With a young, high-capacity fleet, Hapag-Lloyd is poised for its second half century as a merged organisation, while implementing measures to maintain profitability and liquidity during the pandemic
In 1968 Weser Express, carrying a heavy tonnage for its time of 736 TEU, arrived in New York to inaugurate the first fully containerised service across the Atlantic from Europe.
Soon Weser Express and sister ship Elbe Express, jointly owned by a subsidiary of two groups – Hapag and North German Lloyd – plied the route as container ships rapidly replaced conventional vessels in one of the great revolutions in logistics.
However, the revolution placed a heavy financial burden throughout the industry as fleets of conventional vessels were steadily replaced. At Hapag and North German Lloyd, the cost of building two more box ships on top of the original vessels began to put a strain on finances. Recognising the inevitable, the two rivals decided to combine resources under a merged entity known as Hapag-Lloyd. That landmark event took place in 1970, exactly 50 years ago.
And today? In a convincing demonstration of the virtues of the merger, Hapag-Lloyd’s original fleet of four ships has grown to some 240 vessels and 120 liner services worldwide with a total capacity of 1.7M TEU – numbers beyond the comprehension of the architects of the original merger. Every year the group shifts about 12M containers around the world.
“About one in every 10 containers transported on the seven seas today is on a Hapag-Lloyd vessel,” points out chief executive officer Rolf Habben Jansen, who has been in the top job for six years. Unusually for a maritime group, he is not a seafarer but a logistics expert who worked in top positions with DHL before moving to the shipping group with revenues of €6.4Bn (US$7.5Bn).
Inevitably, the pandemic has hit the business because of the decline in transport volumes. In Q2 2020, freight was “significantly down” and the group moved quickly to slash capacity and cut costs. Six of its 121 liner services were suspended. On the bright side, the drop in oil prices boosted the bottom line because of the devaluation of bunker stocks.
In half a century Hapag-Lloyd has faced many external threats, but the challenges posed by Covid-19 are unique. At the peak of restrictions, more than 90% of shore-based employees were working from home and at the time of writing most of them were still there.
Despite the disruption, shipping operations continue to run as smoothly as circumstances permit, crewing being a particularly thorny issue. “Worldwide travel restrictions as well as local restrictions currently make crew changes in various ports difficult or impossible however,” the group reported in its latest filing. “Hapag-Lloyd is working closely with local authorities and other market participants to improve the situation.”
The other big problem is the bottom line and Hapag-Lloyd introduced a project called “performance safeguarding” in early 2020 to maintain profitability and liquidity. In a monumental exercise that covered the entire group, Mr Jansen and his team drew up a list of more than 1,700 individual measures that would help it get through the vagaries of the pandemic.
Working with its partners in the Alliance – its Asian partnership – the service network for the major east-west routes were revised and some services had to be merged or cancelled. “These measures enable the Alliance partners to ensure adequate utilisation of their ships and thus save costs,” reports Mr Jansen.
But he did not stop there. In a broad attack on costs, Hapag-Lloyd has found economies in container handling and transport, container-related equipment, ship systems and overheads. Charter arrangements took a hit, with short-term contracts not being renewed and medium- to long-term contracts renegotiated in terms of duration and rates. The net benefit will be savings of well above US$100M in 2020 alone, says Mr Jansen, with the bulk of the savings coming in the second half of the year.
Particular attention is being paid to liquidity, with global cash flow being pooled and working capital carefully managed. Hapag-Lloyd has also got together with its bankers: credit lines were drawn down while ships and containers were refinanced. A casualty of these economies is the newbuild programme – the group has not ordered any new vessels and has no binding agreements for their construction.
Hapag-Lloyd is however weathering the storm. Free cash flow jumped in the first half of the year to €1.06Bn (US$1.25Bn) from last year’s €767.6M (US$904.2M) while, partly as a result, the ratio of net debt to EBITDA fell to 2.6, the lowest since the financial crisis in 2009.
But this is a highly competitive industry that is frequently hostage to fortune. As Hapag-Lloyd heads into its next half-century, Mr Jansen warned that, in predicting EBITDA of up to €2.2Bn (US$2.6Bn) for the full calendar year, “the forecast remains subject to significant uncertainties.”
Since the original merger, Hapag-Lloyd has made something of a virtue of alliances. It is still a German company but with five major shareholders – Kuhne Maritime and CSAV Germany Container Holding, both with about 30% interest; giant investment group HGV (13.9%); Saudi Arabia’s Public Investment Fund and the Qatar Investment Authority with 22.5% between them.
And of course, the group is a key player in the Alliance, a grouping it formed in early 2017 with industry powerhouses in Asia that was this year bolstered by the membership of Hyundai Merchant Marine. In mid-2020 the Alliance covered all east-west trades with a combined fleet of 251 container ships.
Hapag-Lloyd is well placed for the next 50 years. The group boasts a young fleet, with an average age of 9.2 years and an average capacity of 7,265 TEU, making them the biggest, according to its own estimates. “[They are] approximately 16% above the comparable average figure for the 10 largest container liner shipping companies and around 69% above the average ship size in the global fleet,” the group says.
Hapag-Lloyd is also preparing for a low-emissions future. Having opted in the main for low-sulphur fuels, scrubbers are being installed on 17 of the larger ships and on nine under long-term charter. And looking ahead, perhaps impressed with CMA CGM’s giant CMA CGM Jacques Saadé, the group is retrofitting a large vessel for LNG.
As of mid-2020, Hapag-Lloyd has no new ships on order, arguing that it does not need them because of its various alliances. But that may change. According to executive board, the group will “invest in new ships systems again in the foreseeable future.”
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