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One off costs and Russian woes eat into Tallink's key third quarter

One off costs arising of adjustments of tonnage and a sharp fall in business from Russia reduced both revenue and net profit of AS Tallink Grupp, the Estonian cruise ferry group, in the third quarter.

Net profit fell to €36.2 million from €44.0 million in the third quarter of 2013, while revenues declined to €262.7 million from €278.0 million. The third quarter is a key peak season in northern European ferry business.

The group's vessels carried nearly 2.6 million passengers in the third quarter of 2014, which is 5.8% less compared to the same period last year. The number of cargo units transported increased by 1.0% and the number of passenger vehicles transported decreased by 3.7% for the same period as last year, Tallink said in a statement.

The unstable macro-economic situation in Europe has had a negative impact to the Group’s operations. The decline in the passenger volume from the Russian market continuous to be visible, decreasing by 25% in the third quarter, compared to the same period last year.

The Group has been working for a smoother transition facing the sulphur regulations and one of the goals has been to reduce fuel consumption by optimising our current operations, therefore several re-routings were made: the cruise ferry Silja Europa was chartered out, the cruise ferry Baltic Queen changed to the Tallinn-Helsinki route and the cruise ferry Romantika changed to Tallinn-Stockholm route, leaving the Riga-Stockholm route with the cruise ferry Isabelle as the only vessel.

Majority of the decline of the third quarter results was a direct one-off effect related to the re-routing of the vessels, chartering out Silja Europa and the Silja Symphony docking. These changes in the operations are a good reference of the flexibility of our business and ensure that we are better prepared for the upcoming year.

In the third quarter the Estonia-Finland route showed a slight decline with passenger’s numbers decreasing by 3.3%, cargo units transported increased by 11.5% and the sales numbers remained on the last year’s level. The results were affected by a competitor bringing more capacity to the Tallinn-Helsinki route.

The Finland-Sweden route showed a decline with passenger’s numbers decreasing by 5.5%, cargo units transported decreased by 11.0%, the sales numbers decreased by 7.4%. The results were affected by Silja Symphony being out of operations in September.

The Latvia-Sweden route showed a decline with passenger’s numbers decreasing by 23.3%, cargo units transported decreased by 42.5%, the sales numbers decreased by 24.5%. The results were affected by Romantika changing to Tallinn-Stockholm route, leaving Isabelle as the only operating vessel on the route.

In the third quarter the charter revenue increased by 58.9% or €5.2 million, this is a result of more vessels being in charter and is expected to have a positive effect to the profitability in the forthcoming quarters. The total number of vessels currently chartered out is six, while last year at the same time four vessels were chartered out.

While pricing the cargo services for next year the upcoming rise in the fuel price related to the switch to the low sulphur fuel has been taken into account. Pricing of the passenger service will depend on market demand, competition and seasonality.

(Corrected) Odo CBR Commentary - Mitsubishi's woes could discourage Asian to enter cruise ship building

(Corrects ship name in sixth paragraph in original text from Ruby Princess that was built by Fincantieri to Sapphire Princess that was the second ship Mitsubishi built for Princess.)

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The deep losses that Mitsubishi Heavy Industries, the Japanese shipbuilding group, said it would book from the construction of two 124,500 gross ton cruise liners could deter ambitions of other Asian shipyards from entering the cruise ship building business.

The Japanese shipbuilder said in connection with the publication of the interim report for the first half of its financial year that it will book a charge of JPY 39.8 billion in its first half financial year 2014 results, in addition to a JPY61.4 billion charge that it had booked against the two ship order in its accounts for the previous financial year.

Mitsubishi blamed problems with design and procurement for additional material for the losses, which combined amount to the region of $887 million. We also understand that the yard has had problems with the weight of the ships.

Figures from Odo Cruise Report & Forecast 2014 show that Mitsubishi accepted a price of $647 million for each of the 124,500 gross ton vessels. This gives a price of $5,196.8 per gross ton per vessel, which is markedly below the average price of $5,893 per gross ton of the AIDA fleet, including these two ships. The rest of the AIDA fleet has been built in Germany, save for the first ship that came from Finland in 1996.

The average price per gross ton of the newbuildings from Mitsubishi is also markedly below the $5621 average of newbuildings due for delivery in the 2015-17 period, that covers the entry into service of the AIDA ships. In the previous four year period, the average was much higher, at $6,159 per gross ton, as these contracts were signed before the outbreak of the financial crisis.

