The simple answer is not that much. Yes, ocean carriers have made some further savings on their voyage costs, and, yes, most lines and hence their customers have benefitted from a larger number of direct port calls and in some cases an increased number of arrivals and departures each week. However, schedule reliability has changed very little, perhaps no surprise given the huge amount of vessel shuffling that has had to take place in order for carriers to put their new service strings and port rotations in place.

Alarm bells

There has been little attempt at service differentiation. Alarmingly, the four main alliances have a similar number of service strings and ports of call on the main eastwest trades. They all maintain slow steaming strategies and make considerable use of transhipment hubs, despite rallying calls from several beneficial cargo owners (BCOs) for some normal (faster) speed services to be maintained and cargo relaying to be reduced.

In this regard, forwarders and logistics service providers continue to win new business as they can package a range of services from different modes and transport operators and come up with a range of door-to-door and value-added solutions. There is also evidence that suggests alliances have led ocean carriers to become even more internally and operationally focused, resulting in BCOs talking to forwarders about more of their business needs. There is a general perception that forwarders are more customer-focused.

The alliances have failed to prevent liner shipping becoming even more commoditised and they have not contributed to a more stable pricing environment. Competition is as intense as ever and freight rates remain unremunerative, barely covering operating costs, let alone justifying further investment in the sector.

Rush for tonnage

Yet the past six months has seen a rush in new ship orders, fuelled, it seems, by the alliances. The alliances and individual carriers, for instance, have taken decisions to ensure they remain in touch with those companies deploying the largest ships, as it is generally accepted, when it comes to economies of scale, that the bigger the ships, the better they are.

Since January 2015, more than 50 ultra-large container carrying ships – defined as capable of loading over 14,000 TEU and, therefore, too large to transit the new Panama Canal locks – have been ordered, and more contracts are likely to be announced before the summer.

The move to mega ships is reshaping the industry, according to many analysts. Addressing the recent Navis World conference, Ron Widdows, chairman of the World Shipping Council and former president and CEO of NOL, said the time has come for carriers to start thinking differently about shipping line alliances.

“The jump by carriers to deploying mega ships has led to massive cascading which has brought us to a situation where global supply and demand is now irrelevant and where only trade lane supply and demand can influence the market,” he said.

“The race to bigger vessels is such that carriers are left with cost cutting as their only option for survival and, while alliances play a key role, here, they are still far too limited in their scope. To date, they [alliances] have been limited to vessel operations and that is not enough to address the industry’s fundamental problems.

“Some carriers are pinning their hopes on a return to some sort of balance of supply and demand to help drive up rates, but any idea that this might happen in the near future is fantasy.”

Shortcomings

Widdows claimed that O3 (CMA CGM, China Shipping Container Lines and UASC) was “too small”, that those carriers outside of the leading three (Maersk Line, MSC and CMA CGM) needed to find ways of “extracting more value out of the alliances” if they are to survive and that the industry should expect further consolidation.

In this regard, it is interesting that Hamburg Süd – which has a separate agreement with UASC covering reciprocal arrangements on their respective north-south and east-west services – appears to be getting closer to becoming a full member of O3, presumably then to be called O4.

Widdows called for greater collaboration between carriers themselves, and by extension, ports. “Only under unified systems can the industry benefit the majority,” he argued. “There are significant opportunities for liner shipping companies to improve their cost, productivity and efficiency bases, but there needs to a significant change of mindset if this is to happen.”

He suggested that alliances should consider “deeper forms of collaboration”, including operating common pools of containers, sharing documentation and developing single intermodal companies to tackle landside inefficiencies, and extend their ambit into more trade lanes.

“The biggest opportunities are how carriers can cooperate landside,” he said. “Lines have to look at ways of making better use of their terminals and collaboration needs to be extended to managing rail connections and chassis supply.”

Arguably, it is in the terminals and in the pre-carriage and oncarriage activities that the greatest opportunities now exist to reduce costs, increase scale and raise productivity. However, the regulatory issues are completely different and, as Widdows admitted, the challenges in doing this are huge.

He cited an area like the US west coast, where all of the main operators own their own, or have very strong and vested interests in the terminals. But, he argued that the alliance concept had to be extended to terminals, and multiple terminals needed to be managed as if they were a single facility.

Widdows felt that existing alliances were not realising their potential. “Take the G6, he said. “It does not cover the intra Asia trade, which at nearly 60M TEU a year is nearly triple the size of the AsiaEurope routes.”

