Developments concerning the ocean container shipping industry are now moving at a faster and more discernable pace. Last week featured the news of the consolidation of Japan’s three largest shipping lines. This week adds even more perspective to an industry that is now facing even more structural and other changes. Shippers, transportation procurement teams and indeed maritime regulators need to be prepared to respond to the ongoing implications and not be lulled into predominant one dimensional cost savings strategies.
Yesterday, industry leader A.P. Moller-Maersk announced financial performance for the September ending quarter and the news was not good, not even for the industry leader. The headline was a 43 percent plunge in overall profits. Maersk Line, the ocean container business unit incurred a loss of $122 million from a $243 million profit in the year ago quarter, despite container shipping volumes rising 11 percent in the quarter. That double-digit volume rise is noticeably above actual industry shipping demand, implying that market-share volume shifts are perhaps underway.
Maersk CEO Soren Skou indicated that shipping rates bottomed at the end of the first quarter and are slowly rising due to the departure of Hanjin Line shipping vessels from global routes. He further indicated that Maersk has observed a general rise in rates averaging 5.5 percent since the second quarter, but keep in-mind that the spot rate base remains below break-even profitability. Of more interest, the CEO validated that industry consolidation is set to continue and that nobody could have expected how fast it is now occurring.
Of far more interest to this author was what was further indicated to The Wall Street Journal. The CEO declared: “In 1996 the top three carriers had 17 percent combined market share. By next year the top three carriers will have 43 percent market share, and it’s not going to stop there.”
That statement, by our lens should be of concern to shippers and regulators alike. While most shippers may be inclined to appreciate the cost saving benefits of historically low transport rates, it seems rather obvious that the battle for market share and industry dominance is underway among top-tier carriers. The winners will obviously be those with the largest financial pockets and backers and the prize is global scale and industry dominance. The WSJ reported this week that cumulative financial losses for this year could be as high as $10 billion, which is double the recent forecast from industry advisory group Drewry.
We would add that the formation and approval of existing multi-line shipping alliances could possibly be a further enabler to market-share dominance. Competing or non-aligned shipping lines are therefore under even more pressure to further consolidate or risk intolerable financial losses. Meanwhile industry leader Maersk has already indicated that it will seek further opportunities to acquire other attractive lines if the opportunity presents itself.
In a separate interview with the WSJ, the vice-chairmen of CGA CGM, the third ranked global shipping line indicated that none of the 20 top shipping companies are likely report operating profitability this year. He further indicated that his firm is not looking to further acquisitions after recently acquiring Singapore based Neptune Orient Lines.
This week, the Boston Consulting Group added its industry research perspectives in a report: The New Normal in Global Trade and Container Shipping. (Sign-in account required) The report forecasts that shipping capacity will continue to outpace shipping demand by a range of 8.2 percent and 13.8 percent compared with a 7 percent imbalance today. BCG expects annual growth in global container traffic to range between a bear scenario of 2.2 percent and a bull scenario of 3.8 percent, with a base scenario of 3.2 percent through 2020. Further estimated: “that by the end of 2020, oversupply of vessel capacity will stand at 2 million to 3.3 million TEUs.”
These are yet further indications that industry supply and demand imbalance will extend for an additional four years without changes on either end. That again reinforces the building tide of industry consolidation or the opportunity for further market share penetration by the largest and more financially strong carrier groups. Dominant operation of today’s newer mega-ships has another implication, that being the current limited amount of ports that have the infrastructure and modernization to be able to load and unload such vessels on a timely basis. The timing and availability of leased container truck chassis remains a shipper and industry concern.
For shippers and services procurement team, the financially motivated strategy is to try and lock-in today’s historically low rates in longer-term contracts, before further consolidation changes the negotiating picture. That goal is sometimes complicated when transportation services are outsourced to a third-party logistics provider or global services provider, and whether savings are being passed along. However, with such a shipping industry supply and shipping demand imbalance compounded by added consolidation threats, it may be wise to allow for opportunistic spot-rate contracting for shipping, especially concerning carriers or global shipping routes that continue to be highly competitive.
