Quick Comment: NOL’s Period 5 operational data (both volumes and freight rates) remain similar to Period 3 and Period 4 data, implying little change in underlying challenging market conditions. NOL continues to have approximately 20% of its fleet laid up.Until container traffic growth is sufficient to absorb the substantial excess capacity, we think investors looking for signs of sustainable freight rate recovery to breakeven levels are being too optimistic.

NOL and other shipping companies are proposing Asia-Europe rate hikes of US$100-300/TEU in July. We think that a portion of this rate hike may stick, as current rates are below cash breakeven levels (~US$400-500/TEU for the industry), but will be offset by declining Transpacific rates (post conclusion of delayed annual contracts in July), leading to continual deterioration in overall average freight rates.

What’s New: In Period 5 (May 2 to May 29, 09), NOL reported a 21% YoY volume decline due to deteriorating global trade demand and capacity cuts in an effort to reduce operating costs. The Period 5 volume deterioration of 21% was similar to 22% volume deterioration for Periods 3 and 4 and an insignificant 1% MoM improvement for Period 5 vs. Period 4.

Period 5 average freight rates declined 23% YoY, to US$2,326/FEU, reflecting the rapid deterioration in freight rates and lower bunker fuel surcharge. Period 5 average freight rate deterioration of 23% was comparable to Periods 3-4 rate deterioration of 20-21%, and on a sequential basis, Period 5 rates were unchanged from Period 4 rates. The sharp volume and freight rate deterioration resulted in a revenue contraction of 39% for Period 5.