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The Impact of Alliancesin Container Shipping
Case-Specific Policy Analysis

The Impact of Alliancesin Container Shipping
Case-Specific Policy Analysis

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Case-Specific Policy Analysis Reports
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Acknowledgements
This project was directed by Olaf Merk. The report was written by Olaf Merk, Lucie Kirstein andFilip Salamitov. It benefits from contributions by Sofia Serna Angel and data contributed by SeaIntelligence. The report was made possible through voluntary contributions by the Spanish Ministryof Transport (Puertos del Estado), the Italian Ministry of Infrastructure and Transport and Hamburg
Port Authority. Valuable comments on a draft version of the report were provided by Stephen Perkins,
Rex Deighton-Smith, Michael Kloth, Edwina Collins, Dejan Makovsek and Jagoda Egeland (all ITF),
Pedro Gonzaga (OECD), Andreia Thiel, Björn Pistol (Hamburg Port Authority), Ignacio Arrondo(Puertos del Estado), Niels Selsmark (Danish Transport, Construction and Housing Authority),
Gabriele Grimm (Germany Federal Ministry of Transport and Digital Infrastructure), Sonya van deGeer (New Zealand Ministry of Transport), officials from the United States Federal Maritime
Commission (FMC), officials from the European Commission, officials from International Shipping
Division, Maritime Bureau, Ministry of Land, Infrastructure, Transport and Tourism, Japan, officials
from the Ports and Harbours Bureau, Ministry of Land, Infrastructure, Transport and Tourism, Japan,
Konstantinos Adamantopoulos, Philippe Billiet, Claudio Ferrari (University of Genoa), Katsuhiro
Yamaguchi (University of Tokyo), August Braakman and two reviewers who wish to remain
anonymous.

TABLE OF CONTENTS –5

Table of contents
Executive summary..................................................................................................................................... 7
What is an alliance? .................................................................................................................................. 10
The rationale of alliances ........................................................................................................................ 12
Four generations of global alliances in container shipping ..................................................................... 13
Drivers of alliances in container shipping............................................................................................... 15
Major global trends related to liner alliances .......................................................................................... 16
How alliances work................................................................................................................................. 16
How to determine impacts of alliances? ................................................................................................. 18
Impact on transport systems .................................................................................................................... 20
Do alliances produce more efficient transport systems? ......................................................................... 20
Do consumers benefit? ............................................................................................................................ 31
Are alliances indispensable? ................................................................................................................... 36
Effects on competition ............................................................................................................................ 37
Impacts on transport stakeholders .......................................................................................................... 50
Shipping .................................................................................................................................................. 50
Ports, terminals and port services ........................................................................................................... 55
Freight forwarders................................................................................................................................... 67
Shippers .................................................................................................................................................. 68
Policy assessment and options.................................................................................................................. 72
Competition policy frameworks.............................................................................................................. 72
Asymmetry of treatment of shipping and ports....................................................................................... 80
Ports policies ........................................................................................................................................... 85
Policy options.......................................................................................................................................... 87
References .................................................................................................................................................. 92
Annex 1: Case Studies – Shippers ......................................................................................................... 112
Annex 2: People Interviewed ................................................................................................................. 119
Annex 3: Vertical Integration of Selected Carriers ............................................................................. 121
Annex 4: The New Italian Seaport Authorities .................................................................................... 125
Notes ......................................................................................................................................................... 126

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EXECUTIVE SUMMARY – 7

Executive summary
What we did
This report assesses the impact of global alliances in container shipping. It sets out how alliances
work, how they affect maritime transport systems and transport stakeholders, and how they are
currently regulated. Based on this analysis, the report provides policy recommendations togovernments. This report benefits from study visits to Spain, Italy and Germany and draws insightsfrom interviews with a range of stakeholders within the maritime logistics chain, listed in Annex 2.

