Consolidation in the ocean shipping industry is causing drastic changes to the current carrier vessel sharing agreements, but how will it all play out? American Shipper CEO Hayes Howard discusses some of the possible alliance scenarios.
I will be participating Thursday on a panel at the International Trade Symposium in Norfolk, Va., the purpose of which is to examine the realignment of the major ocean carriers in response to the stressed container shipping market. In anticipation, I have been playing the “Alliance Game,” rearranging carriers and vessel sharing agreements to see what share of the market the different groupings will have when the current wave of consolidation has receded.
Since I invented the game, I suppose I should explain the rules.
• Market share is defined as a carrier’s percentage of total deployed vessel capacity in a given trade.
• Capacity data is based on BlueWater Reporting’s estimation of vessel capacity allocated by each service to a particular trade. This gives a much better picture of capacity than nominal, or “pure,” capacity.
• Alliance capacity is based on all vessels currently deployed by the alliance member carriers on the trade.
For the game, I have developed four scenarios in the three major east-west trades – Asia to North Europe, Asia to North America (transpacific), and North Europe to North America (transatlantic).
The first scenario (fig. 1-3) is the control group, showing estimated allocated vessel capacity deployed by the carriers that are members of the four existing major alliances.
S1 CHARTS – Four major alliances today
Fig. 1 Asia to North Europe
Fig. 2 Transpacific
Fig. 3 Transatlantic
The second scenario (fig. 4-6) recalculates market share to take into account the four changes that have already been announced:
1. The purchase of APL parent Neptune Orient Lines by CMA CGM;
2. The merger of COSCO and China Shipping (CSCL);
3. The dissolution of the Ocean3 Alliance on April 17, 2017;
4. And the creation of the new OCEAN Alliance, effective next April, by CMA CGM/APL, COSCO/CSCL, OOCL and Evergreen Line.
S2 CHARTS – Combining G4 and KYH carriers
Fig. 4 Asia to North Europe
Fig. 5 Transpacific
Fig. 6 Transatlantic
The new OCEAN Alliance orphans UASC, which has been a member of the Ocean3 Alliance, but creates a group that could offer capacity similar to that of the 2M Alliance between Maersk Line and Mediterranean Shipping Co. (MSC). The new alliance also substantially reduces the capacity of the existing G6 Alliance and the CKYHE Alliance, removing two major carriers from each group. This has fueled speculation that the remaining carriers in the two groups will combine to form a new alliance to compete with the OCEAN and 2M alliances.
My third scenario (fig. 7-9) brings together the remaining members of the G6 Alliance – Hapag-Lloyd, MOL, Hyundai Merchant Marine (HMM) and NYK – with what’s left of the CKYHE Alliance – “K” Line, Yang Ming and Hanjin – in a new alliance I am calling the “G7.”
S3 CHARTS – Four Alliances with new OCEAN Alliance
Fig. 7 Asia to North Europe
Fig. 8 Transpacific
Fig. 9 Transatlantic
For my final scenario (fig. 10-12), I am speculating that the following changes will occur:
• The discussions between Hapag-Lloyd and UASC result in some sort of combination, adding UASC to the “G” group of carriers;
• The two struggling South Korean carriers – HMM and Hanjin – will be forced to merge, and will stay in the “G” group;
• The three Japanese carriers – MOL, NYK and “K” Line – will not want to operate together in a single alliance, causing MOL to move to the 2M Alliance and strengthening that group’s foothold in Asia;
• And because of the longstanding relationship between COSCO and “K” Line, “K” Line will follow COSCO into the OCEAN Alliance.
S4 CHARTS – Hapag-Lloyd and UASC merge, Korean carriers merge, MOL joins 2M and K Line joins OCEAN
Fig. 10 Asia to North Europe
Fig. 11 Transpacific
Fig. 12 Transatlantic
From a regulatory standpoint, any of these scenarios should be able to pass muster. While I am showing some alliance groups deploying capacity above 40 percent of the total market – something of a magic number for anti-competition watchdogs – this does not tell the whole story.
The current 2M carriers, for example, deploy an estimated 42 percent of the capacity on the transatlantic trade, according to BlueWater Reporting. If you only look at alliance services, however, the 2M’s market share is closer to 21 percent. The carriers of the G6 Alliance deploy 34 percent of allocated capacity on the trade, 8 percent less than the 2M carriers, but the G6 services have an alliance market share of 25 percent, 4 percent greater than that of the 2M.
An unconfirmed report in the Wall Street Journal this morning cites anonymous sources close to the matter that said a new alliance involving Hapag-Lloyd, MOL, HMM, NYK, “K” Line, Yang Ming and Hanjin, my third scenario, will be announced today.
I am still betting on scenario four, but, admittedly, I do not have any money in the game.
The ocean carriers, on the other hand, have a lot of skin in the game, and I have advised our printer to stock up on red ink for our annual review of carrier financial results in the July issue of American Shipper. I am surprised that carriers have not already taken more drastic action to stem their losses, but I also wonder if the realignment we are in the midst of will make much difference.
In each of the three major east-west trades, the carriers are currently organized into four groups and, combined, deploy over 91 percent of the capacity. And in the weakest trade, the Asia to North Europe trade, where rates have been flirting with negative margins, they control over 99 percent of the capacity. It is stunning to me that with all the tools they have at hand to control capacity, they are unable to make a reasonable return on their investments.
Will reforming from four major alliances into three make a difference?
I am hoping so, but I’m not holding my breath. Most shippers I have spoken with agree that it is important that for carriers to make a reasonable return, but that doesn’t mean cargo owners will volunteer to pay higher rates if the carriers are not demanding it.