Top global container lines have varying strategies for terminal activity.
By Eric Johnson
The Chilean liner carrier CSAV has had a difficult few years financially.
Between 2006 and 2010, the line lost more than any other of the publicly traded top 20 global container carriers — nearly $700 million in all. In 2011, it lost another $959 million.
So it made some sense when CSAV decided last year to spin off its terminals, tugs, and logistics business Sudamericana Agencias Aéreas y Marítimas (SAAM) to raise cash for its beleaguered liner business.
The spinoff, completed in February, was determined because the “risks and volatility are different” for the liner and terminal operating businesses, Oscar Hasbún, CSAV’s chief executive officer, told American Shipper
in a February interview. He also said it will make it easier for the terminals company to access capital markets for expansion.
For CSAV to separate its liner and terminals businesses is not unique. OOCL, for example, divested itself of a series of North American terminals in 2006. But it does raise some questions about how CSAV and its liner carrier brethren view their terminals.
Are they cost or profit centers? Are they independent businesses within a group portfolio, or are they tools for liner carriers to better control their destiny? The answers differ depending on what the various carriers want to achieve.
“If they want exclusivity and flexibility, then it’s better that the terminals’ priority is to serve the interests of the parent line,” said Neil Davidson, senior advisor for ports at the London-based consultancy Drewry. “However, if the portfolio is suitable for use by various shipping lines, then there’s a good chance that it can operate profitably and make a contribution to the owning carrier’s bottom line, or offset liner losses.
“The cost center approach is aimed at achieving greater efficiency in the carrier’s business by integrating the terminal with the wider shipping service network of the parent carrier,” he added. “The profit center approach seeks to achieve greater efficiency at each terminal by implementing common systems and best practices across the terminal network to improve efficiency.”
According to Drewry, 13 of the top 22 terminal operators in the world are in some way affiliated with container lines. All but one of those can be found outside the powerful cadre of the top four terminal operating companies globally — PSA International, Hutchison Port Holdings, DP World, and APM Terminals — which collectively control about two-thirds of all global port throughput.
But the remainder of those liner-affiliated terminal operators have a vital role to play within the shipping groups to which they are attached.
“When we talk about carriers’ investments in terminals, there is a sliding scale with, at one end, investment in terminals solely to secure access to capacity and to serve the parent line (as a cost center), through to those carriers who view the terminal business as more of a separate business unit in its own right, with profit as the primary motive,” Davidson said.
“APM Terminals has moved to the far end of this scale, in that APMT is not even owned by Maersk Line,” he said. “It is owned by the parent group and so Maersk Line and APMT are sister companies rather than parent-child.”
Davidson said other carriers whose terminal businesses are nearer the APMT end of the spectrum are CMA CGM and its Terminal Link unit, NYK Line and its terminal business, and COSCO Container Lines and its sister company COSCO Pacific.
“COSCO and COSCO Pacific get complicated because COSCO Pacific is a standalone terminal business, but COSCO Container Lines also has terminal interests itself,” Davidson said.
Then there is Terminal Investment Ltd. (TIL), the terminal operator often associated with Mediterranean Shipping Co. Davidson said a lack of transparency on MSC’s relationship with TIL clouds the industry’s understanding of the affiliation between the two entities.
Though the link has been described in press releases related to specific terminals as such: “TIL has a unique relationship with Mediterranean Shipping Co.,” with TIL’s investments and projects conceived with the aim of handling MSC’s volumes.
Highstar Capital, the infrastructure investment company that controls Ports America (the biggest terminal operator in the United States), describes TIL as an affiliate of MSC on its Website. TIL is a partner in Ports America’s Outer Harbor project in Oakland, Calif.
MSC declined comment when asked about its involvement with TIL.
As for CMA CGM and its subsidiary Terminal Link, which operates 24 terminals worldwide, the French line told American Shipper
that all its facilities are common user and not dedicated to the affiliated shipping line. CMA CGM, which is privately held, declined to elaborate when asked if it considers the profits and revenues of its terminals business as separate from its liner business.
Some lines have, in recent years, changed the way they report their terminal financials, with the aim of combining those revenues with liner revenues. APL, for instance, used to report its terminals as a separate business, but now they are reported in a combined fashion, APL spokesman Mike Zampa told American Shipper
OOCL, MOL, Hanjin Shipping, and Hyundai Merchant Marine all told American Shipper
that they also do not report the financial performance of their terminals separately from their liner divisions.
“On the one hand, internally we may look at the financial performance of the terminals separately and we do attempt to gain profit from our terminals,” said an MOL spokesman. “On the other hand, we don’t report the financial performance externally.”
OOCL told American Shipper
that it considers its terminals as a cost center for its liner business, not a separate profit center for the group. Since selling a group of common user North American terminals in 2006 — ones OOCL did seek to glean profit from — the line now operates terminals only where it seeks to gain advantages in efficiency and priority — in other words, where it can control its own destiny.
Some lines, including MOL, lump terminal revenue into the greater liner shipping division, but operate terminals on a neutral basis, meaning the facilities aren’t dedicated purely for services run by the affiliated line or its alliance and vessel-sharing partners.
Hanjin views things similarly. The South Korean line’s terminals, including U.S. operations in Long Beach and Oakland, Calif.; Seattle; and Jacksonville, Fla. are multi-user facilities.
“As for our external business performance report, we don’t separate the financial performance of our terminals from that of liner shipping,” a Hanjin spokesman said. “We track them for our internal use. We do try to gain profit from terminals as a new source of income other than our liner business, however, they also function as a cost center for our liner business.”
