Flat volumes and dropping rates lead to first quarter loss for CP Ships

Flat freight volumes and a significant drop in rates has created a first quarter loss of US $6 million loss for CP Ships, CEO Ray Miles told shareholders yesterday at a meeting in Toronto.

"This is the first quarter we’ve had a loss in quite a long time. I think it does illustrate the depth of the recession we are in," Ray Miles said. "The loss is pretty much in line with what we thought. This is expected to be a difficult year. We are in a cyclical business and we are probably in the trough of the cycle right now. But there are a number of signals and signs that are beginning to give us some comfort that our financial performance will improve during the course of the year. Our target was always to earn our cost of capital even when in the bottom of the cycle. That objective is going to be sorely tested this year and it’s going to be very tough for us to meet. But we will be profitable this year."

In the seasonally weaker first quarter, volume of 436,000 TEU was flat compared with the same period last year. Average freight rates were down seven percent from fourth quarter 2001 and 13 percent lower than first quarter 2001. In comparison, CP Ships posted an operating profit of $31 million (all figures in U.S. dollars) in the first quarter of 2001 and $35 million before exceptional credits in the fourth quarter 2001.

Particularly difficult have been the Asia-Europe and Europe-India trades, where excess trade lane capacity has stiffened competition and placed great pressure on rates. CP Ships suffered an operating loss of $19 million in the Asian market, compared with a profit of $1 million in the same quarter last year. First quarter volume for this market was slightly higher than in the fourth quarter but average freight rates were 11% lower.

In its strongest market, the TransAtlantic, CP Ships posted an operating income of $8 million, a $10 million decrease. Average freight rates were 14% lower and volume was down 6%. Miles said the Atlantic Space Charter Agreement announced earlier this month between CP Ships and its existing partners, the Grand Alliance Carriers, and Cosco, K Line and Yang Ming, should help deal with overcapacity issue in the TransAtlantic trade.

The Latin America market proved a welcomed surprise for CP Ships in the first quarter, turning in an operating income of $6 million, which was $2 million higher than what was achieved in the same period last year. Significantly lower ship network costs from the replacement of chartered ships by owned ships and charter renewals at lower rates were among the operating efficiencies CP Ships was able to lean on to fight a 13% reduction in average freight rates compared with the first quarter of 2001.

The Australasian market, however, suffered the same fate as the Asian market. CP Ships incurred an operating loss of $3 million in the first quarter versus a $3 million profit in the first quarter of 2001. Freight rates were down 10% from the same period last year. Volume was down 4%.

One of the bright sides alluded to is CP Ships’ performance in March. Despite weaker freight rates the company managed to show an operating profit with seasonally stronger volume than in January and February and lower operating costs.

Company executives also said their 2002 annualized cost reduction target of $100 million remains on course with savings already achieved from operational cost cutting initiatives and organizational changes. During the quarter, CP Ships renewed charters for 13 ships at significantly lower rates and that is expected to generate savings of nearly $25 million this year.

The ship replacement plan, meanwhile, remains on track. The first newbuilding of 3200 TEU is scheduled for deployment in June. Another nine ships, one second-hand ship, and six long-term charters will be deployed by the middle of 2003 and based on current fleet size projections will increase the owned and long-term committed fleet to about 75% by capacity of the total. Current fleet size is 78 compared with 84 last year.

CP Ships operates in 23 trade lanes and owns six different lines: Cast, Canada Maritime, Lykes Lines, Contship Containerlines, ANZDL, and TMM Lines.

**** The May issue of CT&L will include a full interview with Ray Miles and COO Frank Halliwell.