Saturday, September 06, 2014

How Do You Define Permanent?

Yesterday, September 5th, Horizon Lines named a new “permanent” president. A good chuckle. This might be one of the shortest term “permanent”  presidents for a public company in years. Why make such a statement? Here’s the logic.

Prior to the rumors throughout our industry and in public about Horizon Lines selling its Puerto Rico line of business this year, Horizon Lines is, and remains, the largest Jones Act Carrier in the country. Click here for a recent article discussing Horizon’s current state. In the past 10 years, they have been sold at least twice, and have had to restructure their debt once at least, maybe twice. Net result, current shareholders are now debt holders. Subject to a fact check, we believe they haven't had a profitable year in about 5 years. To Hawaii, their ships are old and use really old technology which means they cannot compete cost-wise with the newer vessels that Matson and, to a lesser extent, Pasha now have.

There is plenty speculation among those active in the Jones Act shipping trade as to what the rumors about them selling their Puerto Rico properties and/or line of business means to other trade lanes, Alaska and Hawaii. When we polled our shipping company contacts, we could not get any responses to our questions concerning this. Nothing, not a word. Stonewalled. Someone had to know something!

Then a light bulb went off. Our experience buying other companies came in handy. The only reason we didn’t discover anything on the “coconut wire” was because every ocean carrier with Jones Act business was probably talking to them, and Horizon has good investment bankers who most likely put together Non-Disclosure Agreements with penalties if word were to get out. They must be worried that if it became public knowledge they are selling any of their remaining trade lanes, existing customers would start making deals with other carriers with whom they already have relationships. Neither the buyer or seller want that, so nobody is talking at all, except to say things like “Yes, it will be interesting to see what they do” or “I don't have time to speculate about these things, I'm focused on keeping our business and going after theirs”.

In Hawaii we have suspected for years that Horizon has some sweetheart deals with other forwarders. We’re quite certain those forwarders are watching in angst and may be in discussions now with either Matson or Pasha to try and minimize the impact of a change in carriers. The good news is, this potential change does not impact DHX - Dependable Hawaiian Express at all negatively. We pride ourselves in our outstanding quality of service and had eliminated Horizon as one of our service providers years ago due to the age of their ships among other things.

We speculate these deals are in the making and may be announced soon. Their new “permanent” president’s job may become one of deconstructing Horizon Lines and then liquidating what's left.

How permanent is that?

Monday, July 28, 2014

Horizon Lines Update

The following is an update to our blog published July 21, 2014. We’ve highlighted in red a passage pointing out that Horizon Lines, at some point, has plans to leave the Hawaii market. Our Managers don’t believe they’ll last long enough to sell it, unless it’s soon.

Debt-ridden Horizon Lines in talks to sell Puerto Rican assets to Crowley
Horizon Lines is reportedly in talks to sell off its facilities at the port of San Juan, as well as its ships and routes to and from Puerto Rico, to Jacksonville-based competitor Crowley Maritime.

Industry sources told Caribbean Business that Goldman Sachs is brokering an $80 million deal between Crowley and Horizon.

The talks for the San Juan port facilities and lines are reportedly part of Horizon’s plans to sell all three of its Jones Act routes — San Juan, Alaska and Hawaii — to different buyers for each of these markets.

Last year, Horizon posted more than $100 million in losses and the company has $700 million in debt, the company reported to the Securities and Exchange Commission.

Crowley is currently conflicting with the Puerto Rico Ports Authority over tax credits it wants to cover the estimated $100 million the company will need to invest in port facilities to receive two new ships, El Coquí and El Taíno, scheduled for delivery in the second quarter of 2017.

If Horizon does sell to Crowley, then Crowley could use Horizon’s docks without having to improve their own.

“If Crowley buys Horizon’s ports facilities, Crowley wouldn’t have to make the improvements. All they would have to do is move over to Horizon’s facilities at the dock,” one industry source said. “Crowley was expecting to get tax credits from Ports to make the improvements, but since the government is broke, the authority doesn't want to give Crowley tax credits for this investment.”

Monday, July 21, 2014

Will Horizon Lines Survive?

We have said for at least five years that Horizon Lines current business plan is a recipe for investor disaster. The older management at Horizon Lines could care less about their investors; this has become an issue of “every man for himself,” particularly in Hawaii where management ego and having a job to go to has become more important than longer term profit and survivability. This leads to the investors eventually losing out if/when the business folds.

