Some shipping lines are still posting 9-figure profits amid downturn

Wednesday, 17 April 2024

The predicted container shipping wipeout is not here yet. Several container lines are still posting nine-digit quarterly profits, despite a tepid peak season, slumping rates and a tidal wave of new vessel capacity. 

Liner companies Ocean Network Express (ONE) and Matson reported their latest quarterly results on Tuesday and Monday, respectively.

They are totally different companies: ONE is the world’s sixth-largest ocean carrier, with a global footprint. Matson is a niche operator with an expedited China-U.S. service that competes with air freight, plus domestic U.S. Jones Act services.

Both are still solidly in the black. The adjusted share price of Matson (NYSE: MATX) is up almost 40% year to date. As more carriers report results, it appears that steep losses being suffered by Israeli ocean carrier Zim (NYSE: ZIM) are, so far, the exception to the rule.

ONE predicts profits for fiscal year
Singapore-headquartered ONE reported net income of $187 million for July-September (the second quarter of its fiscal year 2023), down 97% from the one-off, boom-inflated results of a year ago, and down 64% sequentially versus April-June.

“Despite the start of the peak season, there was no strong recovery in cargo movement,” said the carrier.

“In North America, cargo movement showed some momentum in August, but lacked sustainability.”

chart of ONE results

Nevertheless, the company’s latest results are better than its pre-pandemic performance. ONE had net income of $121 million during the same period in 2019 and lost $192 million in July-September 2018.

ONE does not report average freight rates. Rather, it publishes an index of average quarterly rates (the combination of spot and contract rates) in comparison to the average for April-June 2018.

This index continues to fall. It’s still above pre-COVID numbers, albeit approaching those levels.

ONE’s Asia-U.S. rates in the most recent quarter were 4% above the average at this time of year in 2019 and 8% above 2018 levels.

ONE’s average Asia-Europe rates in July-September were 15% above the 2019 average and 9% above 2018 levels.

chart of ONE rates
(Chart: FreightWaves based on ONE financial filings)
Three months ago, ONE declined to provide guidance for its fiscal year, stating that market conditions were too uncertain. It belatedly issued that guidance on Tuesday, forecasting net income of $851 million for the 12 months from April 2023-March 2024.

That would be considerably better than pre-COVID returns. It earned only $105 million in FY 2019 and lost $586 million in FY 2018 (when results were impacted by costs from the 2017 merger that created ONE from the fleets of Japan’s NYK, MOL and “K” Line).

A ‘unicorn’ among transportation companies
Meanwhile, Hawaii-based Matson continues to outshine the competition.

“Unicorns do exist — just look at Matson,” wrote Stifel analyst Ben Nolan in a client note.

“While virtually every other segment of [containerized] transportation is struggling, Matson continues to put up surprisingly good results, which are significantly greater than pre-COVID results.”

Matson — with a fleet that’s 1/25th the size of ONE’s — reported net income of $119.9 million for the third quarter of 2023, down 55% from $266 million in Q3 2022 at the tail end of the boom.

chart of Matson results
However, the niche carrier’s latest quarterly profits were up 48% sequentially from Q2 2023 and were more than triple profits in the same period in 2019, pre-pandemic.

“It appears as though the company now has a much broader customer base willing to pay elevated rates for expedited trans-Pacific business that is still far cheaper than air freight,” said Nolan.

During Monday’s conference call, Matson CEO Matt Cox said his company continues to obtain higher China-U.S. rates than the Shanghai Containerized Freight Index. He noted that Matson’s 11-day expedited China-U.S. service is offering “a significant value proposition to air freight customers,” at 10-15% the cost for five to seven days of additional all-in transit time.

“For our China service, we expect continued solid demand,” said Cox.

Inventory overhang issue ‘played itself out’
Cox also commented on U.S. inventory levels — a major issue for shipping lines in the trans-Pacific trade. This topic was also addressed by Matthew Shay, president and CEO of the National Retail Federation (NRF), during a recent Port of Los Angeles press conference.

A year ago, carrier executives at Maersk and Hapag-Lloyd highlighted a potential demand driver from restocking in 2023. The theory was that U.S. companies imported too many goods during the supply chain crisis, leading to bloated inventories. When those inventories finally wound down, importers would have to restock, pushing shipping demand — and rates — back up.

The growing consensus is that restocking rate upside will not happen and that inventories have already normalized, with little effect on rates.

“We are hearing that most of our retailers have worked through those inventories,” said Cox. “There are exceptions — product lines that still have a surplus. But our general feeling is that retailers have done a really good job of working through their overhangs.”

According to Shay, “I think this [inventory issue] has largely played itself out. It’s not something we’re hearing about from our members. It isn’t high on anyone’s list.

“Our assessment is that the inventory-to-sales ratios are back down to pre-pandemic levels and people are pretty comfortable that they’ve got their inventory mix right and they’re in a good place on inventory.

“It’s also our sense that most of the inventory necessary for the holiday season is already in the U.S., in the warehouses or other at points of distribution,” said Shay. “We believe the peak shipping season was probably this summer and specifically in the month of August. Most of the merchandise is already here.”