The most prominent criteria for multi-industry internal transportation and logistics teams is, as always, to ensure that any ocean transportation services provider or third party logistics provider consistently delivers reliable on-time services and is responsive to unplanned events. The memories of the 2015 U.S. West Coast port disruptions and consequent implications for lost business remain top-of-mind. The need for planning and collaboration among internal finance, procurement, internal and contracted supply chain operations teams is therefore paramount.
Finally, we advise that shippers, brokers and logistics operators provide added pressures in 2017 for shipping lines and respective shipping consortiums to move beyond pooling of vessels and one-sided optimization of global routes and more into insuring consistent on-time and predictable delivery performance, augmented multi-modal container tracking, routing visibility and other customer focused improvements. The time is long overdue for industry-wide data and information exchange standards.
The takeaway is that ocean container transportation planning cannot be taken for granted in such turbulent times.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Last week, transportation equipment provider Bombardier announced plans to shed an additional 7,500 jobs, or just over 10 percent of its global workforce, as it focuses on turnaround efforts amid a soft business-jet market and hiccups with its CSeries commercial aircraft program. This announcement came in the wake of a prior February announcement to reduce 7000 jobs.
The Canadian-based commercial aircraft and train manufacturer indicated that the headcount reductions will be global in-nature, affecting administrative and non production positions across the company, and are expected to save it about $300 million by the end of 2018.
According to business media reports, about two-thirds of the latest headcount reductions will stem from Bombardier Transportation, the company’s rail manufacturing business. About 2000 of these job cuts are expected to impact employees within Canada.
The cuts are further expected to include a realignment of design, engineering and manufacturing structures and the creation of new “Centers of Excellence” overseeing both rail and commercial aircraft manufacturing.
As Supply Chain Matters and business media continually points out, Bombardier has made a big strategic bet with the development and production in the CSeries single aisle commercial aircraft being a global airline alternative to aircraft producers Airbus and Boeing. This new aircraft finally entered commercial service with Swiss International after a multi-year program delay and flew its first paying passengers in July.
While the new aircraft is garnering positive reviews from airline customers, the financial toll on the broader operations of Bombardier continue and have had a noteworthy financial impact on the company. A year ago, to overcome continued financial funding needs, Bombardier struck an agreement with the government of Quebec to give-up nearly half its stake in the CSeries program in exchange for a $1 billion additional investment. The company further sold an equity stake in its train manufacturing division to a Quebec pension fund for $1.5 billion. That division continues to respond to stiff global competition coming from China’s lower-cost, state-owned rail equipment producers who are in the process of merging.
The latest and perhaps most untimely setback to CSeries program came late this summer with an announcement by aerospace aircraft producer Pratt and Whitney that it would not be able to meet its 2016 production and delivery commitments to certain aircraft manufacturers that included both Bombardier and Airbus.
We previously highlighted that Airbus’s first-half shipping performance related to its new A320 neo aircraft were noticeably impacted by delayed delivery of Pratt’s new geared turbo fan engine. Airbus had delivered just 5 A320neos in Q1 and 3 in Q2 while nearly a dozen of completed aircraft was reported at the time to be lined-up on factory adjacent runways and parking areas awaiting Pratt to deliver completed engines. The July delay was associated with fixing the engine’s cooling design through a combination of software and component modifications.
In early September, Bombardier publicly disclosed a delivery schedule adjustment due to the shortfall in expected completed engines from Pratt. While re-adjusting to a lower revenue expectation, the manufacturer reaffirmed its prior earnings commitment, most likely setting the stage for the current headcount reductions.
Moving forward, the new CSeries is more than ever highly dependent on the consistent and more-timely performance of its sole aircraft engine supplier, Pratt. Industry watchers and academics may well look back and question whether specification and reliance on a single aircraft engine design was a wise one. Then again, Bombardier, from the get-go, may not have had the financial deep pockets to be able to certify and source more than one engine supplier.
In the light of our previous posting related to Airbus and Boeing continuing to experience supply chain production scale-up challenges, we turn some attention to new news related to Bombardier’s C-Series program.
