HL Faces Tough Challenges but Sees Profitability on the Horizon

Heavily indebted shipping line Hapag-Lloyd has to reshape many facets of its business model in order to get out of the red. Above all the traditional thinking and outdated interpretation of market developments by many of the company’s managers has to be overcome in favour of a more dynamic and updated strategy. If successfully realized, it would revolutionize the world’s fourth largest shipping company by means of tonnage and pave the way for a promising future.

‘Chicago Express’ of Hapag-Lloyd coming into the port of Hamburg
‘Chicago Express’ of Hapag-Lloyd coming into the port of Hamburg

HL’s debts have reached Himalayan highs, currently totaling around 3.5 billion U.S. dollars. During last year’s first three quarters the company lost 1.1 million dollars per day! Since 2011, the Hamburg-headquartered enterprise is in the red, with 2014’s balance sheet estimated to contribute an additional 200 million dollars to losses carried forward.

External factors were blamed for the losses
The regrettable financial results have always been explained with unfavorable market circumstances and the general rate decline in ocean freight, said HL’s new CEO Rolf Habben Jansen, who took the chair in mid-2014. Therefore, the company’s deteriorating financial situation was explained with adverse external circumstances that HL had only limited influence to change.
Now, with Rolf standing on the navigation bridge, things tend to change rapidly shown already by declining losses. “We have to ask ourselves critically why main competitors like Maersk or MSC manage to be profitable year after year in contrast to Hapag-Lloyd, despite the adverse market conditions which more or less are common to all,” he said at his first press conference held in Hamburg after taking the chair. His conclusion: not only unfavorable external circumstances can be blamed for HL’s outflow of funds, but also some internal factors that need to be reconsidered.
This also includes a radical shift in external and internal communication. Whereas in the past it was common HL policy to publish as little as possible things now have turned to the opposite with former head of communication at Lufthansa Cargo, Nils Haupt, being responsible for explaining externally and internally his company’s strategy and decisions. This basically also includes “addressing unpleasant truths,” Nils states.

Shortly after HL’s press conference Nils Haupt (right) met with Fokko Doyen, LH Cargo’s Chief of the carrier’s MD-11F fleet  /  source: Franca D.
Shortly after HL’s press conference Nils Haupt (right) met with Fokko Doyen, LH Cargo’s Chief of the carrier’s MD-11F fleet / source: Franca D.

Major enhancement program
By putting his finger on the weak spot Rolf and his executive Board Members might irritate some of the many traditional thinkers but bringing in fresh ideas seems to be the only way to get the enterprise financially afloat once again.
His modernization program includes half a dozen major projects, stretching from cost saving activities to network improvements.
Key elements are new sales initiatives and service optimizations. The Dutch national frankly admits that customers “were not always the focus of our attention during the last 5 to 6 years. In this field we can do much better.” The 48-year old manager goes on to say: “we need to intensify the dialogue with our clients.”
However, he admits that enhanced sales efforts don’t pay off immediately but will stimulate growth and bottom line profitability only within two years and thereafter.
Until then a cost cutting program shall generate annual savings in the triple-digit million euros region. Financial synergies resulting from the integration of the container business of Chile’s CSAV shipping company are expected to amount to 250 million euros in 2015.
Another pressing task standing on Rolf’s agenda is the improvement of the domestic transports of goods, namely within the U.S., be it by rail or road. “This is a very large single cost factor that we intend to reduce without hampering any service,” he notes. Further, he intends reducing bunker costs because their current high level has an adverse effect on HL’s earnings.

Rolf Habben Jansen
Rolf Habben Jansen

Crucial tasks on the agenda
Turning to major future targets he mentioned plans for ordering a number of super large container ships able to carry 18,000 TEU (twenty foot equivalent unit) each. “They are up to 20 percent more productive than our current fleet of 12,000 or 13,000 TEU vessels,” he explained. Having said this he indicated, however, that those 400 meter-sized container ships can only operate on certain routes. “They are too huge to pass artificial waterways like the Panama Canal,” Rolf hints on the limits of this latest vessel generation. Placing an order for new 18,000 TEU vessels at a Korean shipyard will only be performed for price reasons in close coordination with the members of the G6 alliance, encompassing the shipping lines APL, Hapag-Lloyd, Hyundai Merchant Marine, MOL, NYK Line and OOCL.
As to the G6 members, Rolf conceded that the departure reliability of many of the partner’s ships steaming on jointly operated routes was in the past not as accurate as intended. “But lately it has improved noticeably, although this topic is still on the table,” he notes. 

Profits on the horizon
According to the manager, the financial turnaround will be achieved earliest in Q3 of 2015. It wouldn’t make much sense, is his personal view, to start any steps towards an IPO at an earlier date. “It would be better to execute it later, preferably in 2016 when we earn money again and the value of HL has increased substantially, to achieve more favorable financial terms,” he urges. Basically, Rolf favors an IPO because it would give his firm a more favorable access to the capital market and lower the interest payments substantially.
The three anchor shareholders CSAV (34%), the City of Hamburg (23.3%) and Kuehne Maritime (20.8%) seem to support this course, shown by their promise to maintain a 51 percent majority stake in the shipping line for the next ten years. Comments HL’s CEO, whose contract runs for five years: “This trailblazing decision gives us a high level of planning security.” 

Heiner Siegmund  

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