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Maersk Eyes Service Cuts as Profits Sink on Capacity and Cost Issues

A.P. Moller – Maersk, the world’s biggest ocean freight carrier, saw its underlying loss in the first quarter widen to $239 million from $139 million a year earlier, as overcapacity and higher fuel cost combined with trade tensions, and indicted it was set to cut some services.

In releasing first quarter results, the company said a number of short-term initiatives are being implemented to improve profitability. Maersk reiterated expectations for 2018 of an underlying profit above 2017’s $356 million and earnings before interest, taxes, depreciation and amortization (EBITDA) in the range of $4 billion to $5 billion compared to $3.5 billion last year. But the company warned about the impact of “increased uncertainties due to geopolitical risks, trade tensions and other factors impacting container freight rates, bunker prices and rate of exchange.”

“In the first quarter of 2018, we reported a 30 percent revenue growth and the integration of the business is well underway with a successful start to the Hamburg Süd integration and the closing of Maersk Oil transaction in March with an accounting gain of $2.6 billion,” Søren Skou, CEO of A.P. Moller – Maersk, said. “At the same time, on the short-term performance, our result especially in the ocean related part of the business was unsatisfactory. In response to the current challenging market conditions we are implementing a number of short-term initiatives to improve profitability and we reiterate our guidance for 2018.”

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The company’s revenue grew to $9.3 billion, with growth in all business segments and a strategic transformation well underway.

In an interview with the Wall Street Journal after its financial presentation in Copenhagen, Skou said, “In the short term we will be closing down some services. Overcapacity is the biggest defect.”

He noted in the company’s financial release that a new financial reporting structure has been implemented to support the strategic direction of becoming a global integrator of container logistics. Four new business segments–Ocean, Logistics & Services, Terminals & Towage and Manufacturing & Others–are aimed at growing the non-ocean part of the business disproportionally to the ocean.

“The new format reflects that we are an integrated global container transport and logistics business focusing on our customers’ value chains, and it allows us to follow our progress, particularly in those parts of the business which are not purely ocean freight, which we need to grow in order to minimize the cyclical part of our business,” Skou said.

Maersk’s volume growth in Ocean came in at slightly below estimated global demand growth of 3 percent to 4 percent. The non-Ocean businesses reported revenue growth of 6 percent in Logistics & Services and 11 percent in Terminals & Towage.

EBITDA increased 5 percent to $669 million, negatively impacted by adverse rate of exchange compared to same period last year of around $100 million. Earnings in Ocean of $492 million were hit by higher unit costs due to adverse developments in bunker price and rate of exchange.

Maersk reported a net profit of $2.75 billion, compared with a profit of $245 million in the same period last year, but the gain came from the sale of two units, Maersk Oil and Maersk Tankers.

Skou told the WSJ that higher fuel prices had added $70 to the cost of shipping a container from Asia to Europe and across the Pacific.

“Costs are rising overall and becoming inflationary,” he said. “That’s not what we are used to.”

As for tariff threats flying back and forth between the U.S. and China, Skou told the Journal, “A trade war between the U.S. and China would be very, very bad,” he said, adding that new U.S. sanctions on Iran are “a driver” for rising oil prices.