Operating Risks
A wide variety of economic, political and social factors in countries throughout the world have the potential to impact negatively the NYK Group's mainstay shipping and integrated logistics operations, as well as its cruise and other businesses. Indicated below are some of the risks that could affect the Group's operating performance, share price and financial conditions.
The items described in the text below represent the Group's judgment of potential future events, as of March 31, 2009.
- A major shipping accident
Based on the Group mission statement that we contribute to the betterment of societies throughout the world as a comprehensive global-logistics enterprise offering ocean, land, and air transportation through safe and dependable monohakobi (transport), the NYK Group operates and controls ships throughout the world. We recognize the safe operation of vessels and preservation of the environment as our top operational imperatives. To ensure operational safety, we have implemented our own safety management system, NAV9000, to pursue environmental management certification. We have established the Environmental Safety Measures Promotion Council, which is chaired by the president of NYK, to periodically review safety measures for shipping and other operations. This structure is designed to guarantee steady improvements in the Group's safety levels and to ensure appropriate responses in the event of an emergency. Nevertheless, a major unforeseen accident, such as an oil spill or some other type of environmental contamination, could impact the operating performance and financial condition of the NYK Group. - Changes in the overall shipping and freight markets
The NYK Group endeavors to create stable operating revenue that is not affected by overall changes in the shipping market. However, changes in the balance of shipping supply and demand, such as a falloff in international freight demand or increasingly severe competition, could cause a substantial decline in shipping revenues or ship rental income. Such a situation could impact the operating performance and financial condition of the NYK Group. - Fluctuations in currency exchange rates
Many of the NYK Group's operations are denominated in foreign currencies, creating the possibility of losses resulting from exchange rate fluctuations. To reduce this risk, where possible we denominate costs in U.S. dollars and use hedging transactions, such as foreign exchange contracts and currency swaps. When preparing consolidated financial statements, the NYK Group converts the financial statements of its overseas consolidated subsidiaries into yen. As a result, fluctuations in currency exchange rates could affect the operating performance and financial condition of the NYK Group. - Changes in fuel prices
The NYK Group regularly purchases bunker oil for use as fuel for vessels operating throughout the world. Bunker oil prices fluctuate according to changes in the global crude oil supply and demand situation, and other changes involving OPEC and crude oil producing countries. We minimize the effect of such events by maintaining diverse fuel procurement sources, engaging in futures transactions and conserving on fuel consumption. Even so, steep rises of crude oil prices or increases in the low-sulfur fuel regulations could impact the operating performance and financial condition of the NYK Group. - Changes in regional economic conditions affecting global operational developments
As the NYK Group's sphere of operations includes Japan, North America, Europe, Asia, the Middle East, and other regions, economic conditions in each of these areas can influence the Group's operations. We gather information ourselves and employ outside consultants to minimize and, where possible, avoid such risks. Nevertheless, these changes could affect the operating performance and financial condition of the NYK Group. Some potential risks are described below.
- Disadvantageous political or economic factors
- Government regulations, such as operational or investment permissions, taxes, foreign exchange controls, monopolies or commercial limitations
- Joint operations or tie-ups with other companies
- Social upheaval, such as wars, riots, terrorist acts, piracy, infectious diseases, strikes, and computer viruses
- Earthquakes, tsunamis, typhoons, and other natural disasters
- Impacts of incidents arising during system development or operation
The smooth operation of its fundamental IT systems is essential to the operations of the NYK Group. In the event that an earthquake, fire, or other calamity affects the stable operation of these systems or causes them to go down, the Group will make every effort to get these systems back on line promptly. However, if these systems remain down for more than a certain period of time, the provision of information to customers and our business operations could be affected. Such incidents could impact the NYK Group's operating performance and financial condition. - Stronger legislation on environmental preservation, safety and security
The NYK Group recognizes the vital importance of environmental conservation activities and the security and safety of its distribution supply chain to its worldwide operations. Increasingly stringent public regulations to preserve the environment include moves toward double-hull construction, which reduces the danger of oil spills in the event of an oil tanker collision; standards to reduce CO2, SOx, and NOx emissions; and the use of electronically controlled engines. The costs required to respond to increasingly stringent legislative measures or social expectations on environmental preservation—including the prevention of global warming, atmospheric pollution, and the preservation of biodiversity, as well as safety and security, could affect the operating performance and financial condition of the NYK Group. - Operational restructuring