What we foundGlobal alliances have become a dominant feature of container shipping. They are cooperationagreements between container lines (carriers) on operational matters. Alliances usually consist of aseries of agreements with global coverage on sharing vessels and slots on these vessels. The aim ofsuch alliances is to achieve economies of scale and wider service coverage. Whereas the early
generations of global alliances that emerged in the mid-1990s provided a vehicle for cooperation
between smaller carriers, alliances are nowadays cooperation tools for the largest container lines: thethree global alliances (2M, Ocean and THE Alliance) that are operational since April 2017 regroupthe eight largest container carriers of the world. These three alliances represent around 80% of overall
container trade and operate around 95% of the total ship capacity on East-West trade lanes, where themajor containerised flows occur.
Alliances have allowed carriers to acquire and operate mega-ships, reducing unit costs. Without
alliances certain carriers would not have been able to acquire mega-ships. As it is the ordering of
mega-ships that has fuelled overcapacity, there is a link between alliances and overcapacity. Alliances
have also made the maritime transport offer more uniform and limited the possibilities of carriers todifferentiate themselves. Alliances have contributed to lower service frequencies, fewer direct port-toport connections, declining schedule reliability and longer waiting times. This has increased totaltransport times and delivery uncertainty for various shippers, leading to higher inventory and buffer
costs. Moreover, alliances have proved to be inherently instable: considering that all major carriers arein alliances, changes in one alliance can have an impact on the whole sector.
Several impacts of alliances on the transport system as a whole can be identified. They contributeto concentration of port networks and bigger cargo shifts from one port to another when allianceschange port networks. Within ports, the buying power of the alliance carriers can create destructive
competition between terminal operators and between other port service providers such as towage
companies. This can lower the rates of return on investment for the port industry, results in the declineof smaller container ports and the disappearance of smaller independent terminal operators, as well as
towage companies. A particular concern is that alliances and alliance carriers frequently exert strongpressure for publicly funded infrastructure upgrades to be undertaken to support the use of megaships, while these expenditures often prove to be uneconomic, either due to shifting demand for port
services or the monopsony power exercised by the alliances.
Although overcapacity in the liner sector has lowered freight rates, these cost savings are partly
offset by a number of additional costs for shippers. Moreover, by limiting shipping options, alliances
have frustrated the risk diversification strategies of shippers and freight forwarders.
Alliances could raise competition concerns in what has become a concentrated market. The top
four carriers accounted for 60% of the global container shipping market in 2018. The market share of
the biggest carrier (19%) is larger than the market share of any global liner alliance before 2012,
which signifies the different character of current alliances. Global alliances give more market power
to carriers and have several implications. First, they represent barriers to entry on East-West trades:
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8 – EXECUTIVE SUMMARY
only the largest companies would be able to compete on price for Asia-Europe services outside analliance structure. Second, alliances could function as vehicles for collusion between carriers, as they
provide carriers with in-depth insights on the cost structures of their competitors. Thirdly, alliances
give very considerable bargaining power – “monopsony power” – to carriers in regard to ports andterminals. The result can be declining rates for port services, carriers requesting additional public
infrastructure, and vertical integration by carriers, in particular in terminal operations. Consequently,
the market share of carrier-dominated terminal operators has increased from 18% in 2001 to 38% in
2017. This could raise competition concerns if dedicated terminals exclude other carriers and if
carriers’ terminal investments raise entry costs that make container shipping a less contestable market.
The first generations of alliances allowed smaller carriers to achieve economies of scale, basedon complementarity between them, and as such increased shipping options. The current three alliances
are not serving the smaller carriers but each brings together two to three very large carriers that would
be able to offer most of their services outside an alliance. Contrary to some transport sectors – e.g.
aviation - economies of scale in container shipping can also be achieved via mergers and acquisitions– or via the organic growth of carriers increasing market shares.
Over the last decades, the EU has acted to remove the sectoral exemption from competition
policy long enjoyed by liner conferences. However, the remaining block exemptions for alliances
have enabled a rapid evolution of these arrangements and the industry has, as a result, recently
reached a position of high concentration when assessed on key measures. One could wonder if there
are still welfare benefits from maintaining block exemptions.

