By Meredith Martino
The shorthand names for some of today’s shipping line industry alliances might sound like Bingo calls or Battleship moves, but vessel sharing agreements are no game for the port industry – though they may end up setting some ports up for major wins when it comes to vessel calls and business agreements.
Ports throughout the Western hemisphere keep a close eye on the liner industry. As companies blur hard-edged distinctions that once separated them from competitors, their business decisions have ripple effects for ports.
Sharing space on vessels is not a new concept. For about 25 years, some shipping lines have engaged in partnerships that have allowed competitors’ cargo to “ride the lines” of another company. As ships have gotten larger, shipping companies have come to grips with the fact they don’t often have enough cargo to fill their own vessels. By partnering with another company, they can maximize the efficiency of the larger vessels and minimize costs.
“How do you fill a 12,000-13,000 TEU vessel going it alone?” asked Federal Maritime Commission Chairman Mario Cordero, whose agency’s mission is to foster a fair, efficient and reliable international ocean transportation system and to protect the public from unfair and deceptive practices.
Similar to the alliances that have been forged in the commercial airline industry, shipping line alliances are seeking to cut costs for ocean liners. And they have been successful.
“When you look at the economics of the per-box cost, that’s been the driver,” said Chris Lytle, executive director of the Port of Oakland. “In the past 10 years, with the high cost of vessel operations, particularly the high cost of fuel, the economics of large ships dominates.”
Stemming losses has been critical for carriers in the past five or so years. After confronting significant financial challenges, ocean carrier companies had to assess how to move forward. While there have not been any firm moves toward major consolidations or mergers within the industry, the trend toward vessel sharing alliances continues.
On the Horizon
Within the shipping line industry, two major alliances exist – the G6, which has grown out of the Grand Alliance to include APL, Hapag Lloyd, HMM, MOL, NYK and OOCL; and the CKYHE Alliance, in which Evergreen joined Cosco, K Line, Yang Mine and Hanjin Shipipng earlier this year. Maersk and MSC attempted to ally with CMA CGM in the P3 alliance, but Chinese officials rejected the proposal, essentially taking it off the table globally. Maersk and MSC have moved forward with a less formal vessel sharing alliance of their own. CMA recently announced the formation of the Ocean Three Alliance with China Shipping Container Lines and United Arab Shipping Co.
“Given the ongoing issue of rates and profit margins, carriers will continue looking to vessel sharing agreement,” said the FMC’s Cordero.
Lytle agreed: “More consolidation wouldn’t surprise me. Nobody thought the Grand Alliance would be the G6.”
As cost savings are being realized by the allied shipping lines, there are questions and concerns about whether those savings are being passed on.
At the AAPA 2014 Spring Conference, port industry executives interested in container issues discussed a range of topics, including the effect of shipping line alliances. Many port leaders questioned who was seeing the benefit of shipping line alliances and increased efficiencies in the liner industry.
Cordero echoed the industry questions: “After cost savings, who will benefit? Two parties that come to mind are shippers and consumers.”
But for the port industry, the financial bottom line may be more simple.
“If the lines become economically viable through alliances, this has a net positive effective on ports,” said Oakland’s Lytle.
In short: It’s in the port industry’s best interests to have a robust, financially viable liner industry that can absorb some of the volatility and instability that has threatened its wellbeing in the past decade.
Opportunities to be Seized
But ports need not simply be standing on the sidelines watching changes in the ocean liner industry and waiting to see what the effect of those changes will be. In fact, there are opportunities for those ports that can adapt to the effects of alliances.
The implementation of vessel sharing alliances essentially equates to use of the fleet’s largest ships, and while the size of those ships can pose challenges for ports, it also presents opportunities.
“There is tremendous upside potential,” said Lytle. As ports strive for more efficiency and create more flexibility to accommodate vessel calls, they can be poised to attract more business. “Larger vessels can have 10,000 vessel moves, and the cargo can’t sit and wait. Not every terminal can do this [volume of movement]well.”
“Whichever terminal that’s the most efficient, that’s the terminal that’s going to benefit,” he said. “Ports have to have active involvement. They can’t hand this off to the terminals.”
Cordero, also a former commissioner at the Port of Long Beach, highlighted four key areas that ports need to be prepared to address to stay nimble and respond to vessel sharing alliances and the changes they are bringing to the shipping industry: 1) having sufficient infrastructure, 2) utilizing technology as it relates to operations, 3) mitigating congestion inside and outside the terminal and 4) pursuing sustainable port development to reduce costs.
“The issue now is addressing congestion,” he said. “What are the reasons? It’s fair to say that factors are common to all ports.”
Lytle emphasized that whereas the push several years ago was to build, there is now overcapacity in some places and the focus has shifted to “taking the land we have and using it more efficiently. Speed is essential.”
But for all the benefits that shipping line alliances can provide ports, there are challenges that arise, too. The straight-forwardness of a single company’s more streamlined decision making process is now being replaced with the bureaucracy that comes from multiple companies being required to reach consensus on major business decisions.
The added number of parties and steps for review can complicate or slow down processes that previously had been relatively quick.
“The planning horizon is extended,” said Lytle. “Instead of reaching one agreement, we essentially have to have more time to reach agreement with multiple parties.”
And the difficulties of adapting to shipping line alliances are not just at the local level – there are challenges that arise at the national level throughout the western hemisphere.
U.S. port directors gathered at AAPA’s Spring Conference expressed concerns about the ability of the federal government to react to changes in the goods movement system in a timely way, citing the length of time and amount of planning and documentation required to complete dredging and surface transportation projects.
“We can’t act quick enough,” said one port executive.
FMC Chairman Cordero sees a role for his agency in overcoming obstacles and facilitating a dialogue related to government policy.
“The issue of congestion is not isolated to a particular coast or port,” Cordero said. “It’s due to a lot of factors. Ports are looking to be efficient and sustainable.”
He added, “At the federal level, the crisis has to be one of national interest.”
To read more from AAPA Seaports Magazine’s Bottom Line issue, browse our digital edition.