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Seaspan Corp (ATCO)
Q2Â 2019 Earnings Call
Aug 7, 2019, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Welcome to the Seaspan Corporation Conference Call to discuss the Financial Results for the Quarter Ended June 30th, 2019. I would like to remind everyone that this conference call is being recorded today, August 7th, 2019 at 8:30 A.M Eastern Time and will be available for replay starting today at 11:30 A.M Eastern Time.
Hosting the call today is Mr. Bing Chen, President and Chief Executive Officer; Peter Curtis, Executive Vice President and Chief Commercial and Technical Officer; and Ryan Courson, Chief Financial Officer.
We will open the call for questions and -- and after the presentation from management, at which point David Sokol, Chairman of the Board, and Torsten Pedersen, Executive Vice President of Ship Management will also be available for questions.
I will now turn the call over to Mr. Ryan Courson. You may begin.
Ryan Courson -- Chief Financial Officer
Good morning, everyone and thank you for joining us to discuss Seaspan's second quarter earnings. This morning we issued a press release announcing Seaspan's second quarter results for the period ended June 30th, 2019. The release, as well as the accompanying presentation for this conference call are available on the Investor Relations section of our website.
Please turn to slide three. I would like to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements, due to risk and uncertainties associated with our business, which are discussed in the risk factor section of our annual report filed with the SEC on Form 28-F for the year ended December 31st, 2018.
Our risk factors may be updated from time-to-time in our filings with the SEC. Please note that we assume no obligation to update any forward-looking statements.
With that, I will now pass the call over to Bing Chen to discuss highlights and recent developments.
Bing Chen -- President, Chief Executive Officer & Director
Thank you, Ryan. Please turn to slide four. Operational and financial performance. I will first provide brief financial highlights for the quarter and then Ryan will elaborate further. Our industry leading second quarter utilization of 98.7% was an improvement from last year's second quarter performance of 98.6%. Revenue for the quarter was $275.4 million, our better than expected operating income of $110.4 million was driven by lower operating expense per ownership day, which we continue to improve upon.
Our cash flow from operations was $369.9 million for this quarter. The increase from prior period is primarily due to the collection of a $227 million charter modification payments, as discussed last quarter.
EPS per diluted share was $0.10 compared to $0.34 in the second quarter of 2018. However, I would like to note that one-time, $227 million charter modification payment we benefit from in the first quarter of 2019, brought forward earnings we would have recognized on those charters in this quarter and subsequent quarters as well.
Also, the changes in fair value of our financial instruments contributed to a loss of $0.07 per diluted shares for the second quarter, primarily due to the tightening of the yield curve.
Given better than expected operational performance and a decrease in LIBOR, we will be revising guidance positively for revenue, operating expenses and operating lease expense for 2019, based on stronger than expected first quarter performance -- first half performance.
As previously mentioned in our closing call, we closed our $1 billion portfolio financing program, which will be our primary source of secured financing going forward. We have continued to execute on our capital strategy, repaying the remaining $311.4 million outstanding on our 2019 notes in April and subsequent to the quarter end have prepaid $231.3 million of the secured debt, increasing our pool of unencumbered assets to 40 vessels.
Please turn to slide five. While we continue to deliver on our five priorities, I would like to provide an update every quarter on key developments with regard to each of these focuses. We have made significant progresses this quarter and throughout this presentation, we will discuss some of our recent accomplishment, as they are related to these key priorities.
Our continued drive for operational excellence allows us to deliver better than anticipated operating earnings via improved operating expenses.
Our team has a strong focus on providing best in class service at a best in class cost. We do this by consistently investing and building on our integrated platform to enhance our customer-centric focus. We continue to build upon our customer partnership, signing significant charters this quarter, including several multi-year charters for our Panamax vessels to three of our key customers.
We have also been focused on deepening partnerships with our customers via our core business, highlighted by our recent framework agreement for strategic cooperation with Cosco Shipping Energy Transportation.
I'm pleased with our accomplishment this quarter and our team continues to build a solid track record for always executing on promises we have made to our customers, employees, financial partners and our shareholders.
Please turn to slide six. Since the last -- since the start of the quarter, we have concluded seven fixtures with one of our largest customer, Cosco Shipping, which includes several multi-year time charters. We continue to guide our customers on fuel change over procedures and make progress on our previously announced scrubber projects.
The projects and technology team is also working on several build [Phonetic] modifications to ensure we are able to provide best-in-class performance for our customers. June 2019 was the first month since April 2017 with no off charter days, meaning that all of our 112 vessels were on charters for the entire month.
This has been the focus for Seaspan internally and demonstrates our ability to provide excellence in both our in-house technical and commercial management of our fleet.
