Horizon Lines is discontinuing its money-losing trans-Pacific service, a route that sought to sail in a niche market underneath the scope of larger container lines by linking the U.S. West Coast with Guam and China.
The last eastbound voyage on Horizon’s trans-Pacific service is scheduled to depart Shanghai on Nov. 2. The final westbound sailing to Guam and surrounding islands is set to depart the West Coast on Nov. 10.
The company, in the midst of a broad restructuring after steep financial losses in the past year, said it expects to cease all operations related to its trans-Pacific service during the fourth quarter and will seek the subcontract the five chartered ships it has used in the service.
Horizon’s exit from the Guam trade will leave Matson Navigation as the only U.S.-flag carrier between the U.S. mainland and Guam.
Horizon launched its trans-Pacific service last December after Maersk Line did not renew a take-or-pay agreement under which the Danish carrier had chartered space on the eastbound backhaul of Horizon’s U.S.-flag domestic service to Guam.
The decision ends a niche service in which Horizon sought to provide fast transits using five chartered ships with nominal capacities of 2,824 20-foot-equivalent units. The China service operated from Ningbo and Shanghai in China to Los Angeles and Oakland, with westbound service from the West Coast to Guam, Micronesia and the Northern Marianas.
Horizon’s China-to-U.S. service debuted just as trans-Pacific rates began tumbling amid rising capacity. Horizon said it met volume and vessel utilization goals but that low rates and rising fuel prices made the service unprofitable.
Trans-Pacific spot rates from China to the U.S. have fallen more than 47 percent in the last 12 months to approximately $1,500, the lowest level since the 2008-2009 recession. Bunker prices have risen approximately 40 percent since December.
Horizon said an expected surge in Guam cargo from a planned military deployment from Okinawa was delayed by budget crises in Japan and the U.S. and revised Japanese priorities after the earthquake and tsunami.
The company said its trans-Pacific service produced negative adjusted earnings before interest, taxes, depreciation and amortization of approximately $43.7 million for the nine months ended Sept. 25, with additional losses expected through the rest of this year.
The company said it will classify the service as discontinued operations and expects to record a pretax restructuring charge of between $105 million and $110 million in its current quarter. The charge includes estimated costs to return excess rolling stock equipment, facility closures, severance, and vessel charter expense, net of estimated sub-charter income.
CEO Stephen H. Fraser said the decision to exit the trans-Pacific was “a very difficult decision” but “will allow Horizon to focus on our core domestic ocean shipping services, and provide the opportunity to produce a more profitable and stable financial performance over time.”
“We do not expect any measurable improvements in fuel prices, the freight-rate environment or in this trade lane for the foreseeable future,” said Brian Taylor, executive vice president and chief operating officer. “Growing capacity continues to outpace demand and the forecast for 2012 calls for more of the same.”
Taylor said exiting the China and Guam markets “will allow us to focus all of our resources on serving customers in the very solid domestic ocean markets in Alaska, Hawaii and Puerto Rico.”
Horizon is the largest U.S. domestic ocean carrier. The company recently completed a $652.8 million refinancing that averted bond defaults threatened by the fallout from Horizon’s guilty plea last March to an antitrust violation for price-fixing in the Puerto Rico trade.
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