Hyundai also tallies its liner and terminals business into a consolidated number even though the line told American Shipper
it operates Hyundai Terminals as a separate business unit.
“To ensure access to terminal capacity, competitive rates and service, they are an integral component for operations in selective markets,” a spokesman said. “The terminals operate as a cost center for Hyundai but they do compete for third party business.”
Davidson said that, outside of APMT and COSCO Pacific, NYK is the only carrier that breaks out its terminal revenue separate from its liner revenue.
Even those lines with terminal portfolios that are more at the cost center end of the scale, “there are often joint ventures with stevedores and terminal operators, who are clearly profit motivated,” he added.
Those lines that view terminals as part of their larger liner operations see advantages in overall network efficiency and flexibility, especially the ones running dedicated terminals.
“These fall clearly into the cost center in my view, and they don’t directly contribute to liner profitability,” Davidson said. “However, their strength is in the flexibility they offer to the carrier. For example, having your own terminal means that if vessels are running late, or early for that matter, it is easier to accommodate them, compared with a multi-user terminal where berth windows are held by numerous carriers. This flexibility can have indirect profitability benefits for the carrier.”
APMT, COSCO Pacific, and Evergreen (and TIL, if considered aligned with MSC) are the only liner-affiliated operators among the top 10 global operators. The rest of the top 10 is composed of companies that are outright terminal operators — the powerful troika of PSA, Hutchison Port Holdings, and DP World, and smaller, but not insignificant European operators.
Meanwhile, the remainder of the terminal operators affiliated with container lines lies outside that powerful cadre of operators.
The decision of whether a terminal is to be used as a profit or cost center has to be viewed through the reality that terminal operators have much better margins than liner carriers. This is simple to compare when looking at APMT’s results relative to those of Maersk Line, and COSCO Pacific’s results compared to COSCO Container Lines.
Maersk Line lost $483 million in 2011, yet APMT secured operating profits of $767 million in the same year. Going back to 2010 (a better year since both divisions were profitable), APMT had an operating profit margin of 21.4 percent, while the liner division had an operating profit margin of 11.7 percent. And 2010 was a record-breaking year for Maersk, in which it had the highest one-year profitability of any container line ever.
The most comparable relationship to Maersk and APMT is COSCO and COSCO Pacific. In 2011, COSCO Pacific had an operating profit of $179.4 million on revenue of $599.2 million. That’s a 29.9 percent profit margin from operations. Juxtapose that with sister company COSCO Container Lines, which suffered a $1 billion loss in 2011 on $6.4 billion in revenue.
The operator has stakes in more than 20 terminals worldwide (though most are in China), and many of its stakes are minority ones, meaning it isn’t the primary operator.
It’s difficult to determine how profitable the rest of the carrier-affiliated terminal operators are because they generally group the financial performance of their terminals together with that of their pure liner shipping businesses.
“The tricky thing is migrating from a cost center-based terminals portfolio to a profit-based one, because clearly the parent shipping line is used to paying certain prices, and a profit-seeking approach to the terminals often results in the need for higher prices,” Davidson said. “This is one of the main reasons why APMT’s EBITDA (earnings before interest, taxes, depreciation, and amortization) margin is lower than that of the other main stevedores — there is a Maersk Line legacy.”
In this case, Davidson is referring to APMT’s profit margin relative to independent operators, not the container line. In this comparison, APMT doesn’t stack up quite as well. PSA International, the largest operator in the world by equity-adjusted throughput, had profit margin of 39.4 percent in 2011, a staggering return on revenue considering global container growth that year was muted.
APMT’s profit margin in 2011 was 16.3 percent. So despite APMT having 50 percent more revenue than PSA, its profits were roughly half that of the Singapore-based independent operator.
DP World had an operating profit margin of 37.5 percent in 2011 with $1.1 billion in profits, meaning APMT had barely two-thirds the profit of Dubai-based DP World, despite DP World having two-thirds the revenue of APMT.
Of course, profit margin doesn’t tell the whole story. Some in the industry point to a company’s return on invested capital (ROIC) as being a better indicator than pure profit margin, given that labor costs can vary widely depending on an operator’s geographic footprint.
APMT’s return on invested capital was 13.1 percent in 2011, after being 16 percent in 2010, and 10 percent in 2009. PSA doesn’t specify ROIC in its financial statements, so it’s difficult to directly compare the two companies by that measure.
But APMT’s relatively lower profit margin perhaps underlines the effect that a shipping line can have on the profitability of an independent, yet affiliate terminal operator. It’s hard to imagine that APMT’s average cost efficiency is half that of PSA’s. It’s also hard to imagine that PSA is able to secure tariffs at twice the average level of APMT on the same costs.
So therein lays the dilemma for container lines and their terminal operating subsidiaries or divisions. There’s no perfect way to structure the relationship between lines and affiliated terminal operators.
A pure profit-based approach can have detrimental effects on liner efficiency, but can help a group balance lean years on the liner side, while a pure cost center-based approach means the lines are ignoring the high profit-margin nature of terminal operations. And a hybrid approach means neither set of advantages is pressed to its full potential.
By spinning SAAM off, CSAV perhaps decided that the best course was to cash in and let the terminals business succeed on its own merits as independent operators have, even in down years for container shipping. More than five years ago, OOCL decided much the same for its portfolio of profit-based terminals. Other lines have taken an opposite tack, integrating their terminals into their liner shipping businesses.