In a year overshadowed by historically low freight rates that impacted heavily on the profitability of our liner business, APL continued to distinguish itself in the minds of customers around the world.

In particular, the Company’s response to the major industrial disruption on the US West Coast and our approach to the changes brought about by new global security initiatives helped reinforce our reputation for service excellence and innovation.

We can take heart from these achievements and the formal recognition of customers and industry awards, but our financial results in 2002 reflect a tough and unsustainable operating environment.

The adverse conditions of 2001 flowed through into the new year. And, despite encouraging growth in container trade volumes globally, APL, along with other carriers, was unable to capitalise on this.

Freight rates dropped in every tradelane during the first half of 2002 — including our key Trans-Pacific trade, where average rates were 14 per cent lower year-on-year.

Globally, APL rates averaged US$2,092 per FEU (forty-foot equivalent unit), representing a 9 per cent drop on 2001 and 18 per cent down on 2000.

APL achieved a fleet utilisation averaging better than
85 per cent across our global network and cost savings in excess of US$200 million, which helped reduce the average cost per FEU by 7 per cent. Hedging also held bunker fuel costs against escalating world oil prices. However these gains, combined with a solid recovery in the Asia-Europe trade during the second half of the year, were not sufficient to compensate for the markedly lower rates which eroded US$400 million from our freight revenues.

The outcome was that APL recorded a 5 per cent drop in revenue from US$3,592 million to US$3,425 million. Core Earnings Before Net Interest Expense, Tax and Exceptional Items (Core EBIT) fell US$92 million compared with 2001, to a loss of US$73 million.

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TRADE GROWTH

Demand for APL’s services remained strong in 2002, translating into an increase of 6 per cent in our total cargo volumes to 1.5 million FEU.

We increased trade volumes by 12 per cent to 600,000 FEU in the Trans-Pacific, 20 per cent in the Latin American trade to 118,000 FEU and up 24 per cent in the Trans-Atlantic to 83,000 FEU. Both Asia-Europe and Intra-Asia remained stable as we focused closely on yield and managing capacity in an effort to sustain rates.

While we added new vessels to the APL fleet, this increase in total freight volumes was achieved with 4 per cent less headhaul capacity, demonstrating the value of our capacity management programme. The delivery of seven newbuilds during 2002 has allowed APL to replace older capacity and resulted in lower slot costs, in line with our strategy of optimising the efficiency and flexibility of our fleet through a mix of owned and chartered vessels.

The Trans-Pacific was again the largest trade for APL in 2002, accounting for more than half of revenues, with low rates in this trade a major contributor to our poor financial performance.

Following a depressed 2001, demand in the Trans-Pacific unexpectedly rebounded early in the year on the back of strong business confidence and US consumer spending, driving volumes higher. But contract commitments limited our ability to effect rate increases.

The prolonged shutdown of US West Coast ports during the peak season, due to a collapse in negotiations with the International Longshore and Warehouse Union (ILWU), was another factor that impacted on the Trans-Pacific trade in 2002, causing massive disruption within our network and for our customers.

But, while the US$8 million cost of restoring services and repositioning cargo compounded the financial impact of low rates in 2002, APL won widespread praise from customers for our service during this period. The Company’s efforts to communicate and provide solutions for our customers clearly differentiated APL in circumstances that might otherwise have marred our reputation for service quality. This was reflected in APL being named “Best Transpacific Shipping Line” for 2003 at the Asian Freight & Supply Chain Awards (AFSCA).

The new six-year agreement reached between the Pacific Maritime Association (PMA) and the ILWU in November means that we now have a measure of certainty for our business planning and a platform for implementing new technologies and investment at these ports that will benefit both APL and our customers into the future.

While US exports to Brazil and Argentina fell significantly during 2002, exports from both — along with economic growth in Chile, Columbia and Peru — were a welcome boost to the Latin American trade. APL continued to build its presence in the region with an expanded network of 40 service points, which connect Mexico, the Caribbean, and Central American markets with both Asia and Southern California.

Trade growth to and from China again exceeded forecasts, and the region continues to account for more than 40 per cent of APL’s volumes in major East/West trades. However, as with other trades, rates deteriorated substantially as carriers fought to fill new and incremental capacity — more than off-setting revenue-related volume gains from the Greater China market.

Equipment imbalances, caused by the gap between imports and exports, also grew in 2002. While our overall costs for empty container repositioning were largely held in check through greater efficiencies, this will continue to be a major challenge for the China market.

To help correct this imbalance, APL has extended the Red Sea Express (REX) service to include South China calls, feeding containers directly into these demand locations from the Middle East.

Our renewed yield management efforts will ensure we continue to minimise these costs through network optimisation.

With foreign direct investment in China expected to drive export growth of more than 25 per cent in the coming year, this market offers exciting opportunities for an established player such as APL.

We have been developing service enhancements to all major ports in China — with improved transit times and routing options to meet customers’ requirements and build on market opportunities. During 2002, we added 10 new port calls involving multiple trades, covering South China, Xiamen, Ningbo, Shanghai and Qingdao.

Along with China, the other major growth market for APL within Asia is the Indian Subcontinent where we expanded service in 2002.

Along with our focus on restoring rates in all trades, our business plans for 2003 include further diversification of our revenue streams by growing Asia-Europe along with a number of our other trades.

Another area where we are growing and expanding our business is in Eastern Europe and Russia. At the same time, as with other areas of our network, we continue to reduce costs in Europe particularly in the area of terminal operations.

APL performed strongly in the Trans-Atlantic trade, sustaining the revenue growth of the past four years. While the East/West trade imbalance is an ongoing issue, the outlook for this market remains positive.

Another growing and profitable segment of the liner business for APL was the reefer trade. Under a newly-established global reefer team, we have embarked on a strategy of optimising the deployment of a finite reefer equipment fleet to achieve the best returns, while maintaining our reputation as a premier reefer carrier in all the major markets.

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