Andy Lane from CTI Consultancy takes issue with the recently published International Transport Forum report on container alliances and a call for the EU’s block exemption for liner shipping to come to an end.
The OECD/ITF recently published a long report entitled ‘The impact of alliances on liner shipping’, within which much criticism of the existing alliances was made, and concludes that the EU block exemption for liner shipping should not be extended past April 2020. However, it also concluded that alliances would anyway likely continue, albeit with greater discussion when clustering was being altered – which tends to imply that indeed alliances are not necessarily bad in totality. Let’s just remember that all/any changes to alliances are already considered for approval by anti-trust authorities, and whereas many are permitted – P3 is a live example of one which was not.
As was to be expected, various shipper associations jumped immediately onto the bandwagon, potentially without considering fully how the life of a shipper might be without alliances. Of the claims made and conclusions reached, many can be considered highly subjective, incorrect and even irrelevant, which are addressed below.
Whereas it could be implied that alliances have partly fuelled the megaship arms race, this was already underway from 2006 (Maersk’s E-class) and again in 2012 (EEE class). It is true that some smaller players have been able to build such behemoths due to their alliance membership. However, dissolving alliances will not make the megaships disappear, and without alliances how might the networks of Evergreen and HMM, etc look? Not very comprehensive maybe.
Alliances versus consolidation
Industry consolidation was long overdue, and a natural development. It had been expected that alliances might have gone some way towards avoiding this, but ultimately that was not the case. Without alliances however, might we see new rounds of consolidation of the mid-sized operators, who would struggle to achieve suitable product offerings and scale if forced to operate independently? That would only intensify the share of capacity controlled by the few remaining ‘mega’ operators, and more relevantly reduce the quantity of independent commercial entities. That surely cannot be good in terms of shipper choice.
Barriers to (industry) entry
The high capital required, coupled with returns often less than the cost of that capital is the primary inhibitor here. Operators with a different business model and therefore a completely different client proposition might create some niches – although the cost of shipping appears to be the primary (if not only) objective for shippers. One could argue that a new entrant, or a more regional line (such as SM) could grow a larger presence through joining an alliance.
There was some movement in the alliance compositions, mainly as a direct result of industry consolidation before April 2017. The current formations appear to look very stable for the medium to long term, with some agreements having been made to span a decade of operation. Alliance structures will never be changing on a monthly or even annual basis, so they are indeed stable.
This point is really irrelevant on any debate about alliances or block-exemptions. APMT, TiL, Terminal Link and COSCO Pacific have been highly active in acquiring terminals for the past two decades. This is absolutely not driven by alliances, and no ‘alliance’ co-owns any terminals. Alliances actually create a little friction here, as can be evidenced by 2M in both Southeast Asia (Singapore/Pelepas) and North Europe (Antwerp/Rotterdam).
Port and service procurement practices
Generally speaking, each member of an alliance negotiates their own private and exclusive deals with the terminals which serve it. There exist ‘rules’ against joint procurement – although Hapag/ONE appear to have ‘circumvented’ this with their recent joint feeder procurement.
Only where a port/terminal is performing a lot of relay (deepsea vessel connections) transhipment connectivity is it important or required to consolidate many services into a single location – a single point of network convergence. This is limited mainly to Southeast Asia and Northeast Asia. Because of the sheer volumes involved, it is rather unlikely that major shifts in port selection will be experienced whilst the current alliances continue. Without alliances, volumes between hub ports would be more fluid. For hub and spoke transhipment, an alliance can operate reasonably effectively with a multitude of hubs within a region, so this demand is not at all captive and can be moved based on competitiveness factors.
For hinterlands and gateway ports, a single alliance can use multiple ports or multiple terminals within a port and therefore terminal operators can still compete for the business. Prime examples here would be ports such as Los Angeles/Long Beach (different terminals used by one alliance within a port), and more recently 2M’s decision to use Liverpool and London Gateway in additional to only Felixstowe for the UK market (several ports per alliance to serve a single hinterland).
There remains plenty of opportunity for ports and terminals to compete within a free market environment, and those offering the best overall client proposition will be the winners. Ironically, the report concludes that terminals and ports should look to cooperate, which is anti-competitive by implication.
White elephant ports
Except for some of the ‘BRI ports’, can we name one? Naturally public expenditure on ports should always be assessed for overall volume demand and benefits to the community overall. That needs to be the responsibility of local governments, an EU wide port plan and restrictions would reduce competition for the port users.
This old chestnut always gets a mention, however within the 10 years since the abolition of the FEFC, there has not been even one documented case of price collusion being brought forward. By contrast roro and airfreight segments have seen cases brought and proven. Commercial collusion cannot be mentioned in the same book as liner shipping.
Now we have also a suggestion of ‘cost-collusion’. No alliance member will wish to disclose to others the costs of running their own vessels. One would hope (but it is not a given) that each operator would fully understand their own full network costs, as these would be needed in negotiations with partners over network design. There is however no cost information sharing between partners within an alliance.
Product variety and frequency
This is essentially determined by total tradelane demand, divided by the quantity of services and vessels deployed to serve it, and then how assets are deployed. It is also influenced by over/under supply and also fuel prices. When there is ample supply and low fuel costs, string tails get extended, avoiding transhipment costs and creating more direct port-pairs. When the opposite factors are in play, tails are trimmed and port-pair connectively is reduced in favour of transhipment. This we have seen to an extent in recent years.
Where a shipper has a preferred carrier, or wishes to work with a limited number of carriers to reduce process complexity, they have access to an entire alliance network. With no alliances they would have either only access to a particular carriers assets, or they would be forced to work with more carriers and increase process complexity. That cannot be a good outcome.
We need to think of port-pairs in terms of what is commercially offered, for example Shanghai to Rotterdam with the Ocean Alliance needs to be counted as four commercial port-pairs. When analysing in this way, we will not observe any notable decrease as a direct result of the current alliances.
There appears to be a strong link in performance with prevailing fuel costs, and that would be the major factor here. Within an alliance vessel operators have some responsibilities to their partners and therefore might be more inclined to focus more on reliability.
The alliances are getting better at right-sizing capacity, and therefore keeping load factors high and costs down. Whenever costs are being reduced, so are gas emissions. With 10 smaller networks instead of three consolidated ones, right-sizing capacity becomes more difficult to achieve and therefore costs and emissions would likely increase as a result.
There could be many valid reasons for the existing alliances to continue, and the customers might not like (either) an outcome where 10 lines are forced to operate totally independently. That would on the surface not result in better products or continue to drive costs down. Whether the alliances operate with a block exemption or under a different regime is really mere only semantics.