As we continue to strive toward achieving operational excellence, as the key value driver for our customers, our lost time injury frequency performance continues to improve. Additionally, our sea fare retention has improved to 96%.
I will now pass the call over to Peter Curtis, who will discuss the current industry outlook.
Peter Curtis -- Chief Commercial & Technical Officer
Thank you, Bing. Please turn to the slide seven. This past quarter, we saw the charter market continue to move in a positive direction. Despite box rates struggling against the backdrop of compliant fuel and the geopolitical environment.
We saw improving charter rates in medium sized segments, with the idle Panamax fleet declining to the lowest level since spring of 2018, with only one or two presently idle. And as a result of a much improved rates currently above $1,200 a day.
We expect that an increasing scrapping momentum will realize toward the end of the year and into 2020, when the higher fuel prices will take their toll on older and smaller vessels. This will provide additional tailwinds for rates and potentially provide further opportunities for rate improvements.
In the larger sized segments, the 8,000 to 10,000 TEU segment continues to be in high demand, which was partly driven by the need for replacement tonnage due to scrubber retrofitting. We have seen owners secure longer charters, given the high demand for these vessels and expect the supply for the rest of the year and the full year of 2020 to remain tight.
With reduced acquisition interest in the feeder segment below 3,000 TEU, there's been relatively little sale and purchase activity within the first half of the year, as compared with previous years.
We saw the sale of the few Panamax vessels and all the tonnage remains available for sale. That said, there remains no new builds in the 4,000 to 9,900 TEU segment, this being the case for a few years now. And we believe this will provide ongoing support for rates.
This segment accounts for nearly 10 million TEU of the global capacity of 23 million TEU. And we believe the lack of new builds is material in respect to the continued rebalancing of the supply chain. These segments are important for many trade routes for reasons including volumes, port infrastructure and landside logistics capabilities.
In summary, we remain optimistic about rates and asset values for the remainder of the year. Factors supporting such an outlook include the impact of scrubber retrofitting, which I will discuss further. Additionally, the likelihood of further slow steaming with the forecasted overall reduction of around 0.5 of a knot [Phonetic] due to fuel expenses and pressure through the IMO to reduce carbon footprints will potentially drive a meaningful increase in this demand into 2020 and onwards.
Please turn to slide eight. In terms of supply and demand, the rates of global trade growth has slowed marginally in the face of persisting trade tensions. Forecasted annualized growth has softened as the year has progressed. However, as mentioned, we also see improvements in the management of supply side dynamics, that's leading to a more balanced environment across most segments.
Mainland box trade is expected to grow by approximately 2.6% in 2019, supported by the Asia Europe trade, while the rate of growth on the transpacific volumes has softened, but remains positive.
Uncertainty exists with regard to transpacific trade lines [Phonetic], due to the potential effect of tariffs. In spite of this, there continues to be potential for marginal freight rate improvements, as the summer headhaul season progresses, a helpful indicator of the industry is that of utilization on the main trades. The primary East-West trades of Asia, Europe and Transpacific appear to follow a repeated -- or repeating seasonality fluctuation, currently with capable utilization at around 90% on the former and 95% on the latter.
Growth in other trades, however, remains robust. Non mainline East-West routes and the North-South routes continue to experience positive increases in container volumes, and intra-Asia container volumes are expected to benefit as a result of trade tensions and general trade growth.
Please turn to slide 9. On the supply side, the idle fleet order book and demolition volumes have shown positive fundamentals in the second quarter of 2019.
This demonstrates that the industry continues to manage the supply of vessels in an appropriate manner. There have been several encouraging developments, including a growing number of scrubber retrofitting programs requiring replacement tonnage, a lower idle fleet and a near all time low order book to existing fleet ratio at 11.2%.
The order book continues to be polarized with approximately 70% of the order book in terms of vessel numbers, being below 3,000 TEU and about 40% of the order book in terms of TEU, being larger than 15,000 TEU in size.
The low order book demonstrates both an increase in ordering discipline, as well as a limited resources for the ordering of new vessels, which we see as positive developments for Seaspan, as we are able to take advantages of our size, scale and financial strength.
On scrubbers, approximately 1.2% on average of container ship numbers in 2019 and 1% in 2020 is expected to be affected by scrubber retrofitting. But we actually expect more resulting in upward pressure on time charter rates, as line on secure replacement tonnage. This demand has cascaded down to smaller vessels, driving the rate increases and a 27% decline in the idle fleet since the end of Q1.
It is interesting to note that the rate of increase in tonnage removed from the service for scrubber retrofits has accelerated considerably in Q2, and likely represents the picture going forward well into 2020 or even further. To illustrate this, in January, there were 3 units of an aggregate of 18,000 TEU out of service.