To effectively expand their trading horizons, Widdows said that ocean carriers had “to set aside the parochial thinking they have followed for many years”.

While the industry veteran is not alone in expounding such views, his warning was stark. “Without these changes only incremental improvements will take place and not the fundamental changes that are needed.”

Shipper interests

While Widdows is convinced that alliances are not working as well as they could for the ocean carriers, they also appear not to be functioning in BCOs’ best interests, and regulatory authorities are watching events very carefully.

Speaking at the TOC Asia CSC conference in April, David Panjwani, global logistics director for John Deere, said that both larger alliances and larger vessels caused more headaches for shippers.

“The emergence of four large east-west shipping alliances, combined with the introduction of larger vessels and deteriorating schedule reliability levels has caused a series of problems in our supply chain and this has impacted our customers,” he said.

In particular, he said service lead times had become longer as more calls were being made on each string, slow steaming was prevalent and there were challenges with service interruptions.

“We don’t have a lot of exciting things to say in terms of the reliability of shipping products – if anything, it’s the opposite,” said Panjwani. “I was in Australia recently and it was a very unpleasant experience because we are continuing to fail to meet our customers’ delivery dates.”

He added: “We have existing letters of credit and customer service requirements that have to be met, so we have a lot of concerns about the present alliances and industry structures. As a result of service disruptions, John Deere has had little option but to increase the lead times it quotes to buyers of its equipment because of the variability in transit times, and that is not good for us in terms of the return on our assets.”

Failing

He believed that alliances were failing the liner shipping industry, saying that the concept had been around since the 1970s, with the only difference being its concentration into four large ones. He even suggested that outright mergers and acquisitions would lead to better levels of service.

Chris Welsh, secretary general of the UK-headquartered Global Shippers Forum (GSF), also believes service quality needs to be improved. He is also disappointed that carriers have not used the alliance structures as platforms for more innovative supply chain solutions.

He has called for a manageable and rigorous set of monitoring KPIs that can provide the required level of confidence to customers that ocean shipping alliances can deliver tangible benefits in terms of reduced costs, competitive ocean rates and improved services for shippers.

Like Panjwani, Welsh said that the current lack of reliability and predictability of their joint operations was adversely affecting shippers’ maritime and logistics supply chains.

Addressing the Transport Week Conference held in Gdansk in March, Welsh said: “Shipping alliances need to take responsibility for monitoring, measuring and benchmarking their performance on key trade routes. That information then needs to be made transparent to regulators and their customers as evidence of their commitment to showing the pro-competition benefits of improved alliance services.”

Confidence building

He argued that alliances already had a significant “confidence building” exercise ahead of them, as service reliability and predictability were poor. Welsh also questioned some of the tools and mechanisms at their disposal, suggesting they were potentially anti-competitive.

“While alliance members are competing with each other for cargo and market share, they have established mechanisms for sharing strategic information on costs, future capacity investment decisions, trade lane capacity deployment, port and terminal operations, and potentially even prices and surcharges in the context of conference and discussion agreements,” he said.

“The alliance lines leadership should take the ultimate confidence building step of pulling out of all conference and discussion agreements to give assurance that the exchange of sensitive information, including pricing information, on a regular basis within alliances does not lead to abuses of their market power or erect barriers to market entry.

“The GSF calls on the EU, US, and Chinese regulatory and competition authorities to share monitoring data and information to prevent potential competition abuses in the interests of shippers and consumers.”

Regulation

Regulatory authorities are keen to act, should they need to, with Margrethe Vestager, the EU’s competition commissioner, calling on all shippers and industry players to notify the EU if they suspect something is amiss. “We will strike against any of the major alliances if they interfere with free competition and for that reason we will be keeping a close eye on the container industry,” she said.

Inevitably, when there is change, it can take time for things to settle down and this is clearly the case with the new alliances. The main benefits to date appear to largely revolve around cost savings on the ship operating front, with no progress landside and nothing tangible on the service and customer-facing sides of the business, which is disappointing.

The liner markets remain challenging, with freight rates still very low, and so the cost-reduction focus is understandable. But it also means that alliances will never lead to the consolidation that is needed in the industry and which fundamentally can lead to price restoration and investment for service innovation. 

Read this item in full
This complete item is approximately 2000 words in length, and appeared in the May 2015 issue of WorldCargo News, on page 72. To access this issue download the PDF here.