What we recommend
Adopt a presumption toward repeal of shipping-specific block exemptions from competition law
Liner shipping does not have unique characteristics that justify exemptions from competition
law, either for conferences or for alliances. In line with the global long-term trend to dismantle sectorspecific exemptions from competition law and in line with OECD regulatory principles, generic
antitrust rules should apply to all agreements between liner shipping companies, as for any otherindustry, with regard to the cooperation that is allowed. Countries where “conferences” are stillallowed should reconsider their position. In light of the longer-term trend toward the removal of block
exemptions in the shipping industry, the European Commission should carefully consider allowing the
EU Consortia Block Exemption Regulation to expire in April 2020, as currently scheduled, rather
than extending it. A repeal of block exemptions is unlikely to result in the termination of current andfuture alliances, as these could still be authorised under competition law on a case by case basis.
However, it would ensure greater scrutiny of individual alliances and thus more effectively deter any
anticompetitive conduct in the sector. In order to maintain legal certainty, the European Commission
could provide temporary guidelines on how to treat liner shipping in EU antitrust law. If the block
exemption is extended, its scope should be limited, in particular by introducing a provision to consult
maritime transport stakeholders and by excluding joint purchasing by alliances.
Improve project appraisal for port and hinterland infrastructure and adopt common principles
for port pricing
Much of the investment required to upgrade ports to handle mega-ships is publicly funded, either
directly or indirectly. It is essential that these public expenditures be based on sound economic
assessments and that risk-minimisation strategies are in place. New port and hinterland transport
projects should be based on sound projections of cargo flows, particularly from shippers. Demands
from carriers for new facilities should be supported by enforceable commitments from their side toactually use these, to minimise the risk that publicly financed ports will be underused. In the European
Union, this could be achieved by imposing stricter conditions on funding for port projects using EUfunds and those of the European Investment Bank. This could form part of the conditions governing
EU member states’ state aid for port infrastructure. The adoption of common principles for port
pricing – ideally at a global level but at least at regional level - could help to offset the monopsony
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EXECUTIVE SUMMARY – 9

power of alliances and support sound project analysis in cases where new facilities are proposed toaccommodate mega-ships.
Establish more coherent ports policies to clarify roles and reduce risk of creating over-capacity
Governments should define clearly which ports are expected to service mega-ships and whichports have different roles. A reduction in the number of EU “core ports” in the Trans-European
Network as part of the elaboration of a clearer and more detailed port strategy would also reduce overcapacity risks in respect of container ports for mega-ships. Cooperation between ports also provides apotentially significant source of countervailing power in a context of the rapidly increasing
concentration of the shipping industry resulting from the growth of liner shipping alliances. Various
governments, such as those of the US, Japan and China, have facilitated such cooperation bystimulating mergers of public port authorities and allowing port alliances. Within ports, collaboration
between terminals could improve the efficiency of the maritime supply chain, subject to theconstraints of competition policy. Governments could consider how – and under which circumstances– they could allow facility sharing in ports, without introducing new sector-specific block exemptions
from competition law. The potential role of such co-operation arrangements is likely to be greater incontexts where block exemptions for liner shipping have not been eliminated. More collaboration
between the different stakeholders in the maritime logistics chain could also help to reduce theinefficiencies in the whole chain.

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10 – WHAT IS AN ALLIANCE?

What is an alliance?
Global alliances – also called strategic alliances - are cooperation agreements on a global scale
between liner shipping companies (Box 1). Established in the mid-1990s, these agreements involve
ocean carriers operating on major global routes, in particular on the main East-West trade lanes thatconcentrate the largest share of the containerised cargo flows: Asia-Europe, Asia-US and US-Europe.
Strategic alliances were guided and pushed by the Asian carriers, in contrast to the consortia that were
mostly regional in scope and controlled by the European carriers between 1960s-1980s (Lu et al.,2006).
Global alliances have become a dominant feature of container shipping over the last few years.
Whereas cooperation between liner shipping companies in the past took the form of coordination ofprices and capacity, the last two decades have seen the emergence of these global alliances ofcompeting firms that share vessels, in order to generate operational efficiencies and broader service
coverage. The character of these alliances has changed over this period, as this Chapter will illustrate.
We have entered a stage where only three global alliances exist consisting of two to three very large
companies of about the same size, which is fundamentally different from practice less than ten years
ago, when alliances mainly served a limited group of mid-size and small carriers to reach economies
of scale.
Box 1. What is liner shipping?
Liner shipping services are provided as a commercial service by carriers to shippers on fixed routes withregular schedules between ports, mostly via the operation of container ships. Liner shipping is one of the threemain shipping categories; the other two are industrial shipping and tramp shipping. An industrial operator owns
the cargo and controls the ships, aiming to minimise the cost of cargo delivery. They are mostly active in bulk
trades, such as crude oil and other commodities. In tramp operations, the routing and scheduling of vessels is not
fixed, but dependent on where cargo is available. Most tramp operations are in bulk trades.
Containerised transport currently represents the largest share of liner shipping activity; other liner shipping
activities include car carriers and cruise ships. This report focuses on alliances in the container shipping industry.
The major goods transported via container shipping include manufactured goods, machinery, paper, textiles,
beverages and tobacco, frozen food, fruit and certain commodities such as cotton.