In April, that increased to 15 units of about 140,000 TEU, and in July, 30 units of 350,000 TEU aggregates or about 1.5% of global capacity was out of service for scrubber retrofit.
Cycling back to idle tonnage, I think it is useful to explain that as of last week, the idle ship line up of 140 vessels consists of around 100 units less than 3,000 TEU, which are not prime candidates for scrubbers and most of which were idle on spot waiting employment. In the largest segment of 3,000 TEU and above, there were 38 units idle, made up primarily of scrubber candidates and significantly, these vessels were liner controlled [Phonetic] with employment.
In regard to scrapping, demolitions are expected to increase materially toward the end of the year. The increase was largely driven by smaller vessels, due to the higher average age of this segment, as well as the time charter rate environment.
Year to date, scrapping has already marginally exceeded figures from full year 2018, but are still well south of that of 2016 and '17.
I would now like to pass the call over to Ryan to discuss our financial results and forward-looking guidance.
Ryan Courson -- Chief Financial Officer
Thank you, Peter. If we could all please turn to slide 10, where l'll provide an overview of our financial performance for the second quarter. Our vessel utilization for the quarter was 98.7%, an increase from the 98.6% in the second quarter of 2018. Operating costs per ownership day was $5,743, a 7% improvement from the comparable quarter of 2018 and a 4% improvement from the first quarter of 2019.
Revenue was $275.4 million, a 2% decrease from the second quarter of 2018, differential primarily driven by changes in daily charter rates from the charter modification. General and administrative expenses were $6.9 million in the second quarter. This represents a decrease of 24% from the second quarter of 2018, primarily due to the transition payments in 2018 related to prior executives.
Our operating earnings for the quarter were $110.4 million, an 8% decrease over the comparable quarter in 2018. Due in part to higher operating lease expense as a result of the changes in the accounting treatment of operating leases, which we have previously discussed, as well as the charter modifications that took place in the first quarter.
GAAP diluted EPS for the quarter was $0.10 compared to $0.34 in the second quarter of 2018. As being noted previously, our charter modification in the first quarter resulted in a $227 million cash payment, which was reported as a one-time gain during the first quarter. While this transaction was significantly NPV-positive, it did have the effect of lowering future revenue and net income in subsequent periods, post this charter modification, as future charter payments were accelerated to the first quarter of 2019.
Additionally, changes in fair value of financial instruments contributed a loss of $0.07 per diluted share for the second quarter and a loss of $0.07 per diluted share for the first half of 2019. Cash flow from operations for the quarter was $369.9 million compared to $125.4 million in the same quarter of the prior year.
This includes the $227 million charter modification payments that had been collected on April 1, 2019, as previously discussed.
If you could turn to slide 11, where we will discuss our capital structure developments. Upon the close of the first quarter, we continue to execute on our capital plan and have made significant improvements to our capital structure and liquidity position.
Our deleveraging efforts continue, most notably through the receipt of the $227 million from the charter modification payment on April 1, and subsequent pay down of the outstanding principal on our 2019 notes. Following the close of the quarter, we have prepaid $248.5 million in secured debt, which unencumbered six assets.
As of August 7th, 2019, we have 43 unencumbered vessels, 16 of which will enter into our vessel portfolio financing program with the closing of our $1 billion financing program or unencumbered fleet as an increasingly liquid source of capital, as the flexible borrowing base structure allows us to finance these vessels on a short term basis.
This provides us a meaningful amount of flexibility in how we manage our capital structure and liability management program. I will discuss this in more detail on the following slide, which we can now turn to.
As announced during the financing closing call on May, we see the closing of this $1 billion vessel portfolio financing as a structure that will fundamentally change the way business can be done in the container shipping space. The program was a major step in our capital plan. With the closing, we continue to progress on refinancing credit facilities and drawing on the initial $1 billion.
As previously mentioned, we intend to grow this program in the near-term. In addition to improving our cost of capital and amortization profile, the program greatly enhances our flexibility to manage our liabilities. We designed the financing structure to be flexible and controlled by a borrowing base, which allows for Seaspan to draw or repay debt and add or remove secured assets.
With this facility in place, our pool of unencumbered assets becomes more liquid and valuable from a flexibility standpoint. As a final note, the flexibility of the program actually brings much needed simplicity to our capital structure. The program alleviates administrative burden across the treasury team, reduces cash trapped by credit facilities, freeing up working capital and finally provides a more streamlined and lighter set of covenants.
If we could turn to slide 13, I would go over the forward-looking guidance. Please note that any forward-looking guidance is based on current information and estimates are subject to change. As stated in our previous earnings calls, we will issue only annual guidance, as we believe it is more consistent with our strategy to build long term franchise value.
