The Business Of

Transportation | Maersk | How Do They Make Money?

Morning All!

So yesterday, we started our new series on The Business Of Transportation and we briefly touched on what the Danish company, Maersk does. Today, we’re going deeper and asking the question – how does Maersk actually make money from their shipping services?

And to help us answer that question, let’s first take a look at two charts and make a couple of observations! The first chart below shows us that Maersk’s revenue has grown from ~$20bn in 2000 to ~$82bn in 2022. $82 BILLION – that’s a lot of money!

But a key thing to notice is how bumpy these revenues are. They’ve not been going up in a straight line from $20bn to $82bn - it’s been very up and down. And today, we’ll look at why exactly that’s been happening.

The second chart below, shows us how Maersk’s revenues are split up. The majority of revenue comes from their ‘Ocean’ segment - which is basically the stuff we talked about yesterday. Maersk shipping containers for companies (like Tesco, Nike, Apple) from one country to another.

Now, today we’re only going to focus on this Ocean segment because it makes up the vast majority of revenues. And because there’s quite a bit to explain in just this segment. But on Friday, we’ll dive into the ‘Logistics and Services’ business more, because we may see this segment becoming a bigger piece of the pie in future years!

Alrighty, without further ado, let’s crack on… !

A Bit Of Technical Jargon… The Forty Foot Equivalent (FFE)

Okay, so to kick us off, we’re going to split Maersk’s Ocean revenue into its 2 main drivers. One, the number of containers they transport. And two, the average price they charge per container.

Now, before we go ahead and dive into these 2 drivers, we need to first go back to something we mentioned yesterday. And that’s the fact that Maersk transport containers of various different sizes. Some are 10 feet long. Some 45 feet long. But the majority are 20 feet and 40 feet long.

And I mention this because when Maersk break up their revenues, they don’t talk about the total number of containers they transport. Instead they measure their transported volumes in one standard unit – the 40 foot container.

Now, this might be confusing. What about the 20 feet containers Maersk transport? Or the 10 feet containers? Do they not count? Well, no, they DO count. But when Maersk ship TWO 20 feet containers, they’ll count it as ONE 40 foot container. And when they ship FOUR 10 feet containers, they’ll count it as ONE 40 foot container. So, instead of the total number of containers transported, we’ll look at the number of 40-foot equivalent (FFE) containers transported.

A bit of technical jargon there. But hopefully you’re following that. If not, this article here describes the 40-foot equivalent (FFE) stuff clearer than me! Alrighty, let’s crack on. First, we’ll look at volume (FFEs). And then get onto pricing (called freight rate).

I’m Sorry What… One Ship Can Carry How Many Containers?!

Okay, so let’s start off with the big question – how many 40 foot equivalent containers did Maersk transport last year? Well, as we can see from the chart below, the answer is a whopping 11.9 million! That’s ~32,000 containers a day!

Now, I know that 32,000 number sounds like a ridiculous figure. But it starts to make more sense when you realise just how big these containerships are. The world’s largest container ship is owned by MSC (Maersk’s main competitor). And their ship, called the MSC Irina, can hold 12,173 forty-foot containers. That’s in one trip! Below is an image of the monster ship, which is more than 3 football pitches long!

Now, ship sizes have grown strongly over the years. Back in 2005, the biggest ship in the world could carry ‘only’ ~4,500 FFEs. So the 12,173 FFEs that the MSC Irina can carry is nearly 3x as big as that. And this trend for bigger ships is one of the reasons why we saw that 6% growth in Maersk’s transported containers. Bigger ships = more containers can be carried for customers (Tesco, Nike, etc)!

But bigger ships doesn’t explain all of the container growth for Maersk. The other big factor here is the growth is the number of ships that Maersk use. We saw yesterday that Maersk is number 2 in the world, with the company using 707 ships for their operations in 2022. And the chart below shows us how that this figure has grown ~2% per year over the last 2 decades.

So, more ships + bigger ships = more containers that can be transported! That’s hopefully clear. But just before we move on - here’s something puzzling – in 2022, Maersk only owned 389 ships! So where’s Maersk’s other 318 ships coming from?

