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Danaos Corporation leases container ships out to clients - some of the world's largest shipping companies - on multi-year contracts. Containerships have the advantage that cranes can easily load and unload cargo, reducing handling costs in comparison to what was previously a labor-intensive method of filling a ship with cargo by hand. Containers can carry most types of cargo, but are particularly well suited for transporting perishable and manufactured goods. As of 2008, Danaos, among the ten largest containership charter owners in the world, has a fleet of 38 containerships, totaling 149,718 TEU (Twenty-foot equivalent unit i.e the number of standard 20-foot containers measuring 20 × 8.0 × 8.5 feet (6.1 × 2.4 × 2.6 meters) a vessel can carry), and will have 34 more containerships by 2011.[1]

Danaos makes most of its money by leasing out its containerships over long periods (10+ years). These contracts insulate the company from rising fuel costs by passing these costs to customers.[2]. That said, nearly one third of its long term contracts expire over the next five years. Morningstar predicts that the flurry of new ship orders over the last few years will lead to a more than 60% increase in industry supply by 2011.[3] With over 1/3 of the company's contracts set to expire by 2013, Danaos is vulnerable to falling shipping rates, if this incease in capacity leads to oversupply. Danaos is also highly concentrated among a few customers. Its top two customers are responsible for 31% of Danaos’ revenue, the top four make up over 50%.[4]

Business Financials

Danaos’ financial results are driven by the number of vessels in their fleet, charter rates, using their fleet, and expenses.[5] The following is a graph of operating income vs. revenue for Danaos since 2003:

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Danaos Annual Report[6]

During the first quarter of 2008, Danaos increased revenue by about 13% year over year, however, this fell short of analyst’s expectations of a 21% growth rate. The discrepancy is primarily attributed to 6% fewer operating days than projected, leading to 95% vessel utilization (versus 99% assumption).[7]

One reason for the revenue increase is the benefit from an increased world demand for products shipped in containers, escalating shipping demand an average of 11.7% annually from 2004 to 2006 as a result of increased trade globally including, the shipping of consumer goods from Asian to U.S. and European markets.[8]

Another factor can be attributed to an increase in Danaos' fleet size. Danaos owns 38 containerships and an additional 34 new vessels are scheduled for delivery between 2008 and 2011.[9]Since 2005, fleet expansion for Danaos has led to an average annual revenue growth of 27%.[10]Particularly, the addition of nine vessels to the fleet between 2006 and 2007 led to a 26.1% increase in revenue or $53.6 million, to $258.8 million from $205.2 million.[11] The following is a graph of Danaos' expected fleet size by the end of the following years, given that 34 new vessels are scheduled for delivery between 2008 and 2011, on top of their 38 vessels:

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Danaos Annual Report[12]

However, new containership deliveries will raise industry supply by more than 60% by 2011, driving down shipping rates.[13] Charter rates are also a principal driver of revenue. Charter rates are based primarily on demand for capacity as well as the available supply of containership capacity and fluctuate significantly based on macroeconomic conditions affecting trade flow between ports served by liner companies and economic conditions in the industries which use liner shipping services. In order to be less susceptible to the cyclicity of charter rates, Danaos enters into multi-year charters, about 10 years on average. That said, nearly one third of its long-term contracts expire by 2013, leaving Danaos susceptible to downturns in the containership market.[14]The graph below shows the development of indicative freight rates on the peak legs of the mainlane trades, i.e. out of Asia on the Transpacific and Far East-Europe routes, and Westbound on the Transatlantic route.

Danaos Annual Report
Danaos Annual Report[15]

Key Trends and Forces

Dependence on the economic state in Asia Pacific region

The Transpacific and the Far East-Europe are the world's two largest container trade routes. It has been Chinese trade routes which have driven most of the increase in volumes out of Asia, and in 2005, estimated trade volumes on the Eastbound Transpacific trade route grew by 14.1%, and on the Westbound Far East-Europe trade grew by 12.4%. As a result, the majority of Danaos' business are port calls in the Asia Pacific region, particularly in China and Japan. In the second quarter of 2008, markets in the main Transpacific trades declined by approximately 2% to 3% and the growth in Europe Far-East trades dropped from 20% in the first half of 2007 to 10% in the first half of 2008. Also, China's export activity has been adversely affected by the Beijing 2008 Olympics; factories close to the Olympic venues have reduced or even stopped production in an effort to alleviate pollution. [16] Below lists the most popular ports in 2005, 2006, and 2007 by thousands of TEUs imported.

