Matson ends one of its two China strings

Matson ends one of its two China strings    Matson is ending one of its two U.S./China services a year after it was launched, citing sustained high fuel prices, downward rate pressure and overcapacity in the transpacific trade.
   Matson said it will discontinue in late August its expanded China-Long Beach Express service (CLX2), which includes service between Hong Kong, Yantian, Shanghai and Long Beach. The CLX2's last eastbound sailing from Shanghai will depart on Aug. 21. Westbound service from Long Beach to China will continue until Sept. 3.
   The company emphasized that discontinuing the CLX2 would not affect Matson’s five-year-old CLX1 service, nor the company's Hawaii and Guam services. It said the CLX1 service, which has a rotation of Long Beach, Honolulu, Guam, Xiamen, Ningbo, Shanghai, Long Beach, continues to be profitable and benefits from round trip economics because of the outbound cargo moving to Hawaii and Guam.
   “While the termination of the CLX2 service is a significant disappointment to us, our remaining services — Hawaii, Guam and CLX1 –will not be affected by the termination, and remain fundamentally sound with strong long-term prospects,” said Stanley M. Kuriyama, president and chief executive officer of Alexander & Baldwin, parent company of Matson. A&B also has interests in property development, management and agriculture.
   Alexander and Baldwin said Monday the ocean transportation operation had a second quarter operating profit of $9.4 million compared to $37 million in the second quarter of 2010. Revenue in the quarter was $314.2 million, 22 percent more than the $257.2 million in the second quarter of 2010.
   The CLX2 service had an operating loss of $17.7 million in the second quarter ($11 million after taxes), and the service has had operating losses of $49.7 million since being launched last September. The company said it would incur another $20 million to $25 million in after-tax losses related by the decision to end the CLX2, mostly in the third quarter.
   'Matson's expanded service that was launched last year succeeded in achieving our service goals and building on our customer base,' said Matt Cox, president. Indeed, the company said with two China services in second quarter of this year compared to just one in 2010, it moved 38,800 containers in the China, more than twice the 16,400 containers in the same 2010 period.
   “Unfortunately, the economics of the transpacific trade have shifted dramatically in the relatively short time since we developed the model,” Cox. said “Sustained high fuel prices, rate volatility and overcapacity in the Asia market have made this growth initiative unprofitable.”
   “Unlike Matson's first China-Long Beach Express, which includes calls in Hawaii and Guam en route to China, resulting in revenue for both westbound and eastbound voyages, the second string sailed directly from Long Beach to China, making the economics of the service during this period exceptionally difficult,” Cox explained.
   He said the company was able to meet operating and volume expectations, but he said fuel rates from September 2010 to July 2011 have gone up a whopping 47 percent and freight rates are down 27 percent, hurting both the CLX1 and CLX2 services.
   “The good news is that we saw continued improvement in Hawaii volume in the quarter,” he said. Matson handled 35,600 containers to Hawaii, 6 percent more than in the second quarter of 2010, and 23,700 automobiles, an increase of 12 percent. Guam volumes were 3,400 containers, down 19 percent, because the second quarter of 2010 had exceptionally strong volumes due to the start of several construction projects. Guam business was also hurt this year from more competition from Horizon Lines and because of a drop in Japanese tourism following the Tohoku earthquake and tsunami.
   Cox said overcapacity in the transpacific “makes it unlikely that the transpacific will see much of a peak season surcharge this year,” he said.
   Matson has instituted cost reductions throughout the company, that will include deferring hiring and some position eliminations, he said.
   A spokesman said about 60 jobs would be cut, primarily in Hong Kong and Shenzhen China, as well as some customer service personnel in Phoenix.
   “Most of the work related to CLX2 was done by existing personnel who also support Matson’s CLX1, Hawaii and Guam services,” he explained. “Those jobs will not be impacted.”
   Matson Logistics said it had operating profit of $2.1 million in the second quarter compared to $1.7 million in the same 2010 period. Revenue at Matson Logistics was $103.1 million, 16 percent more than the $88.6 million recorded in the second quarter of 2010.
   Matson’s announcement follows the decision by several other shipping companies to end services this year:
   ' The Containership Co. folded its transpacific service in April.
   ' CSAV in June to suspended its ASIAM service connecting the Indian Subcontinent and Far East with the U.S. West Coast.
   ' In July the New World Alliance withdrew its PSW service operated by Hyundai Merchant Marine.
   ' Hainan PO Shipping and TS Lines pulled one of their three jointly operated transpacific services in July, just months after introducing it.
   ' Also in July Maersk Line, Mediterranean Shipping Co., and CMA CGM decided to postpone the introduction until 2012 of a service with an identical rotation as the Hainan-TS Lines TP1 service.
   Francis Phillips, an analyst at American Shipper affiliate ComPair Data, said, “Matson thought it could take on the big boys with smaller, faster ships, as did TCC with low cost charters, and CSAV was wise enough to get out as rates plummeted.
   “What is interesting is how long state-backed Chinese newcomers like Grand China Shipping and Hainan Pan Ocean Shipping can stand big losses too,' Phillips said.
   “I suspect VSA partners Maersk, MSC and CGM, by sharing big ships together with much lower slot costs, have limited their exposure to the China/West Coast North America sector of the transpacific and are well dug in for a war of attrition which will cost them comparatively little,” he said.
   ComPair Data said weekly eastbound transpacific allocated capacity has fallen only 4 percent to 341,193 TEUs since the start of 2011, despite the aforementioned service withdrawals. Allocated capacity is ComPair Data's estimate for the capacity carriers allot to a particularly trade — in this case, from all ports in Asia to all ports in the United States and Canada.
   The relatively small decline in allocated capacity since Jan. 1 is due to capacity injections by carriers on the trade — mostly from newly launched loops, since there were no major services temporarily pulled during the past slack season.
   On April 3, both nominal capacity — the number of slots on ships coming to North America — and allocated capacity hit their 2011 highs to date on the eastbound transpacific. That suggests carriers were eager for a second half surge and ready to provide the capacity to accommodate it.
   Some carrier executives now say demand was overestimated and supply was further boosted by new entrants in the trade adding first and sometimes second loops.
   From April, the industry has reduced allocated capacity 6.3 percent, but at the cost of pulling 10.6 percent of nominal capacity. That's 44,000 TEUs of weekly capacity transpacific liner carriers have to find a use for elsewhere, or else lay up or charter to someone else. ' Chris Dupin and Eric Johnson