SIW1063imagelRemember Blue Funnel (or Blue Flu as it was known)? If you sailed with this classic British liner company, a moist eye is OK. It was magic. But fifty years ago in 1963 the eyes of Blue Flu’s board were moist with frustration. Their fleet of 60+ cargo liners ruled the Asia trades. These meticulously crafted ships had everything – refrigeration, deep tanks, heavy lift and multiple decks – except a decent return on capital.

Diagnosis – It’s the Big C

In 1960 the management had started to discuss the C word, without realizing that Containerisation would destroy their business model. Their model had worked brilliantly for a century, but globalisation was steamrollering their imperial trade routes, labour costs were escalating, ports were congested and the return on investment was shrinking. Big companies can afford to run on autopilot, turning a blind eye to the reality that they are steaming off course, but by 1963 Blue Flu’s board was sweating.

D is For “Denial” (and “Dead”)

Their overwhelming problem was the difficulty of adapting the existing business. How much cargo could be containerised (they underestimated)? Would containerisation work on long Far East voyages (their head of Cargo Handling thought not)? Who carries the awkward cargo? How would they pay for new ships, new terminals and containers? And what happens to their much loved classic cargo liners? There were no easy answers.

Back to the Future

Fifty years later liner company boards are sweating again as they struggle to escape from another ageing business model. Chronic low returns are the symptom, and the C word is the problem. But today C stands for Commodity. Look at the evidence. Since cargo volumes stalled in 2008, service operators went on auto-pilot and tried to bolster returns by investing in bigger ships. But the surging fleet is having the opposite effect (see graph) and low ROIs remain a problem for businesses with big inflexible overheads. Like Blue Flu in 1963, the problem is adapting a tired business model.

No Hiding From the Big C

In the old days liner companies could manipulate the market with price discrimination and conferences. But, in today’s IT driven world, containers have become commodities. Conferences are dead and price differentiation only works if supported by special services (often loss making). The KG system allowed market pressure to be passed down the line, leaving charter owners and their bankers sweating too, but what’s their future?

The Problem is C-ing The Future

So there you have it. Since 1963 the liner business has been transformed, and the world has benefitted. But the problem is back again, leaving companies with a capital intensive business model that does not produce a commercial return. Change is the key, but as Blue Flu proved, the bigger you are, the harder it is to escape from the present. Have a nice day.