Ocean carriers have spent the past week number-crunching to gauge the impact of the sudden announcement from Mediterranean Shipping and CMA CGM that the world’s second- and third-largest lines are pooling services on key liner trade lanes.
None more so than Maersk Line, the world’s top carrier, which acted as catalyst to the deal by ordering the world’s biggest ships earlier in the year followed by the recent launch of a daily service between Asia and Europe in game-changing moves that threatened to eclipse its closest rivals.
Nobody doubts the potential of the partnership between France’s CMA CGM and Geneva-based MSC on the Asia-North Europe, Asia-Southern Africa and South America routes to restructure the industry, not least by driving smaller, more vulnerable carriers out of business and forcing mid-size players to chase copycat deals.
Beyond that, nothing is certain because the alliance, which takes effect in March for an initial two years, may simply turn out to be a temporary marriage of convenience, one that gives the family owned carriers breathing space to sit out slowing cargo growth that is undermining the economics of their cargo-hungry large vessels.
The alliance will have the biggest impact on Asia-North Europe lanes, where it will operate four strings, deploying 44 ships of more than 11,000 20-foot equivalent container units. Another 21 vessels of more than 13,000 TEUs are scheduled to join the MSC-CMA CGM pool over the next 12 months. Most will be deployed on the Asia-North Europe and Asia-Mediterranean routes, container market analyst Alphaliner says.
It’s a boon to both carriers, with MSC having too many ships and CMA CGM too few for current market conditions. MSC is expected to operate 57 ships of 12,500 to 16,000 TEUs by the end of 2015 — 24 remain to be delivered — while CMA CGM will have just 10 in this size range unless it signs new orders or charters.
Alphaliner believes MSC could charter some big ships to CMA CGM, keeping the fleet employed while helping the French carrier hit growth targets blown off course during the financial crisis that convulsed the industry.
But the essence of the tie-up is a defensive bid to keep pace with Maersk Line. The Danish carrier upped the ante in 2011 with a near $4 billion investment in 20 18,000-TEU behemoths that will hit the Asia-Europe market starting in 2013. This was capped by the late-October launch of the Daily Maersk — a seven-day-a-week service deploying 70 of the carrier’s biggest ships to link four Asian and three North European ports with guaranteed delivery times backed by financial compensation for nonperformance.
MSC and CMA CGM’s combined 21.7 percent world market share would put them comfortably ahead of Maersk at 15.9 percent, but theirs is only a hands-off alliance that could have a limited shelf life if the deal no longer suits one or both partners.
Maersk remains the biggest player in the Asia-North Europe trade, with 26 percent of capacity on the route, followed by CMA CGM-MSC’s 22 percent. And Maersk, reversing its previous policy of turning away less profitable business, has made clear it will do everything to protect its market share until the arrival of the 18,000-TEU vessels. That’s when it will leverage the much lower unit operating costs of these mega-ships — 26 percent less than a 15,500-TEU vessel, the company says.
The MSC-CMA CGM alliance aims to fill the carriers’ big ships with boxes while facing up to the Maersk challenge. “In this agreement, you need to see something like the counterpart of the Maersk group … it is clear for us that the role of the alliance is to offer the same level of service,” said Michel Sirat, chief financial officer of Marseilles, France-based CMA CGM.
The carriers would be “delighted” if other lines joined their alliance “because at the end of the day, we need to fill the vessels,” said Diego Aponte, MSC’s vice president.
MSC already is in a vessel-sharing alliance with CMA CGM and Maersk on an Asia-North America route, and in July the carrier signed a three-year agreement with Chile’s CSAV to jointly operate four liner services spanning North Europe, the east and west coasts of South America, Asia, South Africa, the Middle East and India.
The CMA CGM-MSC deal “could lead to a revamp of the existing alliance arrangements, with more cross-alliance slot-sharing expected to be implemented,” according to Alphaliner.
But it also could raise the stakes too high for smaller and medium-sized companies to stay the course, particularly in the fiercely competitive Asia-Europe market at a time of plunging freight rates and slowing cargo growth.
“We are actually quite well positioned for a longer stretch of tough competition … It would be natural if the smaller players in this business, or their banks, start questioning whether it’s a good idea to keep competing,” said Nils Andersen, CEO of Maersk Line parent A.P. Moller-Maersk.
Almost all carriers will close the year in the red after piling up losses in a third quarter that missed out on a peak shipping season. CMA CGM reported a $224 million loss for July-September on the day it unveiled the agreement with MSC and had $920 million of bonds downgraded by Moody’s the following day. Maersk swung to a third quarter loss of $297 million from a $1 billion profit a year earlier as it lost $124 on every 40-foot container it transported, compared with a near record $616 profit in 2010. Both carriers saw revenue increase over last year.
MSC does not publish financial or market figures.
The prospect of a pumped-up MSC-CMA CGM sweeping up market share from smaller rivals has rattled companies that already were fighting to stay in the race. CSAV, the Chilean carrier, is seeking a “strategic” partner after losing $860 million in the first nine months of $2011, and Israel’s Zim Integrated Shipping Services, which lost a modest $66 million in the third quarter, said it is pursuing consolidation that some analysts interpret as seeking a merger.
Contact Bruce Barnard at email@example.com.