Shipping industry better prepared for disruption as carriers fortify balance sheets, grow nimbler, and address overcapacity – AlixPartners’ 2024 Container Shipping Outlook

NEW YORK (February 29, 2024) – The container shipping industry showed resilience in 2023 amid continued waves of disruption, with financial health strengthening even amid declining revenues, revenue pressure, geopolitical strife, and challenging capital markets, according to AlixPartners’ 2024 Container Shipping Outlook. While conditions could remain positive for carriers – capacity, reliability, shipping rates and regulation must be rigorously addressed.

The new report, published today and based on analysis of the industry and 15 publicly-traded liner companies, delves deep into an industry that has demonstrated resilience and encountered one storm after another. Carriers have financial flexibility needed to seize opportunities and manage risks, including sufficient cash balances for M&A, investments in core business, and actions to further improve balance sheets.

“Dealing with disruption is standard operating procedure in the global container shipping industry,” said Marc Iampieri, Global Co-Leader of the Shipping, Logistics & Infrastructure practice at AlixPartners. “To be sure, industry stakeholders are facing multiple headwinds – including geopolitical conflicts, adversity in key shipping lanes and economic volatility. Carriers have demonstrated that flexibility, adaptability, and relentless focus on profitability remain essential. The adequacy of those actions will be tested in real time.”

According to the study, the container shipping industry is operating against a difficult backdrop. In 2023, revenues dropped 30% from a year earlier, the study found, and EBITDA was cut in more than half over that period. Capacity is on the rise and, consequently, rates are under downward pressure. Conflict in the Red Sea, meanwhile, could linger for months, according to the report.

It’s anything but smooth sailing on the closely watched decarbonization front, the study finds, as CO2 emissions rose to 230 million tons in 2023, putting 2030 CO2 reduction goals at risk. While 2050 Net Zero goals are achievable, they are increasingly ambitious – reaching that objective will require up to $1.4 trillion in investment, a burden that will be borne by carriers, energy suppliers, shippers, and end consumers.

The industry is not in panic mode, however. Carriers have solid balance sheets and an appetite to deploy the financial windfall reaped during the pandemic, according to the study. The $22 billion in CapEx investments recorded last year represent the largest total since 2012. And, $83 billion in cumulative cash reserves represents a level 3.7 times greater than average balances over the past decade.

Aggregate debt-to-EBIDTA ratio are also solid, with today’s 1.2 ratio a far cry from the heavily leveraged days prior to the pandemic. The industry’s Altman Z-score, measuring the likelihood of a company’s insolvency within 12 months, stands at 2.63, or comfortably above a score that signals imminent trouble.

The study also takes a close look at the most important issues that influence performance, including:

Shipping Rates

Rates have created downward pressure on carriers over the past year-and-a-half and have persisted despite a slight upturn toward the end of 2023, according to the study. The war in the Middle East and a consolidation of alliances – now a fixture in the industry – could lift rates out of stagnation. As route maps are redrawn, sailing lengths are extended, setting rates on a potentially steep upward curve.

Capacity Creep

The study finds total capacity is up 10% year-over-year. The continued expansion of the container shipping fleet poses a risk, particularly to rates. Deferred deliveries and scrapping could, however, keep planned capacity expansions in check.

Reliability

Reliability improvements have been hard to come by, in large part due to myriad disruptions. A mere 30% of vessels arrived on time at the low point, and the current on-time arrival rate has levelled off at 65%, well below the pre-pandemic norm. Adding fuel to the fire is overcapacity that leads ships to be held at port past planned departure dates in a bid to accrue additional cargo and avoid underutilized sailings.

The study analyzes three activities that underpin the strategies of carriers as they look to maintain financial health:

1. Paybacks to shareholders in the form of buybacks and dividends, along with debt reduction.
2. M&A investments at a time when valuations are attractive.
3. Vessel orders and investments in the core business.

“There is no one-size-fits-all strategy for success,” said Esben Christensen, Partner and Managing Director in the Shipping, Logistics & Infrastructure practice at AlixPartners. “We identified three different approaches to utilizing profits generated by the business. Some carriers prioritize shareholder returns and debt paydown, others place more emphasis on significant investments in M&A and expansion. 

“What’s clear is the effectiveness of these strategies will be heavily influenced by market volatility. For example, carriers investing in capacity could disproportionately benefit from continued growth; those with a more conservative approach, meanwhile, could better capitalize on softer conditions.”

Shippers, meanwhile, enjoy a buyer’s market amid lower rates and vigorous competition among carriers. Still, most are highly exposed to turmoil and fragile global supply chains. Developing and evolving a reliable Plan B that lowers dependence on ocean transport is essential for flexibility.

The study shows a high level of urgency for 3PLs and freight forwarders to integrate and quit occupying the middle of the market. Cultivating close ties with carriers can lead to acquisitions. Partnerships and strategic agreements will pave the road to resilience and maintaining profitability.

Investors – both equity players seeking short-term rewards and those pursuing longer-term value – will find opportunities. Fixed-income investors will unearth distressed-debt situations, while more realistic earnings multiples and plentiful cash will feed financial and strategic acquirers hungry for dealmaking. Macroeconomic uncertainty and global geopolitical conflict do, however, provide considerable risk.

“The ocean shipping market shows no signs of returning to norms experienced before the pandemic, but most carriers are in a healthy financial position and have strategic flexibility to thrive amid choppy seas,” Iampieri said. “Shippers, meanwhile, are already reaping benefits from increasing their adaptability, agility, and optionality.

“No matter where a company or stakeholder sits in the value chain, learning to turn volatility and sudden reversals into an advantage is required. While predicting the future is impossible, preparing your response is essential.”

About AlixPartners

AlixPartners is a results-driven global consulting firm that specializes in helping businesses successfully address their most complex and critical challenges. Our clients include companies, corporate boards, law firms, investment banks, private equity firms, and others. Founded in 1981, AlixPartners is headquartered in New York and has offices in more than 20 cities around the world. For more information, visit www.alixpartners.com.

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