DFDS is currently working on a large-scale analysis of its route network in an effort to locate routes that could be unprofitable, and which could thus risk being shut down.
This happens in light of the coming environmental regulation that bars ships operating in the North Sea, the Baltic Sea, and the English Channel from emitting more than 0.1 percent sulphur. The regulation comes into force on January 1st 2015, and represents a massive challenge for the shipping industry sailing in the region, CEO Niels Smedegaard tells ShippingWatch.
Costs increase by 40-50 percent
"Fuel costs will increase by 40-50 percent. This is going to shut down routes, and will potentially put companies out of business, so it's pretty serious. And the industry, customers, and politicians are only slowly starting to realize how significant this new legislation is. This is very serious," he says.
DFDS has already closed one route in the Baltic region in 2013 due to the coming sulphur regulation. The route was a marginal business financially, and according to Niels Smedegaard it would have been impossible to turn it around once the new legislation comes into force. The route has now been consolidated with the rest of the network, but it may not be the last service to be shut down:
Seven routes in danger
"In our service network, four to seven routes are in danger, but it also depends on what our competitors do. If they shut down, we might still be able to maintain a profitable business, even though we stand to lose some cargo volumes to road transports. That depends on how politicians approach road pricing and some of the current tariffs there. So there are many factors at play, we don't know what the final outcome will be. But it's something that all carriers are thinking about right now," says Niels Smedegaard.
The company is currently analyzing its route network, and DFDS is speaking to all stakeholders in the food chain, such as port terminals, customers, and employees, to hear what they have to say. Because it cannot be carriers alone who have to shoulder this extra burden, says Smedegaard.
"These are tough negotiations of course, but ultimately, if we can't make the routes profitable we're going to shut them down, it's that simple. So 2014 will be a very decisive year where everyone needs to prepare for this to be as well prepared for 2015 as possible. We're trying to do this through offensive environmental investments and dialog with customers, authorities, employees, and other stakeholders to create an understanding about this," he says.
Million dollar investment for DFDS
DFDS is preparing several of its ships to comply with the new sulphur requirements, and in 2013 the carrier invested around USD 18.3 million in scrubbers, to clean sulphur from the ships' emissions, while the company will spend USD 45.9 million more on similar investments this year. The carrier estimates that some 20 ships will be able to have scrubbers installed, a move that could result in total investments of USD 137.8 million for DFDS. And parts of this expense will impact customers. And their reactions will also influence whether routes will be shut down:
"We'll see how things develop during 2015. When we add a low-sulphur surcharge to our freight business, how many of them will opt for roads instead or find other alternatives? And then we'll be able to see in just a few months how things develop," says Smedegaard.