APL is a world-class liner shipping business and NOL’s chief earnings driver. It has a strong market position and tremendous growth potential. APL also provides the foundation for the future development of our Logistics and Terminals units.

In an environment of escalating operational costs, with fuel prices at historic high levels and rising land transportation costs, and with the industry overall struggling to remain profitable, APL exceeded expectations.

APL’s sustained success is built around a business model – with its intense focus on yield, service excellence, high asset utilisation and cost management – that is an acknowledged benchmark for optimising profitability across the shipping cycle.

In 2007, APL’s operational performance and contribution to Group earnings placed it in the upper echelons of its sector.

Revenue for the year was US$6.65 billion, up 16% over the prior year. EBIT grew by 72% from US$260 million to US$446 million. An EBIT margin of 6.7% was reported.

Over the course of the year, an upward trend for freight rates prevailed. This was reflected in fourth-quarter average revenue per FEU of US$2,865, 11% higher than the same period in 2006.

Operationally, 2007 was a year of records. Volumes reached an all-time high of 2.4 million FEU, up 12% across all trades.

Rigorous cost management underpinned APL’s excellent performance in 2007, despite the very significant increase in bunker fuel prices over the course of the year. Excluding bunker rises, APL’s costs per FEU remained flat.

The Group has affirmed the strategic need to increase the scale of its Container Shipping business. This will allow APL to cater for expected strong global demand growth, while maintaining the Group’s clear focus on profitability.

In 2007, we began an accelerated organic growth phase for Container Shipping and moved to expand our fleet capacity.

For example, NOL made its biggest-ever capital investment in ships by committing more than US$1 billion on orders for eight 10,000 TEU (twenty-foot equivalent unit) capacity vessels. The ships will be among the fastest and most environmentally advanced in marine history when they enter the Asia-Europe trade.

The investment in new ships is closely aligned with growth initiatives in our Terminals business unit. For example, NOL was last year part of the consortium which secured a concession at the Port of Rotterdam’s Maasvlakte 2 facility.

The Group also made major capital outlays on new equipment during the year, including more than 6,000 specialised refrigerated containers (reefer) to cater for the fast growth of our global reefer business. In addition, we took delivery of more than 70,000 dry boxes.

Several new services were launched and our existing portfolio was improved across all trades. For example, the burgeoning Indian market was better served with the enhancement of our China India Express and India America Express services.

Moreover, with our New World Alliance (NWA) partners we announced a major upgrade of ship capacity and enhanced port coverage of the South China Express service. The Alliance has begun to phase in eight vessels with capacity ranging from 8,100-8,500 TEU, of which APL will be contributing four ships.

Customer feedback and challenging operating conditions were the catalysts for a series of innovations in 2007.

APL launched the world’s largest ocean-capable shipping container, branded “Ocean53™”. The 53-foot container has become fundamental to domestic intermodal transportation in the US since it was introduced by APL in 1989, but laden 53s were previously not strong enough for ocean transits. Our strengthened boxes allow more cargo to be transported directly from Asian factories to US stores.

The new containers offer 60% more capacity than standard 40-foot containers. Major US retailers were quick to recognise the advantages of “big-box economics”. Ocean53™ also has a positive environmental impact. The bigger boxes cut down on cargo trans-loading and the number of truck moves, so traffic and exhaust emissions are reduced.

With the launch of the ground-breaking Suez Express (SZX) service, APL delivered an answer to the global freight congestion crisis. As container volumes grow and the transport system becomes overburdened, shippers are finding it harder and harder to eliminate variability from their supply chains.

The weekly service provides the industry’s fastest transit times from Asia to the US East Coast through the Suez Canal. Importantly, it offers dependable access to the US East Coast from multiple Asian origins at a time when other transport alternatives are becoming increasingly congested.

The US-flagged SZX has also added significant value to APL’s US Government business, which performed exceptionally well in 2007. In this segment, revenues and volumes rose significantly.

Our US-flag business received a welcome boost at the end of 2007 with the announcement of an agreement to train US maritime academy cadets aboard our internationally flagged containerships.

Robust demand was experienced in each of APL’s largest trade lanes – the Transpacific, Intra-Asia and Asia-Europe.

Transpacific volumes rose by 14% year-on-year. Headhaul growth in the trade was 5% compared to 1.6% in 2006. Soaring bunker costs and challenging market conditions led a number of Transpacific carriers to withdraw capacity.

Moderating growth in eastbound Transpacific traffic was compensated for by robust growth in the Transpacific westbound and expansion in other trade lanes such as Intra-Asia and Asia-Europe.

Asia-Europe volumes rose by 3% year-on-year. The highlight for this trade was the rate restoration achieved over the year.

Intra-Asia continued its trend of rapid growth driven by increased Asian demand for Asia-made goods. APL’s Asia/Middle East volumes rose by 17% over the prior year.

Some two-thirds of global container trade volumes originate or terminate in Asia – with Intra-Asia now the world’s largest trade. We expect this growth to continue. Our company’s strength and expertise in Asia places us at a considerable advantage, which we will continue to leverage.

The performance of our Latin America trade was solid. Volumes grew, supported by several service enhancements.

Challenging westbound conditions in the Transatlantic, created by weaker demand and overcapacity, were offset by strong eastbound growth – fueled by the softer US dollar. The effect of these changes has been to make the Transatlantic a balanced trade.

We continued to improve our Transatlantic offering by, for example, connecting the fast-growing Egypt market with the US East Coast with market-leading transit times.

The container shipping industry continues to face major challenges. APL has taken a leading role in addressing industry issues including transportation congestion in the US and globally.

A serious issue faced in 2007 was cost inflation – particularly for fuel, which is APL’s single largest operating expense, accounting for more than 50% of the cost of a ship voyage. The fuel issue was felt most acutely in the Transpacific, where contracts have traditionally not contained bunker recovery measures.

APL was one of the few carriers to remain profitable in the Transpacific in 2007. Decisive actions such as our move, along with our NWA partners, to reduce capacity earlier than ever before ahead of the slack winter season ensured we managed costs effectively, despite historically high fuel prices. Allied to the reduction of capacity, APL continued to keep a tight focus on variable costs. Disciplined bunker hedging actions implemented at the beginning of the contract year had a positive impact.

We also decided, along with NWA partners, to deploy more ships on selected services in the Asia-Europe trade and to run them slower as an important fuel-saving measure.

The members of the Transpacific Stabilization Agreement, which APL chairs, have called for rate increases and full floating bunker charges in Transpacific contracts. Early interactions with customers were positive and carriers have shown a strong commitment to cost recovery. A clear understanding of the financial pressures our industry faces and the need for lines to make adequate returns, in order to maintain the service levels that customers demand and to reinvest in assets to support future growth, has been established.

Industry dynamics began to shift somewhat in 2007. Traditionally, conditions have been driven by market perceptions of supply and demand – that is, if space was tight, rates went up; if there was too much space, rates fell. However, there are signs that the cost environment and carriers’ increased focus on profitability are beginning to reduce the overwhelming influence of perceived supply and demand as the key industry bellwether.

APL’s ability to obviate the more extreme fluctuations of container shipping cyclicality – clearly demonstrated over recent years – will be challenged further in 2008 by a possible slowing of the US economy and a tougher cost landscape. Service integrity will be challenged by growing terminals and transport infrastructure congestion, particularly in Europe, and by the trend toward slower vessel speeds to reduce fuel costs.

However, following another very successful year, our Container Shipping business model and our strength across the booming Asia region sees us well placed to sustain our success.