Horizon Lines Terminating Puerto Rico Operations
Horizon Lines announced that it would cease providing liner service between the U.S. and Puerto Rico by the end of 2014 due to continuing losses without the prospect of future profitability.
Sea-Land Service, Inc. ("Sea-Land") pioneered the marine container shipping industry and established Horizon Lines' business on April 26, 1956, when the vessel Ideal-X sailed from Newark, New Jersey to Houston, Texas. Sea-Land introduced container shipping to the Puerto Rico market in 1958, which Horizon Lines has continued to the present.
"We have a 56-year history in the Puerto Rico trade and truly value the relationships we have established," said Steve Rubin, President and Chief Executive Officer of Horizon Lines. "Unfortunately, a combination of factors, including uncertain prospects for the Puerto Rican economy, losses over recent years and more expected going forward, aging ships that we cannot afford to continue to maintain or replace, and upcoming large capacity additions by two other carriers has led to this difficult but prudent and necessary decision."
In Puerto Rico, Horizon Lines has incurred substantial cumulative losses and negative cash flows in recent years, despite ongoing efforts to remain competitive. Horizon is currently serving the trade with two vessels built in the early 1970s that have become increasingly costly to operate and expensive to maintain. As recently as 2012, Horizon operated four vessels, but the Company had been forced to remove two vessels from the Puerto Rico service due to prolonged falling demand and the need to cut costs.
As an example of the challenges this aging fleet has posed, last month the Company chose to cease operating its Horizon Discovery in the Houston to San Juan trade route and has entered into an agreement to scrap this vessel. The Horizon Discovery built in 1968, would have required substantial expense to dry-dock for maintenance as required by federal law. The two vessels Horizon Lines presently operates in the trade are both required to be dry-docked similarly during 2015 at an estimated combined cost of $16-20 million. Furthermore, other carriers are scheduled to introduce four new, efficient vessels into service that will greatly expand capacity, further burdening Horizon Lines' current, limited ability to offer ongoing service that can remain competitive.
Operations of the Puerto Rico service will be curtailed in a careful and orderly manner. The Company will cease liner service for domestic customers by the end of the year, however San Juan terminal services will continue to be provided into the first quarter of 2015. The Company will work closely with customers to assist them in identifying service alternatives.
The Company is expected to incur restructuring charges between $90 million to $100 million related to terminating its Puerto Rico operations. These charges include the cost of employee severance and termination benefits of $35 million to $45 million and costs of $55 million primarily related to equipment impairment and contract termination costs. Approximately $85 million to $95 million of the charges are expected to result in cash payments. These costs are preliminary estimates and are subject to change.
"On behalf of our entire Board and management team, I want to express our deep appreciation to our employees, customers, vendors, union partners, and the citizens of Puerto Rico for their efforts and support over the years," said Mr. Rubin. "During my short tenure as CEO we have made tough decisions to try to restore profitability in the hopes of continuing the service. In addition, management had explored several other strategic options in an attempt to maintain a presence in Puerto Rico, however none proved to be possible. This decision is a very painful and difficult one for all of us, but it is the only viable course of action for our Company given the circumstances."
Horizon Lines, Inc. also announced today that it has entered into definitive agreements for a series of transactions that will result in the sale of the entire company, the first being the sale of its Hawaii business to The Pasha Group ("Pasha"), followed by Horizon Lines, Inc.'s subsequent acquisition by Matson, Inc. ("Matson") (NYSE: MATX).
Horizon Lines' decision to terminate its Puerto Rico service is independent of those transactions, and the Company intends to cease operations between the U.S. and Puerto Rico whether or not the transactions with Pasha and Matson are consummated.