Sunday, 9 March 2014

Carrier Mega-Alliances ‘All About Cost Reduction’

From left: Adam D. Hall, Dollar General; Klaus Schnede, Eastman Chemical. From left: Adam D. Hall, Dollar General; Klaus Schnede, Eastman Chemical.
It is possible to think up all kinds of scary scenarios that could play out as container lines form new vessel-sharing alliances or expand existing alliances, but the primary goal of carriers is to deploy the largest ships at their disposal in order to reduce their per-unit costs.
“It is all about cost reduction. It’s as simple as that,” Lars Jensen, CEO and partner in Sea-Intel Maritime Intelligence, told the JOC’s TPM conference on March 3 in Long Beach.
The alliance scene in container shipping is hot. The G6 alliance of APL, Hapag-Lloyd, Hyundai Merchant Marine, Mitsui O.S.K. Lines, NYK Line and Orient Overseas Container Line are waiting for the Federal Maritime Commission to approve expansion of vessel sharing to the trans-Pacific and trans-Atlantic trades.
The G6 currently operates in the Asia-Europe and Asia-U.S. East Coast trades. If its expansion plans are approved, the G6 will share space on 240 vessels in the major east-west trade lanes.
Evergreen Marine Corp. agreed in principle to join China Ocean Shipping Co., “K” Line, Yang Ming and Hanjin Shipping Co., which have been sharing vessels in the CKYH Alliance.  The new CKYHE plans to begin the expanded alliance arrangement next month in the Asia-North Europe and Asia-Mediterranean trades.
Also, Cosco and China Shipping Container Line last month announced that they had signed a strategic cooperation framework agreement. Although the two large Chinese carriers have not released the details or goals of their agreement, it could lead to an alliance-type structure.
The pending alliance that has stirred up most of the interest on the alliance scene was the announcement last year by the world’s three largest shipping lines, Maersk Line, Mediterranean Shipping Co. and CMA CGM, that they intend to form the P3 alliance and begin operations around mid-2014.
If the P3 receives regulatory approval in the U.S., Europe and China, the lines will share space on more than 250 vessels on the Asia-Europe, trans-Pacific and trans-Atlantic trades.
Jensen said it is not the number of ships the alliances will operate that is the key to their formation. Rather, it is the size of the ships. The G6 and CKYH alliances will each operate vessels with an average size of more than 11,000 20-foot container units, and the P3 will have an average vessel size of 13,000 TEUs.
These large vessels significantly reduce carrier operating costs, and based on the huge vessels of up to 18,000-TEU capacity the P3 will have, the P3 will be the clear winner in reducing operating costs, he said.
Carriers have been ordering large vessels for the past decade, and what appeared to be an excellent idea when container volumes were increasing rapidly with no end in sight turned into a major problem with the global trade recession of 2008-09. Since 2010, the carrier industry has experienced three straight years of losses.
In this current environment of slow trade growth and vessel capacity exceeding demand, the formation of the P3 Network makes sense, said Bill Woodhour, vice president center trade and marketing at Maersk Line. Since carriers have by and large been unsuccessful in increasing their freight rates to compensatory levels, cutting costs is the only option, Woodhour said.
Beneficial cargo owners accept the fact that carriers must reduce their costs, and they say participating in vessel-sharing alliances may be the best option available.  “It’s a natural evolution of the industry to foster cost savings and become more efficient,” said Klaus Schnede, manager marine-air-facilities procurement at Eastman Chemical.
For the next few years, as carriers adjust to operating in their expanded alliances, freight rates could remain constant or even drop a bit, Schnede said.
BCOs expressed some concerns, however, about the service levels that could develop from the alliances.  Periodic surveys of carrier on-time performance indicate that for most lines reliability has been mediocre at best in recent months.
Adam Hall, senior director of international logistics at Dollar General, said he does not see the formation or expansion of alliances on their own fostering improved overall reliability. In fact, the opportunities for taking ad hoc action to cancel sailings when load factors are judged to be insufficient will increase, he said.
Carrier communications about their plans have been poor and have been limited primarily to the issuance of press releases, Hall said.
Cargo interests are not especially concerned that the closer working relationship among carriers will encourage collusion on prices, which they noted is illegal. In fact, Jensen said that if existing alliances ever had a reason to collude on pricing, it would have been the past two or three years as the industry racked up billions of dollars in losses.
“I would almost describe them as inept on collusion,” he said.

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