Home » Breaking News, Maritime » Report: Box shipping alliances limit shippers’ options, lower service quality

The International Transport Forum (ITF) in a new report said the alliance structure in container shipping has reduced shippers’ choices and lowered service levels, as it called for an end to the EU’s block exemption to forming consortia that the liner shipping industry currently enjoys.

The ITF made the call as the European Commission reopened in September its investigation into the block exemption which allows carriers to operate alliances on trades that serve the European Union.

Brought into law in 2010 the block exemption is due to expire on April 25, 2020, and the EC has called on carriers, shippers, forwarders, and ports for their opinions.

The ITF report, “The Impact of Alliances in Container Shipping,” argues that the alliance structure has reduced shippers’ choice and lowered service levels through “lower service frequencies, fewer direct port-to-port connections, declining schedule reliability and longer waiting times.”

“Whereas the early generations of global alliances that emerged in the mid-1990s provided a vehicle for cooperation between smaller carriers, alliances are nowadays cooperation tools for the largest container lines: the three global alliances (2M, Ocean and THE Alliance) that are operational since April 2017 regroup the eight largest container carriers of the world,” it said.

These three alliances, it added, represent around 80% of overall container trade and operate around 95% of the total ship capacity on East-West trade lanes, where the major containerized flows occur.

The report, published November 2, 2018, further observed how alliances have allowed carriers to acquire and operate mega ships, reducing unit costs but fueling overcapacity.

Less service differentiation

Alliances have also made the maritime transport offerings more uniform and less differentiated, it continued. “Alliances have contributed to lower service frequencies, fewer direct port-to-port connections, declining schedule reliability and longer waiting times. This has increased total transport times and delivery uncertainty for various shippers, leading to higher inventory and buffer costs.”

The report identified several impacts of alliances on the transport system. For one, they contribute to concentration of port networks and bigger cargo shifts from one port to another when alliances change port networks.

In addition, within ports, “the buying power of the alliance carriers can create destructive competition between terminal operators and between other port service providers such as towage companies.”

This, said the publication, can lower the rates of return on investment for the port industry, results in the decline of smaller container ports and the disappearance of smaller independent terminal operators, as well as towage companies.

A particular concern is that alliances and alliance carriers frequently exert strong pressure for publicly funded infrastructure upgrades to be undertaken to support the use of mega ships, said the report. However, “these expenditures often prove to be uneconomic, either due to shifting demand for port services or the monopsony power exercised by the alliances.”

Although overcapacity in the liner sector has lowered freight rates, these cost savings are partly offset by a number of additional costs for shippers. Moreover, by limiting shipping options, alliances “have frustrated the risk diversification strategies of shippers and freight forwarders,” the report further stressed.

Moreover, alliances could raise competition concerns in what has become a concentrated market, it said. The top four carriers accounted for 60% of the global container shipping market in 2018. The market share of the biggest carrier (19%) is larger than the market share of any global liner alliance before 2012, which signifies the different character of current alliances, said the paper.

Increasing market power

Global alliances give more market power to carriers and have several implications, said the report:

  • First, they represent barriers to entry on East-West trades: only the largest companies would be able to compete on price for Asia-Europe services outside an alliance structure.
  • Second, alliances could function as vehicles for collusion between carriers, as they provide carriers with in-depth insights on the cost structures of their competitors.
  • Thirdly, alliances give very considerable bargaining power—“monopsony power”—to carriers in regard to ports and terminals. The result can be declining rates for port services, carriers requesting additional public infrastructure, and vertical integration by carriers, in particular in terminal operations. Consequently, the market share of carrier-dominated terminal operators has increased from 18% in 2001 to 38% in 2017. “This could raise competition concerns if dedicated terminals exclude other carriers and if carriers’ terminal investments raise entry costs that make container shipping a less contestable market,” said the ITF.

The current three alliances are not serving the smaller carriers but each brings together two to three very large carriers that would be able to offer most of their services outside an alliance. Contrary to some transport sectors—e.g. aviation—economies of scale in container shipping can also be achieved via mergers and acquisitions—or via the organic growth of carriers increasing market shares, said the paper.

Repeal EU block exemption

The report recommends the repeal of shipping-specific block exemptions from competition law.

“In light of the longer-term trend toward the removal of block exemptions in the shipping industry, the European Commission should carefully consider allowing the EU Consortia Block Exemption Regulation to expire in April 2020, as currently scheduled, rather than extending it.”

It acknowledged that a repeal of block exemptions is unlikely to end current and future alliances, as these could still be authorized under competition law on a case-by-case basis. “However, it would ensure greater scrutiny of individual alliances and thus more effectively deter any anticompetitive conduct in the sector.”

For its part, the World Shipping Council (WSC) has criticized the ITF report and its call to end the European Commission’s block exemption for ocean carriers. The WSC, which represents the container shipping industry, said the paper demonstrated “a fundamental misunderstanding” of how the consortia block exemption works.

The ITF is an intergovernmental organization with 59 member countries. It acts as a think tank for transport policy and organizes the annual summit of transport ministers. The ITF is politically autonomous and administratively integrated with the Organization for Economic Cooperation and Development or OECD.

Photo: Emperor Genius at English Wikipedia

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