Shipping line ONE publishes a blockbuster, but warns about the future

Another quarter, another surprisingly high record profit for a shipping line. Amidst all the gloom talk of falling demand and a “hard landing”, results and forecasts released Monday by Ocean Network Express (ONE) highlight how much shipping lines will continue to rake in as the COVID-induced consumer boom subsides.

ONE, the world’s seventh largest carrier by fleet size, reported a July-September (second fiscal quarter) net profit of $5.52 billion. That’s up 32% year-over-year (y/y) and slightly higher than the $5.5 billion earned in the previous three months.

The most recent period also boasts the company’s highest revenue of $9.37 billion, up 24% year-over-year and up 4% from April-June.

Smaller fleet, less volume, but more revenue

Revenues continue to grow despite a reduction in fleet size and cargo volume. ONE’s fleet capacity was 1,526,999 twenty-foot equivalent units as of the end of September, down 4% year-on-year and 5% from the peak at the end of March 2021. ONE handled 2,898,000 TEU of cargo in July-September, up 9% YoY and 1.4% from April-June.

The reason for the increase in revenue and profit, despite the drop in volumes: revenue per container continued to grow. In the latest quarter, ONE achieved average revenue of US$6,464 per 40-feet equivalent unit, up 36% YoY and 5% from April-June.

The rise in FEU income figures is in stark contrast to the spot rate indices, which show significant declines over the same time periods.

The average FEU Drewry global composite spot rate index for July-September 2022 was on average 40% lower than the same period last year and 24% lower than April-June.

This dichotomy highlights the pitfalls of using spot rate indices as a benchmark for ocean carriers’ profits. Operators have more volume on contract rates than on spot rates, and their business is different from a combination of global indices.

The increase in ONE contract rates more than offset the decline in spot rates. “Spot rates fell … but average rates remained high,” the company said in an earnings release. “Freight rates remained unchanged [in the latest quarter].”

Profits will fall, but will remain well above pre-Covid levels

ONE acknowledged that the final quarter would be a climactic one. The turnaround has already begun. He cited “stable freight movement” in July, followed by “a sudden drop in transport demand in August and September”.

Looking ahead, he warned that “due to the stockpiling situation in North America and Europe entering recession, it is expected to take some time for cargo movement and short-term freight rates to recover.”

For the second half of ONE’s fiscal year — October 2022 to March 2023 — it forecasts revenue of $4.25 billion, down 61% sequentially from the previous six months and down 57% year-over-year.

These are huge percentage declines, but they come off a historically high base driven by a one-time surge in freight caused by the pandemic. Net income in the most recent quarter was 46 times higher than July-September 2019 net income before COVID.

Even with the projected cuts, ONE expects its fiscal year revenue to be $15.3 billion, down 9% year-over-year but still its second-best fiscal year on record. (ONE was created in 2017 by merging the container fleets of Japan’s MOL, K Line and NYK.)

To put the projected decline in perspective, ONE’s average quarterly net income in March-December 2019 before COVID was $44 million. The average quarterly earnings ONE expects in the next six months amid “deteriorating conditions” is 26 times higher. That’s a forecast most CEOs would be envious of, and one that doesn’t fit the definition of a “hard landing.”

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