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Shipmanagement

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R1114 Shipmanagement

Shipmanagement fails to convince

The shipmanagement industry could be on the verge of a period of renewed expansion after a period when growth seemed to have stagnated.

Less than a quarter of the world's fleet is controlled by third-party managers, and fee levels have stubbornly refused to rise above what managers themselves see as paltry levels, despite the growing complexity of the job. Independent shipmanagement is usually perceived as a growth sector, yet its share of the commercial shipping fleet remains stubbornly stable. Shipmanagers, it seems have failed to persuade the industry of the value of the services they offer.

The shipmanagement industry can make the case that choosing third-party management can secure lower vessel operating costs. Yet in 2011, some owners have claimed that taking matters in-house is the route to cost reduction. While many ships are shown on the fleet databases as being under separate management, many of those managers are merely part of the owner's own organisation and should not be counted as third-party managers.

Recession opportunities

Third-party shipmanagement received its initial boost when banks that had foreclosed on owners found themselves with vessel assets that they had no idea how to operate. While the ultimate goal was to sell, the new owners had to operate those ships until the shipping market improved enough to make a sale viable. That was where third-party managers came into their own.

It was thought that similar opportunities would arise as a result of the recent recession. But things didn't work out that way. Except in extreme circumstances, financiers were reluctant to foreclose on owners, perceiving that a flood of secondhand tonnage would leave assets too devalued for them to recoup a worthwhile portion of their losses.

With a renewed economic crisis unfolding over the summer, the patience of under-pressure banks is wearing thin, and this could open up more opportunities for third-party managers as the number of non-professional owners increases.

The other critical driver is access to crew. The recent hysteria surrounding potential shortfalls of officers has subsided. However, it has not entirely gone away. The rate of growth in the commercial fleet has slowed - but there is no evidence that it will decline in the medium to long term. Furthermore, in some regions, the senior officer cadre is ageing and looking at retirement. Elsewhere, there have been signs that officers want to come ashore at a much younger age than their predecessors.

Crew recruitment, training and retention are some of the key selling points of many shipmanagers. The critical question is, how crucial a bargaining chip could this become? Most managers have a mix of full technical and crew management contracts. Could a situation arise where being able to supply the crew enables managers to look to arrangements where crew might only be supplied if the owner commits to a full technical management contract?

The costs and responsibilities associated with managing ships have grown steadily more onerous, yet management fees have shown little improvement for decades. While this poses obvious problems for managers, it helps deter new entrants from trying to gain a foothold in the industry.

The cost argument is an interesting one. The shipmanager's case is based largely on scale economies. Although there are a number of large fleet shipowners, they are in the minority and the average fleet size is around 7-8 ships. For management operations, the corresponding figure is 35-45 ships. Clearly, managers will argue that they offer more than a scale economy advantage. There is an expertise and experience input and the ability to offer a number of additional, value-added services.

With the in-house route, there always has to be a fear that in difficult times the less scrupulous owners will take internal cost cutting measures to an extent that risks their operation becoming sub-standard. When markets are adverse, cost cutting and planned maintenance deferrals can be legitimate short-term measures. However, a price has to be paid at a later date.

The case for increases in fees over the past decade or so (e.g. with the taking on of ISM and ISPS Code requirements plus increased difficulties in sourcing seafarers and ensuring that they are proficiently trained) appears self-evident. Yet, still there seems to be an impasse.

However, the stagnation of fee levels does not point to there being much enthusiasm for lower-cost entrants trying to build market share and risking short-term loss-leader policies. In general, owners are looking for respected and respectable service providers, and too much cost cutting might provoke fears that rules are being bent - and that the service will suffer as a result.

Dubious reputations draw the attention of Port State Control bodies. The commercial repercussions of a Port State Control detention (including loss of hire, adverse implications for insurance cover, discomfort at the owner's bank and future wariness of charterers) could well outweigh any short-term savings. Furthermore, an owner might have a suspicion that a fee-cutting manager might not be passing on various discounts that are due to the owner under the management agreement.

Takeovers in the management sector

The past year has shown that outsiders have confidence in the third-party management sector, with new owners buying a majority holding in the world's largest independent, third-party manager, V Ships. Several buyers were reported to have made moves to acquire the 50% holding held by Exponent Private Equity. Ultimately, a Canadian pension fund, Ontario Municipal Employees Retirement Scheme, prevailed. However, the indications are that V Ships' worth was perceived to $500 million - possibly more.

The successful buyer is a significant institutional investor. The other contenders were various private equity groups. This does not suggest that V Ships was unprofitable or existing in the hand-to-mouth manner seen with some shipowners. Furthermore, the buyers have hinted at a future exit strategy - possibly via an IPO - that will yield them a worthwhile return on their investment.