The cooperation in global alliances covers utilisation of ships, sailing schedules and itineraries,
containers and use of joint terminals. In short, the cooperation covers full integration of service
capabilities. Cooperation via global alliances does not cover joint sales, marketing, pricing, joint
ownership of assets, pooling of revenues, profit or loss sharing or joint management. These
characteristics distinguish it from other forms of cooperation in liner shipping. The following forms
can be identified:Slot charter agreements (SCA) require a fixed percentage of vessel capacity to be exchanged
between carriers over a given time period. There is one carrier that operates the vessel, butother carriers use a share of the vessel capacity, so that they can widen their coverage.
Vessel sharing agreements (VSA) are more cooperative and entail cooperation between
companies to fulfil demand on particular trade routes through sharing of vessels owned
and/or operated by different carriers, and joint optimisation of ship scheduling andassignment of ships to routes (Panayides and Wiedmer, 2011). Global alliances could beconsidered a bundle of vessel sharing agreements between the same carriers on a global
scale. Whereas slot charter agreements are basically contractual agreements, strategic
alliances are mainly operational agreements (Ryoo and Thanopoulou, 1999).
Consortia are cost-reducing forms of cooperation that focus on a single maritime service.
Each consortium is internally regulated by a number of specific agreements among the
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WHAT IS AN ALLIANCE? – 11







partners in the consortium (Panayides and Wiedmer, 2011). These internal agreements cantake the form of slot charter agreements and vessel sharing agreements, described above.
Conferences are cooperation agreements in which shipping firms set common freight rates
and regulate their capacity. As such they could be considered liner shipping’s form of cartel
agreements. Liner shipping conferences have been in operation since 1875 and have long
been exempted from anti-trust legislation. This practice has changed over the last decades,
most notably as a result of the 1998 Ocean Shipping Reform Act in the United States andthe repeal of the EU Block Exemption to liner shipping conferences in 2006. Althoughconferences in liner shipping still exist in some parts of the world, their relevance hassignificantly decreased. Related to conferences are voluntary discussion agreements, inwhich carriers exchange commercially-sensitive information and discuss voluntary
guidelines on freight rates, without collectively setting prices.
Joint ventures arise where there is a change of control on a lasting basis: joint ventures are
vehicles that perform all the functions of an autonomous economic entity. In this sense, itgoes beyond the cooperation of a regular global liner alliance where decision making poweris still considered to be part of the partnering institutions.
Mergers and acquisitions could be considered the most cohesive form of cooperation asthese lead to full or almost full integration of corporate activities. Several “brands” maycontinue to exist even if they have been integrated in a larger company, e.g. shippers can beclients of APL even if it is now part of CMA CGM Group.

In practice, ocean carriers use many of these cooperation tools simultaneously. Carriers that arein the same global alliance can have vessel sharing agreements with carriers from different alliances,for example for some of the North-South trade lanes. Carriers have been part of global alliances and at
the same time pursued mergers and acquisitions. Each carrier makes strategic choices about the mixof these cooperative tools, which results in different corporate strategies. For example, the strategy of
the Italian-Swiss carrier MSC is based on organic growth, that is: acquiring ships rather than shipping
firms, and did not engage in alliances until 2015. In contrast, the German carrier Hapag-Lloyd has
been part of global alliances since 1989 and acquired various carriers – such as CSAV and UASC –whilst being one of the rare global carriers that never bought mega-ships.
Cooperation has in many cases extended far beyond liner shipping. In other words, cooperation
within the container shipping sector (horizontal collaboration) is often complemented withcooperation with other parts of the maritime transport chain (vertical collaboration), in particular
container terminal operations and – to some extent – hinterland transport and logistics activities.
Similar cooperation tools as those mentioned above are deployed in such vertical links, including joint
ventures and acquisitions. Some global alliances cover terminal operations.
Global alliances also exist in other transport sectors, in particular in the aviation industry. Global
alliances between airlines emerged at the end of the 1990s; they now cover a large share of theworld’s airlines in order to share planes and landing slots at airports. As in container shipping,aviation now has three large global alliances: SkyTeam, Star Alliance and Oneworld. Alliances areused to some extent in other shipping sectors e.g. liquid bulk shipping companies in Sweden formed
the Gothia Tanker alliance in order to gain operational efficiencies via vessel sharing and other formsof cooperation (OECD/ITF, 2018). Alliances are more or less absent from land transport modes, suchas trucking and rail transport. In the case of rail transport, this could be explained by lack of interoperability of systems across borders, which has limited global competition. Yet, alliances in freightrail start to emerge; an example is Holding Exploris, an alliance between eleven firms, seven of which
are rail freight operators (Laroche et al. 2017). In non-transportation sectors, strategic alliances arevery frequently used in a wide variety of industrial sectors, ranging from the automotive to thepharmaceutical industry.

