Sunday, July 22, 2001

While Matson Navigation Co.'s freight levels have been
flat, its competitor, CSX Lines, claims to have
gained volume.

Staying afloat

Matson Navigation Co. earnings
plummet just as new competition
is seen on the horizon

By Russ Lynch

Its profits are falling, it is not making the money its owners would like and its cost are staying high, but Matson Navigation Co. says none of that provides any reason to cut back service.

C. Bradley Mulholland, Matson president and CEO, said in an interview Friday that the opposite applies. This is a time to maintain the highest possible level of service, he said, and the decision in October to increase the West Coast-Hawaii fleet to eight ships from seven won't be rescinded, he said.

Competitor CSX Lines, the former Sea-Land Service, agreed that keeping service high is key. "You find the most economical ways that you can to utilize the high cost assets that we both have," said Brian Taylor, CSX vice president for Hawaii-Guam.

One way is an agreement announced last week for Matson to carry some of CSX's containers from the West Coast under contract to CSX. That fits the needs of both, making it more cost-efficient for CSX to move freight from some parts of California and helping Matson get the most use out of its vessels.

But nobody should construe that as any lack of competition between the two, both companies said, and CSX pointed out its Hawaii business has been going up while Matson's is flat or down. One conclusion could be that CSX, which entered the West Coast-Hawaii ocean freight market in 1987 and started to hack away at what was seen as a near monopoly by Matson, has succeeded in grabbing some of Matson's business.

Matson Navigation Co. is spending more than $36 million
to rebuild its container yard facilities on Sand Island.

Matson concedes that it has to fight for its business.

What's more, both of the big shipping lines say, there is excess capacity in the mainland-Hawaii freight market and it will be very hard for newcomers to make inroads.

The newest to announce its intention to enter the market is Santa Maria Shipping, based in California, which says it will hold a news conference tomorrow, featuring Gov. Ben Cayetano, detailing its plans to build two containerships and ply them between California and Hawaii.

Last year Pasha Hawaii Transport Lines, a California-Connecticut partnership, announced its plans to build first one, and then two, drive-on drive-off freighters specifically to bring automobiles from the West Coast to Hawaii.

Matson, the biggest subsidiary of Honolulu-headquartered Alexander & Baldwin Inc., helped pull down its parent's earnings in the latest quarter by reporting a dip of more than $9 million in its operating profit, to $18.7 million in the three months through June 30 from $27.9 million in the same period of 2000.

Mulholland acknowledged that part of the dip was from costs related to bringing back a ship that had gone out of service and building the fleet back to eight ships from seven.

His boss, A&B President & CEO W. Allen Doane, told securities analysts in a conference call last week that a $10 million dip in second-quarter revenues compared to last year came half from the planned shutdown of a West Coast cargo shuttle business and about half from a slowdown in its cross-country intermodal business that brings cargo to the West Coast for shipment to Hawaii.

Stripping those away, there was zero growth in year-over-year in revenues from the core business of shipping goods from the mainland to Hawaii, Doane said.

One item that cut into Matson's operating profit was $3.7 million in additional vessel operating costs because Matson added capacity "for competitive reasons," Doane said in a nod to challenger CSX.

The basic problem in the slowdown of Matson's business is the flat state of Hawaii's economy, Mulholland said. "What we're seeing overall from the economy is that the economy, at least as represented by our freight volume, is flat," he said.

"We're not really seeing any uptick in our freight volume," he said, adding that the flatness is across the board, from automobiles to goods ordered by island retailers and all kinds of other commodities.

"It's not a huge drop in volume but we thought we were going to have an uptick and we didn't," Mulholland said.

CSX's Taylor said West Coast-Hawaii container business at his company is rising and he claims some victory over Matson for that. "That's what we're in the game for, picking up some of theirs," he said.

But just like Matson, CSX has to watch its costs. Both companies have a fuel surcharge in effect, a little over 4 percent, designed to be lowered or rescinded if bunker fuel prices drop. Both have to watch costs and both increased freight rates 3.5 percent earlier this year.

"It's been an ongoing effort at CSX for several years on the cost side," Taylor said.

It's harder to see his company's Hawaii results in the parent CSX Line reporting than it is to see Matson's in A&B's financial statements, he said, because the Hawaii business tends to get rolled up inside CSX reports and not singled out, although it is an important part of the parent's business, Taylor said.

But while watching costs is essential, "there is absolutely no change in the level of service that is received by business in Hawaii," he said.

"What we need to do is to continue to look for areas in our operations where we can save costs," Mulholland said. A big step that requires investment now but will pay off in the future is the planned $36 million-plus rebuild of the Matson container yard facilities at Sand Island, Mulholland said.

Recent steps included closing down some old container freight stations, where small cargo shipment by various customers were consolidated into container loads, and let outside consolidators do that.

More recently, Matson announced the sale of a commercial tugboat business on the neighbor islands that no longer fits Matson's needs, Mulholland said.

As for possible new competitors, "the philosophy that we use in the company is that one way or another, we are going to be facing competition, so if you don't have the company poised to deal with that, you're making a major mistake," he said.

The answer is always to look for the best ways to serve the customers and make freight affordable for them, he said.

Matson's Hawaii involvement began in 1882, when Capt. William Matson sailed a schooner from San Francisco to Hilo, hauling food, plantation supplies and general merchandise. He stayed in the business and built a shipping line.

CSX arrived in 1987, dedicated to going head-to-head with Matson in the West Coast-Hawaii business, but doing it differently, going on to Guam and Asia and not making much of an effort to pick up Hawaii-West Coast business.

Now CSX has eight ships in the Hawaii-Guam service but they make three stops in Hawaii a week. Matson also has four ships, but makes four stops a week and does everything it can to be a two-way carrier.

Between them, plus the slower but still-important barge business, that's plenty of capacity for Hawaii, the shipping lines said.

More capacity, such as that proposed by Pasha and Santa Maria, is not needed, Mulholland said, "because both CSX and Matson have surplus capacity and barges can add or subtract capacity very easily," he said.

His company has 208 ship arrivals in island ports each year and CSX has 150. That's well over 300 liner sailings a year and barges are running almost every day.

"So you have to ask what niche are they going after?" Mulholland said.

"We're going to stay very focused on our customers. We're going to give them what they want at a price they want, (so that) there's no reason for them to leave us," he said.

That's why the eight-ship fleet is needed, Mulholland said.

"I don't think it was a mistake" to add a vessel, he said. "The whole system works better because of that service level and is best for customers," Mulholland said.

"We need to keep very high service levels in the Hawaii trade and eight vessels is the key to doing that. It makes our whole system flow better. Clearly the eighth vessel costs more money. There's no doubt about that, but our system runs better and the on-time frequency is the best it's been in five or six years," Mulholland said.

Matson's eighth ship is the 39,000-ton S.S. Ewa, which went into service in October to return service cut in 1998.

Of course Matson would like to see the Hawaii economy turn around. So would CSX.

Taylor said it with an old maritime adage: "A rising tide raises all ships."

Matson's treasure chest

Matson Navigation Co. operating results (in millions)


Source: Alexander & Baldwin Inc. financial reports

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