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TRADING PLACES 54 THE JOURNAL OF COMMERCE www.joc.com AUGUST 24.2015 Peter Tirschwell ALLIANCES: VIABLE CARRIER TOOLS THE JOC'S JUNE 27 cover story ("From Villains to Heroes") detailing shippers' newfound appreciation for ocean car- rier alliances struck me as a distinct change in tone and substance from the long-held view that alliances were viewed as potential instruments of collusion. With a possible shakeup in alliances in the air because of the potential merger of China Shipping and Cosco, the insights from JOC. com Executive Editor Mark Szakonyi are worth a review. I've always failed to understand this air of suspicion, and the peri- odic questions national antitrust authorities have raised about alli- ances. Alliances are a carryover from the days when container lines enjoyed antitrust immunity. It's been suggested that there is a "cul- ture of collusion" that could take root within an alliance framework, but the evidence speaks for itself: No market in which collusion is occur- ring would still be plagued by the pricing volatility we see today. This year represents a high- water mark for alliances in the ocean shipping sector: It's the first in which all major east-west car- riers, other than Zim Integrated Shipping Services, are members of an alliance. And yet pricing this year is wild. That fact hasn't escaped the notice of shipper groups such as the U.S. National Industrial Transporta- tion League. The idea that alliances are unrelated to market dynamics is a good thing for shippers. It means alliances aren't a form of consoli- dation, despite the appearance of such in relation to the vast pools of ships participating members deploy jointly and coordinate tightly. "As you get larger and larger alliances, you are making collusion easier, whether it's legitimate or ille- gitimate," the logistics manager for one major U.S.-based importer and exporter told Editor-at-Large Peter Leach this year. "They are not doing anything nefarious, but alliances make coordination of (vessel) sup- ply easier." Shippers now seem to recognize that alliances don't represent real consolidation and are rightly focus- ing on the more serious potential for actual consolidation — which if it occurs to a significant degree will impact the market, just as it's doing in the U.S. airline industry where consolidation is rampant and, no surprise, prices are skyrocketing. And that's where alliances turn from a threat to a protector of ship- per interests. At a time of increasing division between larger and smaller carriers in terms of market share, capacity deployed and, most impor- tantly, profitability, alliances are a lifeline to smaller lines, allowing them to remain competitive. Shippers "were right to raise a yellow flag when these alliances were cobbled together and pro- posed," NITL President Bruce Carl- ton told The Journal of Commerce in July. "They had the appearance of game-changers. With some time to observe actual performance, there's less to be afraid of than we once thought." And although consolidation in container shipping has been minimal in recent years, nothing is preventing it from advancing. As this article went to press, reports were circulating about a possible Cosco-China Shipping merger, which would unite the sixth- and seventh-largest container lines in terms of capacity as calculated by research firm Alphaliner. Although shippers don't like the idea of one less carrier in the market, they understand why the financially ail- ing duo is looking to tie up, Carlton said. What this means for the two carriers' membership in competing alliances — Cosco in the CKYHE and China Shipping in the Ocean Three — is unclear. If a musical chairs of alliances beg ins, and Cosco ties up with the O3, as some speculate, members of the resulting KYHE will need each other even more. That's because alliances give smaller carriers the ability to offer customers a much broader network and more frequent sailings than the lines would be able to offer on their own. Alliances give smaller carriers access to larger ships than those in their own fleets, allowing them to mimic, if only to a limited degree, the low operating costs that the larg- est carriers are effectively turning to their advantage in generating con- sistently higher profits. The division between successful large carriers and smaller lines has never been wider, with the smaller entities increasingly hanging on and uncertain whether to continue investing. That fact puts alliances in a different and more positive light. It should immediately neu- tralize arguments any government might raise in questioning the legality of carrier alliances and should put an end to the chronic sus- picion of alliances as instruments of collusion. That's not to say shippers should rein in their scrutiny, though. JOC Contact Peter Tirschwell at peter.tirschwell@ihs.com and follow him on Twitter: @petertirschwell.