Tokai Kisen Co., Ltd.

In the passenger segment, boarding passengers are concentrated in the peak summer season, resulting in a tendency for profits to be weighted toward the second half of the fiscal year. If first-half performance is weak, the outlook for full-year results becomes unstable, making it difficult for investors to evaluate performance. Given the highly seasonal demand structure, there is a risk that second-half results could be significantly impaired if external factors such as abnormal weather or infectious disease outbreaks coincide with this period.

Each of the Group's routes is subject to the Remote Island Route Development Act due to its public and livelihood-related nature, and there are routes that must be maintained for public interest reasons even when unprofitable. Operating routes without regard to profitability is a factor that constantly pressures the profit structure. A characteristic risk is that regulatory constraints limit the scope for profit improvement measures such as route abolition or reduction.

A significant rise in marine fuel oil prices is a material cost burden that directly affects the Group's costs. As a countermeasure, a fuel oil price fluctuation adjustment charge has been set separately from passenger and freight fares since December 2004, with a revision also implemented in February 2020 in response to stricter SOx regulations. However, passing on costs through the adjustment charge may lead to reduced demand, and the impact on profits during periods of rising prices cannot be entirely eliminated.

There is a risk that the service rate will deteriorate due to the effects of typhoons or low-pressure systems, reducing passenger and freight revenue. Typhoons tend to be concentrated in the summer peak season, and combined with the second-half-weighted profit structure, the impact on performance could be substantial. A decline in the service rate can also lead to lower customer satisfaction, which may affect demand over the medium to long term.

The routes served and the ports used are located in areas prone to frequent earthquakes and volcanic eruptions, and in the event of a disaster, maintaining scheduled routes may become difficult. Suspension or discontinuation of routes directly leads to the loss of passenger and freight revenue, and if physical damage occurs to port facilities or vessels, substantial repair and restoration costs may be incurred. Given the geographic characteristics of remote islands, alternative means of transportation are limited, so the impact on local communities could also be severe.

If an infectious disease such as a new strain of influenza spreads on a large scale, there is a risk that passenger revenue will decline sharply due to a substantial decrease in the number of passengers. In addition, if employees become infected, securing crew members may become difficult, potentially hindering the stable operation of routes. If an infectious disease spreads during the summer peak season, which relies on tourism demand, the impact on second-half performance would be particularly severe.

Regarding fixed assets such as vessels held by the Group, if a decline in profitability makes it unlikely that the invested amount will be recovered, an impairment loss may be recognized, adversely affecting the financial position and operating results. In addition, for other securities with market prices, the mark-to-market method is applied, and a decline in market value due to fluctuations in the stock market could also adversely affect the financial position. Given the existence of unprofitable routes and demand volatility, the risk of impairment on fixed assets remains potentially high.

The Group assesses the recoverability of deferred tax assets based on estimates of future taxable income; however, if it is determined that sufficient future taxable income cannot be secured due to declining profitability, the deferred tax assets will be reversed and tax expenses recorded. This reversal would adversely affect the financial position and operating results. If unprofitable routes continue to be maintained or the external environment continues to deteriorate, there is a risk that securing taxable income will become difficult.

Factors that could impede the safe operation of vessels exist, including crimes such as terrorism and encounters with large marine creatures. Should such events occur, the safety of passengers and crew could be threatened, potentially leading to route suspensions and a loss of social trust. The Company conducts regular training in cooperation with relevant government agencies to help prevent accidents before they occur.