Ocean Carrier Alliances Part 1: New Carrier Alliances in 2017

By: Mollie Bailey, Director, International, LCB, Transplace

While the changing atmosphere of ocean carrier alliances for containerized cargo isn’t something new, it’s certainly top of mind for many shippers and carriers alike thanks to a tumultuous last few years. In our recent Shipper Symposium Series Webinar, I discussed these alliances and what they mean for the industry – and in part one of this two-part blog post series, I’ll share what the ocean container industry has looked like over the past ten years and share which global ocean carriers have recently partnered.

New Carrier Alliances for 2017

What used to be four primary ocean carrier alliances has now transformed into three new large ocean carrier alliances, which kicked off their services on April 1, 2017. To understand these partnerships, it’s important to know the three ways that ocean carriers (i.e. container carriers) can partner in our industry:

  • Slot Charter Agreements: When a shipping company buys a certain number of slots from another carrier.
  • Vessel-Sharing Agreements (VSAs): VSAs are normally dedicated to a certain trade route for pooling fleets. Partners within a shipping consortium agree to operate liner services along a specified route using a specified number of vessels. It is not necessary for each partner to have an equal number of vessels. Carriers move containers on one another’s behalf to extend their service offerings and geographic coverage.
  • Carrier Alliances: Alliances cover multiple VSAs and carrier members jointly operate and decide on major service routes, new services being introduced, transit/service levels and capacity controls. Each carrier member agrees to contribute a certain amount of resources. Alliances let carriers offer more sailings with fewer vessels.

The three large alliances that kicked off in 2017 are considered formal carrier alliances, and were a dramatic display of the vast changes being made in the industry – as they now cover 95% of global container trade. These alliances are:

*Click on image for full view.

 

But why the need for alliances at all? The answer lies in the state of the ocean container shipping industry over the past ten years.

Industry Woes: The Supply and Demand Imbalance

Over the past ten years, this industry has seen the persistent challenge of an imbalance of global supply and demand throughout the market – and this affects both carriers and shippers. At times, there is overcapacity in the market, causing the rates to plunge, but there are also instances in which demand picks up quickly. Carriers have benefitted from these periods of increased demand, causing rates to shoot up and become more volatile and challenging for shippers to allocate and purchase space.

One of the driving factors of this global supply and demand imbalance was carrier Maersk’s fleet investment initiative: Maersk wanted to control the global container market and drive existing industry rates, and started making more vessel orders and placing shipping orders from more vessels to achieve this. However, this effort was stymied by the Great Recession of 2007-2009, when demand decreased rapidly for container shipping.

The Recession caused a chain reaction for carriers, and they had to try and stop the bleeding and ensure that freight rates didn’t tumble too far. Some of the methods they used to do so included:

  • Slow Steaming: Carriers tried to conserve fuel that they were burning and take a longer time on export routes (for example, from the U.S. back to Asia).
  • Vessel Idling: Carriers chose to take vessels out of operating streams during strategic times when demand may have slowed (after peak season, late winter).
  • Organizational Cost Cutting: As they had limited ability to control overall rate market pricing, carriers cut back within their organization and spent a lot of time and energy trying to trim costs.
  • IT Modernization: Carriers made large investments in information technology infrastructure, creating e-shipment sites where bookings could be made online, documentation could be reviewed, etc.

The industry is also still seeing the fallout from the recent Hanjin bankruptcy, driving the need for carriers to reassess their structural alignment and evaluate who they are partnering with. No one in the industry wants to see another major bankruptcy with another large carrier like Hanjin.

So, how is this affecting the current ocean container market, and how can carriers partner together and provide pricing that meets the needs of the marketplace? Stay tuned for part two of this blog post to find out!

How are these alliances going to affect your organization?

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