2017 shipping alliances, a “Game of Carriers”, questions remain

Strategy for Business and IT, Operational Change, Improvement, Innovation - Vice President APAC

Launching one shipping alliance is a high wire act. Launching two at the same time looks more like a complicated trapeze act done without a safety net. April 2017 marked the re-arrival of old container lines wrapped into new alliance colors, all full of hope for the new chapter of the drama that container shipping has become over the last few years. The 3 alliances collectively hold 90% of the shipping market, a fact that will impact shippers and ports alike.

The game will be played in the network capacity optimization area, as pricing coordination is off limits under the anti-cartel statues and regulatory approvals. Ignore for the second news of revival in rates, as that is secondary to more strategic issue of services availability arising out of carriers’ desire for greater efficiency. Ignore also the fact that each carrier belonging to any alliance has also numerous volume sharing agreements and slot exchanges with other carriers allied within other alliances.

In the backdrop are the economic realities. The 2017 will not be much different from the carriers’ modus operandi of the past few years. It will be still about fill’em up, catch the revenues, keep cutting into expenses, and don’t worry too much about the profits. Of those the most important to shippers and ports will be the aspect of carriers cutting into expenses related to running their mainline network to unprofitable or unproductive Origin and Destination locations. It will essentially come down to the size of the vessels and the average volume of containers lifted per port call.

Carriers' network planners will plan those much larger vessels by reducing the number of port calls and asking the ports to increase their lift capability to shorten the stays of those vessels in port. This will cut off ports not being able to meet the performance expectations and push the problem up to ports which are more efficient by volume and more expensive per lift. I can almost imagine a situation, whereas a carrier will simply offer to keep their call(s), but only if the average price per call comes down. The implicit threat would be for the port to lose the calls and the revenues that come with them.

Shippers will have an equally interesting time, as the carriers will renew their focus on using IT technologies smarter. It will mainly come down to focus on and greater understanding of the demand. Serving great number of locations frequently leads to big discrepancies between the expected and realized demand, both in terms of container volumes and profitability of shipping orders. Reducing number of ports will allow the carriers to better analyze behavior of customer segments, the nature of the demand coming through remaining ports and the commodities shipped. With that comes greater flexibility in price management, as pricing varies greatly based on commodity inside the container. You saw a harbinger of that in the seeming shortage of slots from Northern Europe to Asia. What was an easy booking process at reasonable prices changed rapidly into game of too many shippers chasing too few slots at the prices the shippers wanted. Presumably, the slots were not there because the ships were full, but in reality they were there for higher price combined with the preference for long term customers who produced higher profits for the carriers.

The above situation will not change much with more and more ultra large container vessels arriving at the scene. There was a palatable excitement in the air at seeing the MOL Triumph, a beast of 20,170 TEU capacity to hit the water. Five more will follow shortly and many more after that. Even if not full, a call by one of those will require longer berth window per call and the network planners will be very choosy about where to call. As a result of these mega additions, the ports need to prepare themselves for fewer visits and painful increase of costs on the landside, as equipment and people will be put into overtime to accommodate drive for shorter stays in port. The shippers should consider how those fewer calls will impact their transit times, capacity “shortages”, FOB points, and the overall pricing pressures. These are not imaginary threats. Planning and acting now will spare you headaches later in the year.

If you are a shipper, carrier, port or an intermediary, catch up with me at TOC in Singapore or the upcoming conferences in Hamburg for a discussion about optimization technology and how to maneuver better in those treacherous waters of container shipping. Your company’s bottom line might be very thankful for it.

If you found this topic interesting, leave your comment or suggestion. I will be happy to listen and respond.

On a broader note, I manage Asia Pacific division of Quintiq, a constant innovator in applying mathematical optimization to solve real life business planning & execution problems. All my writings draw on real life business experiences with my clients. Asian examples feature big, because I live and work in this region and see its dynamics first hand. If that interests you, please follow me to receive the latest updates.