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12 – WHAT IS AN ALLIANCE?

The rationale of alliances
Global alliances have become essential tools for corporate strategies of carriers because they canhelp achieve economies of scale and economies of scope. Put differently, alliances are perceived tofacilitate the two elements that ocean carriers compete on: low prices and broad service coverage.
Although the literature on alliances in liner shipping identifies a variety of possible reasons (Agarwal,
2007; Cariou, 2002), it basically boils down to these two (price and service coverage). One of themain arguments for cooperation of carriers with other carriers is the high fixed-cost structure of theliner shipping industry (Haralambides, 2007): the provision of a weekly liner service between
different continents requires investment in a set of ships that will sail irrespectively of their utilisation
rates. Collaboration between carriers in global alliances can mitigate this problem and can generate
economies of scale and scope.
Economies of scale
Containerisation has standardised liner shipping, which has propelled a business modelcharacterised by scale. The standardisation brought about by the deployment of containers hasbrought down transport costs, but it has also made liner shipping a more uniform product, which madecost savings via economies of scale the dominant business strategy in liner shipping. This took shape
via very significant increases of ship size in the container sector, the most substantial increase of all
ship types over the last two decades (OECD/ITF, 2015). The motivation behind the deployment ofever larger ships is to generate lower costs per transported container.
Alliances are considered tools to optimise the potentials of these economies of scale. They makeit possible to carriers to acquire new bigger ships together, to share vessels to guarantee utilisation
rates of ships that would be needed to reap the benefits of economies of scale. In other words, large
cost savings could potentially be achieved if partner carriers are willing to collaborate (Lei et al.,2008).
Economies of scope
Alliances could also help carriers to improve service offerings to their customers. Most
importantly, alliances could help them offer a more comprehensive global shipping network.
Extending coverage and providing more services is the single most important motivation ofparticipating in strategic alliances, according to a survey study carried out among representatives ofcontainer carriers (Lu et al., 2006). Many shipping firms are stronger in certain regions as a result of
long experience and loyal customers; alliances between carriers with strengths in complementary
regions could be useful for providing services with a broader network to customers (Mitsuhashi andGreve, 2009). Large shippers prefer to have contracts with a few shipping firms with highlyinterconnected route networks. Alliances allow shipping firms to build networks of sufficient size toparticipate in bids for such contracts (Mitshuhashi and Greve, 2009).
Some carriers have engaged in cooperation in order to gain know-how and technologicaltransfers via exchange with competitors (Kale and Singh, 2007). Sharing of operational information
within alliances is a necessity to ensure the smooth running of operations, which requires significant
amounts of joint planning and action. Exchange of market-related information, including freight rates,
customer-related information and other related commercial issues, is no longer allowed in various
jurisdictions, including in the European Union. Alliances could also be used for the sharing of useful
non-market and non-pricing related knowledge and information. The great interest of carriers in
information sharing can be illustrated by the proposal of the former European Liner Affairs
Association (ELAA) in 2006 to create a regulatory instrument for an information exchange system
between carriers after the repeal of the EU Block Exemption for liner conferences in 2006 (Marlow
and Nair, 2006). The sharing of knowledge and information within liner shipping alliance networks
could confer both common and private benefits.