We intend to update our annual guidance on a semiannual basis with each second quarter earnings release. We will additionally update guidance for material events, as we did in the first quarter of 2019, absent a material event, we do not intend to update guidance during the first and third quarters of our fiscal year.
Given our better than expected operating performance over the past two quarters, we would like to revise our guidance on revenue, ship operating expense and operating lease expense. Revenue will be between $1.115 billion and $1.120 billion.
We increased the lower end of the range by $5 million. Ship operating expenses will be between $240 million and $245 million. We lowered the upper end of the range by $5 million. Operating lease expense will be between $155 million and $160 million. We lowered the upper end of this range by $5 million. G&A will continue to be between $30 million and $35 million. This is unchanged and we reaffirmed the expected range.
If you could now please turn to the next slide. We'd like to take this time to announce and invite you all to our 2019 Annual Investor Day, which will be held on November 22nd at the New York Stock Exchange. In 2018, we held our first Investor Day in many years and it served as a reintroduction of the Company. Going forward, we value this communication platform to meet all of our investors and capital partners to take their time to update them on our business as well as to address any of the questions you may have.
We look forward to seeing you all there. That concludes my formal remarks. We thank you for your time today. And with that, I will pass the call back to the operator to open the call for any questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions]. And our first question coming from the line of Chris Wetherbee with Citi. Your line is open.
Ryan Courson -- Chief Financial Officer
Good morning, Chris. You are in mute.
William -- Citi Group -- Analyst
Sorry. This is William [Phonetic] on for Chris, and we just want to ask you a quick question about your leverage profile. So we understand that your leverage profile has improved recently and we just want to get a sense of how comfortable you are with your current level of leverage after factoring in your prepayment. And has your thought process involved at all when it comes to level of leverage you want to reach and what leverage level you would like to be comfortable at before you consider another acquisition?
Ryan Courson -- Chief Financial Officer
Thank you for that. From a leverage perspective, we continue to execute on our capital plan that we outlined on our 2018 Investor Day. We think that the deleveraging profile of the Company is -- currently continues to be in the right direction and we always evaluate capital allocation opportunities both on the capital structure that we have currently as well as capital outlay opportunities from a M&A or acquisition opportunity perspective.
That said, from a long term goal, we continue to believe that we're on track to achieve an investment grade credit rating.
William -- Citi Group -- Analyst
All right. Thank you for that additional color there. When you think about your available capacity on your current credit facilities and also your ability to upsize your vessel portfolio financing program, under what situations would you want to upsize that facility?
Is it something you guys would consider using in M&A or are there any restrictions on it that could prevent you from doing so?
Ryan Courson -- Chief Financial Officer
It's a good question and you can find the relevant 6-K that details the terms of that on EDGAR. What I would say with the portfolio financing program is that, it is going to be the cornerstone secured financing program that we have for our current outstanding asset portfolio. So as we think about the upsizing, it really allows us to manage that asset that current asset portfolio [Phonetic] we have in a more dynamic and flexible manner.
And so when we think about increasing the size of it, just for the current assets, what we think about is also removing current secured bilateral facilities that are outstanding. As we remove those secured bilateral facilities, we increase the flexibility not only to operate and manage those liabilities, but also to do things within inside the business on a cleaner, more streamlined basis.
From a capital outlay program, we continue to have significant capacity available under that facility. It's a $2 billion total capacity facility and we're going to have drawn a $1 billion at the close of the first phase, and so we will have capacity to work through vessel acquisition opportunities in that, determined by the financial profile of those vessels.
William -- Citi Group -- Analyst
All right. Thank you. And I guess just one final question there. I mean, what are your thoughts on the current shipping market and valuation levels across it? Are there any portions of the container market that look particularly attractive to you right now in terms of a TEU range or anything like that?
Bing Chen -- President, Chief Executive Officer & Director
Thank you. This is Bing. That's a good question as well. I think for us, obviously, we have over 20 years accumulated proprietary knowledge with regard into the assets, and that's what we're here for -- is to managing the assets. That being said, we don't really particularly focusing or prefer one particular class versus the others. The way we're looking at the acquisitions of the assets or purchases, whether it's a new build or is the second hand is, is really looking at first is the risk adjusted return. The return is very important.
And secondly, we'd also look at is from the impact of our balance sheet in terms of how that's financed. And the third part we're looking at is the customer needs, because that's very important. Ultimately, the customer demand is the driver in addition to the other criteria we consider. So in general, I think, your question is with regarding to which class of the vessels is more in demand or have more value. I think we -- in a previous phone call, the cause we have mentioned is that, particularly at current maybe the over 12,000 TEU vessels, those are the vessels much more versatile. And that actually you can see from the fleet composition of ours that actually a majority of 70% of our fleet is above 10,000 TEU.