The following article was written in and is found in the Journal Of Commerce:

Analyst: Horizon Lines faces debt crisis
Joseph Bonney, Senior Editor | Jul 14, 2014 11:35AM EDT

Horizon Lines will have difficulty refinancing its heavy debt during the next two years and may be forced to shed assets, a move that would shake up the Jones Act domestic trade, analysts from BB&T Capital Markets said.

“If Horizon Lines cannot refinance its debt obligations, which come due in 2016, we believe the balance of supply and demand will tip in favor of the remaining vessel operators” in the Jones Act trade, BB&T said in a research note.

“Our sense is Horizon will no longer be able to kick the can down the road because the company’s debt obligations keep growing, increasing at double-digit interest expense, and that Horizon will have to shed assets,” BB&T said.

Horizon skirted bankruptcy in 2011 with a refinancing that left the company with a heavy load of high-interest debt. BBT noted that the company has more than $100 million in interest debt obligations due in each of the next two years and more than $600 million due in 2016.

The company’s earnings before interest, taxes, depreciation and amortization were $95.3 million in 2013, and are expected to be only $85 million to $95 million this year, BBT said.

Horizon posted a GAAP operating loss of $8.6 million in the first quarter, compared with a loss of $4.3 million a year earlier.

“The company continues to incur debt to help fund operations, and as it struggles to turn a profit, we expect the debt load will rise and with an aging fleet in need of repair and overhaul and significant capex requirements, the ability to successfully turnaround the company is a challenge to say the least,” BB&T said.

Horizon’s ships have an average age of 37 years, making its fleet among the oldest of any liner company in the world. They compete in Puerto Rico, Hawaii and Alaska markets where competition is increasing and rivals are introducing modern ships.

Horizon’s future has been the subject of industry speculation since Sam Woodward, the company’s CEO, resigned June 27 with a year left on his contract. Board member Steve Rubin, principal of intermodal consulting firm InterPro Advisory LLC, was named interim CEO.

Rubin could not be reached for comment today.

Six former executives of Horizon and Sea Star Line were sentenced to prison in connection with a price-fixing scheme that began after Navieras exited the Puerto Rico market in 2002 and continued until federal agents raided company offices in 2008. Horizon, Sea Star and Crowley pleaded guilty to antitrust violations.

The market for carriers serving Puerto Rico’s depressed economy is “oversaturated,” BB&T said. Sea Star and Crowley have announced LNG-powered vessels that will compete with Horizon’s aging ships.
Horizon also faces challenges in the Hawaii market, where Pasha is introducing a second ship, and Alaska, where TOTE soon will have LNG-powered ships that unlike Horizon’s will comply with new emissions requirements.

The aging ships in Horizon’s fleet don’t comply with environmental rules that will require Jones Act domestic vessels to use LNG or low-sulfur diesel by 2020.

“Any way you slice it, Horizon Lines is looking at a significant capex spend the next couple of years just to bring all of the company’s vessels into compliance with current environmental laws,” BBT said.

BB&T said that with the carrier&rsquos competitive and capital investment challenges and $500 million in debt as of the first quarter, “it is hard for us to envision how Horizon turns things around.”

Monday, July 07, 2014

Shipping Lessons Learned

Although we’ve been DHX-Dependable Hawaiian Express (DHX) since 1982, in 1999 we joined the international freight forwarding industry as DGX with the assumption of the company was going under. With DHX we had historically focused on selling to shippers, however the beneficial cargo owners (BCO’s), for DGX were primarily other freight forwarders. We felt with time, our DGX customer base would eventually change and be made up of a few loyal forwarder partners, with more emphasis on customers who were shippers/BCO's.

Our study of the international forwarding community revealed that serving other forwarders as an NVOCC was a fruitless business. Many NVO’s had failed and been acquired by others, with their business folded into the business of the acquirer. So, our thrust was to build on the base forwarder business with BCO business. 15 years later we see we have failed in certain trade lanes, but made progress in others.

The question is how to turn those failures into successes.

