Published October 30, 2008

NOL warns of losses as choppy seas loom

Q3 net profit falls 82% - but the real trouble starts now

By VINCENT WEE
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(SINGAPORE) The global shipping industry is headed for a situation 'never seen before' and the US$35 million profit that Neptune Orient Lines (NOL) still managed to turn in for the third quarter will likely turn into an operating loss in the current quarter, group president and CEO Ron Widdows warned yesterday.

Tougher sailing: Headhaul volumes in APL's key TransPacific trade shrank in Q3 and this may be compounded by the global financial crisis and economic slowdown Q3 net profit falls 82% - but the real trouble starts now

Net profit fell 82 per cent from US$191 million in the previous corresponding quarter while revenue rose 16 per cent to US$2.35 billion from US$2.03 billion previously.

'The group continued to generate a profit in the third quarter despite the deterioration of conditions in the container shipping market,' said Mr Widdows. 'Reduced demand in key trade lanes, combined with cost increases and worsening global economic conditions have adversely impacted our profit performance in the third quarter,' he added.

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Click here for NOL's unaudited financial information

Mr Widdows warned that more trouble lay ahead. 'Clearly, the pace of trade flows are going to diminish in the not too distant future and some of that has found its way into third-quarter results but it will only be towards the later part of this year and earlier into next year that you will really see the slowdown,' he said.

For the third quarter, NOL's container shipping business APL saw a 10 per cent rise in volumes to 622,000 forty foot-equivalent units (FEUs) and average revenue per FEU rose 8 per cent to US$3,127. Total revenue rose 22 per cent to US$2.04 billion but lower core freight rates in the Asia-Europe trade took a bite out of profit, with Ebit (earnings before interest and taxation) falling 95 per cent to US$9 million.

Core Asia-Europe headhaul freight rates (excluding bunker adjustment factors) came under severe downward pressure on softer demand and ahead of expected capacity overhang in 2009/2010, NOL said.

This trade will likely see negative volume growth on a full-year basis and it is reasonable to assume that it will turn further negative next year, Mr Widdows said.

Increasingly, the long-leg Intra-Asia trades have also been affected, as they are hit by capacity cascaded from other trades, principally Asia-Europe.

Average headhaul utilisation had already started to come down to 90 per cent in the third quarter from 99 per cent previously.

Significantly, headhaul volumes in APL's key TransPacific trade contracted during the quarter and this may be compounded by the global financial crisis and economic slowdown, NOL said. In addition, Japan's No 2 line Mitsui OSK Lines announced that it would resign from the Transpacific Stabilization Agreement.

'We are acting quickly and decisively to trim capacity and reconfigure our service networks, adjusting port calls and service loops and withdrawing a number of vessels from service. These actions will reduce our costs and better align APL's service networks to the lower demand levels currently being experienced,' said Mr Widdows.

He said APL's capacity in the Asia-Europe trade would be reduced by close to 25 per cent, with around 20 per cent of the company's TransPacific tonnage also to be removed from service.

Key changes are also underway in the Intra-Asia trades, he added. Together with APL's alliance partners, this translates into about 40 ships that will be taken out of service, Mr Widdows said.

APL Logistics delivered a 42 per cent increase in Ebit to US$17 million for the third quarter, although logistics revenues registered a slight one per cent decline to US$315 million. The terminals business saw Ebit rise 5 per cent to US$23 million on one per cent increase in revenue to US$146 million.

NOL shares closed 7 cents higher at $1.17 yesterday.