A unique confluence of factors made 2008 a volatile year for NOL's core container shipping business.

APL’s services are central to global commerce and the daily lives of the world’s population. We are among the world’s best container shipping companies, with a business model that is acknowledged in our industry as being highly effective. The APL model is based on operational flexibility, high asset productivity, strong cost and yield management. It is underpinned by a culture of service excellence.

In early 2008, forecasts suggested that European and Asian economies would remain strong in 2008, with leading container shipping players continuing to record significant earnings. In the first half of 2008, APL delivered a performance that largely supported this positive outlook.

However, the second half-year was marked by an unprecedented confluence of negative factors. By the third quarter, global demand for container shipping services was falling precipitously, while bunker fuel prices peaked at around US$761 per tonne in July. This began to impact on the container shipping industry as a whole – with APL among the few players to remain profitable.

As the global economy moved toward recession during the fourth quarter, the shipping industry began to feel the impact. Vessel utilisations and core freight rates (excluding bunker recovery) fell. The Asia-Europe trade was particularly badly affected, with the high double-digit growth rates of the past couple of years giving way to volume contraction during the second half of the year.

Performance Summary

The full-year Core EBIT contribution of APL Container Shipping was US$73 million, down 83% year-on-year. This performance reflected arguably the toughest conditions in the industry’s history.

A fourth-quarter Core EBIT loss of US$84 million, due largely to dampened demand, foreshadowed challenging times ahead. Although the Group’s bunker hedging policy provided the intended protection on a full year basis, the fourth quarter was impacted significantly by costs related to fuel hedging settlements.

Container Shipping revenue reached a record US$7.95 billion, up 19% on the prior year. This was driven by a 5% rise in volumes carried and, significantly, by success in increasing fuel cost recovery, particularly in the Transpacific trade. APL’s work in managing fuel costs and establishing floating surcharges on customer contracts helped mitigate the effect of higher bunker prices.

Average revenue per FEU rose by 11% year-on-year to US$3,033. However, core freight rates came under extreme downward pressure in the fourth quarter. Despite the fall in fuel prices in late 2008, bunker costs during the last quarter were still, on average, 13% higher on a year-to-year basis, excluding bunker hedging factors.

In the fourth quarter, there was a rapid deterioration in demand across all trades. This, coupled with proactive capacity management by APL to reduce costs, led to a decline in volumes and fourth quarter revenues were down 2%.

Vessel utilisations averaged 89% for the year, down from 97% in 2007. Seasonal capacity reductions were compounded by worsening demand conditions in the fourth quarter when average utilizations dropped to 83%.

Downturn Counter-measures

In November, APL was the first major container shipping player to unveil wide-ranging changes to services and major capacity reductions across all key trade lanes, following the Group’s early recognition of indicators of market decline.

A prudent response was mounted. This included business-wide moves to reduce costs to a sustainable level. Personnel with experience of successfully managing through previous downturns were appointed to key roles.

As the year progressed, APL’s conservative approach to fleet and network management proved advantageous, allowing for a more flexible and aggressive approach as the Group adjusted its capacity deployment to reflect fast-changing demand conditions.

APL moved to reduce vessel capacity in Asia-Europe trades by 25%, in the Transpacific by 20% and Intra-Asia by 16%, including measures taken as part of the New World Alliance group of carriers. The capacity reductions put in place will lower NOL Group’s annual vessel network costs by about US$200 million. However, the decisive actions taken could not fully counter the speed and dramatic nature of the downturn which occurred in global container trades.

Trades in Focus

In 2008, the Asia-Middle East and Transpacific trades contributed 35% and 33%, respectively to APL’s overall volume mix, reflecting proactive management of the trade mix in order to maximize yield. The mix for Latin America (8%), Asia-Europe (18%) and the Transatlantic (6%) remained unchanged year-on-year.