In the meantime, We have learned valuable lessons:
  1. You cannot teach a domestic transportation salesperson the international business easily and rarely successfully. When you attempt to train, the salespeople want to sell what they feel comfortable with, and lots of what they sell in the domestic trade is based on value, that is how you differentiate yourself in the market plus a competitive price. When dealing with other forwarders, such as our international business was, selling is primarily focused on one thing - price, given that service between most NVO’s to the forwarders is relatively the same. So, when selling value to BCO’s and price to other forwarders, not only do the salespeople have to have an extended knowledge of the product to be able to sell to both forwarders and BCO’s, but their salaries and talents are minimized when selling to forwarders because their focus is based on delivering a cheaper price, as opposed to product differentiation and value.
  2. Selling to BCO’s for international import and export business requires not only product knowledge and differentiation, but also an infrastructure and expertise to support it. Where freight forwarders know the import /export rules and regulations, a BCO, depending on size, may not. So all the sales associates in your office need an in depth knowledge of your service. Basically, the BCO needs to rely on your expertise to protect and serve them. Add to this a domestic sales force that’s really not familiar with international freight and you do not get warm, fuzzy feelings of confidence if they go to an associate in the international business with a BCO question, and then get a response they do not believe is a knowledgeable, professional response. They feel exposed that they are placing their existing accounts at risk, and soon stop selling a service they don’t know and/or feel uncomfortable with.
  3. If management feels changing to a different customer base will hurt their area on the surface they may support the change on the surface only because leadership is pushing for it, but they probably are not expending energy to make it happen. During the time the change is being made, they will look lesser to themselves and the boss, so it is against their human nature to support something that may hurt them.
Many will talk the talk, but will not walk the walk. Possibly this group of managers does not have the expertise needed to teach their team because they have grown up serving other forwarders, and cannot figure out how to serve BCO’s.

A manager not wanting to look lesser, coupled with a lack of appropriate knowledge and/or abilities to teach what they have learned from years of experience, can potentially stop upper management’s thrust to a different type of customer base in its tracks.

So where do we go from here? We are always, hopefully, learning, changing and evolving. More to come on these challenges.

Tuesday, April 08, 2014

A Clean House

In our various offices and freight facilities, our standards have always included having/keeping a clean house, and ensuring it’s kept as clean as possible on a continuing basis. It’s an issue of pride in what we do, how we do it and our image in doing so. We want to be the best in everything we touch or are involved with. That’s why we were so happy with the results of a recent audit we had performed on us as part of our ongoing commitment to meet our food shipping customers’ needs.

The audit, called “Distribution Center Food Safety and Quality Systems Audit” received a 96.7 score out of a possible 100 points, indicating an outstanding outcome. Our operations management and systems management really have pulled together to ensure, on a consistent, continuous basis, we are taking appropriate measures to keep our facility clean and are surpassing current food shipping standards. This audit is performed annually at the request of certain customers, using an independent, outside third party with expertise in food handling and warehousing, and we are delighted with the results. To all of our Associates reading this - way to go! Thank you.

The audit was performed by Silliker, Inc., a Merieux NutriSciences Company, who works as a third party consultant in the food industry performing audits like the one performed for DHX - Dependable Hawaiian Express. A copy of the audit is available upon request by email: cammie.laster@dhx.com.

This is another way we like to point out the “Dependable Difference” to our Customers. Thank you for your support and your business!

Thursday, February 20, 2014

How competitive are the Hawaii/Guam Shipping Lanes?

A historical review of the Hawaii and Guam shipping lanes will show you there have never been three large ocean carriers shipping from the mainland to the Hawaiian Islands and Guam. Historically, there is Matson, and then there is Brand X - whoever it may be. Brand X is usually someone Matson “lets” into the trade because they see them as being a threat, but a manageable threat.

The last time Matson had a real competitor was in 1974 - I believe a company called Seatrain Lines. Seatrain Lines ran a Hawaii service from 1969 until 1974. They actually competed against Matson service-wise - so, when Seatrain Lines (which had a roughly 20% market share of the Hawaii Trade after being in the business five years) ran into financial difficulties, Matson acquired certain property improvements and rolling stock (keeping anyone else from getting them) and the competitor (Brand X) left in the trade was a weaker, more “manageable” ocean carrier, US Lines.

The winds of change are among us, and right now, nobody is talking. We do know that Pasha Group, the newest Hawaii ocean vessel operating carrier, did not renew their intra-island shipping permit, so they can no longer compete with Young Brothers on intra-island freight moves. Plus when their new vessel comes, they will not have the equipment available to service all the islands themselves in a timely manner.

We also know that Horizon Lines who evolved from US Lines into Sealand into CSX Lines and then into Horizon Lines has old, unreliable vessels which have a tough time staying on schedule given all the mechanical issues their old vessels have.

Pasha, after their new vessel (their second vessel) is operating, will only have one vessel that can take more than a small amount of containers. Between Pasha and Horizon Lines, I believe that sooner or later their managements will realize the benefits of working together, and try to solidify both of their strengths in one “not publicly offered” combined service when they are bidding for the business of steady, weekly or twice weekly shippers/consignees.

Matson will continue to maintain a roughly 70% market share (100% for Guam) until a serious competitor with lots of $$$ gets involved.

Frankly, I do not believe anyone else wants to/can take on Matson given the investment as well as the stiff competition.