As 2014 rolls out, shippers are likely to benefit from increased freight rate competition as competing carriers try to preserve market share in the face of the new mega-alliance. When the P3 launches some time during the second quarter, it may initially increase capacity on the trans-Pacific and Asia-Europe trade lanes. “It may drive rates down because of that,” said Richard Smith, vice president of transportation at Sears Holdings. He said it would be difficult for carriers to nail down rate increases in their negotiations for new trans-Pacific contracts next year.
The result will be increased rate volatility and the possibility that competing carriers will consolidate services with each other and/or with the two big existing alliances. “The other lines have to look toward forming more operational alliances, not necessarily like the P3 or the G6, but alliances where they can deploy their big ships and realize cost savings,” said Neil Dekker, head of container research at Drewry Shipping Consultants in London.
The G6 in December unleashed the first response, saying it plans to expand into the Asia-U.S. West Coast and trans-Atlantic trades to compete with the P3.
When the world’s three largest carriers launch the P3 Network, they will actually be reducing the number of ships they deploy in the main east-west trades to 252 from 346 currently, but the ships they deploy will be their largest and most fuel-efficient, which will cut their slot costs and enable them to offer lower freight rates.
Although there will be fewer total ships operating in east-west services, the competing alliances may not have enough firepower to defend their market shares. “The existing alliance structure will not be sufficient to be able to compete successfully. P3 will have a better product than anyone else, because they cover more port pairs and they will be able to produce it at a lower cost,” said Lars Jensen, CEO of research analyst SeaIntel. “All members in both alliances are searching high and low for a solution that will allow them to maintain the existing alliance structures and compete with the P3 by associating with other carriers.”
Evergreen Line, which already has taken delivery of the first of 10 13,000-TEU ships, is in talks to expand its cooperation with the CKYH Alliance among Cosco, “K” Line, Yang Ming and Hanjin Shipping. “It makes sense for Evergreen to firm up its position by forming an alliance where they can leverage slot-charter deals, realign their ships in bigger service profiles and offer their customers more port pairs,” Dekker said.
UASC and China Shipping, which cooperate in a vessel-sharing alliance and slow-charter swaps on the trans-Pacific, and have a lot of capacity coming out of shipyards, also could form their own alliance or combine with the CKYH, or the G6, which consists of APL, Hapag-Lloyd, Hyundai Merchant Marine, MOL, NYK Line and OOCL. United Arab Shipping and China Shipping each have five 18,000-TEU ships on order, which will make up a single string in the Asia-Europe trade, and UASC has another five 14,000-TEU ships on order, so the two carriers are becoming heavyweights.
“If you have that duo plus Evergreen teaming up with the CKYH, then you have something approaching what might compete with the P3,” Jensen said. “If you get that duo teaming up with the G6, you could also make the same argument.”
There may only be room for one big new alliance consisting of carriers that already have or will have new ships of 16,000 TEUs and up, and it may take several years for such an alliance to emerge because of the difficulty of meshing networks and services.
“Once they get to that point, the carriers with the big ships that are part of that competing alliance are still in the game for the major east-west trades, but the carriers that do not make it into that alliance are not viable on the main east-west trades over the long-term,” Jensen said. “They could become niche carriers for the north-south trades and the intra-regional trades, but not on the main east-west conveyor belts. It’s a commodity, and it’s all about producing it at the lowest possible cost.”
When the P3 is launched, the Daily Maersk service from Asia to Europe, which has been billed as a conveyor belt, may expand to include vessels from MSC and CMA CGM. Rodolphe Saade, executive officer of CMA CGM told the JOC that the French carriers’ vessels would become part of Daily Maersk.
Allen Clifford, executive vice president of MSC in the Americas, said that when carrier services in the main east-west trades become a commodity, the key to differentiating services on the east-west conveyor belt will become customer service. But Jensen thinks customer service will become irrelevant “if you get the conveyor belt to work without a hitch, because they just have to move the stuff from A to B.” Customer service right now is important because the service often fails, so carriers need to take corrective action, he said.
The P3 isn’t quite a done deal yet. It still must pass muster with regulatory authorities in China, Europe and the U.S. The Federal Maritime Commission in December held a summit with regulators from China and the European Union that initially was to focus on the P3 but was broadened to include alliances as a whole. The FMC said its concerns stemmed in part from the market share the P3 would control in the three east-west trades: 42 percent in Asia-Europe, 40 to 42 percent in the trans-Atlantic and 24 percent in the trans-Pacific.
As a result, the routes and services may not look quite like what the world’s three largest container lines planned last year. The EU antitrust authority, known as DG Comp, has a higher political profile in Europe than the FMC and is more likely to force changes on the P3.
“The P3 might be told they can’t have that many services to Europe so that the politicians can actually show they are doing something for competition,” Jensen said. “The Chinese authorities are the wild card, because no one has been through that process with them before.”
But he said that if the P3 gets approval as planned, it would only perpetuate the difficult market conditions. “It means the current oversupply, the current fight for survival, the current volatility will only continue, unchanged for at least the next couple of years until there is another attempt at consolidation on this scale.”
