Horizon Lines to discontinue trans-Pacific service

Horizon Lines, Inc. (OTCQB: HRZL) reports that it will discontinue its Five Star Express (FSX) trans-Pacific container shipping service between the U.S. West Coast, Guam and China. The U.S.-flag containership operator says it is implementing an orderly transition plan, beginning October 31, 2011, and will work aggressively to mitigate any supply chain disruptions for its customers. It says that discontinuation of the  Guam and China services will have no impact on its domestic ocean services in Alaska, Hawaii, or Puerto Rico.

The last voyage of the FSX service from China is scheduled to depart Shanghai on November 2, 2011. Horizon Lines also will suspend ocean services to Guam and surrounding islands effective with the last sailing from the U.S. West Coast on November 10, 2011.

The company expects to cease all operations related to the FSX service during the fourth quarter and does not expect to have significant continuing involvement in the operations after the termination. Therefore, the company will classify the FSX service as discontinued operations and as a result, expects to record a pretax restructuring charge of between $105 million and $110 million in fiscal fourth quarter 2011. The charge includes estimated costs to return excess rolling stock equipment, facility closures, severance, and vessel charter expense, net of estimated sub-charter income. Losses associated with the FSX service produced a negative adjusted EBITDA impact of approximately $43.7 million for the nine months ended September 25, 2011, with additional losses expected through the end of the year.

Following their last voyages, the five Hunter-Class D-8 vessels operating in the FSX service are currently planned to be laid up, after dry-docking of the remaining four vessels. The vessels are leased from Ship Finance International Limited through 2018 to 2019. Horizon Lines is exploring sub-chartering the vessels and other solutions to partially mitigate ongoing charter expense and maintenance costs.

Horizon Lines launched the FSX service in December 2010, following expiration of a long-term space charter agreement with Maersk Line. Since early in the year, the FSX service met volume and vessel utilization expectations, winning cargo from customers attracted to the schedule reliability, rapid ocean transit and seamless intermodal rail links to inland U.S. cities. However, the Shanghai Container Freight Index cites eastbound freight rates from China to the United States have fallen more than 37% in the past 12 months, from $2,400 per 40-foot container in October 2010 to approximately $1,500 in October of this year, the lowest level since the worldwide recession of 2008-2009. At the same time, the average price of bunker fuel has climbed more than 40% since the launch of the service.

“We do not expect any measurable improvements in fuel prices, the freight-rate environment or in this tradelane for the foreseeable future,” said Brian Taylor, Executive Vice President and Chief Operating Officer. “Growing capacity continues to outpace demand and the forecast for 2012 calls for more of the same.”

In Guam, the expected growth in cargo driven by infrastructure improvements associated with the military redeployment from Okinawa has been further delayed due to the budget crises in Japan and the U.S., as well as revised Japanese priorities in the wake of the earthquake and tsunami earlier this year. This has made the Guam trade no longer financially viable for Horizon Lines, without an eastbound return voyage from China.

“Given current market conditions and foreseeable future expectations, discontinuing the FSX service is the appropriate decision for the company,” said Mr. Taylor. “It will allow us to focus all of our resources on serving customers in the very solid domestic ocean markets in Alaska, Hawaii and Puerto Rico.”

October 25, 2011