William -- Citi Group -- Analyst
All right. Thank you for taking my questions.
Operator
And now our next question coming from the line of Randy Giveans with Jefferies. Your line is open.
Randy Giveans -- Jefferies -- Analyst
How're you doing, gentlemen. How is it going?
Bing Chen -- President, Chief Executive Officer & Director
Good morning.
Ryan Courson -- Chief Financial Officer
Good, thanks.
Randy Giveans -- Jefferies -- Analyst
I'd have [Phonetic] few quick questions from me. So Slide 7, shows some recent improvement in short term rates on the 4,400 TEU vessels. So what are the kind of current [Phonetic] one to maybe three year, I guess, time charter rates for these container ships, and do you expect to keep operating these in spot or you look to sign a bunch of these away on some charters?
Peter Curtis -- Chief Commercial & Technical Officer
Hi, Randy, it's Peter here. So firstly, our spot vessels or our short term vessels are primarily in the segment of the Panamax. We have been successful in putting away some of these vessels for longer periods. As the demand for -- the demand is essentially exceeded the supply.
So we found it opportune to put vessels away. So we've been fairly successful on that. In regards to the general dynamic, one of the comments I made a little earlier was that the segment between 4,000 and just below 10,000 TEU, has got to zero order book.
And this constitutes nearly 40% of the total capacity of the global fleet. So it comes against a more economic tonnage in the future, which reflects back at what Bing was looking at or talking about in terms of our future prospects.
But in essence, we see good prospects for this fleet of ours. We review fairly frequently what we want to do with the tonnage. And so far, our aims are to retain the tonnage.
Randy Giveans -- Jefferies -- Analyst
Okay. I guess since you just locked in a few away, what rates were you locking into your net [Phonetic] and what duration?
Peter Curtis -- Chief Commercial & Technical Officer
We've done a few on multi-year, and some of them have been fixed rates and some have been on -- what's called a floating rate context. And you would have seen these -- that we've mentioned this in our previous call.
Randy Giveans -- Jefferies -- Analyst
So for the fixed rates of those $10,000, $12,000, $14,000 a day, can you give some kind of range around that?
Peter Curtis -- Chief Commercial & Technical Officer
Now they are sort of between the $9,000 and $11,000 a day.
Randy Giveans -- Jefferies -- Analyst
And then [Speech Overlap] Well, go ahead.
Bing Chen -- President, Chief Executive Officer & Director
The market today has increased quite considerably due to this shortage. We -- what you see in the market today is above $12,000 a day. And our most recent fixture was [Indecipherable] it's actually, if you're looking at the beginning of the year, the rate is almost doubled in the sense that right now, as Peter said, is actually moving in APAC areas close to $13,000 in the most recently [Indecipherable]
Randy Giveans -- Jefferies -- Analyst
Great. Okay. That's a good guess [Phonetic] there. All right. Second question, has there been any increased interest from some charters to install scrubbers on the vessels with long term charters? Maybe either through Seaspan paying the capex forward and then doing a rate step up something like this?
Ryan Courson -- Chief Financial Officer
Randy, could you maybe repeat the question just for to make sure that we all [Speech Overlap]
Randy Giveans -- Jefferies -- Analyst
Yeah. Sure. So has there been an increased interest in recent months from the charterers on the vessels with long term charters to install scrubbers? Maybe by you, Seaspan paying the upfront capex for the scrubber installation and then the charterer, thus increasing their day rate by $2,000 to $3,000, $4,000 a day to repay you over the next three, four years?
Peter Curtis -- Chief Commercial & Technical Officer
Yeah, it's Peter again. In essence, the answer is yes. We continue to discuss with our customers. The two methods that you've mentioned are in fact the methods that we employ already with the units that we are retrofitting, we'll be retrofitting starting in Q4.
We maintained discussions with our customers going forward as to the interest and in certain cases, there's more interest than others.
Randy Giveans -- Jefferies -- Analyst
Okay. And then can you give me the number of vessels that are currently scheduled to get scrubbers installed? Either later this year or early 2020?
Bing Chen -- President, Chief Executive Officer & Director
In our fleet, we have ten units --
Randy Giveans -- Jefferies -- Analyst
Ten units discover [Indecipherable].
Ryan Courson -- Chief Financial Officer
Yeah.
Randy Giveans -- Jefferies -- Analyst
Awesome. All right, one more question just kind of general. Obviously, US-China trade war making new headlines. So how do you kind of see the container ship market being impacted by these new tariffs? Will there be some replacement of routes or is it kind of too late at this point in the logistics already in place that there won't be much impact to the transpacific trade?
