APL turns in US$26m Q1 profit, reaping the benefit of being part of larger group

Singapore

THE benefits of being part of a larger group are showing in Singapore-headquartered container shipping line APL's first-quarter report card.

APL turned in a net profit of US$26 million for the three months ended March 31. This compares with a net loss of US$105.1 million posted by its then Singapore-listed parent, Neptune Orient Lines (NOL) for the year-ago period.

Chief executive Nicolas Sartini told The Business Times that one-half of this turnaround was accounted by cost savings reaped from being part of the larger CMA CGM group.

Marseille-based CMA CGM, which is the third-largest container shipping company in the world, completed the acquisition of all shares in NOL last September; the combined group has thus emerged as the top dog in the transpacific trade.

Mr Sartini became CEO last June. Since then, APL has shaved more than US$100 million in costs from synergies with its French parent, including leveraging the scale of the larger group to negotiate better buying terms, he said.

Alphaliner consultant HJ Tan noted that in this respect, the larger CMA CGM group has also benefited from the accounting treatment of APL's US$1.2 billion FY16 loss after a one-time write-off in excess of US$800 million.

CMA CGM then elected to apply purchase price accounting, which provided for part of APL's FY16 loss to be counted as "goodwill" in the accounts of the French shipping group. This allows the group to recognise most cost-savings in FY17 with minimal downside from one-off non-recurring items, Mr Tan explained.

Mr Sartini also pointed out that APL did not resort to slashing staff numbers significantly in Singapore in order to cut costs.

Just a dozen were made redundant here as their positions have moved to Marseille in France. Another 135 employees were redeployed to the CMA CGM group of companies here.

That leaves about 500 employees on APL's payroll in Singapore. Its staff number totals about 5,000 globally.

Mr Sartini emphasised that APL's strong revenue performance for the January to March quarter is the more significant half of its turnaround story.

APL's first-quarter turnover of US$1.28 billion compared favourably against NOL's Q1 FY16 turnover of US$1.14 billion.

Part of APL's revenue expansion came from improved freight rates over 2016 levels, which have mostly held out months after the collapse of South Korea's Hanjin Shipping.

Billions of dollars of cargo left stranded as a result of Hanjin's collapse have discouraged shippers from squeezing shipping lines and tipped the scale in favour of improving freight rates.

What could have played a bigger role in supporting APL's Q1 topline performance months after Hanjin's collapse, however, were improved fundamentals in container shipping.

"Overall demand growth for container shipping of close to 5 per cent more than offset a lower base capacity expansion of 2-3 per cent," said Mr Sartini.

APL's volumes for transpacific and Asia-Europe trades expanded 34 per cent and 12 per cent respectively over the previous year.

APL has wasted no time in milking advantages from being part of the CMA CGM group.

Since January, APL has rolled out six new weekly services including the Japan Straits Express Service that was jointly launched with CMA CGM. Mr Sartini pointed out that two of the three vessels that will ply this service are from APL and one from CMA CGM.

But perhaps more importantly for APL, it has gained through its French parent, a seat in the Ocean Alliance.

Ocean Alliance, a vessel and slot-sharing alliance among four shipping lines - CMA CGM, Cosco Container Lines, Evergreen Line and Orient Overseas Container Line, has emerged with a total capacity of 3.5 million TEUs (20-foot equivalent units), a dominant force in the lucrative transpacific trade.

Analysts have flagged this alliance as one growth engine for CMA CGM and APL from the second quarter of 2017.

Concurring with this assessment, Mr Sartini cited the alliance as "a game-changer for APL".

Backed by enhanced connectivity of the larger Ocean Alliance network, APL was able to roll out direct services for markets that were relatively inaccessible previously.

APL's Pendulum Loop 1 - West Coast service (PE1) is a prime example; this new service, which marked its first sailing in April, was touted as the first direct service connecting Jakarta to the US West Coast.

APL has sought to further differentiate itself by launching, independently of its French parent, the Eagle Guaranteed value-added service in February 2017. This value-added service promises day-definite arrival of shipment on its exclusive Eagle Express service at six inland destinations in the Americas via the Global Gateway South Terminal in Los Angeles.

APL's new value-added service, which is being charged at a premium on top of its Eagle Express service, leverages on the value very large retail groups attach to a predictable supply chain. These customers will continue to rely on container shipping companies such as APL to service their logistics needs, Mr Sartini said.

The APL CEO is concurrently pursuing options including potential tie-ups with e-commerce platforms, to reach out to small and medium enterprises (SMEs).

He pointed out that APL intends to play a role in Singapore's National Trade Platform (NTP). NTP is a one-stop, integrated digital platform aimed at connecting shippers, shipping lines, the port, government agencies and logistics players.

Shipping lines can look to simplify processes and gain cost efficiencies by supporting NTP's drive to digitise and go paperless, he explained.

Digitisation is a necessary evil for the brick-and-mortar retailers and shipping lines alike, seeking to ride on the e-commerce wave to reach out to new customers.

Meanwhile, the second quarter of 2017 is shaping up to be a better quarter for shipping lines compared to the corresponding three-month period in 2016.

Ocean Shipping Consultants' director Jason Chiang projected that freight rates are likely to sustain at the same level heading into Q2, with the impact of shipping alliances kicking in from April 1.

"This bodes well for the industry as a whole," he said.