Freight News, Sea

Should shipping lines go head to head? (Updated)

[ November 14, 2016   //   ]

Should shipping lines go head to head?

Shipping lines might in future have to compete head to head rather than through the current system of alliances, consortia and vessel sharing agreements, says the Global Shippers Forum (GSF) in a new report.

The report (The Implications of Mega-Ships and Alliances for Competition and Total Supply Chain Efficiency: An Economic Perspective) says that many shippers are questioning whether dealing with fewer fully-independent shipping companies could be better than a larger number of allied shipping companies in alliances.
It questions the received wisdom in the shipping industry that vessel sharing agreements and alliances are good for competition.

GSF secretary general Chris Welsh argues: “It has been clear for some time that the existing business model isn’t working for either carriers or their customers. There is a widening gulf between customers’ expectations and quality of service as carriers focus almost exclusively on operational arrangements and alliance structures. We urgently need a new ‘commercial contract’ where the needs and incentives between shippers and carriers are better aligned.”

The GSF paper notes that with mergers and lines going out of business, 6-10 major carriers could end up controlling the world’s main container trades. Introduction of mega-ships and the associated development of four – but possibly soon to be three – strategic alliances involving the world’s top 16 operators presents potential competition issues, as independent carriers are forced out of the market or are driven into smaller niche markets. Should the market become consolidated into 6-10 major operators controlling the main trade lanes, GSF believes it would be inevitable that the market share thresholds for alliances and consortia agreements would have to be so low they would be ruled out on competition grounds, with carriers having to compete head-to-head.

New approaches to competition and regulation might be needed, Welsh argues. These include prior notification and approval of alliance and consortia agreements, and greater use of merger legislation to assess the competition impacts of alliances and consortia agreements, together with the maintenance of genuine independent competitors on key trade routes to alliances.

In response, the World Shipping Council said that while it agreed that the container industry was changing rapidly, it disagreed with some of GSF’s proposed remedies. It foresaw that there would be both consolidation in the industry and alliances.

It stated: “The GSF paper seems to suggest that these basic economic drivers should be replaced by some as-yet undefined global collective planning process made up from all parts of the supply chain.”

WSC continued: “Carrier decisions – just like shipper decisions and port investment decisions – are made, and will be made, on the basis of what makes the most sense for their businesses, including the need to serve their customers.”

It also disagreed with GSF’s analysis that reducing the number of major carriers to 6-10 would lead to a heavily concentrated market. It was also unhappy at GSF’s suggestion that notification for consortia agreements might be reintroduced, because of the resulting delays and uncertainty.  The need to do so could actually make the industry less willing to adapt consortia and similar arrangements as market conditions changed, it said.