Bing Chen -- President, Chief Executive Officer & Director
Thanks, Randy. This is Bing. As we previously stated, actually for Seaspan, we don't see any impact. This is actually evidenced by the fact that for the past since June that we have zero idle for the entire fleet of 112 vessels.
For the industry, we see based on a forecast by the research, I think for the industry as a whole, probably the impact is somewhere around in the guesswork around about 2%. The negative impact to the total industry. The impact obviously will be primarily in the areas of Transpacific. That being said, and as you correctly pointed out, the -- ultimately, it's a matter of -- for shipping, it's the matter that you're moving the goods from point A to B.
You're just changing the routes from -- across Transpacific to maybe other routes, that's one thing. And the other part is, this is also, that if we were looking at that in terms of the growth and as Peter mentioned earlier, the industry as a whole, I think the traffic for North to South and other regional traffic actually, the growth of the other areas would actually offset in the negative impact from the trade war.
And if we're looking at the other reference point, is that, if we're looking at the last year, when the tariff discussions were initially added on, actually, accelerated the demand, because the goods needs to get in earlier. So if we're looking at this round of tariff discussions that is going to -- in other words, the US is going to impose on this additional $300 billion of tariff, effective September 1st.
Actually, that probably could also have acceleration factor to the demand side of it. As Peter mentioned earlier, again, that, if you're looking at right now, just for the factor of Panamax, well 4,000, 5,000, 5,500 TEU sectors right now that's a zero in the market. That's a zero idle vessels.
So that will give you some color in terms of the impact.
Randy Giveans -- Jefferies -- Analyst
All right. Thank you for the time.
Operator
Our next question coming from the line of Amit Mehrotra with Deutsche Bank. Your line is open.
Chris Snyder -- Deutsche Bank -- Analyst
Hey, good morning. This is Chris Snyder on for Amit. So as we move closer to 2020, can you talk about the impact of higher fuel prices on the business? Of course, you guys [Technical Issues] through, but how do you think about higher fuel prices as it relates to the broader container ship demand and your counter party's ability to handle the step up in fuel costs?
Peter Curtis -- Chief Commercial & Technical Officer
Hi Chris, it's Peter. So generally speaking, you're quite right. We see additional fuel costs coming on with the improvement in the supply demand question, part of which has been the retrofitting of scrubbers, which we expect will continue through probably until 2021, would be my prediction, which causes by the very meaning tonnage coming out of service and therefore further tightening of the supply demand service -- supply demand equation.
With the increase in costs, against other aspects such as the environmental aspects regarding carbon footprints, etc. What we think would likely happen would be some speed reductions, which would be yet again a further influence on a tightening supply demand equation.
So all in all, we see that these changes in the environment of fuel cost, carbon footprint reduction, etc, are all very positive signs for Seaspan, and which we have actually -- we are starting to see being realized in the market.
Chris Snyder -- Deutsche Bank -- Analyst
Okay, fair enough. And then just following up on the slow steaming. Could you maybe just talk about the speed of the current fleet and how low could this potentially go in 2020?
Peter Curtis -- Chief Commercial & Technical Officer
What we're seeing currently is our larger vessels are operating at about, just below 19 knots on average. The smaller vessels are just above 19 knots on average. There is predictions of maybe about 0.5 of a knot reduction, which would have a meaningful effect on fuel consumption, and therefore on carbon footprint reduction.
Chris Snyder -- Deutsche Bank -- Analyst
Okay. Thank you for that. And then second question. And so the market has got pretty tight despite the trade tensions.
However, somewhat surprisingly, there's really been no ordering for container ships since Q1, despite market being tight in the order book at a 20-year low. So I guess, firstly, are you just surprised at the lack of ordering, and is it the result of maybe just negative sentiment around trade or something more structural going on?
Bing Chen -- President, Chief Executive Officer & Director
Hi Chris, this is Bing. I think that we're not surprised. As you know that industry in general is developing toward a healthier demand and supply dynamics.
In terms of the shortage of the new build, I think it's in a way, it's quite expected, and we would expect that this is going to continue going forward as the demand and supply is getting more healthier. Just in the way that those shortages is actually, to a certain extent has also been compensated by the alliances, which, as you know, that with alliances that's continued to forge ahead, that do actually brings the further efficiencies across the liners. And that's, I think, one of those healthy development as well.
And speaking of the fuel cost, as you raised the question earlier, I think that, we are very confident in the sense that, our customers over the long-term they will be -- manage these fuel cost effectively, and I think that overall that from the demand and supply perspective, and I think that's the fundamental of the industry is moving toward the positive direction.