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WHAT IS AN ALLIANCE? – 13

Economies of scope could be reached via alliances of carriers that are complementary to eachother. When small firms enter alliances to operate cross-ocean routes with larger firms, they often
have a feeder network in one of the route nodes. This market complementarity is matched by a size
difference in the ships of the firms in the alliance (Mitshuhashi and Greve, 2009). However, alliances
between carriers with very different design speeds or age of ships might be more difficult to realise, as
these differences would be difficult to bridge on similar trade lanes.
The rationale for alliances can vary depending on the profile of the carrier. Carrier size used to
be a determinant for criterion, with smaller global carriers participating more in alliances. In 2010
only one of the top five carriers was part of an alliance, whereas most of the smaller companies in the
top 20 were in an alliance. It was generally understood that the largest companies were capable ofcovering most geographic areas with their own fleet, and that big and smaller companies were lessprone to demand uncertainty than medium-sized companies (Ferrari et al., 2008). This logic no longer
seems to hold. Since 2015, virtually all large carriers form part of a global alliance. Firms that havecompetitive and operational interdependencies that are too complex to resolve for multiple routes in
global alliances may still be able to operate on a single route (Song and Panayides, 2002), which has
led to cooperation in single routes among firms that operate competing routes elsewhere.
The crucial question is: are the theoretical benefits of alliances being realised in practice?
Various studies indicate that benefits could be attained if partner carriers are willing to work out fullcollaboration, namely joint optimisation of vessel departure times, shipping-order assignment to thevessels, sharing of profits, demand information and operating costs (Lei et al., 2008). Yet, one could
still wonder if the alliances are achieving their assumed benefits. As remarked by Bergantino andVeenstra (2002), liner companies may be taking decisions on the basis of potential cost savings whichmight never be achieved in practice. This report aims to answer the following question: what are theimpacts of alliances in container shipping: for the liner industry itself, but also for other transport
stakeholders and the whole transport system?

Four generations of global alliances in container shipping
All major container carriers are now involved in one of the three global alliances: 2M, Ocean
Alliance and THE Alliance (Table 1). These bring together the largest eight container carriers into
groups of more or less equivalent market share. 2M consists of the two largest container carriers, theDanish Maersk and the Italian-Swiss MSC, and has been operational since 2015.1
The two other alliances, Ocean Alliance and THE Alliance, consist of three large carriers each.
They have been operational since April 2017, formed from carriers that were active in three otheralliances operating prior to April 2017.2 The reshuffling of these alliances became necessary becauseof cross-alliance mergers, something quite typical to the history of alliances in liner shipping.
Alliances have become a dominant feature of container shipping. Since global alliances incontainer shipping emerged around two decades ago, with the creation of Global Alliance and theGrand Alliance in 1996, the market shares covered by carriers in global alliances have increased
steadily, particularly during the last few years. In 2011, there were three alliances (CKHY, Grand
Alliance and New World Alliance) like now, but their combined market share was 29%, whereas in2018 the current three alliances (2M, Ocean, THE) have around 80% market share of the global ship
capacity (Figure 1). Global market shares are actually fairly imprecise indicators in this respect, as
global alliances mainly operate on East-West trade lanes, where the combined market share of thethree alliances is around 95%.3.

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14 – WHAT IS AN ALLIANCE?
Table 1. Overview of the three global alliances in container shipping (June 2018)
Alliance
2M

Ocean Alliance

THE Alliance

Carriers
MaerskMSC
Cosco-OOCL
CMA CGM
Evergreen
Hapag-Lloyd
ONE
Yang Ming

Global market share (%)
19
15
12
12
5
7
7
3

Global carrier rank
1
2
3
4
7
5
6
8

Note: Global market share indicates the share of global container carrying capacity of the carrier
Source: Own elaborations based on data from Alphaliner (2018)

Figure 1. Global market share (container carrying capacity) of global alliances (1996-2018)
90%
2M

80%

Ocean Alliance70%

THE Alliance

60%

MSC/CMA CGM

50%

Ocean 3G6

40%Maersk/Sealand30%

United Alliance20%

Global Alliance
New World Alliance

10%

CKYH/E
0%Grand Alliance

Source: Author’s elaborations based on data from Alphaliner (1996-2018)

