Catching up on significant news impacting global supply chains, readers should note that A.P. Moller Maersk, the parent of market dominant ocean container shipping firm Maersk Line, reported Q1-2015 fiscal results this week. The overall financial headline for the Maersk Line business was a net profit level of $454 million in the latest quarter amid a 3.2 percent drop in overall revenues. By our lens, it is yet another indication that global dominant carriers are stressing increased profitability over service needs with increased implications for shippers, suppliers and B2B / B2C customer segments.
In both the earnings briefing and various interviews with traditional financial media, A.P Moller Maersk CEO Nils Anderson lauded the best first-quarter performance despite decreased volumes and falling rates on shipping spot-markets, declaring that Maersk Line almost doubled its results, its best performance ever. Return-on-invested-capital (ROIC), a key measure for the shipping industry reflected a 14.3 percent level amidst an overall shipment volumes decline of 1.6 percent. Cash flow from operations increased by nearly $200 million. Specific mention was made to the Asia-Europe shipment segment where Maersk has elected not to fully engage in a current price war among existing competitors who are apparently leveraging the current 30 percent decrease in the cost of bunker fuel. He acknowledged that Maersk was willing to absorb some market-share loss to protect profitability. CEO Anderson also confirmed eight successive quarters of in fuel consumption efficiencies in areas such as more efficient new vessels, slow steaming and the current depressed levels of bunker fuel costs. He further emphatically declared: “We have no intentions of speeding up the network” that current slow steaming practices would continue despite the current 30 percent lower cost of bunker fuel. He added that the company has continued plans to reduce overall costs by around 20 percent by the end of 2016.
Maersk Line additionally reported the completion of its vessel sharing alliance with Mediterranean Shipping Lines (MSC) at the beginning of April on the East-West segment.
Supply Chain Matters has previously called attention to the important takeaways reflected from the latest financial results for UPS, and earlier FedEx, namely that dominant carriers in their shipping segments are exercising strategies of maximizing profitability in spite of decreased fuel costs. Thus, shippers expecting some relief in the continuing trend of far more expensive surface and air transportation rates are going to be disappointed. The pressures on many industry supply chains, especially those in the B2C sector, for taking out additional cost has increased, and transportation is the major culprit. Once more, the new world of online and Omni-channel customer fulfillment requires higher levels of services and flexibilities. Hence the current vice for those responsible for transportation cost performance and rate negotiation.
Instead, this is undoubtedly a time for very active negotiation of transportation rates among carriers more willing to forgo near-tem profitability to capture needed market-share or added network volumes.
Perhaps lost in this current global-wide dynamic is the longer-term impact on smaller firms who do have the shipment volume leverage of global multi-national firms. Once more, for the ocean container segment, continued slower steaming without consequent major investments in customer service and in-transit container visibility implies continued high inventory investments to compensate for such inefficiencies.
Dominant carriers are obviously exercising a Darwinian strategy of shakeout of marginal players who may fall by the wayside. It would have happened earlier if the cost of fuel had not dropped so dramatically. If fuel costs continue to increase to former levels we may well all witness another round of turbulence.