Consolidation Of Global Liners Spells Trouble For Container Lessors

| About: Triton International (TRTN)


P3, CYKHE, and G6 Alliances Consolidate Market.

Rationalization of Container Fleets Coming.

Container Lessors Provide the Swing Capacity to Liners Putting Them at Risk.

Negative implications for TAL International (NYSE:TAL), Textainer (NYSE:TGH), and CAI International (NYSE:CAP).

Large global container line companies are consolidating through mergers and alliances. This will lead to more efficient utilization of assets and a reduction in container demand which will disproportionately hurt container lease companies.

Container Line Consolidation

Members of the newly formed "P3 alliance" are Maersk Line, MSC, and CMA CGM. Together, the control approximately 36% of the container shipping market. The alliance will allow these companies to pool and coordinate ships along major trade routes in order to cut costs by operating more efficiently.

Currently, members of the alliance are only able to put their containers on their own ships. A Maersk container (empty or full) for example has to wait until a Maersk ship comes along to be loaded.

With the new alliances, a Maersk container can be loaded onto a ship owned by Maersk, MSC or CMA CGM so it doesn't have to wait as long and turns more often. As a result Maersk can handle the same amount of goods with fewer boxes.

Here's a representative example of how the math works: Say a shipping line operator has 1,000 containers that each handle four shipments a year (4,000 total shipments) that each take 50 days. It's in use 200 days out of the year and idle 165 days. If the container only has to sit idle for only 115 days because it has more opportunities to board, each container can handle five shipments a year and the shipping line can handle the same 4,000 shipments with 800 containers and eliminate the cost of leasing 200 containers.

Container line operators typically own approximately half of their containers and lease the other half from container leasing companies like TAL International (NYSE:). If the line operators need fewer containers, they will reduce their fleet by letting leases expire and/or not leasing additional containers because the incremental costs of using their own fleet are lower than continuing to lease from others (ie: lessors represent swing capacity).

In addition to the P3 alliance, several Asian operators have joined to form the CYKHE alliance. Altogether, the members of the CYKHE alliance (COSCO, Yang Ming, K-Line, Hanjin, and Evergreen) have in excess of 25% market share. The G6 alliance is comprised of APL, Hyundai Merchant, Mitsui OSK Lines, Hapag-Lloyd, NYK Line, and Orient Overseas Container Line formed to compete with the P3 and CYKHE alliances.

Consolidation is also occurring through M&A like Hapag-Lloyd's acquisition of CSAV. Just yesterday, Germany's second largest container shipping line, Hamburg Sued, expressed interest in a merger with Hapag-Lloyd as well.

As a result, the container line market is going from fragmented and disorganized to highly concentrated and coordinated. This is rather bad news for container leasing companies...


I believe this is a significant shift in the container market that has gone unreported by sell-side analysts who prefer to view container leasing companies through rose-colored glasses when reality is going from bad (as evidenced by declining lease rates and utilization) to worse (excess capacity and significant declines in utilization).

As the alliances take effect, shipping line operators will pare their container fleets by allowing leases to expire. This is bad news for lessors who were already starting to see utilization decline and the problem likely gets worse throughout 2014 as consolidation implemented.

I believe this will lead to declines in lease rates, utilization and used container values. With high priced leases signed in 2010 and 2011 starting to expire (see page 26), this couldn't come at a worse time.

I believe this will be especially hard on TAL due to their stretched balance sheet, tight dividend coverage and significant deferred tax liabilities. For further details, see my recent articles on TAL (here, here, and here).

Disclosure: I am short TAL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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