RankPortCountry2007[17]2006[18] 2005[19]
1SingaporeSingapore27,93224,79223,192
2ShanghaiPeople's Republic of China26,15021,71018,084
3Hong KongPeople's Republic of China23,88123,53922,427
4ShenzhenPeople's Republic of China21,09918,46916,197
5BusanSouth Korea13,27012,03911,843
6RotterdamNetherlands10,7919,6559,287
7DubaiUnited Arab Emirates10,6538,9237,619
8KaohsiungTaiwan (Republic of China)10,2579,7759,471
9HamburgGermany9,8908,8628,088
10QingdaoPeople's Republic of China9,4627,7026,307

Increase in the supply of containerships drive down charter rates

According to analysts, by 2011 the supply of shipping containers will increase by 60% (Danaos alone will have virtually doubled their fleet by then). An increase in the supply of shipping containers drives down the shipping rates, and make it more difficult for Danaos to engage in multi-year, fixed-rate time charters. Previously, Danaos entered into contracts for around 10 years, and this has allowed them to avoid the cyclical and volatile shipping market, however, as a more active short-term or spot market develops, it becomes more difficult for Danaos to enter into long term contracts.

Dependence on a limited number of customers

In the past several years APL-NOL, Hanjin Shipping and HMM Korea have represented substantial amounts of Danaos’ revenue. Particularly, during 2006, APL-NOL, Hyundai, CMA-CGM and China Shipping, generated approximately 53% of their revenues from continuing operations. Likewise, in 2007, approximately 55% of their revenues from continuing operations were generated by China Shipping, Hyundai, CMA-CGM and Yang Ming. [20] With these companies, Danaos deploys their containerships under multi-year, fixed-rate time charters having initial terms that range from one to 18 years. These charters expire ranging from the third quarter of 2008 to the first quarter of 2028, with no more than nine expiring in any 12-month period. As a result, Danaos’ revenue will continue to be dependent on a limited number of liner companies and their desire to engage in such contracts with Danaos.

Loss of revenue from exchange rate fluctuations

Danaos generates all of their revenues in United States dollars, but in 2007 incurred approximately 52.0% of their vessels’ expenses in currencies other than United States dollars, particularly in the Euro. As the US dollar declines relative to the Euro, expenses incurred will increase, thereby decreasing their net income. [21]The graph below shows historical exchange rates between the US Dollar (USD) and the Euro (EUR) between 5/30/2007 and 5/1/2008

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Exchange-Rates.org[22]


Competition

The containership sector of the international shipping industry is characterized by the significant time required to develop the operating expertise and professional reputation necessary to obtain and retain customers. Danaos competes for charters based upon price, customer relationships, operating expertise, professional reputation and size, age and condition of the vessel. Danaos focuses on larger TEU capacity containerships, which they believe have fared better than smaller vessels during global downturns in the containership sector and provide them with increased flexibility and more stable cash flows than smaller TEU capacity containerships. In the containership sector, competition for providing containership services comes from a number of experienced shipping companies, several of which are listed below:[23]

  • Zodiac Maritime - an international ship management company specializing in the management of Cape-size, Panamax and Handy-size Bulk Carriers, Chemical Tankers, LPG Tankers, Container Ships and Pure Car (Truck) Carriers.[24]
  • Seaspan Corporation - Marine transportation company serving the West Coast of North America.[25]
  • Costamare.

Danaos also anticipates that an increasing number of marine transportation companies will enter the containership sector, including many with stronger reputations, resources and experience. This increased competition causes greater price competition for time charters and for secondhand vessels and newbuildings.[26] The following is a list of the top containerships charter owners by TEU capacity.[27]

NameShipsTEUAvg. Size
NSB Niederelbe85353,5544,159
E.R. Schiffahrt65291,7784,489
Reederei C.-P. Offen63236,8873,760
Costamare50192,1513,843
Peter Dohle69174,5842,530
Zodiac Maritime42163,8963,902
NVA Norddeutsche31121,1953910
Rickmers Reederei57117,1352,055
Danaos26106,5354,098
Seaspan Corporation1890,2785,015
Kaisho Shipping1482,4165,887


References

  1. yahoofinance.com
  2. DAC Morningstar Report 2008 - Page 2
  3. DAC Morningstar Report 2008 - Page 1
  4. DAC Morningstar Report 2008 - Page 1
  5. DAC 2007 20f - Page 43
  6. DAC 2007 20f - Page 2
  7. DAC Morningstar Report 2008 - Page 1
  8. seekingalpha.com - Danaos Corporation: Stable Shipping Company Sports a 7.4% Yield
  9. danaos.com
  10. DAC Morningstar Report 2008 - Page 3
  11. DAC 2007 20f - Page 47
  12. DAC 2007 20f - Page 26
  13. DAC Morningstar Report 2008 - Page 1
  14. DAC Morningstar Report 2008 - Page 1
  15. DAC 2007 20f - Page 2
  16. finance.yahoo.com
  17. Port of Hamburg
  18. AAPA World Port Rankings 2006
  19. AAPA World Port Rankings 2005
  20. DAC 2007 20f - Page 9
  21. DAC 2007 20f - Page 12
  22. www.exchange-rates.org
  23. DAC 2007 20f - Page 9
  24. Zodiacmaritime.com
  25. seaspan.com
  26. DAC 2007 20f - Page 30
  27. seekingalpha.com
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