Thinking of Blue Ocean Strategies in Shipping

Spending time with a couple older, biographical books on the pioneers of the shipping industry, Aristotle Onassis and Stavros Niarchos, one can be considered the pursuits of an incurable nostalgic dreamer. But, ideas still can found in timed books and biographies under the excuse of light summer reading.

Although Onassis and Niarchos were neither the biggest shipowners or the richest men of their time, they have defined their era, their national origin and their industry. There is no better proof for that that half a century after their peak, especially in the case of Onassis who is the monolectic summation of the shipping industry. You cannot tell someone you are a Greek in shipping without hearing: “Are you related to Onassis!”.

Undoubtedly, these two were larger than life characters: highly intelligent, hyperactive, daredevil risk takers. On occasion, their behavior seemed textbook case of hubris and egoism, taken straight out of an ancient Greek tragedy.


A Textbook Case

In their business, they were very astute entrepreneurs identifying business opportunity and going after it ferociously. They saw business trends before competition saw it, they had the conviction to go after these opportunities while most other shipowners ignored them, and found ways to best exploit the opportunities ahead (truth be told, not always perfectly legal - as Onassis had to spend a few days in American jail cleaning up his questionable acquisition of several Liberty ships, while Niarchos who was quick to depart the US, never traveled back to the US - under fear of arrest and prosecution.)

Some historic reference here: Europe was destroyed after WWII, and it took some faith that the Marshall Plan would work for a European reconstruction and the world economies would grow again. The consensus opinion in the shipping community was that the years after WWII was a deja vu case of weak economic conditions after WWI which eventually led to more fights. While other shipowners opted not grow their fleets, Onassis and Niarchos went aggressively after it with massive newbuilding programs.

At the same time, great discoveries of crude oil were found in Middle East and crude oil was taking an ever greater market share of the freight market; tankers were becoming much more active and desirable than drybulk tonnage. Onassis and Niarchos were the first to see the opportunity of the potential of the new cargo, and they expanded massively in the tanker market. And, this was a market yet to be developed in terms of trades, vessel designs and regulations; in the 1950’s, a 10,000 dwt tanker was an experimental new design of the “supertanker” era. However, Onassis and Niarchos hired top tier naval architects and engineers and they pushed the design and size of tankers, so, in 1960, Niarchos built his supertanker MT “World Hope” of whole 26,000 dwt at his own shipyard, Hellenic Shipyards. As a matter of comparison, a modern supertanker VLCC vessel is 320,000 dwt, almost nine times bigger than post-war era tankers.

In today’s business strategy terms, a “blue ocean” (a new market of a new line of business that expands an established market beyond its known boundaries ofa product and supply and demand) presented to them and they exploited the opportunity to the fullest extent; other ship owners opted to stay with the traditional market of drybulk ships and more or less ignored the incipient tanker market.

And, while they dedicated themselves to exploring this new blue ocean, they explored every option at establishing a foothold in this new market starting with chasing new sources of capital: European (read English) banks active in shipping were depleted of capital after WWII, and both Onassis and Niarchos looked for new sources of capital, especially from American banks, and for that reason, they both established presence in New York (at least originally) to seek capital from banks financing energy companies and projects. And, taking it one step further, instead of depending on ship mortgages from banks like the traditional owners, they innovatively looked to obtained financing on behalf of the contracts to ship cargo (crude oil) for new ships (we call it “cash flow lending” these days). And, they levered to the till! While traditional Greek shipowners (including their father-in-law, Stavros G Livanos, the doyen of the Greek shipping who opted to save money and make their shipping acquisitions in cash or minimal leverage), Onassis and Niarchos borrowed as much as they could (which, in a growing, booming market of the “blue ocean”, it was the right way to invest, in retrospect).


The Fleet Admiral

Definitely, Onassis and Niarchos did not invent this blue ocean in shipping (the impending tanker market); tankers became a big market on its own based on energy needs and crude oil discoveries, but on the other hand, Onassis and Niarchos identified the trend early and used maximum effort and leverage to exploit it. The original case study of a “Blue Ocean” widely used in business readings is about the “invention” of the Cirque du Soleil model which combines elements of opera and ballet in a circus format (but without animal shows when attendance to itinerary circuses went down due to concerns on animal welfare): a new format and content that opened up a whole new market to a wider and more affluent audience. The most prominent example of a “Blue Ocean” strategy in the shipping is the creation of the cruise industry in the late 1960’s, when useless liner ships went to disrepair and were rusting in Florida after the invention of the jet engine; a couple of enterprising men led by Ted Arison were looking for an alternative use to scrap of old liner vessels and the foundation of Carnival Cruise Lines took place on the premise that people would pay money to cruise about on ships for leisure than just pay for the utility of a simple transit or ocean crossing. Onassis and Niarchos were at the right place at the right time when the need for a new market was developing, and they sure did make the best of it; most of the competition stayed with a conservative approach to old “rust bucket” dry bulk vessels chasing the same market.

Taking a look at today’s shipping market, it’s hard to see a new “Blue Ocean”, what would expand the shipping industry beyond its traditional boundaries of transporting raw materials and consumer products worldwide. Some may say that Liquified Natural Gas (LNG) may be the “cargo of the future”, a Blue Ocean for shipping. The world LNG tanker fleet has grown by 110% in the last decade and the outstanding LNG orderbook is the highest of any other asset class. But again, several studies point that LNG is still a dirty fossil fuel and the LNG market is replacing the crude oil tanker market and still, renewables have the potential to cut the prospects of the LNG trade short. But also, and we are hesitant using the word disruption, shipping is becoming more integrated in the supply chain and brute transport of cargo is not the case anymore: shippers need real time information for the shipment that will arrive just-in-time in perfect condition, and also want to make sure that their shipping partner complies with same high standards of corporate and social responsibility, including regulatory environment (if a lender considers the CO2 footprint of a mining company, implicitly the shipowner’s emissions come into consideration); thus, a “Blue Ocean” strategy may lay open in the technology and services space adjacent to shipping where a brand new market could be found.


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© 2018  - present Karatzas Marine Advisors & Co.   All Rights Reserved.

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