Drewry: Carriers Sail Away with Booming Profits

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In the latest Container Insight Report by Drewry Shipping Consultants, advisors detail that revenues for virtually every major carrier were down at the halfway stage of 2015, yet profits were up as a result of lower fuel costs.

Out of the 16 of the top 20 shipping lines that reported on their financial results, just two (Taiwanese carriers Yang Ming and Wan Hai) were able to improve their sales in H1, 2015.

A combination of slow demand growth and worsening freight rates meant that these lines – together controlling approximately 65% of the world’s containership fleet – between them collected just shy of US$60 billion in container revenues in the first six months of 2015, down 5% on the same period in 2014.

Despite poor sales performance, the same carriers were able to more than triple their average operating margin, which jumped from 1.7% in H1, 2014 to 5.6% in H1, 2015. In dollar terms this means that the operating profit for these 16 carriers rose from $1.1 billion to $3.3 billion.

Drewry believe the change in direction that fuel costs have taken means that carriers’ costs are falling faster than freight rates, enabling them to continue posting profits, albeit shrinking with each passing quarter. Drewry estimates that industry-wide unit costs fell by around 11% in the H1, 2015 versus the same period in 2014, whereas unit revenues were down by approximately 7%.

Unfortunately, there is very little visibility on the cost side from carriers but a few lines do publish some information that helps illuminate the importance of bunkers as a part of the overall operating expenses. Maersk reported that its average Q2, 2015 bunker fuel bill was down by over 40%, while OOCL and CSCL reported similar savings for the first-half.

Drewry asks how much of carriers’ continued profitability can be attributed to their actions? Firstly, it should be remembered that some of carriers’ revenue deflation is linked to lower BAF contributions to freight rates as a direct consequence of reduced marine fuel prices so they cannot take all the blame for that. At the same time, the introduction of larger and more fuel-efficient ships is contributing to the cost savings, but some of that benefit will be negated by the destabilising effect on rates that these new ships are causing.

Events outside their control are dictating carriers’ bottom lines and as such that represents a serious risk to sustainable profitability. Carriers need to somehow find a way to make GRIs stick and boost revenue before costs start rising again. That is a very difficult challenge.

The Drewry View: Based on prevailing fuel and rates in Q3, 2015, the advisors expect the story will be much the same i.e. diminishing profitability, meaning that the accumulation over the first nine months will be enough for carriers to walk away with okay sums for the full year, regardless of what happens in Q4, 2015.

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