Well, the answer is… they rent them! But I know what you’re thinking - who on Earth has huge container ships lying around for Maersk to rent from? Well, the answer is - other shipping companies! And yup believe it or not, Maersk actually rents ships from their competitors. And competitors rent ships from Maersk! These ship-sharing activities are actually a part of bigger agreements that are seen in the shipping industry - called shipping alliances. We don’t have time to really dive into this now - but for those of you who want to learn more, I recommend checking out this video!

Okay, let’s press onwar… wait hold on! We’ve just seen that Maersk have been transporting more containers every year from 2007. But in the very first chart we saw today, we saw that Maersk’s revenues fell from 2007 till 2016. So, what’s going on here? How are Maersk transporting more containers but making less revenue? Great question! And that’s what we’ll be covering now…

Low Supply + High Demand = Higher Prices!

Okay, time for the second part of our equation – freight rates - which is the price Maersk charge customers for transporting a container. The chart below shows us how these prices have changed over the years. And we can see something peculiar happen recently – rates have skyrocketed since 2020!

So first question – what caused this explosion in price post-COVID? Well, the answer will (hopefully!) be familiar to most Economics students! Because it’s all about supply and demand.

We touched on this yesterday. But when COVID hit, two things happened. One, the supply of containers came crashing down. The virus outbreak meant ports were temporarily shut down. Port workers who load and unload containers from ships were off work. And so, many shipping companies like Maersk actually cancelled journeys, reducing the capacity of containers they could carry.

However, whilst this was happening with supply. Demand for containers was going the opposite way! Me, you and millions of other people were all stuck at home with not much to do apart from shop online! Tools for the garden, home office setups, home workout equipment, you name it. And the increase in demand for goods meant that Amazon, Zara, most online retailers were desperate for getting more of their products shipped from overseas to their customers’ countries. The demand for shipping containers was super high. And it was this mixture of a low supply and high demand, which lead to freight rates going through the roof.

And by the way, we can see shifts in supply and demand influence the freight rates in other periods too. Pre-2007, shipping companies were loving life. The global economy was booming. More and more goods (and hence containers) were being transported around the world. And shipping companies like Maersk were building more ships to expand capacity.

However, when the global financial crisis struck in 2007, what happened? Demand for containers fell. Because the global recession meant that demand for goods had decreased. But to make matters worse, supply was higher than it had been before. Remember, shipping companies were building more ships in the good days. Which meant an excess of ships in the bad days. What followed was a period of declining freight rates from 2007-2016. Which was one of the main reasons why Maersk’s revenues fell over this period – despite the company transporting more and more containers over that period. Mystery solved!

One final thing to mention when it comes to freight rates is that Maersk have relatively little control over this. Let’s say MSC, and Maersk’s other competitors all start building lots of ships. The global capacity to transport more containers goes up (meaning supply goes up). And if there’s no increase in demand, freight rates will fall.

And this lack of control over pricing is an interesting point for Maersk. We’ll touch on this more tomorrow and Friday. But pricing for shipping companies isn’t like it is for other companies. Netflix can determine what prices they lift their subscription rates by. LVMH can determine what prices they lift their bag prices by. But Maersk – they TAKE the market prices. And we’ll see the impact of this on their business model later in the week!

All Good Things Come To An End… ?

Alrighty, let’s wrap up for today! And below we can see our revenue driver equation updated for Maersk’s 2022 numbers. The company transported 11.9 million forty-foot containers during the year. The average price they charged for transporting a container was $4,628. And multiplying the two numbers together gives you ~$55 billion! Simple!

Revenue above says $55 billion but Maersk’s Ocean revenue was $61 billion in 2022. The difference comes because Maersk also a couple of other minor things in their Ocean segment.

Now, some of us may be thinking - ‘we’ve just seen Maersk hit record revenues in 2022. Freight rates are at all time highs because of the supply/demand imbalance. Surely that has to come down as the supply/demand balance is restored right?’

And yes, that’s absolutely right! Over the last year, Maersk have been telling investors that their revenues and profit are set to plummet in 2023 and 2024. Revenues so far in 2023 have fallen ~40% vs 2022 numbers! And profits are expected to crash by an even greater percentage.

And hopefully, this gives us a bit more understanding of that first chart we saw today on Maersk’s revenues. The reason revenues are so up and down is because of supply and demand imbalances, which cause freight rates to sharply rise and fall. We’ll explore this cyclical element of Maersk’s business model in more detail this week!

5th Dec 2023

Nigel Jacob CFA