Collectively, all of this seems to be pointing towards third-party shipmanagement being a quietly confident sector. Even so, success will remain linked to the quality of the operation and the service provided. Shipmanagement is far more than just being a fee-driven business.

Yet there remain obstacles to expansion. Most owners must have convinced themselves that their in-house management is competitive; otherwise many more owners would outsource. Furthermore, many - probably most - of the small fleet operators that are the mainstay of the commercial fleet take an asset player's approach, making quick, opportunist decisions on buying and selling ships. Third-party management has problems with this approach. Furthermore, many of the benefits of third-party management are dissipated if the focus is on the short term. The longer-term case for scale economies falls flat if the owner's approach is "˜cheap as possible now' as the asset will be "˜cash tomorrow'.

The other side of the coin is that the management sector must have a relatively loyal band of clients. This seems to be the key to the stable percentage shares of the fleet. The implication is that, broadly speaking, managers work with the same owners and so their portfolios expand and contract with the changes seen in these owners' fleets.

Technical management

Shipmanagement has two distinct divisions - technical and commercial - while the shipping operation itself will have a related administrative or financial management arm. These activities need to be co-ordinated at the strategic level. Management needs to appreciate the wide range of risks that it is exposed to, both commercially and operationally, and deal with those areas of risk that do not sit within the company's defined limit of acceptable risk. Part of the risk exposure assessment - including its impact on the flexibility and immediacy of decision making - is the in-house versus third-party management debate.

The key technical management concern is keeping the hardware running. This covers human, mechanical and system requirements, and one plus point often claimed by the third-party management sector is that its purchasing power gives it an advantage over that of a small fleet shipowner.

In the crewing equation, sourcing, recruitment, training and retention are the prime focus of management attention. Clearly, pay levels are a factor along with other components in the employment contract. However, also critical are other factors that make the seagoing experience rewarding and the extensive periods away from home and family life palatable. This is the area in which the third-party management sector appears to have the most scope to drive up its market involvement. However, setting up and running training establishments can be a costly considerations for management companies. If dealing with manning agents, it is also vital to ensure that these agents are providers of quality personnel (in terms of skills, qualifications and good health).

The other major area impinging on the technical management agenda is the regulatory environment. The core of this is built around the IMO conventions. In particular, the focus lies with SOLAS, STCW and Marpol. However, there are emerging necessities relating to ballast water management, emissions and ship demolition. These measures have a habit of increasing the management workload, creating specific responsibilities for named individuals and introducing new tiers of record keeping, training and audits. They often further empower Port State Control.

Commercial management

The focus for commercial management is the income stream. The key is optimising the employment of each vessel in the fleet and securing the best possible freight rates. The core skill is the ability to read the market correctly. However, in a market prone to sentiment, a little good fortune will always help.

The shipping market is inherently cyclical. However, it is driven or influenced by other market sectors as well as the global economy. Most of these are cyclical. However, these different cyclical phases need not be aligned. The China boom, where every sector benefited at the same time, was distinctly atypical. Consequently, the current difficult picture faced by all the key shipping sectors is also not the norm.
 
Some owners will outsource commercial management to a third party. However, this has strategic implications surrounding how long the manager might be able to hire out the ship under a timecharter or the extent to which a ship might be "˜open for sale'. Many commercial managers also operate ships on their own account. Hence, owners have to be aware of any possible conflicts of interest that could arise.

Nevertheless, independent third-party commercial management is less common than independent third-party technical management. There are shipmanagement operations that appear to be independent but in practice only serve the fleet of one owner.

Risk management

Risk management is a term that has been appropriated by a number of different sectors. It is seen as a good selling point and insurance companies use the term to describe their role. So too do classification societies. It is also a term much in vogue in finance circles, though here the focus tends to be on derivatives products.

Currently, however, shipping faces risk from previously inconceivable directions. Financial risk looms large. There was always a risk of being unable to secure funds or credit but no one would have foreseen the risk of a systemic, global banking failure. Equally, sovereign risk was probably something that just sat at the bottom of the risk checklist. Now it is a critical risk issue. The USA has seen its credit rating downgraded - something previously thought inconceivable. With Greece, the question is, has it actually defaulted? The position has been obscured by bail-out measures. Concerns remain over the future of the Eurozone and of the euro itself.

Nearer home, shipowners have faced attempts at charterparty renegotiation as even Chinese groups are suffering from the economic difficulties. Counterparty risk and credit default risk are of increasing concern.

Management has to evaluate risk exposures in a co-ordinated and systematic way. It needs to define its own risk appetite and its risk limits. In essence, what is the maximum it can afford to lose? In addressing these matters, one fundamental must not be overlooked. That is, risk cannot be eradicated. Risks might be insured against. Risks might be hedged against. Risks might be transferred or outsourced. However, ultimately, someone somewhere has to pick up the tab.

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