A new report by AlixPartners urges the liner industry to consolidate more. Citing “massive overcapacity, falling profitability and precarious cash-flow levels” AlixPartners said the sector was at a perilous moment.
Nevertheless, companies with “M&A on their minds need to be proactive” if they hope to reap the kind of rewards winners in consolidated industries enjoy—or to prevent becoming acquisition targets themselves, the consultants suggested, pointing to the successful consolidation of the US airline industry as a possible template to follow.
“For the first time in recent memory, the container-shipping industry is seeing the beginnings of the kind of consolidation that has brought increased and sustained profitability to winning players in other industries for years,” said Foster Finley, managing director at AlixPartners and co-head of the firm’s maritime practice. “However, further consolidation and operational overhauls will be necessary if players in this industry, which as a whole remains deeply troubled, wish to reap the kind of benefits enjoyed in other industries. In addition, these uncertain market conditions are casting a long shadow over the annual rate-negotiation cycle kicking off between major importers and their carrier bases.”
Liner capacity is expected to jump by 4.5% in 2016 and another 5.6% in 2017, while demand is expected to increase just 1% to 3% this year, the report noted.
Cash from operations declined by almost twice for the liner industry as a whole as fast as EBITDA in the last 12-month period—by 12% — indicating, according to AlixPartners, that carriers face working-capital challenges, often a precursor to bankruptcy.
The study finds the industry as a whole in the “distress” zone according to an Altman Z-score analysis, a formula for predicting bankruptcy. The industry has been mired in this lowest zone for the past five years, and hasn’t been in the “safe” zone since 2007, notes the report.
Continued poor financial results are predicted in the report for at least the remainder of 2016.
The idea that liners should follow the lead of airlines when it comes to consolidation is nothing new. Gerry Wang, the boss of Seaspan, first mooted the idea two years ago in conversation with Splash sister title, SinoShip.