Future Color of ferries. Fall in Color’s equity ratio

Future Color of ferries

COLOR GROUP, the Norwegian cruise ferry and hotel group, made a brave move when it decided to invest NK 2.7Bn ($415M) in a second 75,000gt cruise liner with the car deck – this is the definition of classification society DNV – less than six months after the introduction of Color Fantasy, the first such vessel. Operating between Oslo and Kiel on 20-hour crossing, the new ship is the main reason why Color Line, the ferry unit in Color Group, was able to carry 50% more passengers in the first of this year. The company has worked hard to build up its brand image in the northern Germany, which it regards as its key source of passengers. Color Line needs a second new ship, to be called Color Magic, to maintain quality on its flagship route. Fantasy’s running mate, the 1987-built Kronprings Harald is a good cruise ferry, but no match for the new ship with its spa, gym and airy multi-deck dining rooms.

Looking ahead, two scenarios for Color Line’s future seem possible. The good one is that the company will be able to fill its second ship, maintain adequate ticket prices and on-board revenue levels and move on to build ro-pax vessels for its services to Denmark. It has an agreement with Aker Finnyards, builder of the Kiel service ships, to work on a design for these. With a modern fleet, tailored to their respective services, Color Line may well further strengthen its current leadership of the ferry market to and from Norway.

The alternative scenario is less encouraging. Figures from Color Group’s 2004 annual report show that its pre-tax profit shrank to NK263M last year from NK349M in 2003. Equity increased by 11.2% to NK1.91Bn, but interest-bearing debt soared to NK3.27Bn from NK1.36Bn at the end of 2003.

Fall in Color’s equity ratio

The company took delivery of Fantasy in 2004, which explains the increase in debt. That is also behind the drop in Color Group’s equity ratio to 30.4% at the end of last year from 43.8% at the end 2003.

On September, the company published its interims for 1H 2005: it booked a pre-tax loss of NK51M, partly due to higher depreciations as a result of the cost of Fantasy.

In the 1990s, crude lines such as Costa Crociere and Celebrity Cruises went through a scenario that may one day face Color: expensive newbuildings boosted volumes but also increased financing costs and borrowing. Eventually, these factors constrained growth prospects and both became acquisition targets.

However, it was partly the new ships that had made Costa and Celebrity interesting to buyers and certainly they raised the price sellers got for their shares.      

This is probably where similarities end. Should Color Group face a similar situation, there is no consolidation taking place in the beleaguered Scandinavian ferry industry which offers little comfort if business turns sour.

With the second new ship, Color Line can offer a constant quality on its key service, so it really needs Color Magic. If the group succeeds in filling both ships at decent ticket prices while encouraging passengers to spend money while on board, chairman Olav Nils Sunde may congratulate himself: a bold move has paid off. But as experience with other Baltic companies has shown, high volumes without decent yields are not enough. The next few years should be quite exhilarating for Color Group.