Sea Containers to Restructure Ferries Division

Friday, November 04, 2005
Sea Containers Ltd., the transport group engaged in marine container leasing, manufacturing, depot and logistics operations, railways operator, ferry operator and leisure industry investor, issued a statement today about a major restructuring of its ferries division and other matters. Background The company's ferries business is composed of three units. The largest is Silja Oy Ab, the Finnish based leading Baltic operator of cruise ferries, ro-pax ships, fast ferries and cruise ships. The second is the company's car-carrying fast ferries business with 9 ships operating in European waters other than in the Baltic. The smallest unit is SeaStreak, the New York based commuter ferry service operating between New Jersey ports and Manhattan. In 2005 the profits of Silja have declined significantly, due to a combination of higher fuel costs which could not be recovered except on services to Estonia, the unsuccessful m.v. Finnjet operation between Germany, Estonia and Russia, reduced profits from duty free sales and overcapacity in the Swedish market introduced by competitors. However, Silja still remains the leading operator in its region with an excellent brand name and reputation for quality, with its core business remaining profitable. The company's car-carrying fast ferries incurred losses in 2005, due in large measure to high fuel prices. The ships burn light fuel which has doubled in price over the 2004-2005 period and it has been impossible to recover the extra cost through fuel surcharges. Other factors have impacted earnings. The ferry routes between France and England across the English Channel have suffered from declining passenger and car volumes, excess capacity and reduced profits from low tax merchandise sales. The company's subsidiary, Hoverspeed, operates between Dover and Calais in the English Channel. SeaStreak, operators of services employing 7 foot-passenger only fast ferries on three routes between New Jersey and Manhattan has also incurred a loss in 2005 due largely to high fuel costs. Passenger fares are being steadily increased to recover the extra cost but the market will only absorb such increases to a certain level before switching to cars, buses and trains. In light of the situation described above, the board of Sea Containers met on November 2, 2005 and has decided to take measures that should eliminate or greatly reduce the operating losses being incurred. In the case of Silja Oy Ab, the company has decided to entertain offers to buy the business. Societe Generale has been appointed to conduct a controlled auction of Silja. In order to restore Silja's health, a number of steps are being taken to improve operating results. These are: 1. The cruise ship m.v. Walrus will be sold preferably or if sale cannot be achieved on satisfactory terms, it will be chartered out. The ship has recently ended a long term charter and is having off-hire rectifications at charterers' expense in Singapore. 2. The Swedish flag cruise ship, m.v. Silja Opera will be sold preferably or if sale cannot be achieved on satisfactory terms, the ship will be chartered out for operation outside the Baltic without high cost Scandinavian manning. The ship will operate in the Baltic until February, 2006, relieving the ships Silja Serenade and Silja Symphony which will be undergoing three year surveys and docking at that time. Silja regrets the loss of the Silja Opera which has established a good market following, but trade unions have been slow to allow manning conditions which would enable the vessel to continue to operate in the Baltic. 3. The m.v. Finnjet has left the Baltic and is currently on charter to Louisiana State University Health Science Center through FEMA, based in Baton Rouge, Louisiana. This vessel will not return to the Baltic. The vessel will be offered for sale, or failing sale on satisfactory terms, it will be chartered out. If chartered out, the ship's diesel engines may be increased in power to allow 24 knots service speed which prospective long term charterers have requested. The ship's hull was built for a 30 knot speed using a combination of diesel engines and gas turbines but gas turbine operation is prohibitively expensive in light of today's high costs for light fuels. 4. The ro-ro ship m.v. Starwind has been sold for $5.4 million in the fourth quarter, close to her book value. 5. Silja's three SuperSeaCat fast ferries will be reduced to two for operation between Helsinki, Finland and Tallinn, Estonia. Financial performance will be improved through better manning arrangements and other operational measures. The third SuperSeaCat will be returned to Sea Containers for deployment in the Mediterranean in 2006. 6. Silja's flagship service employing state of the art vessels Silja Serenade and Silja Symphony, each with 2,852 beds, will be given a $12 million upgrade to freshen the product and increase their profitability. This upgrade will be financed with asset sales or through mortgages on these assets. 7. Silja's largest vessel, m.v. Europa, will continue to operate on the Turku-Stockholm and Turku-Kappelskar routes together with m.v. Festival which operates between Stockholm and Turku. Silja currently also operates two roll-on, roll-off ships on the Turku-Stockholm route and these vessels are capacity constrained. 8. Silja will be reducing its staff and offices in Finland, Sweden and Germany, including up to 150 shoreside jobs at a cost of up to $10 million, achieving annual savings of approx. $18 million. Additionally, an action plan for improved internal cost efficiencies is being implemented to achieve further annual savings of $10 million by the end of 2007. 9. A restructuring charge of $70 million in connection with the plans outlined above will be recognized in the fourth quarter of 2005. It is expected that underlying debt or more will be achieved on asset sales. The cash component of the restructuring charge will be $10 million or less. In summary, Silja is being reduced to its core business of 8 vessels operating on three routes. Silja's EBITDA for 2004 was $70 million and for 2005 after absorbing $22 million of extra fuel costs it expects to achieve EBITDA of $39 million (excluding restructuring costs). EBITDA is expected to improve in 2006 and 2007, assuming fuel remains at today's costs and excluding restructuring charges. It is not possible to predict the sale price for Silja. Car-carrying fast ferries The company owns or part-owns 9 such ships. One SuperSeaCat is on long term profitable charter. Two of the vessels are operated in the Adriatic in a 50/50 partnership with the Mediterranean Shipping Company group. It is planned to put a fourth vessel owned by Sea Containers into the partnership from 2006. The company also operates fast ferry services in the Cyclades Islands in Greece in 50/50 partnership with the Eugenides Group. It is planned to introduce a second vessel into this trade in 2006. Sea Containers is no longer able to support Hoverspeed's losses on the English Channel so it will not operate the Dover-Calais route in 2006 or thereafter. Hoverspeed has commenced consultation with staff as required by labor law, which will result in a significant number of redundancies. A restructuring charge of $15 million will be established to cover the closure of Hoverspeed's Dover-Calais services. Two of the company's car-carrying fast ferries are older than the other ships and were built to a different construction code than applies to newer vessels. These two vessels are currently laid up awaiting charter or sale. Some countries (but not major ones like the U.K., France and Italy) will not permit vessels built to the older code to operate to their ports, thus reducing the company's range of deployment possibilities. The company has determined, therefore, to reduce the carrying value of the two vessels built to the earlier code by $19 million in total and to sell the ships in due course. Two sister ships built to the latest construction code are employed in joint ventures in the Mediterranean where they will remain, however, the board has determined to write them down by $15 million to estimated current market value. Despite the re-deployment or sale of car carrying fast ferries it is unlikely that this business will cover its full costs in 2006 unless either fuel prices decline or fuel surcharges can be collected to cover the high fuel costs. However, this deployment is expected to improve significantly the operating results from the car carrying fast ferry fleet in 2006. The company will no longer operate any of these ships itself but instead will charter them out to joint ventures or other operators. SeaStreak The company has decided to entertain offers to buy this business. In the meantime an action plan is being implemented to increase prices to recover the extra fuel costs, to close the South Amboy to Manhattan service and take a related charge of $2 million and to have the owners charter-out or lay up the two older vessels engaged in this service. SeaStreak time charters the vessels from local owners as required by the Jones Act.
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