Ocean Network Express (ONE) was formed by three Japanese shipping companies, NYK, MOL, and “K” Line. Each of these has reported a loss for the first quarter of their current fiscal year, which runs April 1, 2018, through March 31, 2019. The total losses add up to $120 million on revenue of $2.07 billion.
The carrier is still looking forward to a profitable 12 months, though. Estimates are somewhere in the $12.25 billion range. This is a drop from their original projection of $13.16 billion.
By analyzing what went wrong for the Japanese shipping company, we can learn how to prevent these situations from occurring again. However, it is also important to note that the shipping industry can be complex and ever-changing. Sometimes, being prepared is the best we can do.
Key Operational Issues
ONE is attributing the bulk of the loss to “lower lifting caused by operational teething problems that affected service quality during the operation start-up period.”
As the three shipping companies, NYK, MOL, and “K” Line, tried to switch to a common booking system, several problems arose. These problems had unforeseen effects on customer care. For example, many shippers reported booking difficulties. Forwarders also experienced issues as the three carriers tried to merge their business operations.
A lot of the issues ONE’s customers experienced were a result of reduced fleet size. Although they were operating 230 ships by the end of the first quarter, the company was only utilizing 73% of their fleet. This resulted in shipping delays for a variety of customers. This is something to consider when merging. Make sure you will have enough ships available during the transition to meet your current demand.
There were also problems with coordination. With three different carrier companies combining, several wires got crossed. Staff was not transferred properly, slowing the rate at which ONE could operate.
All things considered, the effects of this merger could have been much worse. Combining three carriers into one company is bound to come with its share of difficulties. Hopefully, other carriers can learn from ONE’s mistakes and some of these issues can be prevented in the future.
Prospects for the Upcoming Quarter
Because ONE is already seeing stabilization in service quality, they expect to be back on track for the second quarter. This gives the company a realistic expectation of $110 million in profits by the end of the current twelve-month period. However, there are still factors at play that ONE knows they need to look out for.
Their major concern right now is that bunker prices will continue to rise. Ship & Bunker reported a 20% rise in price over the period of only ten weeks back in May. They found that the average high was up from $372/mt in March to $449/mt in May. These increases are concerning for any carrier service but could have an especially detrimental effect on ONE’s already vulnerable profit margins.
The company has spoken out to several shipping news sites. One of these is Lloyd’s Loading List. They claim that one of the main reasons for their setback was a lack of staff, as well as IT problems. If this is true, that means that the company did not plan properly for the transition that they were aware would “take a number of weeks to complete.”
Areas to Watch Out For
ONE is hopeful that a few factors will come together to help drive profits up after this unfortunate loss. One of these is the balance of supply and demand in Asia. ONE expects this market to grow by 6% from year to year moving forward. This is because “Major alliances have already announced their service rationalization plan, and it is expected that [the] demand and supply situation will be stabilized.” However, it is also important to note that supply has not quite caught up to demand in the Asia to Europe market. However, ONE expects this to stabilize during peak cargo season.
ONE is also confident that the benefits of integration will far outweigh the temporary losses that they have experienced. In fact, they are predicting a savings of $1 billion per year as a result of the merger. Over time, this would lead to an increased profit margin.
The Search for Scale
It is also important to note the reasons that NYK, MOL, and “K” Line chose to join their containerized businesses. If you are looking to do the same, their reasons may be of vital importance to your decision-making process.
Their main purpose was to gain scale and reduce costs. They invested a total of $3 million in the new company. NYK owns 38% and MOL and “K” Line each own 31%. According to MOL’s CEO, this is an unprecedented occurrence. ONE is the first company in shipping history where “three companies jointly start[ed] a new business on equal footing.”
Now that the merger has occurred, they have a fleet of 230 container ships and a 1.5 million TEU capacity. This allows them to serve more customers than their combined fleets could have before they joined together. By doing so, they became the sixth largest ocean carrier company in the course of a day.
Lessons for the Shipping Industry
There are some key takeaways from this situation that can help shippers prevent negative impacts from issues like this in the future. For one, mergers are not easy. They take time and that time can have a detrimental effect on all parties involved.
If you’re a shipper who is using (or plans to use a carrier) that is going through a major change in their business, it’s best to always have one or two options for shipping your goods in case you run into any major delays or suspensions in service from your carrier.
In the long run, mergers can be good for shippers because they allow carriers to take advantage of economies of scale and lower their costs. These savings can be passed on to the consumer through more flexibility in shipping options, variety in service, or lower prices.
If ONE’s experience teaches us anything it is that mergers are difficult and there is always an adjustment period that exists for all parties involved. As a shipper, you simply have to be patient as things stabilize and always have multiple fallback options. If you can do this, you will eventually see the benefits of a merger pay off in a big way.