Will Existing Carriers Form New Alliance?
Drewry has released its latest container insight weekly report, in which it discusses what is likely to happen to the carriers that have been left behind in the wake of the new OCEAN Alliance between CMA CGM, OOCL, China Cosco Shipping and Evergreen Line.
Subject to regulatory approval, the alliance is to become operational by April, 2017.
There has been much speculation regarding potential changes to alliance membership following CMA CGM’s pending takeover of NOL/APL and the merger between the two Chinese state-backed lines Cosco and CSCL.
According to the joint press release, OCEAN (initially for a period of five years) will cover more than 40 services in the Asia-Europe, Transpacific, Transatlantic and Asia-Middle East and Red Sea trades.
The last two are interesting as it could be a sign that future alliances will break through their traditional, self-imposed East-West trade perimeters.
Drewry believes that the development still leaves plenty of questions unanswered. There remains a myriad of possibilities in terms of what the “orphaned” carriers – those partner lines left behind by the four OCEAN carriers – will do in response.
As of March, 2016 the 2M carriers Maersk Line and MSC dominate proceedings in the Asia-North Europe market with a nominal capacity share of around 36%, followed by the CKYHE Alliance on 25% and the Ocean Three G6 partners, both on 19%
The four alliances are more closely matched in the Asia-North America trade (which unlike Asia-Europe retains some small non-alliance capacity) with CKYHE coming out on top with a 30% share, followed closely by the G6 (26%) and 2M (23%), while Ocean Three lags a bit on 15%.
Based on current capacity shares, the OCEAN Alliance will take over as the largest carrier VSA on the Transpacific with a share of just under 36%, while in Asia-North Europe it will be within 5% from 2M with a nominal capacity share of 31%.
The next big question is – what will happen to the orphans? Will they club together to take on 2M and OCEAN, or will they form other (smaller) cliques to maintain the four-alliance structure?
PTI previously reported on the potential tie-up between Hapag-Lloyd and United Arab Shipping Company, which could give the carriers a way to compete in a market that is currently dominated by other major carriers.
A combined Hapag-Lloyd/UASC merger would give it a 7.6% share of the Asia-North Europe market and 6.5% of the Transpacific, based on current nominal capacity.
To compete with 2M and OCEAN in those routes they would need to bring in other carriers. Outside of those trades, UASC will be very keen to find a replacement partner to CMA CGM to help it fill its 13,000 TEU units in the Asia-Middle East route.
At the beginning of 2016, there were four global alliances comprising 16 different carriers. By mid-2017, Drewry expect that there will be only three main global alliances comprising at the most 13 carriers (following one or more mergers, one or more takeovers and a possible carrier failure).
In other words, the structural industry change is about fewer, larger alliances comprising fewer, generally larger carriers than ever before.
Drewry also expect Maersk and MSC to maintain their status quo, primarily because they are already close the maximum capacity thresholds set by European regulators and because we think they are happy with the two-carrier structure and would want to avoid getting too large and unwieldy.
Japanese carrier MOL has recently partnered with Maersk and MSC in the Asia-East Coast South America trade and already works with the Danish giant on the Europe-South Africa SAECS service.
Were all eight of the orphan lines to join together into a third alliance they would be a match for 2M and OCEAN in both Asia-North Europe and Transpacific.
However, it is unlikely that all eight will agree to a new integrated alliance, because they have very varied interests and HMM in particular has serious financial problems.
The Finance Minister for South Korea has recently called for an industry restructure in order to restore low cashflow for cargo carriers and shipbuilders.
It is more likely that some could form a looser, smaller alliance while others will switch to service-by-service VSAs with the two main alliances.
A third question is what do carriers hope to get out of this alliance merry-go round? It has created a clear divide between those carriers that are safely ensconced in a club and those that are not and are waiting nervously for an invitation.
The lines with their futures sorted may temporarily benefit from any customer apprehension over those in limbo, but if this does occur it will only be a brief side-benefit. Ultimately, carriers’ end game will be to optimise their fleets and minimise costs.
Alliances have thus far failed to solve the most elusive conundrum of stabilising freight rates, and we do not expect this to change.
The Drewry View: The OCEAN Alliance will allow its members to go toe-to-toe with 2M in the major East-West trades. Those left behind will need to move quickly to find new partners or risk becoming uncompetitive also-rans.