January 30, 2014 2:42 am JST

Kawasaki Kisen lightening load to stay afloat in crowded seas

TOKYO -- Improving earnings organically may seem a tall order for Kawasaki Kisen Kaisha, the perennial underdog of Japan's top three maritime transporters. It is perhaps particularly true given that the industry is susceptible to global macroeconomic changes.

     But, in fact, Kawasaki's containership business is performing surprisingly well. Even as those operations of its two larger rivals -- Nippon Yusen and Mitsui O.S.K. Lines -- sank into the red on a pretax basis for the first half of fiscal 2013, Kawasaki's segment posted a 1.5 billion yen ($14.46 million) profit. The key was the flexibility available to a smaller player.

     Containerships, which can carry a broad range of goods from apparel, food and household items to furniture and home electronics, sail to the world's major ports according to set schedules, just as a bus service does. To enhance load efficiency, shippers have been adding larger vessels to their fleets for years.

     But this strategy backfired, and even though total cargo volume increased amid global economic growth, shippers started adding far more cargo capacity, resulting in a structural supply glut. This hurt pricing, and even if transporters managed to raise rates, they soon fell back.

     Kawasaki's containership business incurred a pretax loss of about 40 billion yen for fiscal 2011. This segment is more important for Kawasaki because it generates about half the firm's overall revenue, even though its roughly 360,000 TEU cargo capacity is only around 60-80% of its two rivals. One TEU is equivalent to a 20-foot container.

     Desperate to fix the problem, Kawasaki President Jiro Asakura told the containership segment to "concentrate resources on main services to Europe and the U.S. while thoroughly weeding out weak-performing services elsewhere."

     The company soon overhauled its routes, scaling down its Asia-South America and Europe-Africa services as well as its intra-Asia service. These routes tend to be crowded with vessels that could not fit in the Asia-North America or Asia-Europe runs, making profits hard to come by.

     Kawasaki decided to slash its cargo volume, mostly on low-cost routes, by 10-20% a year, including this fiscal year. This was not an option for Nippon Yusen and Mitsui O.S.K., which, because of their size and global obligations, must keep their services on a more even keel.

     The company also focused on selling facilities and equipment, including chassis that were no longer necessary. For the second half, it is pushing an additional 10 billion yen cost cut centering on asset reorganization in the containership business alone.

     For the full year, Kawasaki, much like its rivals, is bracing for red ink in the containership segment, expecting a 4.5 billion yen loss under a conservative forecast for the second half, the off-peak season. All three shippers blame low freight rates for their uncertain outlooks, and have asked cargo owners to pay more starting last fall.

     "We're getting a certain level of results," Asakura said. But given that previous rate hikes have been followed by drops, he is not anticipating any long-lasting benefits.

     Based on the trio's first-half performances, Kawasaki's full-year profit is likely to beat its forecast, which is quite conservative, according to an analyst at a foreign brokerage. So far, freight rates apparently remain firmer than what they could be under a pessimistic scenario.

     Kawasaki stock's price has soared more than 90% over the last year, beating the Nikkei Stock Average's gain and outperforming Nippon Yusen and Mitsui O.S.K. shares. While trying to ride out the turbulence churned up by the supply glut, Kawasaki may be able to hold its own against the industry leaders.

(Nikkei)

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