The collapse of Hanjin

In the wee hours of the morning of April 15, 1912, the gigantic Royal Mail Ship Titanic, a British luxury passenger liner, sank in the North Atlantic Ocean after hitting an iceberg. More than 1,500 passengers died.

At the time the Titanic entered service, it was the largest ship afloat. Nobody imagined it would sink. But it did — deep and fast into the abyss.

The sinking of the Titanic is the perfect metaphor for the collapse of South Korean shipping giant Hanjin Shipping. It was South Korea’s biggest shipper and the seventh largest in the world, unthinkable that it would sink.

But it did. In 2017, after years of shrinking profits and mounting debt, the final curtain fell on Hanjin. It was not surprising that its Philippine operations would follow a year after.

However, unlike the Titanic’s demise, Hanjin’s fall was a long time coming.

Why did it collapse?

Hanjin Shipping faced a lot of headwinds. Its fate was a reflection of the slowdown in the global economy which drastically affected global trade.

Its real. The global economy is slowing down and it could get worse with the US-China trade war. Even air freight traffic growth is also slowing down. It started in 2018 and it continues to slow, according to the International Air Transport Association (IATA).

In the first half of 2018, air freight traffic rose 2.7 percent year-on-year, less than half the seven-year high of 10.4 percent a year ago, according to IATA.

Thus, for Hanjin, headwind number one was the overcapacity in the cargo shipping industry. Capacity in the shipping industry outpaced demand.

This overcapacity resulted in rising debt levels.

Soon, shippers around the world knew that it was no longer a question of whether or not a big shipping line would collapse. It was already a question of who would be first.

Headwind number two came when it could no longer access credit from lenders because it was already saddled with around $5 billion debt in the middle of 2016. The South Korean giant had to go into receivership.

Then there’s headwind number three, which was the chaotic situation that Hanjin found itself in as soon as it announced bankruptcy — its ships and cargoes were stranded at sea because different ports around the world refused them entry, fearing they would not be able to pay. In some cases, the ships were seized by creditors.

Hanjin Philippines

Because the mother company was helpless, Hanjin Philippines had nobody to turn to when headwinds came its way.

Trade Secretary Ramon Lopez said in the case of Hanjin Philippines, they encountered cash flow problems. Their credit terms were heavy on the tail-end which affected their cash flow, making it difficult for them to sustain their operations.

Sec. Mon said if the parent firm did not go bankrupt, it might have been able to save Hanjin Philippines.

No government bailout

What is clear, Sec. Mon told me is that there would be no government bailout for Hanjin Philippines, the company being a privately-owned corporation.

But he assured that the Department of Trade and Industry (DTI) would continue to link Hanjin with interested investors. There are many shipping companies interested in setting up facilities in the country, including two Chinese investors.

Sec. Mon said it may be easier for them to just acquire the assets of Hanjin Philippines rather start from scratch.

But it is equally important for the government to help displaced Hanjin workers find new jobs. And fast.

Workers or creditors?

Hanjin employed more than 28,000 workers, but it has already laid off 7,000 workers, according to various reports. Only about 300 are to be retained for maintenance duties.

The government should ensure that Hanjin is able to provide workers’ compensation and separation pays before it pays off its creditors.

Hanjin should be reminded that Article 110 of the Labor Code states that “in the event of bankruptcy or liquidation of an employer’s business, his workers shall enjoy first preference as regards their wages and other monetary claims, any provisions of law to the contrary notwithstanding.”

The unpaid wages and monetary claims shall be paid in full before claims of the government and other creditors may be paid, the provision also stated.

The final curtain has fallen on Hanjin. I hope other giants would keep in mind the lessons learned from such tragedies — that even the world’s biggest shippers can collapse, banks can lose billions in the wink of an eye and a mammoth ship like the Titanic is not unsinkable. Nothing is really too big to fail.

Iris Gonzales’ email address is [email protected]. Follow her on Twitter @eyesgonzales.