Current alliances could be considered to be the “fourth generation” of alliances. The first
generation of alliances emerged in 1996. They were ambitious in scope, as they were made up of an
extremely large share of the vessels held by the individual carriers, but these were short-lived inpractice, with the exception of the Grand Alliance. The second generation of alliances proved morestable, with three main alliances – New World, Grand Alliance and CKHY – active throughout that
period with only a few minor changes in composition made. The main model of these alliances was
the combination of one dominant carrier with several smaller carriers: e.g. in 2010, both APL and
Hapag-Lloyd provided more than 50% of all vessels in their respective alliance (New World Allianceand Grand Alliance). The exception to this was the CKHY Alliance. There were two dominant
players, but their competition was moderated by complementarities between the two and with theother smaller carriers.
A crucial change to the alliances model occurred around 2012 when also the largest carriers
started to move into alliances. This was a reaction to the creation of the G6 Alliance in 2012, bringing
together carriers from the New World Alliance and the Grand Alliance. The G6 Alliance formed athreat to the large carriers that had not participated in alliances until then. As a result, Evergreen
entered into the CKHY alliance (since then called CKHYE), MSC and CMA CGM created an alliancein 2012 and formed together with Maersk the P3 Alliance in 2014, which did not receive regulatory

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WHAT IS AN ALLIANCE? – 15

approval in China, but gave rise to 2M in 2015, an alliance between Maersk and MSC. The result of
this was a constellation of alliances that could be considered hybrid, consisting of:an alliance with one dominant and many smaller carriers (G6),an alliance with one dominant and two smaller carriers (O3),an alliance with the two largest global carriers (2M),
an alliance with various dominant carriers (CKHYE).

In addition, it was a constellation that was considered unbalanced and unstable, as the market sharesof the four alliances were fairly different; so many industry observers predicted that this constellation
would disintegrate rather quickly. This happened indeed, due to many cross-alliance mergers andacquisitions since 2015. The generation of alliances between 2012 and 2017, the “third generation”,
could be considered a transition from the previous alliances model to a new type of alliances, the“fourth generation” (Table 2).
The characteristics of this “fourth generation alliances” are fundamentally different from earlier
alliances: all current alliances are made up of at least two dominant very large carriers. CMA andCosco have almost identical market shares, as do Hapag-Lloyd and ONE – and to a slightly lesser
extent Maersk and MSC – so no carrier could be considered dominant in any of the three alliances.
This could have various consequences: the reduction of the number of carriers per alliance could
make decision processes easier, but the equivalence of carriers could also imply stronger conflicting
intra-alliance dynamics, especially when complementarities between carriers are lower than before.
Table 2. Four generations of global alliances in container shipping
Generation
First
SecondAlliances
Global, Grand, Maersk/Sealand
New World, Grand, CKHY

Period1996-1998
1998-2012

Third

G6, CKHYE, 2M, O3

2012-2017

Fourth2M, Ocean, THE

2017- ?

Characteristics
Ambitious focus, instability
Stability, used by mid-sized and smaller carriers.
Transition: the largest carriers also become part ofalliances. Instable alliance constellation
No alliance has one dominant carrier. The carriers inalliances are the eight biggest carriers globally

Drivers of alliances in container shipping
The first and second generations of alliances were facilitated by globalisation and the financial
position of the carriers. The growth of world trade and increased internationalisation of the economy
in the 1990s, made it essential for container shipping companies to extend their market coverage
globally. At the same time, the costs of providing such operations were increasing due to the need to
deploy ever larger and costlier vessels (Slack et al., 2002). Moreover, the financial position of mostcarriers made this a difficult avenue. Alliances between mid-sized and smaller carriers solved thisdual challenge of internationalisation and the capital intensity of bigger ships.
The partial prohibition of shipping conferences made alliances the main avenue for cooperationof shipping companies. Although vessel sharing agreements have been deployed in liner shipping fora long time, global alliances are relatively new. The demotion of the conference system primarily
through the United States Ocean Shipping Reform Act (OSRA) in 1998 and the abolition of the
exemption from anti-trust rules by the EU in 2008 have led companies to seek other forms ofcooperation, in particular alliances (Fusillo, 2006). So, it is fair to say that strategic alliances havetaken the place of liner conferences as means of co-operation (Sjostrom, 2010).
The emergence of “third generation” alliances is strongly linked to the first order of mega-ships
in 2011. This order was perceived by many smaller carriers as the creation of an entry barrier, so theystimulated intensified cooperation between their existing alliances (New World and Grand Alliance),
in order to create the economic size needed to order these mega-ships. This development – illustrated

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16 – WHAT IS AN ALLIANCE?
by the creation of G6 – and the rise of economic and financial risks due to the deployment of new
ultra-large container vessels has subsequently compelled the largest ocean carriers to cooperate witheach other in global alliances. The consolidation in container shipping has driven the emergence of
the “fourth generation” of shipping alliances. The composition and more concentrated nature of these
alliances is a direct consequence of acquisitions of smaller carriers that made the previous
constellation of alliances no longer sustainable.

