Harwich: Stena Line remains buoyant amid choppy waters

WHEN Stena Line placed an order for two enormous superferries, Britannica and Hollandica, to ply the North Sea routes between Harwich to Holland, there was still a breezy sense of economic optimism in the air.

But by the time two passenger-freight giants were launched in May and October of 2010 at a cost of �375million, the financial climate had changed considerably.

An economic storm of previously unimaginable proportions had been unleashed on an unsuspecting world as banks collapsed and financial institutions toppled.

Swedish-owned Stena Line, the largest ferry operator in Europe and one of the largest in the world, found itself having to navigate a course through rough economic seas, and shield itself as best it could from the full brunt of the credit crunch.

In 2008, the order books were full, explains Lars, and the pre-crash decision to purchase the boats fitted an upward trend. Luckily, being a privately-owned company and having based its decision to renew and upgrade its ships on much longer-term factors, Stena was relatively sheltered, although not immune, from the effects of the turmoil. It meant the business could be steered quickly out of danger, and could act with more dexterity than those lumbered with the extra baggage which goes with public ownership.

Ferry businesses, explains Lars, were a barometer for the incoming bad news as the larger effects of the banking crisis began to be felt.

“We are the first part of the chain here and now you can argue we are the first part of seeing a little bit of an upturn,” he says.

“There was more capacity coming into the market so that meant prices dropped. You had all these companies worldwide - a lot of companies could not keep up. The rates they were getting were lower than the running costs.

“They were just trying to keep the business going. Over time, a lot of companies have gone under.”

As a result, ships have been decommissioned, introducing more scrap metal onto the market, and the battered survivors of the storm have had to pick themselves up as best they can.

“It’s been difficult for all of shipping during this recession, but some have been more buoyant than others. You make decisions to invest at your own peril. It’s useful for us to be relatively financially stable to ride out stormy weather,” says Lars.

“Clearly, we don’t invest in a time horizon of a few years - the life time of this ship (Britannica) is about 30 years.”

Stena, a privately-owned conglomerate, was set up 50 years ago by Sten Allan Olsson, and is now run by his son, Dan Sten Olsson, who is in his mid 60s.

When Lars, a graduate of Gothenburg University, arrived in the UK back in 1991 to join the British business area of the company, some staff mistakenly surmised, because of his surname, that he was related to the owning Olsson dynasty.

“That’s what everyone thought when I came over - they thought I was Olsson junior,” he laughs.

“Dan is actually the one who grew it into what it is today. He’s a shrewd businessman actually.”

The group that the family created is one of the biggest industrial groups in Northern Europe by turnover and by number of people. Every year more than 500,000 people cross the North Sea between the UK and Holland with Stena Line. It’s a sizeable enterprise, with 5,700 staff, and 19 ferry routes in Scandinavia and around the UK, with 38 vessels connecting to eight countries. In 2011, its revenue was around �852million, and nearly 15million passengers, 3.1million vehicles, and 1.6million freight units travelled with it.

Lars, who has been involved in the industry for 25 years, has a lot of sector involvement through lobbying organisations. He was chairman of industry lobby group Passenger Shipping Association (PSA) between 2008 and 2010 and now sits on the board. He is chairman of the Chamber of Shipping’s ferry and cruise panel, vice chairman of the shipping sector lobbying group Maritime UK, and is a Liveryman with the Worshipful Company of Shipwrights and a Freeman of the City of London. With his extensive inside knowledge of the industry, he believes the company is doing well in the circumstances.

“We are doing well. We are breaking some of the industry trends which is good,” he says.

The business has still not returned to the highs of its 2008 volume figures though - it’s something like 15% off those, he explains, but even so, the situation has improved considerably from the low point in 2008/2009.

“The market overall is still not back to where it was before the recession hit,” says Lars. “In 2007 we thought the curve would continue and it was growing at 3 or 4% a year and in 2008 it fell off a cliff. In 2009 it was down 30% from 2007.”

The launch of the new ships is having a positive impact on the business, with increases on both the passenger and the freight side, but obviously, the investment is substantial.

“I think we are beginning to reap rewards on the investment we have made. If we can resolve some of those issues in terms of additional cost I think we should perform well. The thing is, we live on an island and people forget that 80% of the goods come in by ship. We are reliant on shipping and I think that’s something we should be more aware of, particularly here.”

Stena Line is organised into three business areas - Scandinavia, North Sea (which includes Harwich) and the Irish Sea.

On the North Sea area, Stena has three routes. Harwich to Hook of Holland is the biggest route in terms of passengers and freight volumes. Harwich to Rotterdam is purely freight, and emerged after Cobelfret closed its Ipswich to Rotterdam service and Stena took over the ships. The third route is a freight-only one between Killingholme in Humber (near Hull) to the Hook of Holland.

It offers twice daily return crossings on its Harwich to Hook of Holland route.

The majority of the turnover for the ferry business is freight-related, but the privately-owned, unlisted company is a conglomerate dealing with everything from scrap metal through to shipping oil platforms, oil drilling, property, recycling and finance. This breadth of interests provides it with some stability and ballast in uncertain times.

