One of the two companies that own NCL Corporation (NCLC), which again comprises Norwegian Cruise Line and NCL America, warns that they are not sure that NCLC will be able to meet its obligations after a yeasr from here. That is a bit scary, but before proceeding, here is the actual text issued by Genting Hong Kong:
"We believe our cash on hand, expected future operating cash inflows, additional borrowings under existing credit facilities and our ability to issue debt securities or raise additional equity, including capital contributions, will be sufficient to fund operations, debt payment requirements, capital expenditures and maintain compliance with covenants under our debt agreements over the next twelve-month period. There is no assurance that cash flows from operations and additional financings will be available in the future to fund our future obligations."
Well, you could say that who can tell the future - apart from the so called climate experts, who do not seem to show any degree of humility when it comes to the reliability of their 100 year weather forecasts.
Anyway, the future of NCLC could turn out choppy after the next 12 months, for which the company has the financing in place to take delivery of Norwegian Epic and to meet its other financial commitments as well.
The development of the US economy, for which NCLC depends on more than the other three cruise majors, is obviously a crucial factor to get falling yields back to a rising track. Indeed, there is indication that the worst is over for the global economy, which bodes well for NCLC's efforts.
The NCLC fleet now comprises only modern tonnage, which has hardly ever been the case before, and the beefed up Freestyle Cruising concept has strengthened the image of the NCL brand by differentiating it clearly from competing offerings. That is good news too.
But if - and indeed this is just an if at this point - NCLC failed to honour its obligations some time after the end of 2010, what then? If comparisons drawn from container and dry bulk sectors of cargo shipping are anything like justified as they most likely would be, it seems highly unlikely that NCLC would go bankrupt even in a worst case scenario. Why not? Well, for the same simple reason that has kept many a troubled container line and dry bulk shipping company afloat despite the fact that they have breached loan covenants and missed repayments of debt.
Banks do not want to became shipping companies, nor would they want to turn to a cruise line. Consequently, should NCLC run into trouble in the future, the likeliest way out would be a rescue package, e.g. in the form of a debt to equity swap. This would give NCLC's financiers a significant, perhaps even controlling interest in the company. However, it could continue trading as normal and at some point, after some restructuring, the banks could quite simply sell their shares.
Unlike container and dry bulk shipping, the cruise industry is highly consolidated and there is no structural overcapacity, which is a major worry - probably for several years to come - in both of the two sectors of cargo shipping.
With a modern, harmonious fleet NCLC should be able to capitalise well on a recovery of the cruise industry. It would be a great shame to see the worst case scenario to materialise. Anyway, one more question remains: how come the NCL group has never produced strong ,consistent profits like its competitors? It has suffered from some kind of an issue for too long.
Introduction of the SS Norway in 1980 has been hailed as triumph, but I would say it was a mistake of strategic importance. Unlike Royal Caribbean and Carnival Cruise Lines, NCL was not able to build a consistent fleet until it axed the last obsolete ships last year. You have to learn to walk before you can run, a fact that both Royal Caribbean and Carnival understood, but which NCL failed to grasp. This had a crippling effect on its prospects for two decades.
Then, in the middle of the current decade, came the NCL America adventure that was the biggest strategic failure of any major cruise company in the past 10 years, if indeed not more. Lots of capital and other resources were pumped into a project that failed on almost every account, leading to dramatic downsizing of the NCL America brand to just one from three ships. This again took up further resources at the Miami headquarters.
All these are matters of the past now. Today, NCLC has a good fleet, a strong brand and these should provide it with a platform on which to prosper.
Monday 16 November 2009
Friday 13 November 2009
Something is fundamentally wrong with Finnish shipbuilding
Something is badly wrong with Finnish shipbuilding: it appears to plunge from one crisis to another, both in good times as well as bad ones.
Throughout the years, the yards there have been able to build spectacular vessels, the latest example of which is Oasis of the Seas. However, what the various owners of the three yards that are all owned by STX Europe today have not been able to do is to run them smoothly.
Two decades ago, in the autumn of 1989, a company called Wartsila Marine Industries (WMI) went bankrupt. It owned the yards in Helsinki and Turku. It had a huge orderbook, including two 58,000 gross ton cruise ferries for partners of Silja Line and three 70,000 gross ton Fantasy class cruise ships for Carnival Cruise Lines.
