A group of 12 shipping lines that carry most cargo between North Europe and the United States have formed a new union and will withhold about 19 percent of their capacity for U.S. imports in an effort to raise prices.
The carriers, which said losses in the trade in 1991 totaled about $250 million, hope to have the Trans-Atlantic Agreement (TAA) in operation by June, barring government opposition. The group includes all but two major shipping lines on the route."It's intended to have an impact on rates because the carriers on this trade are losing so much money," said Christopher J. Rankin, director and chief executive officer North American trade division in East Rutherford, N.J., for shipping line P&O Containers Ltd.
The 19 percent capacity withholding is believed to be the largest of its kind.
Federal Maritime Commission Chairman Christopher L. Koch said Wednesday the FMC would look favorably at an agreement that doesn't affect exports.
"If the agreement applied to outbound trade, it would make a big difference in how the FMC will review this thing."
But Austin L. Schmitt, director of the FMC's bureau of trade monitoring, added: "The capacity reduction can not create a situation where there is insufficient vessel capacity. "That's the type of thing that would catalyze the commission to act" against the agreement.
The agreement, filed with the FMC on Wednesday, will take effect in 45 days unless the commission asks for more information or challenges it in court.
The group has three objectives: to reduce excess shipping capacity, set rates collectively and share assets such as technology, hardware and vessel space, Mr. Rankin said. He was one of two executives who spoke on behalf of the group with The Journal of Commerce on Wednesday.
He said the union will have two tiers of membership. Five of the shipping lines - Cho Yang, Mediterranean Shipping, OOCL, Senator and POL - will retain more pricing independence.
The other seven carriers will continue to set their rates collectively. However, their existing rate-setting groups, known as the USA-North Europe Rate Agreement and the North Europe-USA Rate Agreement, will be dismantled within 90 days of TAA's start.
Will Middleton, executive vice president Atlantic division for Sea-Land in Edison, N.J., emphasized the effort to raise prices will be long-term and cautious, in an effort to avoid upsetting the flow of Europe-U.S. trade.
Shippers have questioned capacity stabilization agreements as non-market, cartel-like approaches to the problems of carriers.
The executives did not say how much they hope to raise prices. Many of the shipping lines will boost their export rates by $100 for each 20-foot container (TEU) in June, the fourth hike in about a year. Another such increase could come in the fall, Mr. Rankin said.
The carriers have been unable to raise import prices, and Mr. Middleton said the subject has not been discussed seriously.
Executives from P&O and Senator, who spoke with European Community officials on Tuesday, said the officials did not comment on how the EC would react to the new group. The TAA said it is prepared to appeal any government ruling against its formation.
The EC said earlier this year it would review the legality of carrier groups on the North Europe-U.S. trade if the competitive situation changed.
"I'm sure (the EC) will take a very close look at this agreement," Mr. Rankin said, adding the group believes its formation is legal. Mr. Middleton said the U.S. government could block the group only through court action.
Evergreen Marine Corp. and Lykes Bros. Steamship Co. are the only two major carriers on the route not in the agreement. Lykes is currently reviewing the agreement and considering membership, said Ardley Hanemann, vice president for corporate relations.
Executives at Evergreen could not be reached for comment, but an informed source said earlier the company will join if the agreement seems effective.
The agreement is considered unique because it focuses on limiting capacity.
"Whereas in recent years conferences have tended to focus on tariffs . . . the TAA heralds a return to using such agreements to manage capacity," a group press release said.
The TAA hopes to manage capacity by giving its members opportunities to share ships and equipment.
"One reason for this is to give the 12 carriers broad authority" to share hardware, Mr. Middleton said.
Indeed, five of the carriers - Maersk, Nedlloyd, OOCL, P&O and Sea-Land - are discussing a partnership aimed at removing ships. Mr. Middleton said the five carriers might reduce their capacity by 7 percent or 8 percent, and hope to conclude their talks by June.
The TAA plans to withhold import capacity equal to 75 percent of the carriers' excess space. The group also is seeking permission to withhold capacity for carrying U.S. exports, although it has no plans to do so, the executives said.
The 12 shipping lines will file a single tariff, although the prices will vary from carrier to carrier. The single tariff with independent pricing is believed to be the first of its kind, Mr. Middleton said.
The carriers will be allowed to bid for specific contracts at non-tariff rates, a practice known as independent action. The five independent carriers will be allowed instant independent action, whereas the other seven shipping lines will be required to give 10 days' notice.
The TAA also will require service contracts consist of an annual minimum of 250 TEUs, and most will have a maximum term of a year. The contracts must be itemized, and may not contain preferential clauses.
VESSEL USE BETWEEN US/CANADA & N. EUROPE, 1990
Thousands of 20-foot equivalent units
East-bound West-bound Total
Estimated Utilization 59.4 percent 60.5 percent 60.0 percent
Space Available 1,908 1,931 3,840
Cargo Volume 1,133 1,168 2,301
SHIPPING LINES IN TRANS-ATLANTIC AGREEMENT
A.P. Moller-Maersk line
Atlantic Container Line AB
Cho Yang Shipping Co.
Compagnie Generale Maritime
DSR/Senator Joint Service
Hapag Lloyd AG
Mediterranean Shipping Co.
Nedlloyd Lijnen BV
Orient Overseas Container Line
P&O Containers Ltd.
Polish Ocean Lines
Sea-Land Service Inc.