In 2006 high bunker costs, slow economic growth and lower freight rates hemmed in boxship profits. Will containership operators be able to navigate their way out of the box and into profitability this year…or the next?By George Lauriat, Editor-In-Chief, AJOTBy nature, containership operators work from one slump to the next. In the rare moments in between [slumps] when profitability drips green to their bottom lines, carriers make hay and prepare for the inevitable next slump. But even the market peaks are fraught with carrier angst as containership charter rates increase (not to mention fuel and other less predicable elements of the equation) while carriers look to increase slot capacity. Like sailors on shore-leave hearing the dreaded refrain of “last call,” they rush to place their orders. One attractive way of jumping the queue is to buy a company that already placed their order. Another is to band together in an alliance or consortium that can collectively pool their slot capacity and thus improve their overall market share. Oddly, despite all the preparation, ocean carriers rarely seem ready for the next dip in fortunes. During the second half of 2005, container freight rates began to fall and by mid-year 2006 most containership operators were already reporting a significant drop in profits. The reasons and size of the slide varied carrier to carrier. Most reported that increased bunker costs and falling freight rates had been the main culprits. For example, Zim, the Israeli carrier, reported a 37% increase in bunker costs in 2006 compared to 2005. Maersk Line in the AP Moller annual report noted, “The average price of bunker oil was 26% higher than in 2005, corresponding to an increase in fuel expenses of more than $700 million. About half of this increase is covered by rate surcharges.” Singapore based NOL’s (Neptune Orient Line) 2006 annual report’s section on the company’s containership arm, APL (American President Line) illustrated the damage that increased fuel costs had on the bottom line. According to the report “APL’s fuel costs were US$237 million higher than in 2005. Between 2003 and 2006, higher bunker costs and land transportation fuel surcharges have added more than US$500 million to APL’s cost structure.” The report added, ”There was a 2% year-on-year increase in total costs per FEU. Excluding higher fuel prices, APL’s overall costs per FEU in 2006 were 3% lower.” Although increased bunker costs played a major role in the industry’s downturn in 2006, each carrier had its own challenges to over come. AP Moller (Maersk Line) and TUI (Hapag Lloyd) suffered a little corporate indigestion from the purchases of P&O Nedlloyd and CP Ships respectively. Such large-scale purchases require time even for the biggest of carriers to digest. In their annual report, AP Moller’s frank assessment of the purchase was “ Synergies related to the acquisition of P&O Nedlloyd were only realized to a modest extent in 2006, but the basis for the synergies has been established and is expected to be realized in the next few years.” How good is bad year?In many respects, container freight rates are a futures market. Container freight contracts are largely based on what the supply and demand equation is perceived to be rather than what is economic reality. From the shipper side of the equation it is the perception of available slots. Since both the US and European markets are heavily weighted inbound the consumer economies dictate the slots necessary. But the equation weighs heavily against carriers abilities to control freight rates and associated costs. Add in economic performance or at least the perception of global GNP, and the result is a witches’ brew… a kettle of bubbling expectations. But how well did the numbers match up with the carrier performance in 2006? In brief, how good was a bad year? Beijing based Cosco (China Ocean Shipping Company) is the world’s fourth largest carrier and a fairly good barometer of carrier performance. In 2006, Cosco reported revenues o