Busted by the EU?

I believe the recently initiated European antitrust investigation of container lines may be a lot more important than people are giving it credit for. And if I’m right, the inquiry, announced on Nov. 22, could result in significant changes in how the industry operates.

It would be easy to dismiss the investigation by pointing to the container lines’ history of financial losses as evidence of the lack of effective collusion. But with container lines fully exposed to European antitrust law since the 2008 repeal of the Block Exemption, container line profits or lack thereof won’t necessarily be what’s at issue.

Of more relevance, as the European Commission stated in announcing the proceedings, is carriers’ pricing behavior, irrespective of the results. If these were the days of shipping conferences, coordination of price increase announcements would be accepted for what it was: entirely legal within the framework of the carriers’ antitrust immunity, which they still enjoy in the U.S. and many other countries.

Major Asia-Europe carriers’ GRIs from July through December 2013.

But in Europe, with liner shipping no longer treated differently from any other industry, a price increase announcement by one carrier followed almost immediately by competitors announcing virtually the same level of increase and implementation date, is suspect through the unbiased lens of antitrust law.

The EU was clear about this in announcing the investigation: Container shipping companies “have been making regular public announcements of price increase intentions through press releases on their Web sites and in the specialized trade press. These announcements are made several times a year and contain the amount of increase and the date of implementation, which is generally similar for all announcing companies.”

I spoke last week to Daniel Hemli, a New York-based antitrust lawyer with Bracewell & Giuliani who isn’t involved in the EU investigation. He said U.S. and European antitrust laws are generally similar and that in order to prove an antitrust allegation in the U.S., a government regulator or private plaintiff would have to prove the existence of an agreement of some kind between at least two entities that unreasonably restrains trade. “There has to be some kind of agreement between those entities,” he said. “The agreement does not have to be in writing, nor does it have to be explicit; it can be oral and it can be tacit, but there must be a meeting of minds.

“Merely following what your competitors are doing is not in itself illegal,” Hemli continued. “At least in the U.S., you have to prove an agreement either through direct evidence, like a smoking gun e-mail or recording of a telephone conversation, or through circumstantial evidence, that there is some kind of collusive arrangement among the entities involved.”

But here’s where it gets interesting: Such circumstantial evidence, Hemli said, could be where the market participants are behaving in such a way that seems to buck market forces. “A lot of antitrust is based on economic concepts of supply and demand,” he said. “So, for example, all else being equal, if supply goes up, and demand is constant, then price will go down. Thus, if in the relevant market, if there was oversupply, and if (participants) were truly acting independently, one would expect they would be lowering their prices, not raising their prices. Of course, there may be other completely legitimate business reasons for companies independently to raise prices.” 

Container lines often use general rate increases, or GRIs, to attempt to raise prices in the face of overcapacity, thus attempting to counteract market forces and, possibly, hoping the collective weight of multiple carriers’ near-simultaneous announcements will accomplish the goal.

But if the EU were to find this practice to be an antitrust violation, and that seems entirely possible, it would be the end of GRIs as we know them. How carriers would communicate price increases to the market legally is unclear, but it would force the carriers to look elsewhere in search of ways to keep rates at profitable levels.

To Neil Dekker of Drewry, the answer is staring carriers right in the face: “The obvious practical solution is also to align capacity with demand, i.e., in line with more muted demand growth rather than chasing the hypothetical utopia that big ships automatically bring higher revenue because of the associated economies of scale. Yes, they lower costs, but if everyone does it at the same time, the market becomes hopelessly out of kilter. There have been numerous examples this year and before, about too much capacity at the same time ruining the market and rates are sent spiraling downwards.”

The carriers, he said, should “accept that an 85 percent load factor is actually fairly healthy and does not require lines, like Pavlov’s dogs, to automatically reduce rates at this level to maintain market share. In an era of oversupply, lines cannot practically hope for 100 percent load factors unless they are engaging in a constant process of suspending individual sailings and/or strings which in itself causes huge market turmoil and volatility.”  

Peter Tirschwell is executive vice president/chief content officer at JOC Group. Contact him at ptirschwell@joc.com and follow him at twitter.com/PeterTirschwell.