In 2017, liner shipping feels the effects of global realignment of containership operations. “Alliances are everything,” a US East Coast port executive noted just prior to the April 1st (2017) launch of THE Alliance. He’s right. Everything in liner shipping is about alliances: routes, rates, and ultimately ROIs (Return-On-Investments). It has often been remarked about the shipping business, the only constant is change – and if you don’t like change, find another business. But change for the containership business is rarely true upheaval. Carriers come and carriers go, vessels get larger, schedules add and delete ports but the basic elements of the business are still there. This time it’s different. The combination of merger and acquisition activity, the reshuffling of the carrier alliances, and even without the Hanjin bankruptcy (see Matt Miller’s story page 3), represents a nearly unprecedented transfiguration filtering through every aspect of the business. In fact, listening to Maersk’s take on the digitalization of the industry (A presentation was made at CONECT’s Trade & Transportation Conference by David P. Zimmerman, Vice President, Sales-North America for Maersk Line), a new type of business may be evolving right before our eyes. But why now? The answer is not a “Eureka moment” as much as a weary admission of the obvious. Virtually all of the major containership operators have all come to the same bottom line conclusion – no one carrier, no matter how big or well managed, can go it alone. With that self-recognition, a global re-alignment of containership operations was a forgone conclusion. The only real question was what the realignment would look like and the influence it would have on vessel rotations. Consolidation 2016 was a year of industry wide consolidation as a number of top containership operators merged and moved into new alliances either to improve efficiency, address financial problems or simply help balance the supply and demand conundrum (or all of the above). Often these are vastly complicated deals. The $8.7 billion COSCO-China Shipping merger (Beijing approved the merger in 2015), resulting in the new COSCO Shipping, involved 74 related transactions between China’s two biggest state-owned shipping conglomerates. The 2016 notable M&As included: • Hapag-Lloyd & United Arab Shipping Company (UASC), now expected to be completed by end of the month – The merger moves Hapag-Lloyd up to the fifth spot with a market share around 7%. • CMA CGM & Neptune Orient Lines (American Presidential Lines [APL]) – The merger places CMA CGM firmly as the number three boxship operator with around a 6% market share. • The aforementioned COSCO & China Shipping – The merger gives the combined Cosco Shipping a 7% market share. • Maersk & Hamburg Süd – The addition will give Maersk a 9.7% market share. • The announced merger of Japanese carriers MOL (Mitsui O.S.K. Lines), NYK Line and “K” Line – The three Japanese carriers will total a combined 5.2% market share, in a deal expected to begin in April 2018. Naturally, the last round of mergers has set into motion questions on who might be next as the number of top tier partners has suddenly become much smaller. Carriers, like Hong Kong based OOCL, South Korea’s HMM or Taiwan’s Evergreen, Wan Hai or Yang Ming are frequently mentioned as potential targets but more as speculation based on “last man standing” logic than balance sheets. As important as the mergers and impending mergers might be to the ocean carrier box scores, the real game changer is the new system of alliances. Ocean carriers are optimistic that such industry consolidation will lead to better asset utilization, lower operating costs and a reduction in the oversupply of vessel capacity. The three main carrier alliances, 2M Alliance, The OCEAN Alliance and THE Alliance, are relatively similar in size and market share but have great variations in routes and coverages. Also, it is important to note that these are operational agreements as opposed to pricing or financial agreements that would violate numerous regulatory practices. • 2M Alliance – Maersk, Mediterranean Shipping Company (MSC) and Hyundai Merchant Marine (HMM). The 2M Alliance opened for business in July of 2014. South Korea’s HMM recently joined via a deal where they will share surplus capacity and purchase cargo slots with MSC and Maersk, officially starting this month. • The OCEAN Alliance – Formed in April of 2016 by Orient Overseas Container Line (OOCL), Evergreen, China COSCO Shipping, and CMA CGM. • THE Alliance – Comprised of Hapag-Lloyd, Yang Ming and Japan’s three big shipping companies (MOL, “K’ Line and NYK) now operating (April 2017). Early Assessment The dizzying deployment of the three mega-alliances has yet to be fully understood by either the participants, the shipping public or the regulators. In some ways, the new alignment was inevitable. Once the 2M alliance was formed sans CMA-CGM, the die was cast for the Ocean Alliance to emerge as a competitor. And with the Ocean Alliance in play, the remaining top tier carriers were compelled to form THE Alliance. Looking at the alliances holistically, even during the period of “freight conferences,” there probably has never been this much “market share” in as small a group of carriers or alliances. But market share often doesn’t necessarily deter carrier competition. While it’s a hard sell to differentiate one carrier from another when they are all on the same ships, never doubt the competition is still very keen. In a recent presentation, Jay Buckley, executive vice president at Evergreen Shipping Agency (America), was quick to point out, “We [carriers] compete, not only with carriers outside [other alliances] but with other carriers in our own alliance…I even want the freight sailing [with an alliance partner] on my own vessel.” Besides the obvious competition between alliances, nearly all the major carriers have some services that fall outside the alliance agreements. On the ground level, the differences between the carrier alliances is very significant. For example, in the Atlantic the 2M has around a 49% share, THE Alliance, 33% and The Ocean only 13%. But on the Transpacific the 2M has a 20% share while The Ocean has 42% and THE Alliance, a 29% slice. It’s too early to say whether the mega trio of alliances is going to solve the financial woes of the carriers. According to the Freightos International Freight Index, alliance members have been winning the battle of rate hikes with rates up 10% compared to 1% for independents. In all fairness, the independents rarely win these uneven contests. Probably of greater significance is the supply/demand gap moving more in favor of the ocean carriers as net capacity growth (scrapping, postponements versus fleet additions) is looking to be less than 4% this year. However, there may be an ordering issue as virtually all the alliances are adding tonnage in the 10,000 TEU plus category. 2M has 40 vessels over 10,000 TEUs scheduled for 2017, while The Ocean has 28 and THE Alliance, another 15 ships. In recent years, the intra-regional carriers have out-performed major players and it’s interesting that running contrary to the mainstream Evergreen placed two (2015/16)10 ship orders for vessels in the 2,800 TEU range destined for regional deployment. Future Where is it all heading with alliances, larger ships and complex rotations? Probably not exactly where either the carriers or shippers want but rather somewhere in between. Undoubtedly, better economies support better services – as was pointed out recently at the CONECT conference, being the least worse of the worse is not much of a business model. Probably, the next big thing for the shipping industry is the big thing that every other industry sector has already been immersed in – the Internet. The expression “internet of all things” really hasn’t hit the ocean carrier business beyond transactional processing the same way “Big Data” has redefined other industrial sectors. Maersk has already started looking at digitalization and from that, an industry may emerge where alliances aren’t everything.