The Soviet trade that had kept the yards busy was on the wane and just two years after this, the Soviet Union itself would collapse. Against this background , the management of WMI had taken orders, such as the Carnival one, knowing fully well that they can only make money if they can significantly increase productivity.
Nothing of that sort would happen, indeed militant unions preferred to carry out their old practises by extending workers' weekend by endless short strikes. This combined with an unworkable target to raise productivity was largely to blame for the collapse of WMI.
Early in 1990, a new company was erected on the ruins of WMI, mainly by Martin Saarikangas, who became its ceo and Ted Arison, founder of Carnival. It was based on a conversion of debt to equity: the customers of WMI that had claims against the company simply swapped the claims for shares in the new company. The move was a brilliant one, if not unique in similar situations in other industries.
In the early 1990s, the shipping company shareholders of Masa Yards, as the new company was called, sold their shares to Kvaerner, the Norwegian engineering group that was rapidly expanding its portfolio of shipyards. Throughout the decade, Kvaerner Masa-Yards (KMY) was a highly successful builder of cruise liners.
However, a new crisis emerged in the turn of the millennium, when KMY was building a quintet of 137,000 gross ton Voyager class cruise liners for Royal Caribbean International (RCI). In line with industry practise, RCI would pay 80% of the contract price on delivery of each vessel. However, KMY would have to pay its staff, contractors and suppliers at a quicker pace, which meant that the company and the entire Kvaerner group then faced a huge need for working capital. The situation became so bad that KMY actually sold some of the building contracts to banks to get some cash.
As the new millennium progressed and the working capital crisis disappeared from the agenda, a new crisis started to build up at what was now called Aker Yards Finland (AYF). Kvaerner had exited shipbuilding after the working capital fiasco and a disastrous acquisition of Trafalgar House, then e.g. parent of Cunard Line.
The Aker group, which already owned the yard in Rauma, acquired KMY and for some time, everything seemed to go quite well. Then, roughly in the middle of the decade, AYF started to take on huge numbers of orders for ferries, mainly from Tallink but also from Brittany Ferries and Color Line. At the same time, it was building the final Voyager class and later the extended version of that design that was to be known as the Freedom class ships for RCI.
Early in 2007, Aker chairman Kjell Inge Rokke, a former fisherman turned billionaire, offloaded the Aker group's 40% stake in Aker Yards (AKY), which was the Oslo-listed parent of AYF. Soon STX stepped in, first by acquiring Aker's 40% and in the following year, making a full bid for AKY, whose portfolio of cruise ship yards also included the former Chantiers de l'Atlantique yard in France.
The years 2007 and 2008 were not good for Aker Yards: their orderbook was too big and both the yard itself and its suppliers and contractors struggled to keep up with delivery dates and in the case of many ferries, failed to meet them. The group booked heavy one-off charges against these problems.
Rumours started to circulate that Yrjo Julin, the Finnish head of AYF, had been encouraged by Rokke to fill the orderbooks and thereby boost the share price of AKY so that he could get the highest possible price for his shares.
Last year, the situation started to change quickly: ship after another was delivered without new orders being won apart that for two 49,000 gross ton ferries for P&O Ferries. Today, the Turku yard only has Allure of the Seas and the Rauma one the two P&O Ferries' newbuildings on its orderbook.
To sum up: why does the Finnish shipbuilder, whatever its name, go through these seemingly endless difficulties in both good times as bad?
Surely e.g. Meyer Werft in Germany needs to look at working capital and try to maintain a stable workoload throughout an economic cycle as well. Yet we have not heard of any of such problems from the quarters of that company.
Could it be that Finland is a nation of engineering to such a degree that apart from getting the physical product right, other aspects of the business matter little?
As a native of that country that has lived out of there for the past 12 years, it sounds like a credible explanation to a certain degree.
Throughout the years, the yards there have been able to build spectacular vessels, the latest example of which is Oasis of the Seas. However, what the various owners of the three yards that are all owned by STX Europe today have not been able to do is to run them smoothly.
Two decades ago, in the autumn of 1989, a company called Wartsila Marine Industries (WMI) went bankrupt. It owned the yards in Helsinki and Turku. It had a huge orderbook, including two 58,000 gross ton cruise ferries for partners of Silja Line and three 70,000 gross ton Fantasy class cruise ships for Carnival Cruise Lines.
