AlixPartners starts maritime restructuring and advisory practice for carriers.
By Eric Johnson
The global business advisory firm AlixPartners is a well-known name in the circles of financial restructuring and business performance.
So what better arena to apply those principles than to the beleaguered maritime industry?
In late April, the company announced it was launching a global maritime practice aimed at advising a nearly $400 billion industry that is suffering from heavy debt and weakened demand growth in developed markets.
Paul Svindland, AlixPartners’ North American managing director, said in a conversation with American Shipper
that the whole containerized sector will face challenges over the next two to four years.
“It’s still a bloodbath out there,” he said. “The uptick in rates is not sustainable, and it wasn’t enough to begin with. And there continues to be liquidity and cash flow problems. Most carriers also have a lot of debt.”
According to research compiled by AlixPartners for American Shipper
for the annual Who’s Making Money feature (see July issue, pages 32-39), debt levels among the top 15 publicly traded lines reached nearly $91 billion at the end of 2011.
Operating profit from those 15 lines’ parent companies was $9.8 billion in 2011. Take away the A.P. Moller-Maersk Group’s $9 billion in profits (gleaned mostly from its oil interests) and those companies were essentially break even in 2011, facing a mountain of debt tied predominantly to investment in new ships.
“Each carrier’s dynamics are a little different,” Svindland said. “But eventually they do have to say enough is enough.”
Pride is a significant factor when it comes to the type of services AlixPartners can provide container lines. Most of the world’s top lines are backed by families with a long history in the business, or by governments with a strong interest in maintaining merchant fleets.
||“It’s clearly a commodity
business and carriers have to
be laser-focused on having
the lowest costs. The people
who make the most money
have the lowest cost base.
Good solid operators know
how to make money.”
|— Paul Svindland, North American managing director, AlixPartners
“But that doesn’t mean it’s not right to look at a restructuring or turnaround,” Svindland said. “When an industry is in flux, business models change.”
The main point of emphasis for his team is to get carriers accustomed to a new model for the industry, as these companies adjust to new levels of growth demand from developed economies. Attendant to that is the reality that the liner industry has become more commoditized than ever, with less service differentiation.
“Fifteen years ago, you had probably three strata of carriers,” he said. “Five years ago, it was down to two. Now you have 1 and 1a. The premium carriers have gone down, and the less-service oriented carriers have gone up.”
Part of the problem, he said, is that there are certain port pairs where carriers can indeed provide service tiers, “but not enough of those pairs to differentiate themselves. The reality is they’re not perceived as the service providers they once were. It’s clearly a commodity business and carriers have to be laser-focused on having the lowest costs. The people who make the most money have the lowest cost base. Good solid operators know how to make money.”
Svindland said AlixPartners’ maritime practice brings a new type of advisory to the industry, one in which AlixPartners can bring its financial and operational expertise to bear.
“It’s an all-encompassing service, not just one or the other,” he said. “It’s hard to go to the gym and lose 25 pounds, so you need a trainer. We have that hands-on operational understanding to go along with our experience in debt restructuring.”
The maritime practice is aimed at carriers, shipowners, and creditors “across the entire spectrum of operations, capital structuring and transaction advisory,” the company said.
The practice includes a team of nine directors in North America, London, Germany, Hong Kong, and Japan, including Svindland and Esben Christensen, both of whom had previous stints with the A.P. Moller-Maersk Group.
Svindland said carriers are cognizant of the problems they are facing.
“I don’t think carriers are unaware of the need to do this,” he said. “It’s more about the speed with which they need to tackle this realignment. Instead of an 18- to 24-month plan, it should be nine months. You have to eliminate this idea that rates will swing back and we’ll get through this. The mentality of the industry is that the good times will always come back, and I don’t think that’s prudent. They can’t continue to be bailed out. This cycle’s different.”
One potential positive is that banks have cash and are compelled to deploy those assets, but “if you are going to provide capital for carriers, you have to have confidence in those carriers.”
Svindland noted that some of the toughest questions during the downturn came from carriers’ lenders. An obstacle for restructuring firms is convincing companies that their internal management teams can’t necessarily do it themselves.
“No CEO or management team is perfect,” he said. “The team that worked well in growth mode may be different than the one you need in survival mode. That’s no knock on anybody. It’s unfair to expect people to be wired both ways. Our team is prepared to do things in the toughest of times.”