“The size and the power of the group enables Stena Line to invest in a way which perhaps we would not be able to do if we were not a stand-alone ferry company. It’s difficult to make money in the ferry industry any more,” says Lars.

“Over all the ferry companies on the British Isles there’s not one which is British owned any more and I would say there’s not one which is making money at the moment: we are in a loss-making situation. That makes it tough.

“At Stena Line we have not released the figures for this year yet but I think it’s fair to say there won’t be a lot of profit left over. In general terms, there are probably very few of the operators actually making a profit.”

This is down to a number of factors, explains Lars, including historically, the opening up of the Channel tunnel and the loss of Duty Free.

“You need to look at the history. We have been here 20 odd years and when I came over we were doing fine. The industry was doing OK. We had Duty Free which supplemented our income. Low cost airlines were not invented at that time and the cost of fuel was about 30 dollars barrel.

“The tunnel opened, Duty Free disappeared, low cost airlines came about. “Fuel this morning was 108 dollars a barrel. “The industry has seen quite a fundamental change whereby we have suffered both in terms of demand but also in terms of revenue and that’s a double whammy. If you are losing out on the revenue side, all you can do is shave costs and that’s what we have done as an industry over the last 15 years really. We have seen a consolidation of routes. We have looked at all our timetables. Staff have been reduced,” he explains.

“We have reduced our cost base and it’s still not really enough. The recession we saw coming in 2008 already and that has taken a big toll on our freight.

“The cost is still there, so it’s a tough business to be in.”

At the beginning of September, as part of the company’s efficiency drive, the Stena Carrier and Stena Freighter on the Rotterdam-Harwich route were replaced by two new, smaller vessels. The two freight vessels Capucine and Severine were chartered from Cobelfret on a five-year contract.

Pim de Lange, Stena Line area director for the business area North Sea, said the market conditions for the Rotterdam-Harwich route had been “very tough”, mainly due to a very competitive environment on the North Sea and the financial instability and recession throughout Europe.

“This has led to a low capacity utilisation of our two current vessels and a consequential poor financial development for the route,” he said.

Despite the gloomy economic outlook and rising input costs, Stena Line has strived to sustain growth, and has carried more passengers and cars on its Harwich-Hook of Holland route in the first six months of 2012 than during any first-half period since the launch of the current timetable, five years ago.

It increased overall number of passengers across the North Sea for the January-June period this year by 1.9% and numbers of cars by 1.7%. The numbers represent a total year-on-year increase of 4,000 passengers and 800 cars.

The company achieved particularly strong results in the rail and sail ‘dutchflyer’ sector, where it increased numbers by 7%. Numbers of ‘dutchflyer’ passengers in the April-June period were particularly robust, with 11% growth. Since February, it has been working with rail operator Greater Anglia, which provides the train service from East Anglian stations to Harwich International.

But despite these successes, more storm clouds are gathering on the horizon, says Lars.

“If you are thinking a little bit longer term, one of the things that’s really worrying us is the environmental control area (North Sea and Baltic) which means we have to change our fuel from what we are running now which is heavy fuel oil to something called marine gas oil (diesel). That could have a premium of, worst case scenario, 87%.”

The financial implications of this measure, designed to reduce sulphur emissions in shipping’s exhaust are serious.

“We are forced into running on marine gas oil which we already do when we are alongside the port here but at the moment there’s a price increase of about 56%,” explains Lars.

“At the moment it starts on January 2015. “Clearly we are very concerned about this.”

The sector is lobbying Government over the issue, to give it more time to adjust and to enable the technology behind “scrubbers”, the expensive �8million filters needed to ‘clean up’ the fuel on board ship, to be trialled and improved.

“None of the operators are in a position to absorb the additional costs. We just can’t - we are running on such thin margins at the moment - so we are going to have to pass them onto our customers,” he says.

“We have identified as a sector that the areas that are most sensitive and most at risk are the operations on the North Sea and western channel of France. That’s where we have the real problem. I met with our MP here, Bernard Jenkin, and he’s been very supportive and he’s raised the matter in Parliament.

“It’s a concern. It’s a big concern.”

In the North Sea area and around France, shipping remains the greenest way to transport goods across Europe, he argues.

“There’s no doubt about that,” he says.

“We bypass the whole of northern France and send the cargo freight up the coast and that’s good and it spreads the congestion.”

He adds: “There’s an awful lot of shipping in the world and when you move away from a residual product in the refinery process, there’s a shortage of refineries. Almost all the diesel here is imported so clearly that’s going to have a knock-on effect.”

Lars and the rest of the industry is arguing for more time to make the adjustments rather than a change of policy. Since a target has been set of 2020 for shipping across the world to adapt to lower, 0.5% sulphur fuel, compared to around 2% across the world at the moment, the movement towards cleaner fuel is inevitable, although here the target is an even lower 0.1%.

“Give us more time on the routes that are more vulnerable so the abatement technology can catch up,” says Lars.

Fuel accounts for a massive 30% to 40% of Stena Line’s operational costs already, Lars points out.

Lars hopes the industry may be sailing into calmer waters, but he knows that business is still hard won, and that’s unlikely to change any time soon.