APL Operations Review
In a year when transportation infrastructure constraints began to impact the industry in a very significant way, slowing supply chains globally and placing huge pressures on our service capability, as well as driving up costs, it was our people across the organisation and their efforts on behalf of our customers that ensured that APL stood out from the crowd.
We made adjustments to our network, opened up more capabilities and continued to focus on finding innovative ways to flow our customers' cargo as efficiently as possible in this very challenging environment.
At the same time we have stuck to our game-plan for growth, aggressively pursuing opportunities for expansion in strategic sectors, launching eight new services in 2004.
And, as operating costs have been driven higher by escalating vessel chartering rates, increased inland transportation costs, sustained higher oil prices and a weak US Dollar, we have maintained a disciplined focus on our cost savings targets, actually lowering cost per loaded FEU (Forty-foot Equivalent Unit) year-on-year and continued to refine our capabilities to manage yield, improving the contribution margins of our business.
Record Performance
APL's Core EBIT (Earnings Before Interest, Tax and Exceptional Items) of US$892 million is a second successive record for the Company, up 117% on the strong result of 2003. Our Core EBIT margin improved from 9.9% to 16.8%.
Along with an improved business environment, the turnaround in operating performance over the past two years reflects the fundamental changes we have made to how we approach the running of the business and our ability to execute our strategy. It also speaks to the tremendous support that we have had from our customers and the dedication of our people.
APL achieved improvements in average revenues per FEU during the year through a combination of yield management initiatives and general rate increases. The most significant boost came in Asia/Middle East, with a 17% improvement, which, along with smaller gains in the Americas and Europe, saw an 8% improvement in the Company's overall revenue per container, up from US$2,512 to US$2,713 per FEU.
Coupled with healthy volume growth, the improvement in rates helped lift APL's total revenues for 2004 by 27% to a new high of US$5,305 million, an increase of US$1.1 billion over 2003.
Strategic Growth
Behind the top-line numbers in 2004 is a story of robust growth, throughout which we maintained very high levels of vessel utilisation, averaging close to 98% for head-haul trades globally.
Our growth strategy has been, from an industry perspective, purposefully conservative with regard to new vessel commitments. We added 14% of new or upsized head-haul capacity in the major East/West trades in 2004, however, through the improved utilisation of assets - along with the partnership of our alliance partners - we increased total volumes for the year by 18%, to 1.8 million FEU.
China-driven growth was once again a major focus, with the launch of new services strengthening our network around this increasingly dominant sourcing market. Most significant in 2004, were the new services connecting China with the Middle East, the Indian Subcontinent and Australia, along with additional capacity in the Asia-Europe trade and a strategic peak season Trans-Pacific service over our Seattle gateway, which avoided the congestion in Southern California.
APL's volume growth from both North and South China was in excess of 25% year-on-year, with the US still the largest destination market.
The major consumer markets of Europe and
US, coupled with the impact of the shift in
manufacturing to Asia, and China in particular,
continued to fuel strong growth in the Asia-
Europe and Trans-Pacific trades respectively,
while West Asia trade expanded rapidly on the
strength of imports to the Middle East and India.
Intra-Asia volumes overall showed a 30%
increase, reflecting the addition of long-haul
capacity in this trade during the early part of
2004 and the introduction of new services during
the year to enable us to meet demand from our
customers. Thailand, India, South Korea and
Indonesia were among the fastest growing export
markets for APL in the region.
The impact of our growth in 2004 was maximised
by ensuring that each new service start was well
utilised from day one. This took detailed planning
by our trade management and execution by
our sales force, but was also assisted by the use
of new decision-support tools, introduced in
2003 to improve our demand planning and
forecasting capabilities.
These have been refined and fully employed as
part of a more dynamic and responsive business
planning process. We have also continued to
use sophisticated optimisation tools to guide
cargo selection and tune the mix of our business.
Network optimisation, in the past only a concept,
is now a developing core competency of our liner
business. We will further improve this aspect of
managing our assets in the future.
Industry Challenges
While APL's financial results in 2004 paint an
overwhelmingly positive picture, this was a year
of considerable operational challenges across the
industry, with severe pressure on port and intermodal
transport infrastructure.