For the past several years Supply Chain Matters has highlighted Bombardier’s C-Series aircraft program, particularly challenges related to gaining market attraction as a viable alternative to more technology advanced single-aisle commercial aircraft needs. This effort placed Bombardier in direct competition with the Airbus A320 and Boeing 737 for new commercial airline orders. In 2013 Supply Chain Matters declared that the C-Series could indeed be a competitor.
A series of multi-year program setbacks and lack of substantial customer orders have resulted in building financial loses and questioning whether the aircraft would indeed make any mark. The aircraft is powered by the new geared turbofan technology provided by Pratt & Whitney which has experienced its own start-up design and production challenges. Upwards of $3.2 billion have already been written off from the program. Now, there are some signs of life amid some important new orders.
Last week, Delta Airlines agreed to acquire 75 of the CS100 model aircraft with options for an additional 50 aircraft, along with agreeing to serve as the U.S. launch customer. Delta additionally has the option to convert some of the latter orders to the large CS300 model. The firm order was valued at $5.6 billion in U.S. dollars and was characterized as possibly providing some measure of street credibility for the C-Series program. In announcing the order, Delta’s CEO indicate that the airline’s decision brings the C-Series as a third option in the mainline aircraft marketplace.
Deliveries are expected to begin in the spring of 2018 and Delta now represents Bombardier’s largest commercial aircraft customer. Delta announced a new order for Airbus A321 jets as well. Industry watchers and executives indicate that Delta was able to negotiate a very attractive financial deal for the C-Series jets. According to Delta, the CS100 will provide better fuel efficiency and a 30 percent improvement in maintenance costs over Delta’s existing Boeing 717 aircraft fleet.
Last week Bombardier reported year-over-year revenue and profitability declines. According to business media reports, the C-Series is not expected to reach a break-even cash flow basis until 2020. The company remains saddled with a large debt load as-well.
With the new Delta order, the diversified transportation equipment manufacturer has secured 325 firm orders for both the CS100 and CS300 aircraft, including airline customer Lufthansa and its Swiss International unit. According to business media reports, the company is still awaiting a commitment from government owned Air Canada for 45 jets, amid some threats of violation of World Trade organization prohibiting direct subsidies of aerospace by domestic governments. The company is seeking financial aid from Canada’s federal government but those talks remain uncertain. Bombardier has raised $2.5 billion since October after agreeing to sell almost half of its take in the C-Series program to the Quebec government as well as selling a stake in its train-making operations to a Quebec pension fund.
Equipment and capital goods manufacturers have increasingly re-discovered new and growing revenue opportunities that reside in added services and service parts sectors related to in-service equipment. Such opportunities are especially pertinent across commercial or defense focused aircraft which have operational service that spans many years of service. However, when an industry dominant such as Boeing decides that it wants to take more control as well as revenue cut of all service parts, the financial implications and subsequent impacts will reverberate among all key suppliers.
Today’s edition of The Wall Street Journal reports such an implication as Boeing elects to secure a new source of revenue beyond building aircraft. (Paid subscription required) The report indicates that whereas in the past, Boeing’s largest suppliers such as Spirit AeroSystems or Rockwell Collins could sell respective manufactured parts directly to airline and aircraft operators for in-service service replacement needs, the OEM elected in late February to prohibit suppliers from directly selling proprietary service parts, along with suspending licenses to suppliers to sell any such proprietary parts to its customers. The WSJ characterizes this development:
“It is the most aggressive move to-date in Boeing’s year-long effort to assert control over distribution-and the resulting revenue- of parts.”
According to the report, Boeing is looking to nearly triple revenues associated with commercial and defense aviation parts and services business by 2025.
Supply chain teams in these sectors know all too well that margins on service parts can far exceed those for original equipment production needs. According to the WSJ, it can be upwards of 4X more than what Boeing pays for the part to support initial production. Suppliers will often forego margins on supply contracts to a customer such as Boeing with the expectation that multi-year margins can be garnered in service parts needs over the operating life of an aircraft model.
