The European Commission (EC) has launched a review of the five-year container shipping block exemption regulation that is up for renewal in two years with stiff opposition expected to come from shipper groups that say allowing ocean carriers to operate outside competition rules has not improved reliability or service levels.
Liner shipping’s current exemption from anti-trust rules ends in 2020 and as part of its assessment of whether to grant another five-year block exemption order, the EC has called for feedback from those in the container supply chain.
It is an issue that has very distinct positions for and against. Ocean carriers are firmly in favor of maintaining their block exemption while their customers believe the regulation distorts market competition.
Shippers' representative: service reliability is at just 70 percent
The European Shippers’ Council is not yet ready to disclose its position on the issue, but secretary general Nik Delmeire said it was clear that the supply chain was not functioning as it should.
"We are not happy with the way the maritime supply chain is working these days,” he told JOC.com. “When service reliability is at just 70 percent, that means there is still a lot of work to be done, and we hope maritime shipping undertakes all the necessary measures to make the supply chain finally work the way customers expect it to.”
SeaIntel data on liner shipping performance show that the schedule reliability of the top five carriers was between 71 percent and 69 percent in the first quarter, with APL leading the way at just 71.2 percent. However, all the top 15 shipping lines showed a marked decline in schedule reliability compared with the fourth quarter of 2017.
The deteriorating service reliability has led to the 2M Alliance members Maersk Line and Mediterranean Shipping Company recently reducing speed still further on the Asia-Europe trade and cutting port calls. It is not clear whether this will address the poor liner performance, but in anticipation of the EC block exemption review, the OECD has embarked on a study into liner performance and reliability.
“Our interest in alliances is a logical follow-up of our work on mega-container ships from 2015,” said Olaf Merk, who leads the work on ports and shipping at the OECD’s International Transport Forum.
“Like mega-ships, alliances and consolidation have considerable impact on whole maritime logistics chains and a range of stakeholders including shippers, freight forwarders, ports, terminal operators, and port service providers such as towage companies. Maybe some of the current issues with reliability and service quality could be related to alliances,” he told JOC.com.
Ocean carrier groups: consolidation increased efficiency
In a joint submission by the World Shipping Council, the European Community Shipowners’ Associations, and the International Chamber of Shipping, the shipping groups launched a robust defense of the consortia block exemption regulation, which they said had made it easier for liner shipping companies to cooperate in an economically efficient manner for more than two decades.
“The modest consolidation over the past five years has not undermined the block exemption regulation’s viability. There is neither an alternative method for companies to self-assess with the same degree of legal certainty nor an alternative form of cooperation that could achieve the same efficiencies. Therefore, the Consortia Block Exemption Regulation should be extended for a five-year period beyond its currently scheduled 2020 expiration date,” the liner shipping submission stated.
Despite the “modest consolidation” in the industry brought about by consolidation and new alliances, the submission said the exemption provided the legal underpinning for vessel sharing agreements (VSAs) that promoted competition by lowering barriers to entry on a given trade.
“This, in turn, ensures that customers have a wider range of carriers to choose from, increasing competition. They also enable smaller parcels of capacity to be added to a trade than would be required by a single carrier to operate a scheduled service and thereby enable capacity to be adjusted more accurately to demand,” the submission said.
After the abolition of the liner conference block exemption in 2009, the EC reduced the market share threshold for the consortia block exemption from 35 percent to 30 percent, noting at the time that, “since the new legal framework has been in place and applied for only a short period of time, further changes should be avoided at this stage. This will avoid increasing the compliance costs of the operators in the industry.”
In capacity terms, on the two biggest east-west trade lanes touching Europe, four of the six alliance pairs were under the 30 percent threshold in May 2018, according to Alphaliner. The largest alliances had market shares of 38 percent (2M), 34 percent (Ocean), and 24 percent (THE) in the Asia-Europe trade, and 23 percent (2M), 16 percent (Ocean), and 19 percent (THE) in the Europe-North America trade.
The shipping group submission told the EC that the industry has undergone enormous changes in the past few years and without the block exemption in place, entering into the new alliances and many single-trade agreements would have been far more difficult with increased cost of compliance and less legal certainty.
The shipping organizations pointed out that most shipping companies are members of many different consortia. At the time of their merger, Hapag-Lloyd and United Arab Shipping Company were members of 19 different consortia to and from the European Union, which were active on 45 different trades, the shipping group statement said. OOCL and Cosco were members of seven consortia to and from the European Union, which were cumulatively active on 12 trades. Similarly, Maersk and Hamburg Süd were active on seven consortia, which were cumulatively active on 13 trades to and from the European Union.
“Given that facilitating economically efficient cooperation and simplifying administration are two of the consortia block exemption regulation aims, these facts alone establish that it was effective in promoting efficiency-enhancing cooperation,” the shipping organization statement noted.
The increasing capacity of the largest shipping lines has led to speculation that some carriers may decide to step out of their alliances when the VSAs end and go it alone, but the shipping groups said that was not an option.
“The recent consolidation in liner shipping has not undermined the consortia block exemption regulation. The market remains rather fragmented and is not close to a point where even the leading companies could maintain their level of service individually.”