APL delivered a solid financial and operational performance, consistent with our commitment to being a leader in our industry.

Industry concerns of a slump in demand and a chronic oversupply of capacity failed to materialise in 2006. Bearish market expectations caused industry pricing behaviour that negatively impacted freight rates in most trades.

However, demand exceeded industry expectations across many trades. APL reported healthy growth in total container volumes of 8%.

KEY PERFORMANCE INDICATORS
In 2006, APL continued to focus on service to our customers, improving vessel on-time reliability and embarking on a “Service Excellence” initiative that will have a fundamental impact on our delivery capabilities going forward.

We also continued to evaluate performance against key measures such as revenue per FEU, liner network utilisation, cost per FEU, trade lane P&L, trade mix; cost mitigation; and fuel consumption and cost recovery.

Ship utilisation across our global network averaged 96% in the headhaul direction, which was in line with 2005.

Demand during the peak shipping season was very strong with utilisation levels reaching 99% on the Transpacific and Asia-Europe trades.

In addition to softening rates in some trades, fuel price increases impacted margins across the industry in 2006.

APL’s fuel costs were US$237 million higher than in 2005. Between 2003 and 2006, higher bunker costs and land transportation fuel surcharges have added more than US$500 million to APL’s cost structure.

There was a 2% year-on-year increase in total costs per FEU. Excluding higher fuel prices, APL’s overall costs per FEU in 2006 were 3% lower. This reflects our ongoing focus on network configuration improvements, fuel efficiencies and better equipment management.

TRADE LANE INSIGHT
We continued to manage our business mix to ensure we carry cargo that provides the maximum yield.

At 3%, overall growth in the Transpacific was in line with 2005, and reflected the continued strength of demand for Asian imports in the US.

Strong demand conditions in Asia-Europe fuelled by the ongoing sourcing shift and the Euro’s strength relative to Asian currencies, resulted in overall volume growth of 8%.

Demand for our services was particularly strong in the key longhaul trades with Transpacific eastbound volumes growing by 12% and Asia-Europe westbound by approximately 17%.

Our Latin America trade showed growth of 18% year-on-year.

Intra-Asia also continued to grow well, with volumes 14% higher than in the prior year.

STEADY GROWTH OF CAPACITY
APL adopted a measured approach to capacity expansion, which increased by only 6% in 2006.

A total of seven vessels will be delivered in 2007, representing a rise in capacity of about 10%. Going forward, APL will make more vessel commitments in response to market conditions and customer needs.

LINER NETWORK ENHANCEMENTS
New vessels and service patterns were seamlessly introduced in 2006. China’s importance was illustrated in new connections with Vietnam, Australia and both coasts of the US. There were important feeder service enhancements in Europe and connections between the US and South America.

As a member of the New World Alliance, we expanded our service cooperation with the Grand Alliance in 2006 in Asia-Europe, and with the launch of a new Asia-US East Coast offering.

In 2007, we are planning more joint services in response to customer demand, including a ground-breaking all-water loop between South East Asia and the US East Coast via the Suez Canal.

TERMINAL AND EQUIPMENT UPGRADES
Our container handling facilities in key locations enhance our ability to run a tight network and meet customers’ freight delivery needs.

In the US, there are plans to expand our Los Angeles, Oakland and Seattle facilities in anticipation of strong cargo growth.

In early 2007, a capital program for our Vietnam International Container Terminal in Ho Chi Minh City was announced that will double handling capacity to 900,000 TEU (twenty-foot equivalent unit) by 2008.

We also announced plans to create a container terminal at the fast-growing northern China port of Qingdao, which is already a key hub for APL’s services to northern China.

We are committed to investing substantially in both dry and refrigerated (reefer) containers.

APL’s perishables business continued to grow in 2006 with a rise in global demand for products from origins such as Australia, South America and the Philippines.

We also continued to be a leading provider of global transportation services for the US Government.

LEADING INDUSTRY CHANGE
In 2006, APL demonstrated its leadership in areas of importance for the container transportation industry. This included a call to action on the perils of transportation infrastructure congestion; the reinvigoration of key industry bodies such as the Transpacific Stabilisation Agreement (TSA); supply chain security; as well as thought leadership on issues affecting emerging markets such as India and Vietnam.

Infrastructure congestion moves up the agenda
Tangible progress was made in galvanising action on the challenges posed by transportation infrastructure congestion – particularly in the US.

APL first highlighted this issue in 2004 when a labour shortage at US West Coast ports brought containerised trade to a near standstill.

Three years on, an integrated Freight Transportation Policy is on the US Government’s agenda and public and private sector stakeholders are actively discussing how best to progress and fund important infrastructure projects.

However, much more work is needed.

In the longer-term, a fundamental shift in the way containerised cargo is transported throughout the world is required. APL is actively working to create products that meet the customer need for higher levels of confidence that cargo will be delivered reliably to global markets.

TSA Revamp
The TSA is a voluntary discussion and research forum of 11 major container shipping lines – including APL – that serve the trade from Asia to the US.

In late 2006, the TSA placed management of the agreement in the hands of four member carriers, who formed an Executive Committee with APL Chief Executive, Ron Widdows, as its Chairman.

Today, the fundamental aim of the TSA is to inject new energy, ideas and commitment to meet the needs of shippers in the world’s most dynamic trade lane.

Supply chain security
Supply chain security remained a top global priority for APL in 2006.

APL, the Port of Seattle and numerous public safety agencies completed a comprehensive test of security procedures at the port to respond to an emergency such as a terrorist threat.

We also called on like-minded countries to work together to find the best way to make international trade more secure at the Asia Pacific Economic Cooperation Symposium on Total Supply Chain Security.In early 2007, US Customs and Border Protection appointed Earl Agron, APL’s Vice President of Security, to a key Departmental Advisory Committee.

Pioneering research
APL continued to put innovative new thinking into all parts of its business. This included pioneering research and trials on several ships into a new approach to vessel maintenance.

The research demonstrates that ships should only be docked when necessary and could drive changes to statutory rules, which have governed the shipping industry for many decades.

Emerging markets leader
While we created advantages for our customers in new emerging markets such as South America and Eastern Europe in 2006, Asia continued to be the focus of global economic activity.

Our well-established presence in key sourcing markets such as China, India and, increasingly, Vietnam helped APL and our customers find new growth opportunities in 2006.

Greater China continued to be the main engine of growth for APL in 2006. But there was also strong growth from India, whose potential as a manufacturing and consuming market was reflected in our 2005 decision to create the South Asia region as one of our five regional management units.

We also established wholly-owned operations in Vietnam in late 2006 and are well positioned to service Vietnam’s expected trade growth, following its accession to the World Trade Organisation in January 2007.

LOOKING AHEAD
Driven primarily by outsourcing of manufacturing to Asia, we expect containerised trade to continue to grow at a faster rate than the world economy in 2007. There are indications that continued robust demand and a moderation of container fleet capacity growth may lead to improving market conditions.

There is also evidence that major lines will adopt a more cautious and disciplined approach to capacity management and freight rate negotiations in 2007.

However, cost pressures – particularly from high fuel and landside transportation costs – will continue to be considerable in 2007.