Carrier vessel-sharing agreements are old hat, but this one has a surprising twist. Maersk, the world's largest container ship line, is joining the No. 2 and 3 lines, Mediterranean Shipping Co. and CMA CGM, in sharing ships in the trans-Pacific trade.
With cargo volumes flat in the largest U.S. trade lane and operational costs soaring, Maersk Line, CMA CGM and MSC will replace four competing services with three on which the lines will share space. Maersk will drop its TP5 and TP8 services, MSC will end its New Orient Service, and CMA CGM is dropping its Yang Tse Service.
It's a way for the lines to maintain service levels and market share in the slowing trade between Asia and the U.S. West Coast while lowering their operational costs. On the two high-volume China services, the carriers will deploy large, efficient 8,000-TEU vessels, while on the lower-volume Japan and Korea service, they will utilize more appropriate 4,000-TEU vessels.
"The three of us came up with a product that will allow us to fill up these big ships at a competitive
slot cost," said Rodolphe Saade, chief executive vice president of CMA CGM.
Although the eastbound trade between Asia and the West Coast is the busiest in the U.S., it was flat last year due to the weak U.S. economy and a spike in intermodal rail rates that scared a good deal of cargo to all-water services to the East Coast. West Coast ports lost nearly 1.5 percent market share last year to ports on the East and Gulf coasts.
The continuing housing slump, credit crunch and near-record energy prices bode ill for the eastbound trans-Pacific trade this year. Carriers already have removed some vessel capacity for the slack winter shipping season, and it is uncertain how much of that capacity will return as cargo volumes pick up this summer.
However, based on initial forecasts for no growth in the U.S. economy in the first half of 2008 and modest growth, at best, in the second half of the year, carriers have to find ways to manage their capacity - rationalizing capacity, in industry jargon.
"The general situation in the Pacific is that carriers are not making money," said Nils S. Andersen, chief executive of A.P. Moller-Maersk. "At least we don't think they are making money, and that, over time, is an unsustainable situation."
Trans-Pacific carriers have been hit by rising costs, including a sharp increase in fuel costs that for the most part they've been unable to pass on to shippers. The carriers are working to persuade shippers to accept floating bunker surcharges in annual contracts being negotiated this spring.
The slowing U.S. economy has affected imports, the main driver of the trans-Pacific trade. Unable to operate profitably in the Pacific, many carriers have shifted capacity to other routes, such as Asia-Europe.
"We are not extremely optimistic about the U.S. economy," Andersen said. But he added that economic growth and container volume remain strong in other regions and that "world dependence on the U.S. economy is lessening."
The trans-Pacific vessel-sharing agreement raised no alarms among shippers, who have become accustomed to such deals and generally accept that the carriers need to find ways to cut costs whenever they can without affecting services.
The carriers said they are not reducing total capacity in the trade - in fact, there will be a slight increase, as 8,000-TEU ships replace smaller vessels on some of the services. "Basically, what we are doing is CMA CGM is coming up with existing volume and so is MSC and Maersk," Saade said. "Everyone is coming up with its already-existing capacity."
The partnership also demonstrates that in the busiest U.S. trade lanes from China to the West Coast, carriers need large vessels to reduce per-unit costs and lessen the impact of rising fuel prices. The cost of bunker fuel has more than doubled since early 2007 to $500 a metric ton.
"This business is a lot about scale," said Vincent Clerc, Maersk's vice president of Pacific route management. "We could see that in South China we had 8,000-TEU economics and we had a certain profitability picture. On the rest of the network, we didn't have the size to enjoy the same economics."
However, many carriers cannot profitably fill 8,000-TEU vessels with their own cargo, so partnering with other carriers makes sense. Clerc said Maersk contacted CMA CGM and MSC and said: "We're not big enough alone, and you're not big enough alone, but together we can do something that's great for the market. We can have a better product.
"It's important to stress that we're pulling out a lot of inefficient product where we think we're not as good, and we're putting together a product that's much better. We think it's the best product on the trans-Pacific," Clerc said.
Carriers could fill 8,000-TEU vessels from North China on their own by making calls in Japan and South Korea as well, but transit times and costs would increase. Maersk, CMA CGM and MSC therefore formed one service to call only in Japan and South Korea. With no China call, however, the lines were forced to use 4,000-TEU vessels that are more appropriate for that service.
The announcement that MSC and CMA CGM were entering the partnership was not surprising - those lines had shared vessels before. Maersk, however, effectively operated on its own in recent years. Maersk's operating partnership with Sea-Land in 1991 led to an acquisition of Sea-Land's international operations eight years later.
Saade said the fact that Maersk is now "looking differently at cooperation with carriers" made the vessel-sharing arrangement possible.
Maersk's decision to change its operating philosophy and find suitable partners was not done on a whim. "As you can imagine with something this size, you don't do it in a couple of days. It took several months," Clerc said.
Still, three months is considered ambitious considering the complexity of bringing together three large shipping lines, each with its own operating philosophy, and agreeing upon vessel contributions from each partner, rotations, port calls and so forth, Saade said. "This agreement went very quickly because the three of us realized that in this difficult market, we needed to come to terms quickly in order to benefit from the cooperation," Saade said.
One string in the vessel-sharing agreement will serve Yantian, China; Kaohsiung, Taiwan; Shanghai and Qingdao, China; Los Angeles; and Hong Kong. The service will use five 5,000-TEU vessels, with Maersk operating four of the ships and CMA CGM the fifth.
The second China string will also consist of five 8,000-TEU ships with a port rotation of Dalian, Xingang, Shanghai, Ningbo, Los Angeles and Oakland. MSC will operate four of the ships and CMA CGM the fifth.
Maersk will operate the five 4,000-TEU vessels in the service calling at Kwangyang and Busan, South Korea; Kobe, Shimizu, Nagoya and Yokohama, Japan; Los Angeles; and Oakland. All three of the services will be in operation by mid-April.
One benefit of the switch to larger ships on some routes will be environmental, Andersen said. He noted that ships create less pollution per ton of cargo than other transportation modes, and that larger ships operate more efficiently. "Big ships, provided they're filled, give you a much better environmental solution," he said.
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