Horizon Lines said Monday that it will discontinue its trans-Pacific container shipping service, which moves cargo between the U.S. West Coast and Guam on its westbound leg and China and the U.S. West Coast on the return, eastbound leg.
Horizon’s decision to end the service follows that of a number of carriers who have decided to withdraw capacity this year as freight rates have plummeted.
The carrier said the last eastbound voyage for its “Five Star Express” or (FSX) service will depart Shanghai on Nov. 2, and the last outbound voyage to Guam and surrounding islands will be suspended with the last sailing from the U.S. West Coast on Nov. 10.
Horizon said it “will work aggressively to mitigate any supply chain disruptions for its customers.”
It added that the discontinuation of the FSX service would have no impact on its other services from the mainland of the U.S. to Alaska, Hawaii, and Puerto Rico.
Horizon said “losses associated with the FSX service produced a negative adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) impact of approximately $43.7 million for the nine months ended Sep. 25, 2011, with additional losses expected through the end of the year.”
It said following their last voyages, Horizon said it plans to lay up the five ships operating in the service, which are on lease from Ship Finance International Limited through 2018 to 2019. Horizon said it is exploring “sub-chartering the vessels and other solutions to partially mitigate ongoing charter expense and maintenance costs.”
Horizon said the company expects to cease all operations related to the FSX service during the fourth quarter and does not expect to have significant continuing involvement in the operations after the termination.
Therefore, the company said it will classify the FSX service as discontinued operations and as a result, expects to record a pretax restructuring charge of between $105 million and $110 million in fiscal fourth quarter 2011. The charge includes estimated costs to return excess rolling stock equipment, facility closures, severance, and vessel charter expense, net of estimated sub-charter income.
Stephen H. Fraser, president and chief executive officer said the “decision to exit this highly volatile market will allow Horizon to focus on our core domestic ocean shipping services, and provide the opportunity to produce a more profitable and stable financial performance over time.”
Horizon launched the FSX service in Dec. 2010, following expiration of a long-term space charter agreement with Maersk Line. The FSX service offers rapid eastbound transit between Ningbo and Shanghai in China and Los Angeles and Oakland on the U.S. West Coast. The westbound leg of the FSX service provides transit between the U.S. West Coast, Guam, Micronesia and the Northern Mariana Islands.
Horizon said “since early in the year, the FSX service met volume and vessel utilization expectations” but said rates have fallen sharply.
It said the Shanghai Container Freight Index says rates from Shanghai to the West Coast have fallen 37 percent since Oct. 2010, from $2,400 per 40-foot container to $1,500. At the same time, the average price of bunker fuel has climbed more than 40 percent since the launch of the service.
“We do not expect any measurable improvements in fuel prices or the freight-rate environment in this tradelane for the foreseeable future,” said Brian Taylor, executive vice president and chief operating officer. “Growing capacity continues to outpace demand and the forecast for 2012 calls for more of the same.”
Horizon also said that “in Guam, the expected growth in cargo driven by infrastructure improvements associated with the military redeployment from Okinawa has been further delayed due to the budget crises in Japan and the U.S., as well as revised Japanese priorities in the wake of the earthquake and tsunami earlier this year. This has made the Guam trade no longer financially viable for Horizon Lines, without an eastbound return voyage from China.”
At least a half dozen companies or alliances have cut services on the transpacific this year including Horizon’s competitor in the Hawaii and Guam trade, Matson.
See: Matson ends one of its two China strings
On its remaining transpacific service, Matson has the advantage of deploying ships built in the U.S., which allows it to carry cargo to both Hawaii and Guam on its transpacific vessels.
The five, 2,824 TEU ships that Horizon has chartered from Ship Finance since 2006-2007 and deployed in its Guam-transpacific service were built in South Korea instead of the United States. Under the Jones Act, the law that regulates U.S. domestic shipping, those “Hunter Class” ships could participate in the Guam trade, but were not allowed to move cargo between the U.S. mainland and Hawai. – Chris Dupin
Horizon drops transpacific service
