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Sept.7, 2015

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Page 33 of 79

BENEATH THE SURFACE 34 THE JOURNAL OF COMMERCE SEPTEMBER 7.2015 Gary Ferrulli HOUSE OF CARDS A VARIETY OF perspectives can be drawn from global container car- riers' first-half financial reports. Early reports from OOCL, the Jap- anese carriers and APL came with little surprise, other than a hint that more losses were expected considering the declining volumes and rates. Carriers, however, cut enough costs through free-falling fuel prices and skipped sailings to offset the decreasing revenue. No doubt, APL's $3 million second- quarter profit — after a $54 million loss a year earlier —got a big boost from the sale of APL Logistics to Japan's Kintetsu World Express, but it was positive for the first time in a long while, nonetheless. Maersk Line's second-quarter profit of $534 million drew mostly negative reaction as the market apparently expected the world's largest carrier to improve on its startling $700 million profit a quar- ter earlier. Still, the second-quarter result was the best of any carrier and yielded a 10.1 percent return on invested capital. Only CMA CGM has been as strong on that front over the past year, with the two carriers' ROIC running 5 points higher than any other. Maersk's first-half profit of $1.2 billion also is more than any other carrier in the industry has made in a year. So that may be the rub: the industry, where ROIC overall is running in the 3 to 4 percent range, poor by virtually any standard. Yet some see Maersk, with its return exceeding 10 percent, as underper- forming. What must those who see Maersk as disappointing think of the other industry participants? Other visible evidence of the industry perception is the negative reaction to Hapag-Lloyd's attempt to move into the public sector with an initial public offering — a move that's been put off for years, and a sentiment that still doesn't look positive. The same negative view kept CMA CGM from going public in earlier attempts. And then there's China's desire to merge its state-owned carriers, Cosco and China Shipping, in an attempt to strengthen the poorly performing duo. Combined losses since 2010 are apparently enough for the government to take a drastic step of consolidating the two enti- ties, in the process benefiting from the removal of redundant processes, systems and people, while creating the world's fourth-largest container line (Story, page 14). This won't be an easy task for political or practical reasons, the latter having a lot to do with the two carriers being in two vessel- sharing alliances, the CKHYE and the Ocean Three. If the carriers merge, what happens to their alli- ance memberships? Think of the impact of that choice. Either way, the two alliances would have to retool because of the changes in the numbers of vessels and the impact on service strings. Port and terminal calls also would have to be reconsidered. London-based consulting firm Drewry went one theoretical step further: joining the CKHYE and Ocean Three alliances. This wouldn't just present logistics challenges with ships, strings, ports and terminals, but an alliance merger also could face regulatory or legal challenges because the merged entity would have a 40 percent global market share. How would the Chinese government, the U.S. Justice Depart- ment or the European Competition Committee respond? But for those who pay attention to the industry and have an under- standing of economics, the existing number of carriers and alliances is a house of cards. With one or two exceptions, none of the carriers are making enough money to perpetu- ate themselves, and those supported by governments apparently are under close scrutiny. While the much-rumored sale of APL by Temasek has quieted, there is a strong view that the issue is price and not the desire to hold onto the carrier for other purposes. Drewry also suggests that United Arab Ship- ping Co. has a strong interest in APL, and that, driven by the government of Qatar, it wants to build a large presence on the global stage for a Middle East-based company. Money shouldn't be an issue with the coalition of governments own- ing UASC. Overpaying for APL, as Kintetsu did for APL Logistics, may be something governments are will- ing to do. The points here are that the container shipping industr y is nearing that tipping point where several carriers are going to get out because they have no real choice, or those that can will sell or merge, again because there aren't any good alternatives. The financial commu- nities aren't anxious to get involved further, and the government entities involved are seeking what they hope to be viable alternatives. JOC Gary Ferrulli is president-North America for Unicon Logistics. Contact him at What must those who see Maersk as disappointing think of the other industry participants?

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