In the Americas, Transpacific volumes fell marginally (1%) for the full year with weaker headhaul liftings somewhat offset by increased backhaul demand. A total of 9% more freight was carried in the Latin American lanes in 2008. Average revenue per FEU for the Americas increased by 15% for the full year and 29% in the fourth quarter, reflecting increased bunker recoveries. However, the Transpacific and Latin America trades recorded volume drops of 25% and 16% respectively in the fourth quarter, largely a product of the ongoing malaise in the US economy.

The trades touching Europe (Asia-Europe and Transatlantic) posted a full-year 2008 rise in volumes of 5%, driven by high demand in the first three quarters of the year. Again, this growth was checked by a 13% decline in the fourth quarter.

Despite the global economic decline, Asia will remain the engine of trade growth in the long term. Intra-Asia trades were NOL’s largest and fastest growing in 2008. In the first half, the Intra-Asia contribution somewhat compensated for the faltering performance in other trades.

In the latter part of 2008, there was a similar story of decline in both volumes and revenues – with the long-leg trades between Asia and the Middle East increasingly the focus of competitive pricing pressures and an oversupply of capacity.

The market for refrigerated (or "reefer") container shipping services continued to expand over 2008. More mature markets such as Japan, the UK and the Netherlands remained steady, while emerging markets such as China, India, Russia and Australia were areas of growth. As well as serving the traditional frozen reefer trade, APL’s expertise in specialised value-added services such as cold treatment and controlled atmosphere supported diversification and enabled more extensive carriage of fresh produce.

Customer Service Excellence

While APL reconfigured its global service network and reduced capacity, it continued to design and deploy reliable and efficient services throughout 2008. Given the cost and demand environments, there was an increased focus on ensuring all services were cost effective while continuing to serve our customers.

In 2008, APL received several ‘best shipping line’ accolades, including Asian Container Shipping Line of the Year at the 10th Lloyd’s List Asia Awards in Singapore and Shipping Line of the Year at the Supply Chain Asia Logistics Awards in Shanghai for the second year running. APL was also named Dry Cargo Company of the Year at the Lloyd’s List Middle East Awards in Dubai. This included companies from all categories of dry cargo vessels, not just container ships.

In December, the Group announced that its Asia-wide container shipping business would be coordinated through two regions – North Asia and South Asia – rather than the previous three regions.

The structuring of Asian operations around two key regions supports efforts to place NOL’s cost base on a more sustainable footing, while enabling closer coordination of activities in adjacent countries. This will ensure the Group continues to provide the highest standards of service to its many customers whose supply chains touch Asia.

Continuing Leadership

In 2008, the Group cemented its reputation as a leading voice on key issues affecting the industry. NOL also continued to be well represented at the industry’s major forums.

During the year, Ronald Widdows was reappointed Executive Committee Chairman of both the Westbound and Transpacific Stabilization Agreement research and discussion groups. Mr Widdows also became Chairman of the World Shipping Council – the Washington DC-based organisation that aims to provide a united voice for the container shipping industry in its work with policymakers and other transport-related industry groups. Mr Widdows was also honoured with the Distinguished Leadership Award for Excellence in Maritime Security in the United States and was named "Newsmaker of the Year" for his contribution to the industry by leading industry newspaper, Lloyd’s List.

In September, Eng Aik Meng succeeded Ronald Widdows as the global head of the APL business, following Mr Widdows’ appointment as NOL Group President and CEO. Mr Eng was previously Senior Vice President of APL’s Intra-Asia business from 2002 to 2007.

In 2008, NOL contributed actively to the Container Shipping Information Service. This service was launched early in the year by the world’s top container shipping players, to provide an authoritative information source on the container shipping industry.

Looking Ahead

While it is difficult to predict the depth and duration of the global economic recession, it is clear that conditions will be highly challenging for APL and for the shipping industry as a whole in 2009.

In the long term, container shipping remains a compelling industry. It is the backbone of world trade and an integral part of the global economy. The need for APL’s high quality services will continue to grow, despite current conditions. The aim is to seize opportunities as they arise, and chart a more rewarding course as markets improve.