In our opinion, Mitsubishi took a risk by quoting a low price for the two ships in 2011 when the contract was signed, but it probably deemed this necessary to allow it to re-enter the cruise ship building business after almost a decade - prior to these ships, it had built Diamond Princess and Sapphire Princess for Princess Cruises in 2003-04.

Mitsubishi's problems highlight the complexity of cruise ship building projects and we believe Asian yards that have time to time featured in connection with potential cruise ship projects will be increasingly cautious to embark on these undertakings. Yards with little or no experience from passenger ship building have, in recent past, run into difficulties also in Europe and North America.

An agreement that Carnival Corp & plc recently signed with China State Shipbuilding Corporation and which also included Fincantieri to ease the Chinese builder's entry into the cruise ship sector is unlikely to produce quick changes in the dominance of the market by established builders.

However, should Fincantieri want to acquire STX France, as some reports have indicated, a successful acquisition would reduce the number of established major builders to just two Fincantieri itself and Meyer Werft, which is probably not an optimal number for major cruise shipping groups.

Two branches of CLIA established in Asia

Cruise Line International Association (CLIA) has announced the establishment of two separate branches of the organisation in Asia and named their chairpersons. Alan Lam reports.

Owing to the sizes of the region and the market, the organisation is divided into CLIA North Asia and CLIA South Asia.

The southern branch will be chaired by, Ann Sherry, Carnival Australia CEO, with Jennifer Yip, Royal Caribbean’s Managing Director Singapore and Southeast Asia, as the Secretary; Paul Chong and William Harber, Carnival Asia’s executives, have been invited to join the Board.

The northern branch will be headed by Dr. Zinan Liu,Royal Caribbean's Managing Director Asia and China. Its aim will be to focus on infrastructure, advocacy and the promotion of cruise to travel industry communities in the region.

Hong Kong Tourism Board and the Singapore Tourism Board have been named as CLIA Global Executive Partners.

"Asia ranks highly on our list of emerging cruise regions as the globalisation of the cruise industry continues to gather pace," said Duffy. "CLIA member cruise lines are already deploying more ships in Asia, opening up more destinations, and customising their onboard offerings to cater to their Asian guests."

"CLIA Southeast Asia and CLIA North Asia will have an influential voice as they work with government and private enterprise to address market needs, master trade distribution, create highly desirable itineraries and offer advice on port and infrastructure," continued Duffy.

South Korea offers visa exemption for Chinese cruise tourists

In its latest move to attract tourists from China, the South Korean government has just announced a further ease of visa requirement for Chinese visitors. Alan Lam reports.

Cruise passengers arriving at South Korean ports on the Bohai Ferry cruise vessel, Zhong Hua Tai Shan (formerly Costa Voyager), will be granted visa free visits. Only recently the country extended its visa free policy for Chinese visitors arriving by air to the popular holiday island of Jeju from 72 to 120 hours.

This policy will help ease the passage for Bohai Ferry’s cruise business in the region. Since the maiden voyage on 16 August, the company has so far operated more than a dozen cruises to South Korea.

Realising the competition building up within the cruise business in the region and recognising the importance of the Chinese source market, other countries in the region are making moves in this direction.

Indonesia for example, a country which until recently has a perceivably hostile visa policy toward Chinese visitors, is considering a visa free policy to Chinese tourists. It is also considering a so-called third country visa, whereby once a visitor has gained entry to Singapore and Malaysia will be automatically allowed to enter Indonesia. Cruise operators have welcomed this development.

Astor owner Premicon Hochseekreuzfahrt files for insolvency

Premicon Hochseekreuzfahrt GbmH & Co. KG MS Astor, which owns the 1987 built cruise liner Astor that is operated by the London based Cruise & Maritime Voyages group, has filed for insolvency at the district court of Bremen in Germany, media reports say.

This is the second German owner of a single cruise liner that runs into financial problems in a short period of time. The company that owns Deutschland, which is operated by Peter Deilmann Reederei filed into voluntary administration a few weeks ago.

The owner of the 20,606 gross ton Astor is part of the Munich based Premicon group, which sold Trans Ocean Cruises and that operates Astor in Germany, together with three river cruise vessels and a ship management company, to Cruise & Maritime Voyages earlier this year.

It is expected that Astor will continue to operate normally despite the problems at its owner company, German media reports say.

It should be noted that Cruise & Maritime Voyages is in not connected to the Premicon group and that no concerns have been expressed over the British cruise operator's finances.

Viking Star