Container Lines Are Using Pandemic Windfalls But Risk Awaits

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  • When French container-shipping giant CMA CGM Group announced a cargo partnership with Air France-KLM last week, the real surprise was its plan to acquire only 9% of the airline.
  • Having made 18 billion euros ($19 billion) of net profit last year, the world’s third-largest container line by capacity could afford to acquire all of Air France with plenty of change to spare.
  • And because the world’s ports are still chockablock and freight rates remain sky-high, it will probably earn even more this year.

A recent news article published in the Bloomberg states that shipping’s $500 Billion Profit Can Take on Amazon.

Container-shipping industry will have earned a staggering half a trillion dollars

Indeed, by the end of 2022, the container-shipping industry will have earned a staggering half a trillion dollars of operating profit from two years of supply-chain misery, estimates research firm and consultancy Drewry.

Besides splurging on dividends and share repurchases, the once-scarcely profitable container lines are planning to use this once-in-a-lifetime haul for acquisitions and investments. Some aim to turn themselves into end-to-end logistics giants, in the vein of Amazon.com Inc. or FedEx Corp.

In theory, this should make them more resilient when shipping freight rates normalize, which is bound to happen one day. Shipping costs have already come down a bit, but due, in part, to the spread of omicron in China, some industry observers now don’t expect port congestion to ease until next year.

These hungry hippos waste their epic windfall on empire building

Of course, the big risk is these hungry hippos waste their epic windfall on empire building, and an industry that’s already on the defensive due to its inflation-stoking profiteering may end up stoking an even greater political backlash.

It’s a sign of how the ambitions of the shipping industry have been transformed that a container liner joining forces with an airline no longer seems unusual: Mediterranean Shipping Co. is angling to acquire a controlling stake in Italian flag carrier ITA Airways, while the billionaire principal shareholder of Germany’s Hapag Lloyd, Klaus-Micheal Kuehne, has built a 10% stake in Lufthansa AG. In addition to expanding its own air-cargo fleet, Maersk agreed to acquire air-freight forwarding specialist Senator International in November.

Shipping’s splurge extends far beyond aircraft to include warehouses, ports and delivery trucks. Connecting the myriad deals announced recently, a few of which I’ve highlighted in this table, is the idea of vertical integration — a fancy way of saying controlling every stage in the supply chain.

Shopping Spree

While not everyone’s pursuing this approach — Hapag Lloyd is sticking to shipping, perhaps because Kuehne already owns a logistics company, Kuehne & Nagel International AG — the marine companies frame it as a win-win. They get a bigger share of their customers’ transportation budget, in return for providing a more joined-up, reliable service.

Being seen as a logistics integrator, rather than just a shipping firm, might also help lift Maersk’s stock market valuation. Currently, the Danish giant is valued at less than three times its earnings because investors think its bumper shipping earnings are unsustainable. (MSC and CMA CGM are closely held).

From an investor perspective

From an investor perspective, it’s refreshing change because historically this industry tended to splash all of its spare cash on new ships, leading to profit-sapping overcapacity (customers didn’t mind, of course, because it meant shipping rates were generally very low).

Though the assortment of toys they’re acquiring has changed, it doesn’t necessarily mean the money is being better spent. Logistics groups know the shipping companies have plenty of cash so can force them to pay top-dollar. And shipping’s previous forays into logistics, such as Maersk’s Damco unit, haven’t always gone well.

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Source: Bloomberg

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