And I think all the other regulatory compliance, environmental requirements is actually -- it's healthier to really, I think improve the standards and also the participants in the industry, and I think from Seaspan's perspective that we are actually working, we see this as a great opportunity that we're working with our customers that to manage the fuel change over, to work on the scrubber installation, to looking at new LNG powered solutions for the new build.
So we are actually seeing these very encouraging development that allows us like -- companies like Seaspan to work with our customers, at the partnership, across the issues in there, whether it's a new build in operations environmental, including the financing to be able to best to service them and being a partner long term.
Chris Snyder -- Deutsche Bank -- Analyst
Well. That's it from me. Thanks for the time, I appreciate it.
Operator
[Operator Instructions]. Now our next question coming from the line of Kevin Sterling with Seaport Global Securities. Your line is open.
Kevin Sterling -- Seaport Global Securities -- Analyst
Thank you. Good morning, gentlemen.
Bing Chen -- President, Chief Executive Officer & Director
Good morning, Kevin.
Kevin Sterling -- Seaport Global Securities -- Analyst
Guys, your zero off charter days in June is quite impressive for a fleet of 112 vessels, and as you focus to keep all your ships moving, what are some of the key drivers to keep your off charter days at zero? Is it just more a function of a tightening market or there's some things that you could do on your end, such as maybe better maintenance, just the ships don't break down and keep them moving?
Bing Chen -- President, Chief Executive Officer & Director
Thanks, Kevin. That's an excellent question. Actually for us to be able to manage a size of 112 vessels with zero idle rate and that's actually quite significant. Market obviously, helped to a certain extent, but this is really the hard work and determination of the team here at Seaspan. We have been consistently working very hard to improve and this quality of service that we -- as we say, we provide the best in class service to our customer in terms of providing the reliability, flexibility and scalability to our customer.
Not only that we will be able to manage in these vessels technically, which our team has done a tremendous, tremendous job in a way that, to manage the size and the diversity of the fleet.
But also that we have a very trusted customer relationship and partnership, which is built over the time, where -- whenever that they have the needs, as we have said. To-date, our customers are not just looking for a vessel alone, they're looking for a solution, they're looking for a service. And this is where Seaspan has built and invested in our platform, integrated platform over the past 20 years.
And with this platform, we will be able to provide again the reliable, flexible and scalable services. Whatever those needs are, which is been embedded in the vessel chartering. And that is the result, as we see that, we continue to strengthening our customer partnership and our customer continue to appreciate and viewing more, and for example with the environmental changes, the fuel IMO 2020 and I think we increasingly our customer comes to us and asking for advice.
And that's one of the very encouraging development. But after all, as we know that the cost, it is also very important. As you see from our press release, that we have continued to drive down our operational cost. And this is -- it's something that is -- maybe, we don't take it for granted that easy, if you see that in the level and the magnitude and consistency of the way that we drive down the cost.
So, as we said, this result, this is very encouraging, but that is a result of our strive to the best in class service with the best in class cost.
Kevin Sterling -- Seaport Global Securities -- Analyst
Got you, Bing. Thank you. Let me take a step further if you don't mind. On your operating expenses, your ship operating expenses. And like you said, you guys have lowered those, and I'd imagine, if you can, you want to keep lowering those. Is there some more lower hanging fruit that you can pick off to keep driving your ship operating expenses lower? Are there things that you can keep doing to get those levels lower or is it more about scale?
Ryan Courson -- Chief Financial Officer
Thanks, Kevin. So at a first level, the team has done a great job focusing on an opex basis, through-and-through, day in and day out as Bing mentioned. We continue to believe that there's opportunity, because we continue to innovate in this space. But we don't provide guidance as it relates to what we think is available from an order of magnitude or an absolute number standpoint.
But we have a best in class scale and a best in class operating platform as Bing mentioned. And we continue to believe that there is opportunity and we continue to innovate in the space and we expect to continue to see improvements over time.
Kevin Sterling -- Seaport Global Securities -- Analyst
All right, thanks, Ryan. And Bing, I've just got one more question. It's a big picture question. So you guys, obviously, you've been quite busy. You've done a lot over the past year, year-and-a-half. You did financing, the acquisition of CGI or streamlining of expenses.
But as we look forward, what's on your to do list now? What are some of the things you're looking to accomplish? Say, the next couple of years, whether it's on the strategy side, operations side? I would just love to hear big picture, what are some of the things you're focusing on now? You've accomplished quite a lot, but what are you looking to? What are some of things you're focusing on now?