The impact was most apparent at the US West
Coast ports during the second half of the year,
particularly at Long Beach and Los Angeles,
as the cumulative growth of trade volumes
from Asia over the last three years began to
outstrip the capabilities of terminals, rail and
road connections.
Bottlenecks were also evident to a greater or
lesser extent at almost every major discharge
port in the US and Europe, slowing supply lines
globally.
Even though we had anticipated some of the
problems and planned for a less-fluid supply
chain over the peak season, the entire industry
saw a deterioration in service integrity and a
significant increase in costs, both from delays and
the impact of network changes made to access
alternative routing options.
In the Trans-Pacific, APL was among the first
to shift volumes away from the congestion
pressure point in Southern California. This action,
combined with the introduction of our PS5 "Peak-
Season" service through Seattle greatly enhanced
the flow of cargo over the West Coast. This early
move was complemented by other network
changes, including adding capacity to our US
East Coast Service, and other, ad hoc solutions
designed to reduce the impact on our customers.
APL's control over our assets, including terminals
at strategic locations with on-dock rail capabilities
and our long-standing relationship with
intermodal transportation operators proved to be
an operational and competitive advantage.
The cost impacts of congestion at major terminals
were nevertheless significant and contributed to
a fundamental increase in our operating costs
in 2004. Within the course of a year we have
seen vessel charter rates jump, further increases
in world oil prices flowing through to fuel costs,
and strong demand for steel driving up the price
of containers. The weakness of the US Dollar
against major currencies, especially the Euro
and the Yen, has also worked against us.
In every area we have been focused on reducing
our exposure to these impacts, including,
where appropriate, sharing or recovering the
costs from customers. In addition, we have
continued to drive costs out of the business,
with rigorous and disciplined management and
improved efficiencies.
This effort delivered US$96 million in savings
across cargo handling, land transportation,
terminal expenses and other equipment related
costs, which, while slightly below target, resulted
in flat overall costs compared with 2003. These
actions coupled with keeping very high levels of
utilisation did, however, allow us to achieve an
overall reduction in the cost per loaded FEU
year-on-year.
Customer Focus
Something clearly illustrated by the congestion
challenges was the value of the investment we
have made in our customer facing organisation
and e-commerce systems support. Our people
made the difference, keeping customers updated
on the movement of their goods and finding ways
to expedite cargo through the problems being
incurred globally, reinforcing APL's reputation in
the industry for quality customer support and
service innovation.
Along with positive feedback from many of
our customers these attributes were formally
recognised early in 2005 with the Network
On-time Performance Award from the logistics
division of leading US-based retailer, Limited
Brands, with the Company specifically citing
the flexibility of APL in providing solutions to
work around market disruptions and
business challenges.
In 2004 we continued to refine and enhance the
range of tools and Web-based services we offer
customers, focusing our investment on areas
which provide them with tangible benefits.
The launch of our new Customisable Schedules
tool is a good example - another industry
first, allowing APL's customers to access the
Company's vessel schedules worldwide and
produce tailored electronic reports to suit their
business planning purposes.
Our investment and leadership in this area
continues to be recognised with industry and
technology awards. However, the greatest
endorsement is the increasing use of these tools
by customers, with the number of Internet-based
transactions at the end of 2004 up 94% on the
same time in 2003.
Looking Ahead
As we move into 2005, the outlook remains
positive. We see a stable market with strong
trade growth continuing.
However, behind the robust growth in 2005,
we will see congestion continuing, potentially
worse in some areas than in 2004, and ongoing
pressure on cost. Maintaining our focus on the
fundamentals while at the same time engaging
with our customers, industry and governments
to bring about much needed improvements in
the transportation infrastructure will be a major
challenge in the years ahead.
Beyond the pressures of supply and demand,
the on-going challenge for APL and the industry
as a whole is to meet the increasingly complex
transportation needs of our customers and
continue to flow their cargo efficiently. This is
a particular strength of our Company, and we
remain confident of APL's financial performance
in 2005.
Our success in 2005 will depend on three core
attributes: innovation, focus and discipline:
innovation to create solutions that provide value
for our customers; a sharp focus on strategic
opportunities to grow our business; and,
continued discipline on the basics - maximising
the use of our assets, optimising yield and
managing costs.
back to top
