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Feature: Slot machines of the sea: jackpots and crackpots
In the casino where ship owners are often said to be found throwing away their money are the slot machines otherwise known as containerships. Money is poured into them but very little seems to come out until a jackpot brings the gamblers back for more. Anticipating another jackpot, even more money –in the form of orders for bigger and better machines – is fed in.
In container shipping it’s all about slots and their costs, revenues and profits. You can share them, fill them, park them or scrap them. Sharing can make sense as long as the regulators say it’s OK. Filling them is tough when demand is wobbly. Parking them in lay-up cuts capacity but isn’t cheap. Scrapping even “modern” slots seems to be the answer for some.
As a study by DNV-GL last year pointed out, increasing the number of slots on a ship – up to 18,000 and even 21,000 TEU – only translates into greater profitability if utilisation is high. A drop of only 3-5%, it claimed, could wipe out any cost advantage over a smaller containership.
To keep those big containerships full, slot-sharing with chosen partners may be the answer. With the laws on the ability of the top container carriers to expand through takeovers and joint ventures tougher than those on alliances, the latter seem to be the favoured method of making a profit. But after making a collective USD 1.5 billion net loss last year and with orders stacking up at shipyards, the former may becoming more attractive despite the risks.
This appears to have been the case with Germany’s Hapag-Lloyd and Chile’s CSAV, which last week confirmed their plans to merge and create the fourth biggest carrier. But any further takeovers or mergers among the top 20 would appear to be limited to a handful of companies if it is accepted that some, like the big three in Japan and the Chinese lines, are off limits because of national interests.
To serve the world as efficiently as possible and still make a profit might require a truly mega-carrier with mega-containerships but, as well as regulatory limits and national interests, there is a ceiling on economies of scale (draughts in ports, for example) against which such behemoths might soon painfully bump their heads.
Americans, of course, who have just approved with caveats the P3 Network alliance, might have noted that, despite having a reasonable claim to have invented containerisation, not a single US-owned entity figures in the top 10 (American President Lines – now simply APL – being a subsidiary of a Singaporean company).
The development of vessel-sharing alliances – P3 (the top three of Maersk, Mediterranean Shipping Co. and CMA-CGM) – and the G6 (American President Lines, Hapag-Lloyd, Hyundai Merchant Marine, NYK, Mitsui OSK Lines and OOCL) – follows the scrapping of long-standing antitrust exemptions in some parts of the world, notably the European Union (EU) in 2008.
A study last year by shippers’ group GSF estimated that more than 50% of the world’s liner trades were operating “within normal competition regimes without antitrust immunity”. Lines based in the EU accounted for a 44% share.
With limited ability to increase rates, the carriers are forced to concentrate on costs and the biggest item in the operating budget – fuel. This is increasingly less a market-driven cost, more one subject to escalating regulatory demands.
Within the next few years (the deadline remains fluid) ships and not just containerships will have to burn fuel with a sulphur content of 0.5%. The industry estimates, based on current prices, the switch could cost it USD 75-100 billion a year. They also face the high costs of meeting ballast-water cleanliness standards.
These cost pressures, even if container rates rise to more sustainable levels, will make it more likely carriers will seek greater efficiencies though cost-sharing alliances and in doing so might look to the skies for guidance.
Last year airlines made a profit of USD 12.9 billion, according to the industry’s trade body, IATA. This year the profit is forecast to rise to USD 18.7 billion but, as IATA points out, that is a “wafer-thin” profit margin of around 2% and airlines, like container carriers, have to focus on “managing efficiency – often through strong partnerships in the value chain”.
Aviation alliances now account for an estimated two-thirds of global available capacity. Within the three alliances – Star, Skyteam and Oneworld – are joint ventures between members that have been granted immunity from anti-trust laws. The JVs allow airlines to offer the same prices, share revenues and costs and combine marketing and sales – in effect but not in law acting as one airline.
The airlines’ argument is that to provide the service demanded by passengers, whether fast-paced business travel or cost-conscious tourists, they need greater economic integration short of actual mergers. Expanded networks, higher service levels and cheaper fares are only achievable with a high degree of certainty over freedom from legal action.
If shipping were able to follow aviation’s path, two carriers in an alliance might form an “immunised” JV that, like airlines, would have to be “metal-neutral” in being blind to which partner’s ships carry the containers.
Both aviation and shipping face sets of regulators in separate jurisdictions with differing approaches and practices. Global industries trying to be as efficient and competitive as possible have to do so without a single global regime saying what they can and cannot do.
And for all the “Open Skies” liberalisation, aviation too remains fettered by national restrictions on foreign ownership (the US has a 25% cap). This “immoveable object” is now being pushed hard by the “irresistible force” of market imperatives, with Australia, for example, contemplating the lifting of the 49% cap on struggling flag-carrier Qantas.