The Soviet trade that had kept the yards busy was on the wane and just two years after this, the Soviet Union itself would collapse. Against this background , the management of WMI had taken orders, such as the Carnival one, knowing fully well that they can only make money if they can significantly increase productivity.
Nothing of that sort would happen, indeed militant unions preferred to carry out their old practises by extending workers' weekend by endless short strikes. This combined with an unworkable target to raise productivity was largely to blame for the collapse of WMI.
Early in 1990, a new company was erected on the ruins of WMI, mainly by Martin Saarikangas, who became its ceo and Ted Arison, founder of Carnival. It was based on a conversion of debt to equity: the customers of WMI that had claims against the company simply swapped the claims for shares in the new company. The move was a brilliant one, if not unique in similar situations in other industries.
In the early 1990s, the shipping company shareholders of Masa Yards, as the new company was called, sold their shares to Kvaerner, the Norwegian engineering group that was rapidly expanding its portfolio of shipyards. Throughout the decade, Kvaerner Masa-Yards (KMY) was a highly successful builder of cruise liners.
However, a new crisis emerged in the turn of the millennium, when KMY was building a quintet of 137,000 gross ton Voyager class cruise liners for Royal Caribbean International (RCI). In line with industry practise, RCI would pay 80% of the contract price on delivery of each vessel. However, KMY would have to pay its staff, contractors and suppliers at a quicker pace, which meant that the company and the entire Kvaerner group then faced a huge need for working capital. The situation became so bad that KMY actually sold some of the building contracts to banks to get some cash.
As the new millennium progressed and the working capital crisis disappeared from the agenda, a new crisis started to build up at what was now called Aker Yards Finland (AYF). Kvaerner had exited shipbuilding after the working capital fiasco and a disastrous acquisition of Trafalgar House, then e.g. parent of Cunard Line.
The Aker group, which already owned the yard in Rauma, acquired KMY and for some time, everything seemed to go quite well. Then, roughly in the middle of the decade, AYF started to take on huge numbers of orders for ferries, mainly from Tallink but also from Brittany Ferries and Color Line. At the same time, it was building the final Voyager class and later the extended version of that design that was to be known as the Freedom class ships for RCI.
Early in 2007, Aker chairman Kjell Inge Rokke, a former fisherman turned billionaire, offloaded the Aker group's 40% stake in Aker Yards (AKY), which was the Oslo-listed parent of AYF. Soon STX stepped in, first by acquiring Aker's 40% and in the following year, making a full bid for AKY, whose portfolio of cruise ship yards also included the former Chantiers de l'Atlantique yard in France.
The years 2007 and 2008 were not good for Aker Yards: their orderbook was too big and both the yard itself and its suppliers and contractors struggled to keep up with delivery dates and in the case of many ferries, failed to meet them. The group booked heavy one-off charges against these problems.
Rumours started to circulate that Yrjo Julin, the Finnish head of AYF, had been encouraged by Rokke to fill the orderbooks and thereby boost the share price of AKY so that he could get the highest possible price for his shares.
Last year, the situation started to change quickly: ship after another was delivered without new orders being won apart that for two 49,000 gross ton ferries for P&O Ferries. Today, the Turku yard only has Allure of the Seas and the Rauma one the two P&O Ferries' newbuildings on its orderbook.
To sum up: why does the Finnish shipbuilder, whatever its name, go through these seemingly endless difficulties in both good times as bad?
Surely e.g. Meyer Werft in Germany needs to look at working capital and try to maintain a stable workoload throughout an economic cycle as well. Yet we have not heard of any of such problems from the quarters of that company.
Could it be that Finland is a nation of engineering to such a degree that apart from getting the physical product right, other aspects of the business matter little?
As a native of that country that has lived out of there for the past 12 years, it sounds like a credible explanation to a certain degree.
Wednesday 4 November 2009
Life after Oasis
The cruise industry has made a lot of noise about the introduction of Royal Caribbean International's (RCI) Oasis of the Seas, which at 225,000 gross tons is by far the largest cruise liner ever built. Obviously, the industry has every reason to tout the new ship - a sister will enter service late next year - not only because of its size, but also due to the many new features it introduces.
Still, it is also obvious to ask what next? In addition to Allure of the Seas, the second Oasis class newbuilding, the Royal Caribbean Cruises Ltd (RCCL) group has three 122,000 gross ton newbuildings due for its Celebrity Cruises brand. Meanwhile, the Madrid-based Pullmantur subsidiary of the group seems to live a life of its own: ships are moved from one market to another and the future of the Croisieres de France brand remains in doubt, at least as far as rumours are concerned.
