At the helm in a tough market

At the helm in a tough market

BQ’s Kate Kolbina sat down with Andres Hunt of Tallink, one of the biggest Baltic companies and the market leader in sea transport, to talk about the company’s past, present and future challenges

Located next to the port of Tallinn, the headquarters of Tallink keep a watchful eye over its fleet of giant cruise ferries as they come and go from the ancient Baltic harbour.

The office itself is spacious and light, with a flotilla of large white models of Tallink vessels permanently at anchor in their glass cages. Closer examination shows that every detail is true to life.

I go to the fourth floor where the management suite is located, akin to the bridge on a ship.
Tallink’s vice chairman Andres Hunt, who speaks for the company in place of its media-shy chief executive Enn Pant (more on him later), is responsible for the vessels’ maintenance and security. He joined Tallink in 1998 as chief financial officer, so it’s no surprise that he starts our conversation by showing me the chart of the company’s revenue structure, including new data from 2013. It reveals that Tallink, by far the biggest ferry operator in the Baltic, with 18 vessels and a fleet capacity of 35,000 passengers, earns a staggering 54% of its €942m revenue from on-board shops and restaurant sales, with ticket sales bringing in less than half of that or 26%.

“Our main product is overnight cruises”, says Hunt (47). “People are on board for about 40 hours on some routes, and it’s important to keep them entertained.” And keep them spending, he doesn’t add.

Apart from overnight cruises, other aspects of Tallink’s business are roll-on and roll-off cargo transportation, city breaks, travel and hotel packages (Tallink owns four hotels in Tallinn and one in Riga). The company also has a business tourism offer, with floating conference facilities. Tallink, which is Estonia’s second biggest company by revenue, listed on the Tallinn stock exchange since 2005, can thus present itself as a one-stop holiday shop. Given that in Tallinn it even runs its own taxi fleet, it offers the complete package, including transfer to the vessel, entertainment en route, and its own hotels and guides at the destination.

“We are a big retailer, tour operator, and everything else our client might need”, says Hunt.

Tallink needs to exploit every cross-selling opportunity it can find, because the ferry transportation market in the Baltic Sea is intensely competitive. The pressure on the company is reflected in the share price: at time of going to press in mid-May, the firm was trading 43% lower than the initial IPO price. Intensifying competition, as well as a weakening Finnish economy, are expected to keep sales almost flat for Tallink this year, according to analysts at SEB.

As well as the twin leviathans of north European maritime leisure transport DFDS and Stena Line, both of which operate a few Baltic cruises, Tallink faces two main regional rivals, Eckerö line and Viking Line, serving around 10% and 33% of the passenger market respectively. Tallink’s own passenger market share was 47% in 2013.

The market for Scandinavian routes between Stockholm, Helsinki, Tallinn, and Turku is already well-served – “even somewhat saturated” according to one industry specialist – and growth is slow, so all competing companies have to innovate to attract customers. Hunt spells out three main areas of innovation: more routes, more up-to-date ships, and better IT infrastructure.

“All of our competitors have modern vessels, just like we do”, he says. “Ten years ago the situation was completely different”. As for the Internet infrastructure, Tallink has good claims to be at the cutting edge. Last year they upgraded their booking system and also developed a mobile “app” for potential customers. I ask him whether Tallink plans to expand into air transportation, a suggestion already raised in the Estonian business press. After all, the Finnish national air carrier Finnair is facing financial troubles and could be the target for a takeover. Why not by Tallink?

Hunt laughs. “From the beginning of the company until 2010 we invested a lot in new vessels, bought out our competitors [including major rival Silja Line in 2006] and developed new routes, so it’s time to focus on our core business and pay back our loans.”

“But we do have great co-operation with Finnair, as 10% of our customers come from outside the Baltics, Finland or Sweden”. Finnair has strong links with Asian markets, and Tallink cashes in by selling ferry packages from Helsinki to Stockholm, Tallinn or Riga, thus capturing about 80,000 Asian tourists per year.

“There will be no planes with Tallink livery in the near future,” smiles Hunt.

That mention of “repaying loans” is an oblique reference to the company’s well documented difficult patch. In 2009, when the Baltics confronted the financial crisis, Tallink had €1.1 billion debt on its balance sheet, accumulated after the series of acquisitions, including Silja Line for €470m (the biggest takeover in Estonian business history) and Superfast Europe for €310m. The company was under pressure from its bankers, who intervened to impose restrictions on dividends and new covenants.

“Now it is good to look back”, says Hunt, “especially because now the debt is under €800 million.”

The company had an operating loss for the year 2008/2009, so the management decided to renegotiate the debt payment terms for the future years. “However, now we can see that it wasn’t even needed, we would have managed with the old schedule as well.”

