“It turned out that football clubs weren’t like normal businesses. In normal business, if you rack up unpayable debts, you close down. However, football clubs rack up unpayable debts and live. No English club has folded for good since tiny Wigan Borough during the Great Depression in 1931. All the rest survived the Depression, the second world war, recessions, corrupt chairmen, appalling managers and now the financial crisis. It’s a history of remarkable stability.
“True, smaller British clubs are forever going insolvent (though the only Premier League club ever to do so was Portsmouth in 2010) but then they do deals with their creditors, usually repay a small fraction of debt, and march on. No creditor or bank manager wants to kill off a beloved ancient institution… Football clubs survive even when they go bust. That’s pretty sustainable.”
The passage above came from a Financial Times piece on Friday about Arsenal Football Club
, one of England’s most venerable soccer institutions.
The article explores how Arsenal’s austere financial strategy has led it to relative mediocrity over the last eight years in the high-stakes world of European soccer. The club has lost ground, success-wise, to bigger spending teams, like Chelsea, Manchester United and, more recently, Manchester City, while focusing on a policy of refusing to spend more than it takes in. On the business side, however, it has cash reserves of around $400 million and debts of $150 million. Both are resoundingly unique in an environment when most top clubs, successful or not, are swimming in tens or even hundreds of millions of dollars in debt.
As Arsenal’s Chief Executive Ivan Gazidis told the Financial Times
: “In football that is seen as conservative. That tells you a little bit about the environment we’re in.”
I couldn’t help but compare the situation to that of the liner shipping industry. The passage so closely mirrors what was seen in the 2008-2011 period. How many times did I, and other trade journalists, write a variation on the sentence: “In what other businesses would you be able to sustain losses over the course of several years and yet still attract investment?"
Well, it turns out we never considered the world of big time international sports, which is probably a more apt comparative case than other transportation industries.
There is a dynamic at play in sports that doesn’t exist in liner shipping, though: success. A team in any given sport is measured by its ability to win and profit. A well-run team will be good at both. A poorly-run one will suffer in both arenas. But a team can adopt the strategy that short-term losses are worth it if the end result is sporting success.
There’s no such fallback position for liner carriers. Profitability is the only goal. Our annual report on the financial health of the top publicly-traded lines ranks those carriers based on their profits, revenue, and profit margin, not how many likes they get on Facebook or how big their Twitter buzz is. There is no World Cup of liner shipping (though that would be fun).
Yet in that dark period, carriers spent, and expected their shareholders to fund that spending, as if they were striving for some abstract success beyond profitability.
We say this all the time, but perhaps there are some signs that carriers have decided that profitability is more important than cache. Some of the decisions taken in the last 12 months exude humility more than bravado. They reflect pragmatism more than machismo.
Maersk risking the wrath of its reefer customers via a big rate hike, with most other major reefer carriers following suit. Germany’s two major carriers announcing they are discussing a possible merger. Mediterranean Shipping Co. and CMA CGM partnering on the Asia-Europe trade, with the mostly Asia-based alliances following suit. Ship orders quieting down. Layups and slow steaming becoming more normal. These are all pragmatic moves that make business sense.
It’s really impossible for anyone on the outside looking in to say for certain, but it looks as though carriers have realized that they are businesses first and foremost, and not vehicles for glamour.
Best to leave grandstanding to the Russian oligarchs and Abu Dhabi royal families that have bought Europe’s biggest soccer teams and have actual, physical trophies to hoist for their huge investment. In liner shipping, being at the top of our profitability table ought to be the grail everyone seeks. - Eric Johnson