But let us go back to RCCL proper: an industry source says that talks are in progress over a possible third Oasis class ship as well as a fourth 158,400 gross ton Freedom class unit for RCI. An option for the fourth ship has been held at STX Europe in Finland for a long time.
What will hapeen in case of these two depends on two things, the source says. First one is price and the second one is what kind of risks RCCL shareholders are willing to take. The global economy appears to be regaining some health again, which is obviously good news. This combined with the hope that Oasis of the Seas will prove to be the success it is expected to be would obviously reduce the level of risk involved with a third order.
A fourth Freedom class vessel might incorportate some features from the Oasis class to breath newlife into the design that dates back to the middle of the decade, wehen it was first unveiled as "Ultra Voyager," with a reference to the previous series of newbuildings of RCI.
Independence of the Seas, which was introduced in 2008, has operated an extended summer season from Southampton in the UK since delivery and starting in 2010/11, will remain in britain year-round. This indicates that a ship of this size can be employed with a greater choice of base ports than an Oasis class vessel. Assuming that the industry regains a path of solid growth in the future, an Oasis class vessel in Southampton could become possible.
The banking industry died first and committed suicide next as it gambled with sub-prime mortgages and financed other asset deals at hugely inflated prices, which then led to the infamous crash in 2007-08. Against this background, it may well be that RCCL will have to turn to the bond market rather than to its banks when it comes to raising - at least part - of the finance it needs to take delivery of Allure of the Seas.
In addition, Finnvera, the Finnish export credit institution that provided already part of the funding for Oasis, may well have to dig into its pockets for a second time. RCCL has financing in place for all the Celebrity Cruises' remaining newbuildings.
RCCL builds truly fine ships for both Celebrity and RCI. However, one question needs to be asked: are these in themselves excellent vessels cannibalising sales of cruises on other classes of ships of these two brands?
Still, it is also obvious to ask what next? In addition to Allure of the Seas, the second Oasis class newbuilding, the Royal Caribbean Cruises Ltd (RCCL) group has three 122,000 gross ton newbuildings due for its Celebrity Cruises brand. Meanwhile, the Madrid-based Pullmantur subsidiary of the group seems to live a life of its own: ships are moved from one market to another and the future of the Croisieres de France brand remains in doubt, at least as far as rumours are concerned.
But let us go back to RCCL proper: an industry source says that talks are in progress over a possible third Oasis class ship as well as a fourth 158,400 gross ton Freedom class unit for RCI. An option for the fourth ship has been held at STX Europe in Finland for a long time.
What will hapeen in case of these two depends on two things, the source says. First one is price and the second one is what kind of risks RCCL shareholders are willing to take. The global economy appears to be regaining some health again, which is obviously good news. This combined with the hope that Oasis of the Seas will prove to be the success it is expected to be would obviously reduce the level of risk involved with a third order.
A fourth Freedom class vessel might incorportate some features from the Oasis class to breath newlife into the design that dates back to the middle of the decade, wehen it was first unveiled as "Ultra Voyager," with a reference to the previous series of newbuildings of RCI.
Independence of the Seas, which was introduced in 2008, has operated an extended summer season from Southampton in the UK since delivery and starting in 2010/11, will remain in britain year-round. This indicates that a ship of this size can be employed with a greater choice of base ports than an Oasis class vessel. Assuming that the industry regains a path of solid growth in the future, an Oasis class vessel in Southampton could become possible.
The banking industry died first and committed suicide next as it gambled with sub-prime mortgages and financed other asset deals at hugely inflated prices, which then led to the infamous crash in 2007-08. Against this background, it may well be that RCCL will have to turn to the bond market rather than to its banks when it comes to raising - at least part - of the finance it needs to take delivery of Allure of the Seas.
In addition, Finnvera, the Finnish export credit institution that provided already part of the funding for Oasis, may well have to dig into its pockets for a second time. RCCL has financing in place for all the Celebrity Cruises' remaining newbuildings.
RCCL builds truly fine ships for both Celebrity and RCI. However, one question needs to be asked: are these in themselves excellent vessels cannibalising sales of cruises on other classes of ships of these two brands?
Subscribe to:
Posts (Atom)