As shippers obtain more information about how the P3 Network would operate, regulators are pressing the three member carriers to explain how the alliance will affect schedule reliability and competition.
The world’s top three container lines — Maersk Line, Mediterranean Shipping Co. and CMA CGM — last week released details of their unprecedented proposed P3 alliance, including ports of call and 28 service rotations.
The P3 goes well beyond past vessel-sharing agreements in the quantity of capacity it will control, the number of service strings it will operate, and in the fact it will be operated not by the three carriers collaboratively as in existing alliances, but by a unified operations entity. Former Maersk executive Lars Michael Jensen will head a staff reportedly of up to 200 in a separate legal entity operating out of London and Singapore.
The carriers revealed that the P3 Network would operate 28 loops using 252 vessels that collectively represent 15.1 percent of the global fleet, or 2.6 million 20-foot-equivalent units. The services would expand each carrier’s current port call footprint, but will make it harder to differentiate their service.
The proposed alliance will enable the trio to reduce operating costs in the Asia-Europe, trans-Pacific and trans-Atlantic trades by consolidating their services around fewer but larger ships that will result in lower per container costs and thus put the carriers at an advantage over lines operating smaller ships.
The number of vessels the three carriers would operate on the east-west trades would decline from 346 currently, according to the Federal Maritime Commission, but the carriers’ overall capacity would not shrink.
By allowing the carriers to reduce operating costs, the P3 would enable the carriers to withstand chronically challenging market conditions. Global container capacity has expanded by 38.6 percent since 2008 to roughly 17.6 million 20-foot-equivalent units, according to Alphaliner. But volume has only risen 2 to 3 percent annually, Stephen Schueler, Maersk Line chief commercial officer, told the JOC’s 7th TPM Asia Conference in Shenzhen, China, this month. The spot rate from Shanghai to the U.S. West Coast, for example, was down 30.7 percent year-over-year in the week of Oct. 18, according to the Shanghai Containerized Freight Index.
Although the P3 is strictly an operating alliance and Maersk, MSC and CMA CGM are known to be intense competitors, the proposed alliance has still raised concerns among shippers and regulators as to possible market impact despite only growing volatility in container spot rates.
Federal Maritime Commission Chairman Mario Cordero on Oct. 22 issued a rare public invitation to fellow regulators in China and the European Union to participate in a summit in Washington specifically focused on the P3. The FMC said its concerns stemmed in part from the market share the alliance would control on the three east-west trades: 42 percent in Asia-Europe, 40 to 42 percent in the trans-Atlantic and 24 percent in the trans-Pacific.
In a swipe at the proposed alliance, FMC Commissioner Richard A. Lidinsky Jr. said, “It is clear this alliance is moving forward as if it has already met regulatory approval despite the lack of any significant filing with regulatory authorities in Europe, China or the U.S.” Zhang Ye, president of the Shanghai Shipping Exchange, told the JOC’s TPM Asia Conference in Shenzhen on Oct. 17 that no filings have so far been made with Chinese regulators.
“The question on every shipper’s mind is ‘what will be the impact on my rates and the quality of services,’” said Chris Welsh, secretary general of the Global Shippers’ Forum.
At TPM Asia, Erik Fransson, logistics manager for the Swedish forest product company Ekman, also expressed skepticism that the alliance would be entirely operational.
The Global Shippers Forum asked the European Commission to investigate the impact the alliance would have on pricing and service. The National Industrial Transportation League, a North American shipper group, wants the Federal Maritime Commission to launch a similar inquiry.
The idea the carriers would use the alliance to collude on rates seems far-fetched to some. The carriers “wouldn’t be so stupid” to use the P3 to engage in uncompetitive behavior given the steady glare of European antitrust authorities on the industry, said Alan Murphy, chief operating officer and partner at SeaIntel Maritime Analysis.
Tan Hua Joo, Alphaliner executive consultant, told TPM Asia the alliance will result in more, not less, competition among the carriers. “I think the P3 is going to drive further aggressive behavior from the P3 carriers, as well as from their competitors,” he said.
The G6 Alliance — including APL, Hapag-Lloyd, Hyundai Merchant Marine, MOL, NYK Line and OOCL — didn’t stabilize rates after being created two years ago, and there is no reason to believe the P3 Network will fare any better, Tan said.
Instead, container rates will become even more volatile over the next 12 months, Tan predicted, as the P3 members ramp up pricing pressure and 1.9 million TEUs of capacity enters the waters during the next 15 months.
With little chance of industry consolidation, the capacity overhang will plague the industry until at least 2016. In the short term, the situation means carriers will have a hard time achieving rate increases in 2014 service contracts, and it’s unlikely they will be able to maintain a November general rate increase of about $1,000 per TEU.
“I think (the GRI push) will fail in the same way it failed last year,” Tan said.
The other concern among shippers is how schedule reliability will be affected by the P3, considering Maersk tops the market on reliability, with CMA CGM following and MSC behind them, according to the SeaIntel Global Liner Performance database. But the trends seem to favor improving reliability. CMA CGM and MSC, along with the rest of the industry, have improved their on-time reliability between September and October, according to SeaIntel data.
CMA CGM has been neck-and-neck with Maersk on reliability in the Asia to Mediterranean trade lane since the beginning of the year, Murphy said, quoting the SeaIntel Global Liner Performance database. MSC has beat the industry average on the same lane since May.