Bing Chen -- President, Chief Executive Officer & Director
Yeah, whether it's a strategy or operation, our number one priority and focus is to create the shareholder value long term. With that being the ultimate goal, on a strategic side, we will continue to managing the business professionally, and to streamline, a process, our team has done a great job. For example, at this first half of year that we really revamped it, our systems to continue to stay in the forefront of leading edge of our industry.
We continue to drive the cost, we'll continue to invest in people and platform. So overall, I think that the first part in terms of our bread and butter is that we're going to continue to focusing on operational excellence, as I highlighted.
At the same time, as you know that our business is actually -- our business model is very stable and predictable in the sense, as you can see, given all these different cycles and events that our business is very stable and resilient, which means also that we actually generate a very sizable amount of capital, free cash flow, as we said that, this is one of the areas that we're going to continue to focusing on, in terms of strategies to best allocating our capital to the way that we can get the best returns for our shareholders.
That being said, we will continue, as we say from a growth perspective, that we're focusing on our core business, which is the container shipping. Whether it's within the container shipping, we're looking at a new build, we're looking at the second hand. And as we said that, we have a very, very clear and stringent criteria in the sense as to -- what our investment criteria is.
And so that is the area that is guiding us in looking at the container space as well as the adjacent space, which in the areas as we mentioned earlier, that for example, we have signed the framework agreement with the Cosco Shipping, Cosco Energy Transportation, OK.
In general, our strategy is to roll, but roll on a very controlled, risk adjusted basis, where that we leverage on our platform. Our platform is in -- consisted [Phonetic] of the innovative, for example, the financing that we have done, the operations we continue to build, the scale and the efficiency and on the customer side. So with all of those being the basis for our growth that we believe that, whether it's within the container space or in adjacent area, we find -- we will find the right growth opportunities and be able to create incremental value for our shareholder going forward.
Kevin Sterling -- Seaport Global Securities -- Analyst
No, it's great Bing. Thank you for your thoughts and congratulations on a solid quarter. And also just how you guys are thinking out of the box. So, best of luck to you. Thank you for your time.
Bing Chen -- President, Chief Executive Officer & Director
Thank you.
Operator
And our next question coming from the line of [Indecipherable]. Your line is open.
Unidentified Participant
Hi. Good morning, everybody.
Ryan Courson -- Chief Financial Officer
Good morning.
Unidentified Participant
Yeah. First of all, just exceptional transition for the Company. I've been following Seaspan for many years and we were kind of in the woods a couple of years ago. And just very impressive transition, the whole new team in place. So Bing led by you, so congratulations on that. Shifting a little bit here, I got on the call just a few minutes late, we had a bunch of calls this morning.
But you look at your new Panamax contracts, I see you have a few multi-year deals. Can you talk to me a little bit on the structure there? Are those floating rates, are those fixed rate? How did those transition be at the market?
Bing Chen -- President, Chief Executive Officer & Director
It's a combination of both. We have some fixed rate, some floating rate. That depends on what we see at market and the right time and we will choose the different structure.
Unidentified Participant
Excellent. And what percent of the Panamax fleet does that make up, because I know you had a lot of Panamax on those short term charters.
Bing Chen -- President, Chief Executive Officer & Director
I think it is a sizable amount in terms of the long term contract that we currently have with our Panamax fleet.
Unidentified Participant
Excellent. And then looking over to your Swiber transaction now working over there in the Vietnam LNG to power project, you know, with the Asian gas prices coming down, it seems like that import project would be pretty economical. I didn't see any direct updates in your press release or in the presentation, was there anything else to share on that? Or is it still in progress?
Bing Chen -- President, Chief Executive Officer & Director
Yeah. As you know that the Swiber transaction is you know, a judicial management [Phonetic] process in Singapore, which is a quite a lengthy and complicated process. As you could appreciate that, we would not be able to disclose anything other than what's been disclosed by them. And it's a process that needs to be managed by the judicial manager and we will update you as you know, the material developments occurs.
Operator
And at this time, I am showing no further question. I would like to turn the conference call back over to Mr. Chen Bing for closing remarks.
Bing Chen -- President, Chief Executive Officer & Director
Okay. So thank you everyone for -- for your questions and also for listening to us. We will look forward to updating you on our third quarter results and wish you everyone have a great day and thanks again.
Operator
[Operator Closing Remarks].
Duration: 53 minutes
Call participants:
Ryan Courson -- Chief Financial Officer
Bing Chen -- President, Chief Executive Officer & Director
Peter Curtis -- Chief Commercial & Technical Officer
William -- Citi Group -- Analyst
Randy Giveans -- Jefferies -- Analyst
Chris Snyder -- Deutsche Bank -- Analyst
Kevin Sterling -- Seaport Global Securities -- Analyst
Unidentified Participant
