Will Waters | Drewry believes operational coordination among box lines has aided competition during a period of market concentration − which is likely to accelerate without a consortia block exemption
Shippers should not fear container shipping alliances, according to container shipping analyst Drewry, which believes operational coordination among box lines has aided competition during a period of market concentration – a process likely to accelerate without the consortia block exemption that is coming under review in Europe.
In this week’s Container Insight Weekly report, ‘Container alliances under fire as consortia block exemption up for review in Europe’, Drewry notes that “cooperation is rife” in the container shipping world, adding: “Despite working in an industry that has often displayed a dark tendency for ruthless undercutting, carriers appear to brush aside any ill-feeling that might be caused by predatory commercial behaviour and generally play well together operationally.”
Drewry notes that there are currently very few standalone container services in the key trades, with vessel-sharing agreements (VSAs) and slot charter deals the standard. VSAs are purely operational co-operative structures that promote efficiency and cost reduction, and do not discuss or agree upon rates or other commercial issues, it points out. They can range in scale from a single service agreement between two carriers to much deeper strategic connections among multiple lines, as seen with the big three alliances − 2M, Ocean Alliance, and THE Alliance – that cover the East-West routes.
“Importantly, VSAs can allow carriers, particularly medium-sized and emerging lines to offer a competitive service at a lower total investment requirement by operating its ships in tandem with other similarly situated carriers – carriers that in some cases individually may be unable to operate in that trade due to small market shares or limited vessel capacity or financial resources,” Drewry says. VSAs also provide carriers with a way to enhance the range of ports that they cover through the exchange of space between shipping lines that offer a different selection of port calls on a given trade route.
“This has the effect of expanding the range of competitive options open to shippers to and from specific port pairs,” Drewry adds. “Put simply, VSAs minimise operating costs and maximise the number of competing marketing entities, offering a ‘win-win’ solution to both carriers and shippers.
However, a new 100-plus page report ‘The Impact of Alliances in Container Shipping’ by the International Transport Forum (ITF), an OECD think-tank, published earlier this month, challenges that view and argues that in their current form alliances are actually detrimental to competition, Drewry highlights.
“The first generations of alliances allowed smaller carriers to achieve economies of scale, based on complementarity between them, and as such increased shipping options,” the ITF said. “The current three alliances are not serving the smaller carriers but each brings together two to three very large carriers that would be able to offer most of their services outside an alliance.”
The ITF report was published in the middle of a European Commission consultation and review of consortia agreement in European trades, Drewry points out. At present, Regulation 906/2009 offers carriers a block exemption to form joint services so long as they don’t exceed a market share of 30%, although that figure can be legally exceeded under certain conditions, the analyst explained.
The exemption has been in place for over two decades, although it has undergone some refinement over the years, most notably in 2008 when the liner conferences that had the power to set freight rates were abolished, Drewry noted. It gets reviewed every five years and will expire in April 2020 unless renewed.
Acknowledging the changing landscape of the container market following recent mergers and acquisitions (M&A), the EC wants stakeholders to give feedback on whether the block exemption is still relevant and that a fair share of the benefits from these efficiencies − economies of scale and better ship utilization – are being passed on to users.
“Ultimately, the EC wants to assess if the current block exemption arrangement is still fit for purpose or if shipping can be brought in line with a general policy to harmonise competition rules,” Drewry says, pointing out that the deadline for submissions to the EC is 20 December.
“According to the ITF, today’s alliances have got too big and powerful and place a barrier to entry on East-West trades for independent carriers,” Drewry notes. “They also fear that alliances could be the breeding ground for collusion between carriers, as they provided members with ‘in-depth insights on the cost structures of their competitors’.
“Unsurprisingly, the ITF wants to see the block exemption expire in April 2020 and while it doesn’t expect that would bring about the end of alliances, it believes it would enable greater scrutiny and deter any anti-competitive conduct.”
Drewry says that even if the block exemption is not renewed, container consortia agreements would not automatically become unlawful: It would only mean that they will be examined under the general rules on competition, the same as cooperation agreements are examined in most other sectors.
Arguing on behalf of the container industry, the World Shipping Council (WSC) wants to see the present arrangement continued, arguing that without the guidance afforded by the legal framework of the block exemption, compliance costs will increase and legal certainty would be reduced, restricting VSAs and thus denying shippers the benefits. WSC adds that removing the block exemption would put Europe at odds with other jurisdictions around the world, placing carriers focused on European trades at a competitive disadvantage, Drewry notes.
Recent consolidation, it said, has not undermined the consortia block exemption as the market is still fragmented and even the biggest carriers could not replicate their current level of service individually, adding that bigger ships make it more relevant than ever.
“Clearly, there is a big divergence of opinion between the two sides,” Drewry highlights. “On one hand the alliances have gotten too large and the member lines could just as well operate independently. On the other, the market is still fragmented and no carrier could offer the same level service by going it alone.
“One side says that VSAs open up the market and increase shipper choice, the other says the opposite is true. So who is right?” the analyst asks.
“Drewry can see some validity in both points of view, but perhaps they are looking at things from the wrong end of the telescope. It’s true that the market is shrinking and service KPIs such as schedule reliability often leave a lot to be desired, but it’s hard to see how that is the fault of consortia.
“The formation of the current alliance structure was a defensive move to lower costs at a time of serious financial distress that brought about the demise of Hanjin Shipping. Without such agreements in place, it is our view that market concentration would accelerate at even faster pace than it is as it would place even higher barriers of entry into European trades.”
Drewry says the industry’s direction of travel was decided long before the current alliances were established. Once carriers embarked on the search for scale economies – itself motivated by poor returns – by investing in the new generation of mega-ships, there was always going to be a shift in the balance of power between carriers that could and couldn’t follow that path.
“Alliances have at least kept entry into the ULCV (Ultra Large Container Vessel) club open to more lines than otherwise would have been the case, negating the need to purchase all of the ships required to operate a weekly service,” Drewry argues.
On the claim that lines could operate the services sans alliances, Drewry notes: “In theory, that’s possible, but to maintain similar port coverage they would need to extend rotations by introducing more ships – making it harder to ‘right size’ ships on a string and sustain utilisation, or alternatively have a more regionalised focus calling at specific cluster ports and develop greater feeder connections. Either way that would extend transit times and reduce the direct service product.
“The reality is that the Asia-North Europe trade will in the not too distant future be entirely populated with ULCVs, so without access to alliances any lacking carriers would be at such a cost disadvantage they would likely be dissuaded from entry,” Drewry added.
“Looking at the current active fleet and orderbook we see that very few carriers will have enough ULCVs in the short-to medium term to run their own loops. Given it requires 10-12 ships per service, even Maersk and MSC with the biggest piles of ULCVs could each entertain running maybe three weekly Asia-North Europe services on their own, down from the six offerings they have now. What would Hapag-Lloyd and ONE do with the six ULCVs they have?”
Drewry argues that the economic efficiency of alliances may decrease as carriers become larger and fewer, being better able to fill the largest ships on their own.
“Instead of three or four alliances or VSAs involving 15 carriers per trade, we can envisage a future with say only four independent mega-carriers per trade and no alliances,” it notes. “On the flip side, if containerships grow larger than the current maximum, the need for alliances will become more imperative.
It concludes: “Shippers should not fear alliances, which have aided competition during a period of market concentration. That process is ongoing, but will likely accelerate without consortia block exemption.”
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