Globalisation might be a reality for shipping and aviation but only in markets, not governments. The floating slot-machines may be governed by global rules on safety and the environment but not, at least not yet, on competition. With jackpots scarce, it is no surprise some think container shipping is only for crackpots.
Source: BIMCO
In container shipping it’s all about slots and their costs, revenues and profits. You can share them, fill them, park them or scrap them. Sharing can make sense as long as the regulators say it’s OK. Filling them is tough when demand is wobbly. Parking them in lay-up cuts capacity but isn’t cheap. Scrapping even “modern” slots seems to be the answer for some.
As a study by DNV-GL last year pointed out, increasing the number of slots on a ship – up to 18,000 and even 21,000 TEU – only translates into greater profitability if utilisation is high. A drop of only 3-5%, it claimed, could wipe out any cost advantage over a smaller containership.
To keep those big containerships full, slot-sharing with chosen partners may be the answer. With the laws on the ability of the top container carriers to expand through takeovers and joint ventures tougher than those on alliances, the latter seem to be the favoured method of making a profit. But after making a collective USD 1.5 billion net loss last year and with orders stacking up at shipyards, the former may becoming more attractive despite the risks.
This appears to have been the case with Germany’s Hapag-Lloyd and Chile’s CSAV, which last week confirmed their plans to merge and create the fourth biggest carrier. But any further takeovers or mergers among the top 20 would appear to be limited to a handful of companies if it is accepted that some, like the big three in Japan and the Chinese lines, are off limits because of national interests.
To serve the world as efficiently as possible and still make a profit might require a truly mega-carrier with mega-containerships but, as well as regulatory limits and national interests, there is a ceiling on economies of scale (draughts in ports, for example) against which such behemoths might soon painfully bump their heads.
Americans, of course, who have just approved with caveats the P3 Network alliance, might have noted that, despite having a reasonable claim to have invented containerisation, not a single US-owned entity figures in the top 10 (American President Lines – now simply APL – being a subsidiary of a Singaporean company).
The development of vessel-sharing alliances – P3 (the top three of Maersk, Mediterranean Shipping Co. and CMA-CGM) – and the G6 (American President Lines, Hapag-Lloyd, Hyundai Merchant Marine, NYK, Mitsui OSK Lines and OOCL) – follows the scrapping of long-standing antitrust exemptions in some parts of the world, notably the European Union (EU) in 2008.
A study last year by shippers’ group GSF estimated that more than 50% of the world’s liner trades were operating “within normal competition regimes without antitrust immunity”. Lines based in the EU accounted for a 44% share.
With limited ability to increase rates, the carriers are forced to concentrate on costs and the biggest item in the operating budget – fuel. This is increasingly less a market-driven cost, more one subject to escalating regulatory demands.
Within the next few years (the deadline remains fluid) ships and not just containerships will have to burn fuel with a sulphur content of 0.5%. The industry estimates, based on current prices, the switch could cost it USD 75-100 billion a year. They also face the high costs of meeting ballast-water cleanliness standards.
These cost pressures, even if container rates rise to more sustainable levels, will make it more likely carriers will seek greater efficiencies though cost-sharing alliances and in doing so might look to the skies for guidance.
Last year airlines made a profit of USD 12.9 billion, according to the industry’s trade body, IATA. This year the profit is forecast to rise to USD 18.7 billion but, as IATA points out, that is a “wafer-thin” profit margin of around 2% and airlines, like container carriers, have to focus on “managing efficiency – often through strong partnerships in the value chain”.
Aviation alliances now account for an estimated two-thirds of global available capacity. Within the three alliances – Star, Skyteam and Oneworld – are joint ventures between members that have been granted immunity from anti-trust laws. The JVs allow airlines to offer the same prices, share revenues and costs and combine marketing and sales – in effect but not in law acting as one airline.
The airlines’ argument is that to provide the service demanded by passengers, whether fast-paced business travel or cost-conscious tourists, they need greater economic integration short of actual mergers. Expanded networks, higher service levels and cheaper fares are only achievable with a high degree of certainty over freedom from legal action.
If shipping were able to follow aviation’s path, two carriers in an alliance might form an “immunised” JV that, like airlines, would have to be “metal-neutral” in being blind to which partner’s ships carry the containers.
Both aviation and shipping face sets of regulators in separate jurisdictions with differing approaches and practices. Global industries trying to be as efficient and competitive as possible have to do so without a single global regime saying what they can and cannot do.
And for all the “Open Skies” liberalisation, aviation too remains fettered by national restrictions on foreign ownership (the US has a 25% cap). This “immoveable object” is now being pushed hard by the “irresistible force” of market imperatives, with Australia, for example, contemplating the lifting of the 49% cap on struggling flag-carrier Qantas.
Globalisation might be a reality for shipping and aviation but only in markets, not governments. The floating slot-machines may be governed by global rules on safety and the environment but not, at least not yet, on competition. With jackpots scarce, it is no surprise some think container shipping is only for crackpots.
Source: BIMCO
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