The NYK Group has restructured its operations in past years. Future operational restructuring activities, if implemented, could affect the operating performance and financial condition of the NYK Group. - Investment plans
Although the NYK Group's plans include investment in the expansion of its fleet of ships and aircraft, fluctuations including market conditions and government regulations could prevent these plans from progressing as initially intended. Such changes could affect the operating performance and financial condition of the NYK Group. - Fluctuations in interest rates
Internal funding provides the NYK Group with some of the funds it requires for the investment in vessels, aircraft and operations, capital equipment and operations. Other funds are procured from outside sources, and some of this external funding carries floating interest rates. The Group seeks to minimize the effect of interest rate changes by moving toward fixed interest rates on the basis of its assumptions about the interest rate environment. However, certain changes in interest rates could impact the operating performance and financial condition of the NYK Group, and affect the future cost of procuring funds. - Disposal of vessels
Changes in shipping demand and supply conditions, as well as technical developments and advances, cause physical limitations on the use of vessels as they become outdated or no longer comply with safety and other legal requirements. In such cases, the NYK Group may dispose of its vessels or aircraft, or cancel certain charter contracts for vessels to be chartered. Such activities could affect the operating performance and financial condition of the NYK Group. - Valuation losses on investment securities
The NYK Group uses the current value method to evaluate its holdings of investment securities that have explicit market values, taking as the market value the average market price during the one-month period preceding the end of the fiscal year. As a result, shifts in stock market conditions could affect the operating performance and financial condition of the NYK Group. - Retirement benefits plan
The NYK Group's defined-benefit plans include a defined benefit pension plan law, a qualified retirement benefits plan, an employees' pension fund plan and a temporary retirement fund plan. Legally, the NYK Group was required to change from a defined-benefit pension plan law to a different type of plan by the end of March 2012. As of April 1, 2007, a defined-benefit pension plan law is applied. Changes in the pension plan, the investment of pension assets or the assumptions behind the accounting for retirement benefits could affect the operating performance and financial condition of the NYK Group. - Evaluation of prospects for recovery of deferred tax assets
The NYK Group performs an evaluation based on estimated future taxable incometo determine the likelihood of recovering deferred tax assets. If we decide that part of or all deferred tax assets cannot be recovered because of a decline in estimated future taxable income or a revision in a nation's tax system, including a change in the statutory tax rate, we will reduce deferred tax assets and post a corresponding expense for taxes in the fiscal period when this decision was made. These expenses could affect the operating performance and financial condition of the NYK Group. - Litigation
The NYK Group is engaged in the ocean cargo transport, global logistics, cruise, air cargo transportation and other businesses. There is a risk of litigation concerning all of these business activities. Depending on the outcome, litigation could affect the operating performance and financial condition of the NYK Group. Two examples of ongoing litigation are provided below.
- Nippon Cargo Airlines Co., Ltd.
Major airlines of the world are under investigation by regulatory authorities in the United States, Europe and other regions concerning an alleged price-fixing cartel for air cargo services. Consolidated subsidiary Nippon Cargo Airlines (NCA) is under investigation by authorities in the United States, Europe and South Korea and is cooperating with these investigations. In Europe, NCA has received a Statement of Objections from the European Commission. In April 2009, NCA reached a plea agreement with the U.S. Department of Justice that includes the payment of a fine. NCA also believes that the European Commission investigation may result in the payment of a fine. NCA has established an anti-monopoly law allowance based on current estimates of these two fines. Furthermore, in the United States, NCA is a defendant in a class action lawsuit demanding an unspecified payment to compensate for damages caused by the alleged price-fixing cartel. - Yusen Air & Sea Service Co., Ltd.
In March 2009, the Japan Fair Trade Commission issued a cease-anddesist order and surcharge payment order to consolidated subsidiary Yusen Air & Sea Service (YAS) and other major users in Japan of international air cargo services for alleged violations of the Anti- Monopoly Act. Following an examination and confirmation of these orders and the careful consideration of a response, YAS concluded that these orders cannot be accepted. Consequently, the board of directors of YAS approved a resolution at an extraordinary meeting held in April 2009 to file an application with the Fair Trade Commission to initiate a hearing regarding this matter.
Despite taking this action, YAS has established an anti-monopoly law allowance equal to the surcharge that the Fair Trade Commission has ordered this company to pay.
- Nippon Cargo Airlines Co., Ltd.
The specific items described above are some of the ongoing risks that the NYK Group faces in its everyday operations, and are not intended to encompass all potential risks.