First Kongsberg Rolls-Royce’ order: the contract and its context

Paul Gunton
Paul Gunton
ShipInsight

09 April 2019


ShipInsight’s technical editor Paul Gunton sees Kongsberg’s first order since acquiring Rolls-Royce Marine as a transitional moment.

Kongsberg’s first order for what was once Rolls-Royce Marine technology gives an opportunity to reflect on Rolls-Royce Marine’s transition into Kongsberg, which was completed on 1 April.

The agreement is for a 10-year ‘Power-by-the-Hour’ service agreement for four coastal cruise vessels on order for the Norwegian operator Havila Kystruten and is worth Nkr150M (US$17M). Its context, however, is just as important as the contract because of the continuity that it signals.

Kongsberg

It is less than two years since Rolls-Royce signed its first marine Power by the Hour contract in May 2017 – it has offered the service in its aerospace sector since 1962 – for what it called at the time a ‘groundbreaking’ agreement covering two sister 5,000dwt cargo vessels Kvitbjørn and Kvitnos, operated by Nor-Lines.

While there have been some agreements covering individual items of machinery since then, ShipInsight understands that there have been few agreements that cover all the Rolls-Royce – now Kongsberg – equipment on a vessel. Adding the detail that this latest deal covers the entire fleet of a new operator that has made history by successfully challenging Hurtigruten to win operating licences on Norway’s west coast, makes this a particularly notable reference.

Geir-Håøy-President-and-Chief-Executive-Officer-KONGSBERG-Nor-Shipping-pic-March-2019
Geir Håøy, President and Chief Executive Officer

ShipInsight published details of the ships’ LNG-fuelled propulsion systems, which will be covered by the scheme, in October last year. The vessels are on order in two pairs at Astillero Hijos de J. Barreras shipyard in Spain and Turkey’s Tersan yard and will enter service in 2021 to operate between Bergen and Kirkenes.

Kongsberg announced the contract on 8 April, just a week after its Rolls-Royce Marine acquisition was finalised, so it must have been part of the final transition discussions. In that context, this order is significant not just from a business point of view but also because it sets an important benchmark so early in the new combine’s life.

Yet that symbolism was not stressed in Kongsberg’s statement marking the contract. “Power by the hour … enables us to offer ships better and more comprehensive service agreements than before,” it quoted Kongsberg Maritime’s president Egil Haugsdal as saying.

But although its announcement of this first order did not emphasis its timing, there is no doubt about the importance that Kongsberg attaches to its Rolls-Royce Marine purchase. “I have looked forward to this day for a long time,” its chief executive Geir Håøy had said in a statement to mark the new era a week earlier. “We have spent a long time planning and preparing, now the work of ensuring a successful integration begins.”

In an interview circulated a few days before that, on behalf of the Nor-Shipping exhibition organisers who believe their show will help promote Kongsberg’s newly-enlarged status, Mr Håøy gave some hints about his plans for the merged business. He hopes to see strategic growth, he said. “We want to secure a bigger footprint upon our customers’ assets” by becoming “more of a complete solutions provider.”

That interview outlined some of the ambitions that must have prompted Kongsberg to make a bid for its loss-making competitor. The combination will be a one-stop shop with broad expertise, Mr Håøy had said. “We believe that is a powerful proposition.” But there is more than just breadth to his plans: there is also size. “We will now have products on around 30,000 vessels in the world fleet,” he said. “This is a very significant installed base.”

It is indeed: the International Chamber of Shipping’s website says “there are over 50,000 merchant ships trading internationally.” If that means 50-60,000 ships, then Kongsberg now has equipment on at least half of the world fleet. Who wouldn’t want that level of market penetration?

Mr Håøy also expects that ships will become increasingly connected and believes that “having one supplier providing complete solutions makes perfect sense” because it provides “a more ‘joined up’ approach [that will] impact positively on both operations and businesses.” There is logic in what he says, but shipowners usually like to see some competition for their business, so they may not fall in behind the march towards a one-supplier future.

While Mr Håøy makes his plans for Kongsberg’s future, the former president of Rolls-Royce Marine Mikael Mäkinen has moved on. In an interview last year, before Kongsberg made its offer, he had made it clear that he would not be staying at Rolls-Royce but was unsure whether he would transfer to its eventual new owner. He confirmed his decision in a foreword to a commemorative publication given to all Rolls-Royce Marine staff as the acquisition neared.

When he had joined in 2014, his plan had been to grow the business, especially in offshore. He was undone by the oil price crash a few weeks later and the downturn in offshore. The marine business went from being Rolls-Royce’s second division in terms of profitability to being a loss-making segment that eventually “was no longer a priority for the group,” Mr Mäkinen’s notes said.

But the Havila Kystruten shows that it is business as usual for those who did make the move. For them, Mr Mäkinen signed off his message with his best wishes. “Thanks for the good times and good luck for the future.”