Consolidation the way forward for container lines: AlixPartners

2016-03-02

The container shipping industry will likely worsen in 2016, and the only solution is further consolidation, according to the latest Container Shipping Outlook 2016 report by business consultancy AlixPartners.

The report highlighted that massive overcapacity suggests a continuation of poor financial results this year, following 2015 in which nearly all key financial indicators declined.

Not only did industry profits, as measured by EBITDA, fall 7% in the latest 12-month period, including a 35% decline in the all-important third quarter, more critically, cash from operations declined by 12%, almost twice as fast as EBITDA indicating that carriers face working-capital challenges, and often seen as a precursor to bankruptcy.

Largely due to the continued introduction of megaships, capacity is expected to increase 4.5% this year, while demand is expected to increase just 1% to 3%. Meanwhile, given low profitability levels, merging companies need to retain combined customer bases and realize substantial cost synergies to successfully service debt burdens.

Rates-wise, traditional peak demand failed to materialize in the third quarter, leading to collapsing freight rates. According to the study, industry revenue in the critical, preholiday third quarter has declined in each of the last three years, to $39.6bn in 2015 from $45.9bn in 2014 and further still from $46.5bn in 2013. The revenue drop last year was the most serious, representing a 16% decline.

The study notes that after a decade of muted M&A inactivity, the container shipping industry could be ripe for a long-deferred consolidation, as seen by the recent rash of mergers. This could greatly benefit ambitious carriers and financial sponsors and the study suggests that the restructuring of the US airline industry previously, could be a template for consolidation in the liner market.

Lim Lian Hoon, managing director at AlixPartners, said: “While weak demand and industry-wide overcapacity are major challenges for all global shipping players, larger financially strong shipping companies in Asia may be able to find further consolidation opportunities in the current environment.

"Chinese shipping companies are particularly well placed to pursue acquisitions of smaller operators, but will need to consider integration plans and also be wary of taking on too much debt in the process.”

Source from : Seatrade Global

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