Indeed, profit quickly climbed back, amounting to €22m in 2009/2010, and reaching €43m in 2013. The number of passengers was rising every year from 2009 up until 2012, which Hunt thinks was due to people choosing shorter and cheaper holidays in neighbouring countries rather than flying further afield.

Now the busiest route is between Tallinn and Helsinki, a trip taken by 4.5 million passengers annually. It is also the fullest in terms of cargo. The Riga-Stockholm route, which currently brings in only 4% of Tallink’s passengers, is increasing faster than any other line: eight years after its inception in 2006, the amount of passengers tripled.

Two of the main engines of Tallink’s business are the exemption from VAT on alcohol and cigarettes on routes involving the Finnish-owned Aaland Islands, and the significant cost differential between the Nordics and the Baltics. As long as these remain, they will bring bargain-seekers on board.

Not all of them, it seems, are happy passengers. A recent survey of Finnish customers by EPSI Rating, placed Tallink third after Viking Line and Eckerö, picking holes in Tallink’s entertainment quality and service levels. But by then the company had already instigated a €10 million upgrade of its Silja Serenade ferry, running between Helsinki and Stockholm, building more retail space, new restaurants and a spa. Another ferry on this line is awaiting the same treatment. “First of all, we upgraded them because these are the oldest ferries that we have, but of course it is also because this line captures the wealthiest clients with diverse spending patterns, so we try to offer them more,” explains Hunt.

He mentions with pride that his management team is on board as frequently as possible to see the business running at first hand. They also have the tradition of mixing the crew on these trips to stay close to the operational nuts and bolts. These moves nothwithstanding, there is a general view of Tallink management as closed and uncommunicative, even in their home market, Estonia. This perception is influenced by the enigmatic silence of CEO Enn Pant who rarely gives interviews or comments, even in Tallink’s annual reports. Amongst Estonian business journalists the company’s corporate non-communication is notorious.

Andres Hunt brushes off this alleged unsatisfied curiosity, with a sideswipe at the “negative news” values of the Estonian press.

“We are a hard-working company; there is a big demand from journalists, but not much availability. Each month we publish all numbers and all information is constantly available on our web page”.

These days, Tallink’s “hard work” is mainly about the search for increased revenues. Where to find them? Plotting new routes to increase revenue is harder than it looks, as points that look promising on the map, often don’t make sense in business terms. For example, although Tallink has no service to Lithuania, it has no plans to start routes from the up-and-coming Lithuanian port of Klaipeda, the critical mass of Lithuanians live in the inland cities, closer to Latvia’s major port than their own.
“There are already a lot of Lithuanians taking ferries from Riga, so for now we are focusing on our existing routes”.

As for the division between leisure and business travellers, Tallink doesn’t tend to segment its customers into such groups:

“Unfortunately nobody tells us their travel purposes when they buy tickets” [because, unlike some airlines, they don’t ask]. But we do have special classes for the business travellers, and they are popular among Finnish and Estonian businessmen travelling between Tallinn and Helsinki”.

Tallink believes it has a big part to play in increasing trans-Baltic trade, and expects to play a sizeable role in increasing trade and commerce between the two countries, as Hunt explains: “Historically there were different types of vessels on this route, and with the bad weather some of them couldn’t run. In 2005 Tallink decided to upgrade its fleet and the competition followed. Now the departures run smoothly in any weather, and our Tallink-Helsinki ferries depart 12 times per day”.

The business and cargo share is also bigger on the Turku-Stockholm line [the closest link between Finland and Sweden], whereas Helsinki-Stockholm and Riga-Stockholm are dominated by leisure travellers. Which share of the travellers is Tallink most interested in?
“We try to attract everyone, our ships are like small cities, you know”, says Hunt proudly. “Cabaret, spas, restaurants…Conference centres that transform into kids playgrounds for the summer period – Tallink does everything to ensure it captures the maximum possible passengers and that service levels encourage repeat business.”

Passengers from Russia constitute about 4% of Tallink’s customers, but Hunt is sure that the wider blowback from events in Ukraine won’t affect passenger volume. “All people are welcome on our vessels, but for some the decision to travel somewhere could be politically motivated. I don’t see any big difference in the number of passengers, at least for now”.
We also discuss two recent ferry tragedies, the sinking of Italian cruise liner Costa Concordia in January 2012 and the MV Sewol off South Korea in April this year. “These accidents are not good for business at all”, he admits, “After Costa Concordia, insurance premiums were increased by a sizeable portion, so we felt the impact here in the Baltics as well”.

