and are looking for an exit. If this trend gathers momentum over the next    few years, it could result in less than 10 major carriers plying the  major trade lanes,  rather than  the 20 to 25  carriers   operating at present.


“It would be a very logical consequence of carriers not being able to get the rate increases they need because of too     much big-ship ordering on the main east-west trade lanes,  especially Asia-Europe,”  said  Rudy  Mack, principal of  the   consultancy Rudy Mack Associates. “Rate-cutting and revenue decreases can only be stopped by bringing the number    of slots available closer to the growth of the market. Until that happens I don’t think we will see any rate discipline in the market.” He said carriers with large ships will continue to try to fill the slots by  reducing  rates,  but  that  if  they  start   merging that will change the basis of the business.


Mergers between carriers would produce enormous cost savings because the combined entity would be able to reduce overhead, consolidate technology systems, combine sales staffs and order fewer big ships. “You have so many saving    opportunities that the cost savings can have quite an impact,” Mack said.


“If the cost of capital is 10 percent and owners are only earning 4 percent, you have a 6 percent differential that’s transferring every year to the users of the assets (shippers), then you are going to see more mergers,” said an executive with a major non-vessel-operating common carrier. “Those carriers that are left are much more likely to get a balance between supply and demand.”


A better supply-demand balance would likely produce higher rates, “but higher rates are not necessarily bad, because they are going to fund more adequate returns to continue to support investment in the business,” the NVOCC executive said.


One U.S. importer agrees with this view. “Capacity is out of control right now, and we could wind up seeing as few as six to eight carriers,” said Pat Moffett, vice president of global logistics at VOXX International. “If the carriers handle it right, they will improve their services and balance their rates so that everyone can reach a comfortable level.”

Shippers would be better off with stable freight rates, even if they rise over time, rather than the kind of volatility they have shown over the last year or two. “When rates drop 30 percent carriers can’t expect to get the whole megillah back in six months,” Moffett said. He said the consolidation of the now-fragmented industry into a few major carriers would not result in a global monopoly, because they would still be in stiff competition with each other, Moffett said.

The merger of international container lines from different countries has never been easy and has often taken years to pan out because of the difficulty of meshing staff and business practices that use different languages and are of different cultures. Those cultural differences created problems when Singapore’s NOL acquired the U.S. carrier APL in 1997 and Maersk bought the U.S. SeaLand Service in 1999 and Anglo-Dutch P&O Nedlloyd in 2004. “It has always been quite a problem, because they really did not plan the strategy of how to merge two cultures,” Mack said. He can attest to that, based on the difficulty he experienced when as president and CEO of Hapag-Lloyd Americas, the German company acquired Canada’s CP Ships in 2005.

But the cross-cultural barriers may be easing, thanks to the growth of alliances among carriers and technology. “People are getting smarter," Mack said. Most carriers are in alliances, " they have to sit at the table with other carriers from other cultures to make decisions, so I think this is already happening. Secondly, all the communications and IT systems have meant that the different cultures are less today than they were 15 years ago.”

| Nov 11, 2015 2:40PM EST







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