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.”

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.”

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.