BCL Announces Financial Results for Year Ended 31st December 2004

Hamilton, Bermuda:  17th May 2005 - The Directors of Bermuda Container Line Ltd. today announce the earnings figures for the fiscal year ended 31^st December 2004.  Net earnings were $3,632,000, a $439,500 or 11% decline from the figure in 2003.  This decline in earnings occurred despite a healthy growth in freight revenue as expenses increased at an even faster rate.

Revenue was up $3,567,500 or 12% primarily due to cargo volume increases; up 8% in the BCL service and 12% in the SISL service from Florida.  Unfortunately, total expenses were up $4,007,000 or 16%; all major expense categories showed increases over the previous year.

2004 is the third year in a row that BCL has reported a decline in net earnings and the last two annual reports have contained warnings regarding the cost pressure facing not only Bermuda Container Line but the shipping industry in general.  BCL has been able to keep the growth in freight rates minimal for a number of years as the two attached graphs indicate.  Even after the general freight rate increase of 1^st April 2005 the basic rates charged by BCL to transport a container from Port Elizabeth, N.J. to Bermuda are only marginally higher than they were 19 years ago in 1986.  By comparison the rate of inflation has increased significantly.   Also, the basic stevedoring rate, the container pick rate, charged to BCL in Bermuda has increased more than freight rates though the growth in the pick rate is also well below the rate of growth in inflation.

The Bermuda shipping industry has been able to keep freight rates stable for two reasons; first - economies of scale due to cargo volume increases and secondly - cost containment efforts.  The volume of containerized cargo handled by the regular liner services to Bermuda has increased by 9,300 TEU or 71% between 1986 and 2004.  The growth in Ro/Ro and non-containerized cargo has been even higher.  This volume growth allows fixed costs to be spread over more containers so reducing the per container cost though variable costs continue to increase.  Stevedoring and cargo handling expense is the single largest expense category, it is a variable one and absorbed 41% of the BCL service gross freight revenue in 2001 but 3 years later in 2004 it absorbed 48.5%. 

There is a limit to how much costs can be offset by volume growth and the Directors do expect cargo volume growth to moderate over that experienced during the past 19 years.  In  fact, cargo volume into Bermuda for the first 4 months of 2005 declined compared to the same period in 2004.

Cost containment efforts have also helped in keeping freight rates down.  A good example of this was the conversion project to convert the "Oleander" to burn heavy fuel oil undertaken in 1998.  This conversion project represented an investment of over a million dollars but without it the cost of fuel for the "Oleander" in 2004 would have been $600,000 higher than it was.  Unfortunately there is a limit to how much costs can be reduced by improved processes and new methods of doing business.  In addition, the shipping industry worldwide is facing cost pressure due to the significant growth in world trade.

The cost of ships is up dramatically.  The €˜Hamburg Index' for ships in the 200 to 299 TEU range, the size of ships used in the Bermuda trade, show daily charter hire rates increasing by 67% between February 2004 and March 2005.  While BCL owns the "Oleander" it does have to charter in short-term ships when the "Oleander" is in dry-dock. 

The replacement ship for the 2004 dry-docking cost nearly 3 times the one for the 2002 dry-docking.  The SISL service does use a chartered ship and when the present charter agreement expires the SISL service will face significantly higher charter costs.  This situation has been made worse by the fall in the U.S. dollar relative to the Euro over the last few years.  Nearly all small container ships are sourced out of Europe and their costs are in Euros.

Even though BCL does own the "Oleander' and therefore can control immediate vessel capital costs, the ship will be 15 years old this year and will eventually need replacing.  Ship building costs have surged recently; the price of steel up over 70% in the past year; and so the capital costs to be incurred when the "Oleander" is replaced will be higher.  In addition, the older the present ship becomes the higher the repair and maintenance costs.

New container and other cargo handling equipment costs have slowly but steadily declined for many years but in the last 18 months have shown price increases of up to 20% and higher.  This is caused by high demand and significant increases in the price of raw materials such as that for steel noted above.

The growth in worldwide trade is also having a negative impact on shore side operations.  Volume growth at all major container ports in North America last year exceeded 10% and is forecast to grow significantly again this year.  This growth creates congestion which gives rise to a double edged sword; a reduction in service levels while at the same time costs go up.  At one stage late last year there were ships carrying 150,000 containers waiting off the U.S. West Coast for space to berth to allow the containers to be off-loaded.   

This port congestion cannot be solved quickly as the length of time to expand or build new port facilities is long; particularly in North America.  Between 1993 and 2003 the number of ports capable of handling more than 2 million TEU per annum went from 6 to 21 in Asia and only 2 to 3 in North America.  There are major political and environmental obstacles to overcome in expanding and developing ports.

This congestion drives up costs significantly; in a recent Journal of Commerce article there was a quote from a spokesman for a major port drayage operator in the New York/New Jersey area "demand for drivers is so strong that the company has had to boost truck drivers' pay 30 percent in the last year".  BCL expects stevedoring and cargo handling costs to increase at a greater rate than the rate of inflation. 

The inescapable conclusion is that freight rates will have to increase at a much higher rate over the next few years than they have over the past 19.  The Directors of BCL are aware of the unfortunate impact this will have on the already high costs of doing business in Bermuda.  Unfortunately, these cost increases are outside the ability of BCL or even Bermuda to control.