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‘THE Alliance’: more than the sum of its parts?

LONDON: May 16, 2016. Drewry Maritime Research says ocean carriers from previous split alliances have reacted very fast to avoid becoming isolated in small, uneconomic groups. However the company notes “alliances are only as stable as their member carriers” and says they should not been seen as the “silver bullet” that will help save the container industry:

When details of the OCEAN Alliance were revealed last month we perhaps rather cruelly dubbed the carriers left behind without any firm alliance plans beyond this year as being ‘orphans’ who needed to ‘move quickly to find new partners or risk becoming uncompetitive also-rans.’

Well, move quickly they have as on May 13 a joint statement from six of the eight carriers – Hanjin Shipping, Hapag-Lloyd, K Line, MOL, NYK and Yang Ming – announced that they would create a new partnership called “THE Alliance” from April 2017.

The somewhat unimaginative branding suggests that most of the past few weeks have been busily spent ironing out details between all of the parties, rather than on cosmetic superficialities. The statement itself was light on the why’s of the move, the blank space inevitably inviting interested readers to draw their own conclusion that the lines were compelled into this forced marriage.

Breakdown of three mega-alliance nominal East-West capacity April 2017 000 teuHaving omitted to give any rationale the statement instead focused on the supposed benefits to customers, claiming shippers would get ‘frequent sailings, high reliability and very attractive transit times’ as a result. It will be interesting to see if this is anything more than puff marketing done at short-notice as increasing vessel speeds to deliver faster transit times would reverse the near decade-long slow-steaming policy of all major carriers and alliances and would certainly give credence to the claims that THE Alliance will be a ‘unique product’ offering.

The statement also clarified that talks between Hapag-Lloyd and UASC are progressing and that the latter is expected to become the seventh member, without saying if that was contingent on a merger taking place or not. It is also understood that the financially embattled Hyundai Merchant Marine (HMM) will be considered for membership if and when it can sort out its problems.

That means that there could be as many as eight carriers in THE Alliance by the time it comes into being next April, which does rather look like a case of having too many cooks.

One solution to help streamline decision making might be to try and install a single independent operational unit, much like the aborted P3 carriers wanted to do before they were knocked back by Chinese regulators. Therefore such a move by THE Alliance members could face the same hurdles and be a non-starter if this is the level of integration of operation that they wish.

A lot can still change before next April and there is a chance that the historic coming together of the three Japanese carriers – which admittedly we didn’t think likely – could herald a merger of their liner divisions, while we still believe a merger between Hanjin and HMM is a distinct possibility. If so, fewer phone calls will need to be made between alliance partners when changes are needed.

Certainly, with all three Japanese carriers behind it, THE Alliance is set to have an unrivalled network of services to and from Japan so that the other alliances might possibly regret having not invited one or more of the Nippon carriers into their clubs.

Now that most of the membership questions have been answered and we know that the container shipping market is moving to a three mega-alliance structure (akin to the airline industry) it remains to be seen whether such a streamlining will aid some of the necessary corrective actions on capacity.

In reality, carriers cannot wait nearly a year to start that process if they want to bring supply and demand closer together and see freight rates moving upwards. The hard work will be in the restructuring of services next year and there will be obvious implications for shippers in terms of who they contract with to protect their supply chains and ensure integrity. During this time there is likely to be continued market volatility until it all beds in.

At the same time, we would argue that the transformation into a three-way mega-alliance industry structure is not an oligopoly that shippers should fear as there will still be at least 12 competing carriers and sales organizations behind these operating alliances.

There are also other carriers from within the so-called “Top 20” that are not assigned to an alliance that shippers can call upon, although none are major players in the East-West routes.

Of these carriers the most interesting to watch will be Hamburg Süd (#7 in the Top 20) that currently has around 30,000 TEU of nominal ship capacity in East-West service, giving it a tiny 0.7 percent share. At present the German carrier has thus far preferred to piggy-back on services with the Ocean Three as it develops its East-West presence, so should it wish to increase its involvement in the East-West lanes it would be an obvious candidate to join the new OCEAN Alliance at some point.

The same would be true if the geography of alliances was to extend to North-South lanes, where Hamburg Süd is most at home. Another carrier to keep an eye on will be Zim (#18), which has much more East-West capacity at around 250,000 TEU (giving a share of 3.0 percent), which is presently used in looser service partnerships with the G6 Alliance.

- Drewry is a specialist research and advisory organization providing analysis and reports for the global maritime industry.

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