A CMA CGM release notes the network will create a new benchmark of service quality by committing to 100 percent schedule reliability, a goal the Daily Maersk aims for. As an independent entity, P3 will be relied on by the three carriers to deliver on service performance.
“P3 will have to deliver on service,” Schueler said.
CMA CGM in its P3 schedule release said its east-west services would provide improved frequency through more weekly loops, daily departures and more direct port pairs each week. The Marseilles-based carrier also said the network would offer wider geographical coverage, such as direct calls to Japan in Asia-North Europe and trans-Pacific trades, and direct calls to Scandinavia and Poland in the Asia-North Europe trade.
In addition to greater reach, Maersk said on its Web site that the stability of the P3 network would reduce cancellations, an increasing form of frustration for shippers. The ability for alliance carriers to move containers directly from one port to another doesn’t necessarily equate to better service, SeaIntel notes. But the number of port-to-port combinations available to alliance carriers would reduce the risk of delays because transport would depend on one service, i.e. the P3, not two or three independent services, SeaIntel said in its weekly Sunday Spotlight newsletter.
The P3 network would offer 143 port-to-port combinations in the Asia-North Europe market, giving it 80 more than the G6 carriers and 87 more than CKYH, according to SeaIntel. In the Asia-Mediterranean trade lane, the P3 network would have 172 combinations, or 122 more than G6 carriers and 83 more than CKYH.
One issue raised by the P3 proposal is the overall impact it could have on capacity. The ships operated by the P3 are larger on average than those operated by the G6 or CKYH alliances. In order to achieve cost parity or get closer to it, carriers in the G6 and CKYK, as well as carriers not affiliated with a major alliance, could be spurred to invest in mega-ship tonnage.
“The reaction could very well be the CKYH and G6 carriers start a renewed program of ordering of mega-vessels, despite the detrimental effect this would have on the long-term market outlook,” Murphy said.
For example, in the second half of 2014, the average P3 vessel on the Asia-Europe trade lane, at 12,675 20-foot-equivalent capacity, will be 12 percent larger than the average G6 vessel and 27 percent bigger than the average CKYH ship, according to SeaIntel. A year later, based on current ship orders including the Maersk 18,000-TEU Triple E ships, the average P3 vessel, at 14,125 TEUs, will be 21 percent larger than the average G6 vessel and have 24 percent more capacity than the average CKYH ship.
A sense of which ports will benefit from the P3 network and which ports will lose is also beginning to emerge as sailing schedules are released. Not yet released is the specific terminals at which the ships would call. Still, the ports chosen by the P3 are a proxy for which ports are “big ship ready,” to use an advertising phrase.
Among European ports, Antwerp is clearly a winner, as the inland Belgian gateway will get an extra call on the alliance’s Asia-Europe service. The increased number of calls is “extremely positive” for Antwerp’s competitive position in the European port range, said Eddy Bruyninckx, CEO of the Antwerp Port Authority.
Rotterdam, Europe’s largest container port, will lose three export calls and two import calls, or more than half its current Europe-Asia calls, according to Alphaliner. Hamburg loses one import call while Bremerhaven’s extra export call is outweighed by the loss of two import calls. Zeebrugge loses one export call and one import call, while Le Havre gains one export call, but this is neutralized by the loss of an import call.
Germany’s upstart Wilhelmshaven is the clear winner, as the JadeWeserPort container terminal on the North Sea operated by Eurogate, which has been virtually empty since opening just over a year ago, will see two weekly P3 services. Other winners are Gothenburg, Aarhus and Gdansk, which will represent new calls for two P3 carriers and Southampton and Dunkirk, which will be new destination for one of the carriers.
In the U.S., it’s little surprise that the ports of Los Angeles-Long Beach, New York-New Jersey and Savannah are poised to benefit, considering their dominant positions in their respective regions. On the West Coast, the port complex of Los Angeles and Long Beach, by far the largest U.S. gateway, will see calls by all five weekly services from Asia, giving the two ports direct calls from 19 different Asian ports. One of the five loops, the Sunrise service, will call at Dutch Harbor, Alaska, to pick up seafood.
On the East Coast, the ports of New York-New Jersey and Savannah will see calls by three of the four weekly all-water services from Asia calling at East Coast ports, giving both ports direct services to and from 10 different Asian ports. These three loops will deploy vessels with 8,500 20-foot-equivalent units of capacity from Asia to the U.S. East Coast ports via the Suez Canal.
In Asia, Port Klang is the biggest loser, according to Alphaliner. The Malaysian port will keep two westbound calls but will lose two of its three eastbound calls. Singapore will also take a hit as the number of its weekly calls to North Europe will fall from three to one. The Port of Tanjung Pelepas emerges as a clear winner in Asia. The Malaysian port’s place on seven of the eight westbound services to Europe will remain unchanged.
Those ports that are part of P3 loops stand to gain more than just volume. They will see faster turnaround times because a single entity will arrange arrival times, instead of three, said Steen Knudsen, chief operations officer for APM Terminals’ Asia-Pacific region. P3 members will focus their calls on mature terminals, not new operators, the executive at Maersk’s port operating arm said.
“Three of the largest players all of a sudden have a common and similar view of schedule reliability, which will help us to deliver a more solid product,” Knudsen said.
Senior Editor Peter Leach, Asia Editor Annie Zhu and Special Correspondent Bruce Barnard contributed to this report.