In a highly regulated industry such as commercial or defense focused aircraft, certain structural or key operating parts have designated service-life provisions which must be adhered to, thus assuring ongoing component stocking and service part demand needs.
The WSJ report further links these moves to Boeing’s ongoing Partnering for Success initiative addressing added cost control opportunities among existing suppliers. According to the report:
“Boeing also prohibited some suppliers from being given new work or withheld regulatory approvals for parts until revised (supply) contracts were complete.”
The report cites a Credit Suisse aerospace industry analyst as indicating:
“The economics of being a Boeing supplier could be facing their greatest challenge yet.”
While airlines themselves have become increasingly concerned by the rising prices of service parts charged by suppliers, by our Supply Chain Matters lens, this revised strategy by Boeing does not necessarily address nor mitigate that trend. It obviously takes away profitability opportunities for suppliers while adding yet another intermediary in the service parts supply chain.
One of the most promising service management opportunities related to commercial and defense focused aircraft resides in the leveraging of Internet of Things (IoT) focused technologies that would allow operating equipment the ability to communicate service and replacement needs based on operating environmental conditions. Rather that static, fixed maintenance schedules, the opportunity is for the equipment itself to self-diagnose its parts replacement needs.
Many original equipment manufacturers are thus positioning to take advantage of such technologies in new service focused business models. That includes aircraft engine producers such as General Electric and CFM International. With this latest move by Boeing, a new participant is added to the overall business model, a participant that must share the same technology tenets being promoted in automated performance monitoring and service dispatch. Add the notion of IoT platform providers positing for their portion of the overall business model via platform adoption and subsequent dominance, and the picture begins to turn to one we have witnessed before with breakthrough technology. Every participant attempting to position for leveraged control of a promising new business model while target customers have to determine what all of this implies for added efficiencies or cost savings.
The dilemma of commercial aircraft supply chains that presented multi-year order backlogs and insatiable demand for more fuel-efficient technology-laden new aircraft has met the reality of more educated and aggressive airline customers, coupled with rapidly changing economic times. These forces are inserting their influence on aircraft pricing, delivery expectations and operating service needs.
Boeing is now responding to these needs by aggressive supply chain cost and headcount reductions, and now, demanding its proportional cut of service parts revenues. In essence, like too many supply chain dominants, the picture is again moving the need of cost reduction or added revenue needs down the supply chain.
More and more, the notion of we are all in this to share industry growth opportunities together reverts back to the supply chain dominant as the ultimate long-term benefactor.
Respective suppliers will obviously have to determine their own response strategies. Larger suppliers will be able to find means to remain resilient to such changes while smaller suppliers may feel the bulk of the pain. In the long-run, the party that ultimately controls the customer relationship along with product and process design ends up to be the eventual winner.
In mid-February we alerted Supply Chain Matters readers that Boeing’s Commercial Aircraft business was planning job cuts as part of a cost-cutting drive. The party line for this action was a response to rising competition from Airbus along with pressure from customers for lower pricing on new aircraft. In February, the aerospace firm indicated that it would utilize a combination of attrition and voluntary layoffs to primarily trim its executive ranks.
Today, The Wall Street Journal and other business media are reporting the announcement by Boeing that it plans to cut more than 4500 positions by June. Boeing is acknowledging to media outlets that in its commercial aircraft business segment the firm expects to initiate about 2400 of these cuts via attrition and approximately 1600 through voluntary layoffs. The cuts include “hundreds” of managers and executives which would indicate a trimming of organizational hierarchy. When considering previous reductions of 1200 positions, the overall reductions are expected to reduce Boeing’s overall employment by roughly 5 percent. The company has further indicated that any involuntary separations of unionized workers “would only be utilized as a last resort.”
Further included in expected cost cuts are reductions in inventory levels, improved productivity and significant cutbacks in business related travel. How these forthcoming cuts will impact the broader supply chain is yet to be determined.
Regarding our last update, there still appears to be no word concerning a U.S. Securities and Exchange Commission (SEC) has launching of a probe of Boeing’s accounting methods related to both the 787 Dreamliner and 747 programs.