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October 15 2018

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30 The Journal of Commerce | October 15 2018 www.joc.com Beneath the Surface Gary Ferrulli CARRIERS AND SHIPPERS continue to prove they are adversarial and, in many ways, self -destructive. It took only weeks after I ended my last article with "the deci- sion-making is in the carrier's hands" when CMA CGM lowered rates in the Asia-Europe container trade. No sur- prise, Maersk Line followed suit, but effecting those rates a week earlier. The snowball begins rolling, and rolls in one direction. Which carrier will be next? For shippers, these moves are an early Christmas gift. For carri- ers, the result will be lower revenue and bottom line results. Coincidently, the European Shippers Association is asking the EU to allow the block exemption from antitrust laws to expire. That exemption allowed the formation of ocean shipping alliances. Shippers claim alliances haven't improved services and have raised prices, acting as cartels. Industry losses of more than $20 billion in the seven previous years, and the first half of 2018 losses point to the contrary. Other evidence includes the carrier's rates of return at under 3 percent for decades, reducing the number of carriers by 75 percent during my career. So, two groups mutually depen- dent on each other continue to be adversarial, each in their own way taking steps to degrade the level of services with virtually no end in sight to what are unsustainable activities and results. If taken to conclusion, it will do great harm to shippers and carriers alike. The carriers seem to be back to pursuing volume and market share after a few months of capacity management that had utilization up and rates rising in major east-west trades. The trans-Pacific is still in the capacity management and spot rates up mode, but will that last? Will the reduction in rates in Asia-Europe spill over to the trans-Pacific? It doesn't make sense to do that, but this is containerized shipping. And what about the European shippers wanting to eliminate the block exemption? Are they serious, or just making noise in the hopes that the carriers will continue to reduce rates, speed up the ships to 22 knots, and pour hundreds of mil- lions of dollars into technology for a better customer experience? While carriers could possibly continue with aliances if the block exemption isn't extended, it exposes the carriers to the antitrust laws, causing business uncertainties that could end the al- liances. How would that impact the container shipping industry? If the EU agrees with the ship- pers and does away with the block exemption, how would that improve services? Why does increasing the legal business uncertainty of alliances help shippers or carriers? If eventually that action leads to other actions that discourage or eliminate alliances, there would be a mass deterioration of services, not improvements. Think in terms of the numbers of vessels required to run a global service with viable schedules be- tween Asia and Europe — multiple strings. Which carriers have the fleet to do that? In reality, perhaps three or four. And that doesn't begin to address the issue of the competitive- ness of the 14,000-TEU ships and smaller vs. 18,000-TEU and larger vessels. Who has the large ships and in what quantities? What happens to costs when one carrier has six strings between Asia and Europe and only three of those strings are with big ships? The cost structure changes, going dramatically up. What about the relatively smaller players who are in alliances and provide service between Asia and Europe only because they are. How would they deploy an "ours only" fleet in trades where they have significantly higher costs and service frequency that can't compete in the market? Rather, they would deploy their limited assets in trades where they can be relatively competitive, becoming regional or niche players. Can they build more ships? Where would the money come from? As an industry they have lost billions during the past 10 years, and there are some very financially weak players around; maybe they would just disappear. In 15 months, carriers will be required to operate globally with low-sulfur fuel. The cost of meeting this regulation could be as high as $100 billion annually. The carriers can't absorb that. Wouldn't the shippers want carriers in alliances cooperating to devise the most effi- cient fuel services they can? I have often made the point be careful what you wish for, you just might get it. This is one of those cases. The last thing shippers should wish for is the elimination of alliances, each carrier operating on their own. Com- petition in major lanes will lessen, not expand. The large carriers of today, literally a handful, will be able to put up a reasonably comprehensive global package of services. The rest will be re- gional or niche players, with addition- al merger and acquisition lwikely. Look at recent mergers and aquisitions such as OOCL and Cosco Shipping. OOCL, one of the better operated carriers with a history of cal- culated growth and profitability, rela- tively speaking, could see the writing on the wall. They couldn't maintain their stature and results because of their lack of size. Scale is necessary to maintain a global presence. The merger of the three Japanese carriers, now Ocean Network Express, or ONE, allowed them to remain globally viable; they needed scale. A literal handful have it, and it becomes even more questionable of who has it when you look at the competitiveness of vessels under 15,000 TEU in the Asia-Europe trades. Alliances have kept many in that market as they have few or none of the assets required to be competitive — their alliance partners do. Two interdependent parties are seemingly taking actions against their own best interests, an interest- ing set of circumstances affecting literally billions of people. JOC Gary Ferrulli is chief executive of Global Logistics & Transport Consulting. Contact him at gferrulli@ globallogisticsandtransport.com. No one wins in this coin toss

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