Tallink naturally stresses that it takes safety very seriously: its employees have routine training every week, and more comprehensive training events 1-2 times per year, involving firefighters and police.“All companies in the Baltics are strictly following safety regulations. Behaviour here is much better than in the other seas,” he assures me.

I raise one of Tallink’s areas of further expansion, Tallink City, a massive shopping centre which will be built in Lasnamäe, Tallinn, by Infortar, Tallink’s major shareholder [holding 36% of its shares]. The shopping centre will offer 144,000 m² of retail space, making it over a third larger than the existing biggest shopping centre in Tallinn, the Ülemiste Centre.

“This is in the interest of our shareholders,” says Hunt. Will there be synergies with other parts of the business? “Of course!” he exclaims, “in every destination people need to have an attraction. We will invite passengers to Tallink City and will be marketing it as one of the attractions of Tallinn.”

The Baltic Sea is ahead of many regions with its strict environmental regulations. “Here you can use only 1% sulphur in fuel, whereas in the Mediterranean you can have 3.5%,” he says.
Hunt is cagey on other future projects, restricting himself to hopes to “remain the market leader in this region and have the better services, quality and range-wise.”
On the corporate side, Tallink is set to pay back the loans and also starting from last year they are resolved to pay regular dividends.

“Annual growth percentages are not so big anymore, we are mature company”, says Hunt “but of course there are a lot of things to do.”

For instance, one big challenge is the new regulation of sulphur content in the fuel, coming into force in January 2015.

Passed by the European Parliament in 2012, it followed calls from the International Maritime Organisation (the UN agency responsible for safety of shipping and prevention of pollution).

All vessels in the Baltic Sea and the North Sea under all flags, of all ages and tonnage are required to have sulphur levels of not more than 0.1%. These seas fall under so called Sulphur Emission Control Areas, where the control for air pollution by ships is stricter than in other seas due to local and global air pollution and environmental problems.”

“This is today’s biggest uncertainty,” admits Hunt. “All transport companies are in the same situation, and it touches around 10,000 vessels: we should either buy more expensive fuel or invest in so-called “sulphur scrubbers.” Tallink is running pilot projects, but it is still unclear whether they will be compliant.

In any case, from next year the company needs to invest additional cash in this problem, and some of these costs will have to be passed on to the customers. But he reminds me that “we are in a better position than competitors, because we have a modern fleet, which uses less fuel than older vessels.”

So far none of the shipping companies have declared what they will do but Hunt thinks all will pay for more expensive, cleaner fuel.

He believes that there are a lot of costs which could be optimised, so sometimes such changes are for the best in the long run.” We already invested in internet sales channels, we also have automatic check-in machines, and mobile application is another potential cost-cutting measure.” These and other measures save overheads by improving efficiency.

“I’ve been with this company for 16 years, but every day there is something new, even now,” smiles Hunt, “this is the main thing that motivates me. Being the market leader, we need to be at the frontier of everything, so we are constantly developing together with the economy and the world.”

The Talink Story

Talink

In 1989 one of the last economic ventures of the doomed Soviet Union was to form a Finnish-Soviet joint venture Tallink to promote shipping traffic in the Gulf of Finland. The founders of the venture were the Finnish company Palkkiyhtymä OY, the city of Tallinn, the Port of Tallinn and the state-owned Estonian shipping Company (ESCO). In 1993, the Finnish investor left the joint venture and the state-owned ESCO became the sole owner of Tallink. In 1994 AS Hansatee was founded and took over the operator company, on a date considered as the legal date of incorporation of the current company. Tallink remained the trademark of ESCO. By 1995, 1.8 million passengers were being carried on the Tallinn-Helsinki line.

AS Hansatee was owned by ESCO, AS Eesti Ühispank and a second private investor, which sold its interest in 1996. In the same year, with the company not in the best shape, a new management team headed by the current Chairman of management board and chief executive Enn Pant, then only 32, was brought in to improve performance. Pant, a bright young graduate of Tartu University economics faculty, served as chancellor in the Ministry of Finance from 1992 to 1996. Under his leadership Tallink has become market leader and one of Estonia’s biggest companies, companies, although some market followers have hinted that more pro-active corporate communications might boost the firm’s underperforming share price.

This sweeping management change was accompanied by a change in ownership and €13 million fundraising, whereby management and certain companies related to Eesti Ühispank became shareholders. The company’s principal shareholder Infortar, was formed as part of this management buy-out.

In 1997, the Company changed its name to AS Hansatee Grupp, which was in use until 2002 when the Company changed its name to AS Tallink Grupp. Market speculation that Pant would leave Tallink in 2011, was refuted by the company.