Cost control is paramount particularly in any business where the goods and services on offer are commodities or the industry so fragmented that owners have little pricing power. This is doubly so if the business is also capital intensive so sweating assets as hard as possible is essential for survival, let alone generating returns, through one business cycle and into another.
Container shipping is just such a case, hence the significance for A.P. Moeller MaerskMAERSK-B.KO +0.07% of regulatory approval for P3, a giant shipping alliance between the Danish group’s Maersk Line unit, France’s CMA CGM, and Swiss-based Mediterranean Shipping Co.
Chinese regulators are poised to give the green light to the tie-up between the world’s three biggest container operators this month, according to people familiar with the matter. The alliance got the nod from regulators in the U.S. a few months ago while the Europe regulator said it had no objections Wednesday.
P3 is set to start operations this fall, just a few months later than originally expected.
Maersk expects to save nearly $1 billion a year from sharing facilities and vessels with its partners on routes between Asia and Europe in combination with the entry into service of its new Triple-E cargo ships, the largest and most efficient ships of their kind which are capable of transporting up to 18,000 containers each.
In doing so, the shipping group would entrench its position as the leader in an industry grappling with low freight rates, amid sluggish growth in global trade, as well as high fuel costs.
“Maersk Line’s [operating profit] margin gap versus peers [rose] to 9.1 percentage points in the first quarter 2014, bolstering its ability to produce good returns while competitors break even or remain loss-making,” said Robert Joynson, an analyst at Macquarie in a recent note to clients.
The P3 plan has already led to change in the industry. German container shipper Hapag-Lloyd AG and its Chilean peer Compania Sud Americana de Vapores SAVAPORES.SN -0.04% completed their merger to create the world’s fourth-largest container-shipping company in terms of capacity in April, bulking up on America-Europe routes where P3 won’t operate.
More change may be on its way. “You just can’t compete with the capacity and network efficiencies of the P3,” the owner of a small Greek container-shipping firm said, speaking on condition of anonymity. “You have to buy bigger ships and combine your capacity with someone else to stay in the business, at least in the Europe-Asia trade.”