Is there more to the 'Big 3' alliance than meets the eye?

Is there more to the 'Big 3' alliance than meets the eye?

THE world's three largest shipping lines, Maersk Line, MSC and CMA CGM, issued a joint statement earlier this week announcing a "long-term operational alliance on East-West trades, called the P3 Network", in a bid to improve customer service and operational efficiency.

But while improved customer service and a desire to increase efficiency are admirable goals, one cannot ignore the potential impact that this move could make in the wider container shipping industry. Nor can one ignore the regulatory interest that will be aroused accompanying this news.

This publication in recent months has speculated that the market is now witnessing a period of covert consolidation on the mainline trades that will ultimately leave the Asia-Europe, transpacific and transatlantic trades with a much smaller pool of service providers than what we see today.

This week's announcement from the "Big 3" certainly adds greater weight to this assertion....

Already Maersk Line operates 15.1 per cent of the world's container shipping capacity, MSC commands 13.5 per cent and CMA CGM operates 8.6 per cent, according to Alphaliner.  

Collectively these three lines operate an astonishing 37.2 per cent of the world's container shipping fleet. As such, any major alliance particularly on the world's three major trade lanes is of great significance.

All three carriers generate most of their business and revenue on these trades, which would indicate that their market share could be even more if we broke it down on a trade-by-trade basis, particularly Asia-Europe.

Nevertheless, it is clearly stated in the announcement that while the vessels deployed on the P3 Network, which will amount to 2.6 million TEU in capacity across 255 vessels on 29 loops initially, will operate independently by a joint vessel operating centre, the three lines will continues to have fully independent sales, marketing and customer service functions.

No doubt this is said in the hopes that it will keep the attack dogs of the European Commission at bay, who will certainly be taking a keen interest in how this alliance manifests itself.

Shipping lines know all too well the heavy penalties they face for collusion. And given the huge potential market share involved with the world's three largest shipping lines operating in close connection with one another regulators will be keen to ensure that everything is above board.

With all of this said it is important to note that the agreement, as was reported in our sister publication the Hong Kong Shipping Gazette yesterday, is not expected to take effect until the second quarter of next year and is still subject to approval from the relevant regulator authorities concerned with each of the three trades.

It is also subject to final negotiations among the three carriers. But the motivation to get the deal done will be high, given the potential for significant operational cost savings.

As the deal currently stands Maersk will contribute 42 per cent of the capacity to the tune of 1.1 million TEU; MSC will deploy 34 per cent of the capacity, or roughly 900,000 TEU, while CMA CGM will contribute 24 per cent or 600,000 TEU.

Outside of the regulatory issues this news could have significant repercussions for other carriers in these three trade lanes, as one would imagine that the economies of scale advantage these three carriers will enjoy will grow to a new unprecedented level.

It will be interesting to see how the market will respond. Will we see a collection of smaller carriers join together to offset the impact of the Big 3 alliance, or will we simply see the gradual phasing out of smaller carriers from the trade lanes?

In recent years it has been said on more than one occasion that in order to compete on the Asia-Europe trade, in particular, you cannot operate anything under 10,000 TEU. This is because it becomes too difficult to compete with the bigger players based on the average per unit operating cost.

Not only do the Big 3 lines command a large market share of today's fleet, they also operate the largest ocean going vessels in the industry. Maersk has just taken delivery of the first of its 18,000 TEU ships. CMA CGM has 16,000 TEU vessels, while MSC is no stranger to the mega ship craze either.

The shipping lines outside of the top three may have a few 14,000 TEU ships here and there, but even if a number of these lines combined, it would be hard to imagine how they will be able to compete against the proposed alliance of Maersk, MSC and CMA CGM.

While these three carriers may claim that the move is all about creating greater efficiencies and improving customer service, which they will no doubt aim to do through this alliance, one cannot help but wonder if another motivation behind this is to force some smaller rivals out of the market in the hopes it will help to stabilise these mainline trades.

After all it has been a very turbulent few years, particularly on the Asia-Europe and transpacific trades.

Is there more to the Big 3 alliance than meets the eye? At this point we can only speculate of course. But the fact that it is the Big 3, all major rivals, rather than Maersk or MSC and a number of smaller lines raises the suspicion that there is.