It takes great skill in managing assets and planning long term to succeed as an ocean freight carrier. New ships are expensive, take several years to build and sail for decades.
This type of long-term thinking and experience in dealing with tough markets — and there’s no doubt maritime shipping has been brutal historically — will serve both A.P. Moller-Maersk A/S and CMA CGM. Both companies took delivery this summer of new Boeing 777 freighters and have lined up deliveries of more Boeing Co. and Airbus SE aircraft as they build out capacity.
These new aircraft represent the action behind the pledges to diversify their businesses during the height of the pandemic when customers were desperate for sea and air transportation. Both Maersk and CMA CGM have invested in the trucking side of the logistics business and are now accumulating their first new aircraft to tackle the air-freight market. Shipping rates soared during the Covid-19 lockdowns, and the influx of cash from this once-in-a-generation cycle gave marine operators the cash to diversify. Maersk earned $31 billion of operating profit in 2022 alone.
Now comes the hard part. Maersk and CMA CGM need to claw out positions in a market that will be defended ferociously. Truck transportation is in its second year of recession, and the much-discussed recovery is still a mirage shimmering in the distance. Air freight, on the other hand, is rebounding nicely from last year’s drop. Volume rose 14% in July from a year earlier, the eighth month of double-digit growth. There’s a good chance there will be a nice bump during the end-of-year peak season.
From 2015 to 2019, air cargo rates during the four-week period at the end of the third quarter rose 5% to 20%, according to a series of charts from Susquehanna Financial Group analyst Bascome Majors that, typical of his style, are so tightly packed with data points that the colorful squiggly lines resemble a Jackson Pollock artwork.“We expect a moderate increase in air cargo rates within the stated range as we approach peak season,” Majors wrote in a Sept. 3 report.
While the timing is favorable for both shipping companies to expand into air freight, the market is fraught with danger. There are large dedicated air-freight companies, including FedEx Corp., Deutsche Post AG, United Parcel Service Inc. and Qatar Airways Cargo, just to name a few. Cargo is also carried in the lower holds of passenger aircraft. That so-called belly capacity has been expanding as airlines return to normal service, especially on routes to and from Asia.
Maersk and CMA CGM are taking different approaches to carving out that position. Maersk has flying experience and will handle its operations in-house. The company founded a passenger airline in 1969 and divested it in 2005, and since 1987 it has flown cargo for UPS under Star Air, a unit that operated 15 aircraft in 2021. The Danish company stepped up its interest in air cargo with the acquisition in 2022 of Senator International, which it combined with Star Air to form Maersk Air Cargo.
CMA CGM has partnered with Atlas Air Worldwide Holdings, which was purchased by a private investor group led by Apollo Global Management last year, to operate its aircraft. The French shipping company expects to have 13 new Boeing 777 and Airbus A350 freighters by the end of 2027, said Damien Mazaudier, chief of the air-cargo business. How many aircraft does CMA CGM want to own over the long term?
“The sky’s the limit,’’ Mazaudier said in an interview. “It’ll take time to develop this. So, we will go progressively.”
The extraordinary influx of cash during the pandemic gave the ocean carriers the opportunity to begin building out an asset-based logistics service from tip to tail (or bow to stern). Maersk and CMA CGM will bump into competitors and suffer turbulent market demand, but they need to stick to this diversification plan even as the pain of the pandemic fades in the rearview mirror.
That’s because ocean carriers could be under a lot of pressure over the medium term as global trade retreats from the go-go growth days that began in the 1990s.
The trend of locating factories in countries closer to where the product will be used (at least the same continent) could have long legs. The driver now is the deteriorating relationship between China, which has backed Russia after its invasion of Ukraine, and the US, Europe and its allies. The pandemic was a wake-up call for how much the US economy depends on Chinese goods. There’s also an environmental argument for making things closer to the consumption point instead of transporting different pieces of production from all over the world. Automation is driving down the labor cost of running factories, which enables more manufacturing in high-wage markets.
The maritime shipping industry has been a tough business plagued by too much capacity. Companies order ships when times are good, but they usually arrive after the hot market has cooled. And then there’s China and its ambition to become the dominant player on the seas both commercially and militarily. The plan started with the steel and then the shipyards to build the vessels. The dominance has stretched to building the cranes that unload ships at port. China’s stunning success was driven by its central government’s purse and planning that tied Adam Smith’s invisible hand, which in a normal market would have guided industry participants to invest prudently and not cut one another’s throats.
The maritime shipping industry has been a tough business plagued by too much capacity. Companies order ships when times are good, but they usually arrive after the hot market has cooled. And then there’s China and its ambition to become the dominant player on the seas both commercially and militarily. The plan started with the steel and then the shipyards to build the vessels. The dominance has stretched to building the cranes that unload ships at port. China’s stunning success was driven by its central government’s purse and planning that tied Adam Smith’s invisible hand, which in a normal market would have guided industry participants to invest prudently and not cut one another’s throats.
“It’s a boom-bust business, and the cycles never last that long,” said Lee Klaskow, a senior analyst for logistics at Bloomberg Intelligence. “When things are good, people order ships. And then demand goes away and all the ships come on the water. When you buy an asset for $70 million to $100 million, you’ve got to use it.”For an idea of the boom versus the bust, Maersk had combined operating earnings of $51 billion in 2021 and 2022 compared with $2.5 billion in 2018 and 2019. It will be a struggle for these maritime shipping companies to diversify into new markets. In the end, the payoff will be more boom and less bust.
Source: https://economictimes.indiatimes.com/small-biz/trade/exports/insights/ocean-freight-carriers-are-ripe-to-compete-in-the-air/articleshow/113112855.cms