A New Take on Alliances

I’m not sure the shipping world needs another article on the emergence of apparent super alliances such as the P3 and G6 (or 8). But I do have perspectives I haven’t seen in writing, based on being in this industry for 40 years, seeing the industry turn over two or three times and watching it grow by more than 400 percent in that time.

The first piece of advice I have when analyzing the P3 Network is to look closely at what the world’s three largest carriers have put together and not at Maersk Line, Mediterranean Shipping and CMA CGM in totality.

The P3’s 252 vessels, 2.6 million TEUs of capacity and 28 scheduled strings undoubtedly are impressive, but it’s important to look at what’s factual and what’s possible. Certainly, the capacity, highlighted by the largest collection of existing and eventual 15,000-TEU-plus ships, is also impressive and serves as the centerpiece of a strategy to become the industry’s lowest-cost service providers — at least where the P3 operates.

Few would argue that the key to survival in the industry is just that — low costs — to withstand the ups and downs of profitability and replace the assets periodically. History shows that high rate levels aren’t sustainable for long periods, so cost control is the only recipe for longevity.

But the P3’s capacity represents only 40 percent of the three carriers’ existing fleets, and they have another 1 million TEUs on order, theoretically bringing the P3 to 35 percent of their total capacity. So what do they do with the other vessels and capacity?

The G6, meanwhile — APL, Hapag-Lloyd, Hyundai Merchant Marine, MOL, NYK Line and OOCL, which could grow by two — plans to be even bigger than the P3 in several trades, and also will have other capacity that isn’t devoted to the alliance.

Admittedly, this is a simplified look at the situation, because in the final analysis, no one knows what any of this will look like a year from now. Regulatory and government intervention may play a large role in the final outcome, but other issues likely will come into play: How many of the vessels that the P3 carriers charter will go back to their owners? Then what? Those owners will have to try to charter them out, and that may be an issue.

There appear to be three areas of concern from various entities: the market strength through capacity control and the impact on rates (they rise); the potential loss of services as the carriers decide where best to deploy the assets; and the reduction in competition as those in the alliance won’t compete (or something like that). Let’s address each:

  • Market strength. If the P3 were a commercial arm, it would be a genuine concern, but that’s not the case. It’s an operating arm, clearly designed to do one thing: offer customers a competitive schedule with the highest level of reliability and the lowest costs. Will rates rise because of this? Why? As we’ve seen for decades, rates are a function of the market. When supply-demand ratios are in or near balance, rates can rise. When they’re not, rates fall. And, remember, other carriers will be doing what they can to attract cargo. The market will be the market with or without the P3.
  • Loss of service. For me, it’s another nonstarter. If there’s a market to serve, someone will serve it. Why abandon a market because of an alliance that soaks up 40 percent of existing assets? Where’s the business logic?
  • Reduction in capacity. Who’s gone? Again, these are operating agreements, not commercial. The commercial arms of these companies will be under the same pressures to produce service at a price that fits market conditions. That’s competition. Why would it go away? Have the members of the G6 or Grand Alliance stopped competing with each other? No.

Today’s rates are largely where they were 20 years ago, some even longer ago than that. That can only be the case because carriers have cut costs over that time, even with their primary operating cost — fuel — and others related to assets and terminals rising significantly. So it’s been a combination of cost savings and market conditions that have given cargo interests what they have today: more services and more frequency at virtually the same rates.

There have been some bumps in that road, for sure, slow-steaming, extended transit times and extended supply chains among them. But that’s the product of a simple recognition by carriers that shippers won’t pay for 22- to 24-knot services, and an equal recognition by cargo interests that carriers can’t absorb that cost.

Half of the carriers are making money, and half aren’t. None are making the types of profits that will demand reinvestment. But somehow there are the brave that do, and some have been better at it than others. It remains to be seen how that plays out in the long run, but the point is, as someone who buys the services day-to-day, I want the carriers to continue to curb those costs and derive profits from those efforts.

I just wish they could do it in a way that rates aren’t changing every couple of weeks. 

Gary Ferrulli, a 40-year shipping industry veteran, is director ocean product for non-vessel-operating common carrier Ocean World Lines, a subsidiary of Pacer International. Contact him at mrgt4811@mindspring.com. The views expressed here are his own and do not necessarily reflect those of OWL.

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