Alliances support box line competition

Alliances and vessel sharing agreements have been blamed for reducing competition between carriers. But without them the consolidation in the container shipping segment may have happened faster.

News ID: 80290

Date: 19 November 2018 - 15:09

CONSOLIDATION AND THE MOVE TOWARDS ULTRA-LARGE CONTAINER TONNAGE HAS DRIVEN THE CURRENT WAVE OF ALLIANCES.

AS THE European Commission begins its deliberations on whether to extend the consortia block exemption for another five years, battle lines are being drawn over the costs and benefits of alliances and vessel sharing agreements.

A recent International Transport Forum report concluded that “liner shipping does not have unique characteristics that justify exemptions from competition law, either for conferences or for alliances”.

But Drewry has come down on the side of the carriers, arguing that shippers have benefitted from the existence of consortia as they have helped facilitate competition in an increasingly consolidated market.

“The formation of the current alliance structure was a defensive move to lower costs at a time of serious financial distress that brought about the demise of Hanjin Shipping,” Drewry said. “Without such agreements in place, it is our view that market concentration would accelerate at even faster pace than it is as it would place even higher barriers of entry into European trades.”

The assertion is because economies of scale have led to the introduction of ultra-large containerships on Asia-Europe trade, and that there would be a shift in the balance of power between carriers that could afford to invest in this class of ship and those that could not.

“Alliances have at least kept entry into the ULC club open to more lines than otherwise would have been the case, negating the need to purchase all of the ships required to operate a weekly service,” Drewry said.

While it was possible that some carriers could maintain similar port pairings without being in an alliance, it would require the introduction of additional tonnage, making it hard to sustain utilisation. It would also extend transit times and reduce direct services.

“The reality is that the Asia-north Europe trade will in the not too distant future be entirely populated with ULCs, so without access to alliances any lacking carriers would be at such a cost disadvantage they would likely be dissuaded from entry,” Drewry said.

But few carriers will have enough ULCs in the short-to-medium term to run their own loops.

“Given it requires 10-12 ships per service, even Maersk and Mediterranean Shipping Co could entertain running maybe three Asia-Europe services on their own, down from the six offerings they have now,” Drewry said.

But if consolidation continues among container lines, alliances may reach a natural endpoint of their own, Drewry noted.

“The economic efficiency of alliances may decrease as carriers become larger and fewer, being better able to fill the biggest ships on their own,” Drewry said.

“Instead of three or four alliances or vessel sharing agreements involving 15 carriers per trade, we can envisage a future with say only four independent mega-carriers per trade and no alliances. On the flip side, if containerships grow larger than the current maximum the need for alliances will become more imperative.”

For now, however, shippers should not fear alliances that have aided competition during a period of concentration.

“That process is ongoing, but will likely accelerate without consortia block exemption,” Drewry said.