Royal Arctic Line caught in downward spiral

Even though Royal Arctic Line expects a profit for 2014, the situation remains tense and the carrier needs new solutions, the company tells ShippingWatch. However, the nature of these solutions remains far from certain.

Royal Arctic Line is struggling financially, and pressure on the carrier's finances will only increase in the years to come, CFO Ole Baunbæk tells ShippingWatch after the carrier published a 2nd quarter interim report last week showing a deficit before taxes of USD 5.3 million.

As such, the carrier needs to find solutions to create a more robust foundation for the company, whose business is based on supplying goods to Greenland. And herein lies the rub - and this has been the case for several years now. Because though it might seem like a competitive edge to hold a monopoly or concession on supplies to Greenland, this is one of the key reasons for the carrier's woes.

This is because construction on the island is slow, and is seasonally lower during the winter months, resulting in reduced cargo volumes for Royal Arctic Line, while the carrier is meanwhile obligated to honor its commitment to supplying every single city and settlement along the vast coastline. An expensive apparatus to maintain.

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"As long as this apparatus needs to run - and run at a high frequency - it is of course going to cost us money, especially in periods where the other volumes are declining, as this results in bigger unit costs. The service rate and extent means that there are limits to how far we can go in terms of savings. But if we had fewer calls we would be able to take operational measures," explains Ole Baunbæk.

Price increase failed to help

The USD 5.3 million deficit represents an improvement compared to the first half of 2013, where the carrier suffered a USD 10.3 million deficit before taxes. In light of this, the carrier is pleased with the result for the first half of the year, says Ole Baunbæk.

For 2014 as a whole, Royal Arctic Line expects a profit before taxes of USD 2.6 - 3.4 million, and this is primarily caused by expectations that cargo volumes will develop slight better in the second half of the year, while the carrier also anticipates a slight rise in activity. Secondly, Royal Arctic Line has performed cost reductions in several areas during the first half of the year, and the company plans to maintain this focus.

Starting March 1st, Royal Arctic Line received permission to increase its freight rates by five percent, but even this failed to improve the carrier's concession revenue.

Struggling Royal Arctic Line lost USD 5.8 million in 1st half of 2014

"Revenue has in fact decreased even further, and this puts us under additional pressure. The savings we've achieved in the first half of the year will not have the same effect in the second half, but we've created a positive foundation," says Ole Baunbæk.

Are you going to attempt another rate increase?

"That's a political decision. There's no doubt that in, terms of the national economy, freight rate increases are not desired. We're going to meet with the owners and discuss the situation, but it will likely be a matter of numerous initiatives," he says, adding:

"First of all we hope that we're approaching the bottom of the construction standstill, so that we'll be able to see a slightly rising trend from next year. We're crossing our fingers for this. It won't take much for it to impact our bottom line. If this development continues at a flat rate, we'll come under pressure."

What are the other possible initiatives?

"That's difficult to say, but there's no doubt that we're looking into it. Cost reductions and optimizations are at the top of the agenda, but there's a limit to how far we can go as long as we have a service duty that we have to comply with. This is of course one of the things that could come into play, though I don't know the extent yet," he says.

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Could the supply duty be constructed in a different way?

"That's also a political decision. I'm sure our politicians want to ensure a stable supply chain - that's going to feature prominently on the list of things we need to maintain. We're in a dialog now, it takes time and we need to try various things," says Ole Baunbæk.

New ships needed

He does not try to hide the fact that Royal Arctic Line faces a challenge on the long term:

"It's no secret that our fleet consists of a series of ships that need to be replaced. They're all - with the exception one newer vessel - paid for and written off. We'll receive new ships next year, and we'll need to pay interest and down payments on these, and they've been financed. This represents an investment of around USD 130.4 million, a majority of which will be financed and written off over a 20-year period. That's a fairly large annual depreciation, so it's clear that something needs to happen."

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