The P3 Network announced today between Maersk Line, Mediterranean Shipping Co. and CMA CGM will have little or no impact on the glut of vessel capacity that has been depressing global freight rates, but will enable the world’s three largest container lines to substantially cut their operating costs on the Asia-Europe, trans-Pacific and trans-Atlantic trades.
The massive combination of services next year could even produce more rate competition from smaller carriers that are not part of the alliance.
The alliance, which will take effect in the second quarter of 2014, will enable the three carriers to deploy their largest, most fuel-efficient ships in the Asia-Europe trade and cascade slightly smaller, but still fuel-efficient, ships into the trans-Pacific and the trans-Atlantic lanes.
“It will cut our production costs through the economies of scale we can tap into by cooperating,” said Vincent Clerc, Maersk Line’s chief trade and marketing officer, in an interview.
“It’s a surprise, but not a very big one,” said Lars Jensen, CEO and co-founder of SeaIntel Maritime Analysis. He said the three carriers have been cooperating in the trans-Pacific for quite a while and that MSC and CMA CGM have combined services on other trades. “What is surprising that they are in such a formal relationship on the major east-west trades.”
“The key thing I see written all over this is (Maersk Line CEO) Soren Skou putting action behind his words,” Jensen said. “He has been saying that the most important thing for Maersk Line is profitability. This clearly demonstrates that is what they are heading for. It reduces their costs, particularly on the Asia-Europe network.”
Clerc cited the example of the Danish carrier’s new Triple E ships, with capacities of 18,000 20-foot-equivalent units, which are being introduced in the Asia-Europe trade this summer. “The fact that we will deploy them as part of a much larger network will enable us to fill them on a shorter rotation with fewer ports, which makes them a lot cheaper to use.”
The P3 Network alliance will be able to cascade 8,000-TEU ships into the trans-Atlantic, and 10,000 to 11,000-TEU ships into the trans-Pacific, which Clerc said none of the partners could do alone. The alliance will also operate 5,000- and 6,000-TEU ships in the trans-Atlantic. On the all-water route from Asia to the U.S. East Coast, the alliance will operate three strings through the Suez Canal using ships of 8,500 TEUs and one through the Panama Canal on 4,500-TEU ships. All of the ships it will deploy in the trans-Pacific to the U.S. West Coast will be above 9,000 TEUs.
“All this creates an ability for us to phase in our newbuildings without aggravating the overcapacity there is on the Asia-Europe trade and generate new cascading possibilities for the ships we need to take out of Asia-Europe and can deploy them efficiently into the Pacific and into the Atlantic and the Mediterranean,” Clerc said. “It’s a great opportunity for us to cascade and reap economies of scale.”
He said the cascading would only reduce capacity in the Asia-Europe trade by a “couple of percent” because of the size of the ships being introduced. The alliance will marginally increase capacity in the trans-Pacific, where the partners are more optimistic about market growth next year than they are in the Asia-Europe trade. In the stable trans-Atlantic trade, capacity will remain largely the same.
“Overall, this is not a rationalization in the sense of a reduction of capacity,” he said. “This is a rationalization in the sense of us reducing our production costs with the same amount of capacity.”
MSC Vice President Diego Aponte said the alliance will give the Swiss carrier “a major improvement to our current service network.” He said this would result from more services, extended direct port coverage and more efficient vessel routing. “It will also deliver significant environmental benefits through substantially lower fuel consumption compared with the lines operating independently and therefore much reduced CO2 emissions for the benefit all,” he said.
Aponte expects the alliance to produce improvements to schedule reliability and reductions in port congestion by combining services and coordinating port arrivals and departures.
The three partners have not yet worked out their combined service network, nor the schedule of their services and port calls. Clerc said the alliance will now begin talks with the ports and the container terminals they plan to call under their revised rotations.
The carriers have not yet talked to the ports or terminals for fear that word would quickly leak out about their planned combination of services and routes, Jensen said.
The P3 Network was given that name, which stands for Project3, because it was the working name for it that the three carriers used in their discussions during the last six months of planning.
The carriers will handle customer service and operations to a joint operations center that will be located outside London, with a branch in Singapore.
Both Clerc and Aponte said the alliance would not reduce competition. The three carriers will compete for cargo on their combined routes and will also compete on other routes that are not part of the alliance.
“Alliances have not removed competition in the past,” Jefferies shipping analyst Johnson Leung said. “The P3 is a capacity-sharing pact and entails no commercial collusion.”
Indeed, Leung said the alliance could actually increase rate competition: “Competition is likely to step up in response to P3.” He said price competition sometimes exists among the alliance members because they do not share common equity interests, and because the lack of product differentiation means pricing is the only means of competing. “Secondly, the P3 will prompt its smaller competitors to respond to the potentially superior services that P3 could offer,” Leung said.
All three lines rank high among the Top 40 container carriers in the U.S. trades, with Maersk Line No. 1 and MSC No. 2 for imports and MSC No. 1 and Maersk Line No. 2 for exports in 2012. CMA CGM held the No. 6 spot in both rankings for the year. Their rankings remained unchanged through the first quarter of 2013.