Shipping Horizons

The news in North Pacific shipping this year was the morphing of CSX Lines-which had itself transformed from Sealand Services, Inc. a few years earlier-into Horizon Lines LLC, bankrolled to the tune of about US$300 million by the Washington-based private investment firm, Carlyle Group.

The Carlyle Group is known for clever but prudent investments, and analysts wondered why they'd picked up CSX's shipping division with its reputation for plying low-margin routes with an expensive, aging fleet of vessels.

Horizon operates under the U.S. law called the Jones Act, which allows it to serve multiple U.S. ports-and prohibits the same to non-U.S. owned and crewed ships. It services routes from the mainland U.S. to Puerto Rico, but is most active on the U.S. west coast, from Los Angeles as far north as Alaska. It also makes calls from the West Coast to Hawaii, Guam and to Saipan, Tinian and Rota in the Northern Marianas.

There are expansion plans as well. The terms of the sale included a non-compete agreement with the Swedish shipping and petroleum firm A.P. Moller-Maersk, but that expires at the end of 2004.

The other strategy is to grow cargo volume which it has been able to do with its deployment of state-of-the-art technology. For instance, 73 percent of the company's cargo bookings are done on line (www.horizonlines.com). It has its own IT subsidiary, Horizon Services Group, which provides customers with software for container loading and inland operations. Another of its projects is www.shipmyvehicle.com, which allows customers to book auto shipping to anywhere in the world. In fact, 90 percent of the bookings are done for lines other than Horizon, which processes hundreds of reservations a week.

In the north Pacific, Horizon's most prominent competitor is the Matson Lines. The two lines compete directly in the Honolulu and Guam markets. Matson spokesman Jeff Hull says, "Matson's been in the Hawaii market since 1882, so we have long-term relationships with our customers." Hull says he thinks Matson has advantages in Hawaii because it serves all the island ports with its interisland service, while Horizon only calls at Honolulu. "Frequency is a competitive issue too and there's a Matson arrival in Hawaii every other day." In Guam, both shippers have once-a-week arrivals, but Hull says the 10-day transit time between Oakland, Calif. and Guam is an advantage over Horizon.

Matson will have a fleet advantage soon too. Hull says Matson is building two new container ships at the Kvaerner-Philadelphia shipyards. "We have eight ships in the Hawaii service and two will be retired once the new ships start service."

Even though the Carlyle Group has projected it will increase Horizon revenues by 50 percent over the next three years through cost-cutting and technological innovations, Horizon still has to come to terms with the costs of its aging, 17-vessel fleet. Horizon spokesman Brian Taylor could not quite acknowledge any Matson advantage with new vessels. "We always welcome new U.S.-built tonnage in the trade," he says, "and we recognize that Horizon must maintain the highest level of schedule integrity to compete with these new vessels. Through a rigorous dry-dock program Horizon Lines currently maintains one of the most efficient fleets in the Hawaii/Guam trade, but we are of course evaluating our own vessel replacement plans for the future."

The ability to purchase new vessels will depend on Carlyle's strategy, which is clearly to turn the company around and sell it at a profit down the road. The ultimate decision will depend on the time horizon that Carlyle's principle investors can tolerate. There is a contrast in the company's structure between the efficient clicking of its customers on the Web sites and the ticking of the clock on its low-tech fleet.