Major global trends related to liner alliances
Liner shipping operates in a dynamic and changing global environment. Containerised tradeflows are impacted by population and economic trends in main world regions, developments in
manufacturing, development of new transport corridors and evolving geo-political conditions. Thisimplies that alliances should be assessed not only as a sectoral business strategy, but also in its interconnections with a wider global environment.
Technical innovation is often associated with economic concentration. For example, digitaltechnologies become more valuable when they can be scaled up and many digital platforms compete
until they reach monopolistic positions. Such innovations and related investments could increase
barriers to entry in many sectors and might make it more difficult for smaller companies to compete.
As result, various industries have become more concentrated over the last decades. Concentration
tendencies are also visible in other transport sectors than maritime transport. For example, the rail
freight sector in Europe has become more consolidated, which could lead to the disappearance of acertain number of operators and create a risk of concentration (Laroche et al. 2017). Concentration inliner shipping in a way reflects these larger developments. As this report will set out, theconcentration of the sector – and related to that, the emergence of alliances – has effects that trickle
down to global supply chains and transport systems.

How alliances work
Despite differences between alliances, most of them work relatively the same. Most carriers haveconsiderable experience with alliances, so the practices of alliances that have ceased to exist
sometimes survive in new alliances. Most of the coordination and information sharing in alliances
covers the same areas, such as stowage plans, vessel assignment and scheduling, as well as problemsolving expertise in the event of engine failures. Regulation of fuel types, environmental issues,
operational efficiencies and engine failures are also openly discussed within alliances (Tan and Thai,
2014).
Essential elements in each alliance include planning of the overall capacity, the contribution ofeach individual carrier in the alliance and the way each carrier gets compensated. One of thedetermining choices is the capacity that the alliance wants to offer on the different trade lanes and theships that each partner in the alliance wants to dedicate to the alliance service. The general principleof an alliance is that the benefits that a carrier gets out of an alliance are related to what a carrier puts
in it, in terms of pooled vessels. Each alliance has developed a reference cost model that is applied forinternal accounting purposes (Box 2).

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WHAT IS AN ALLIANCE? – 17

Box 2. Cost calculation models within alliances
In essence, global alliances are global bundles of vessel sharing agreements. All alliance partners define theircontributions in terms of the vessels they are willing to operate for the alliance. Alliances are usually closed
systems, so the idea is that slots offered on vessels operated by carriers in one alliance are taken by their alliancepartners and exchanged for slots on the vessels that they operate. In order to make sure that this process runs
smoothly, each alliance has a reference cost model to clear these exchanged positions at the end of the month,which avoids that certain partners would be net takers or contributors for too long. In at least one alliance, thisclearing takes place each week via buying and selling of slots; after each month the net position is invoiced tocarriers that pay each other if they have a surplus of slots bought. The cost model used for this internal accounting
procedure could be considered the average of the individual cost models used by each carrier within the alliance. At
the outset, partners have discussed the merits of each individual model and have agreed on a common reference
cost model. This reference cost model could be based on theoretical costs or on real costs; different alliances apply
different practices. The reference cost model takes into account fuel costs, vessel operating costs and depreciation
costs, but excludes the terminal handling fees and port costs that each carrier pays individually and that do not enter
into the alliance reference cost model. The Ocean Alliance specifies the reference costs per service, whilst the otheralliances do this per trade lane.
Although the reference cost model is presented as a theoretical model, it probably allows carriers in the same
alliances to develop a fine sense of the costs of other carriers. Their own position in relation to the reference costmodel also determines if they are net winners or losers from the slot exchange. In the case of the theoreticalreference cost model: the carrier that has the lowest real costs has an interest in a reference cost model with higher
reference values, as it maximises the profit of their net surplus of slots provided.

Port choice is also subject to negotiations among alliance members and can deviate from thechoice of one particular member. This could be particularly contentious for carriers that have large
stakes in container terminals that do not overlap. As will be set out in Chapter 2, various carriers haveacquired stakes in container terminals to handle their ships, sometimes on an exclusive basis via
dedicated terminals. Vessel sharing via alliances complicates this strategy, as in most cases thecarriers in the same alliances have stakes in different container terminals. These differences could
provide complementarities, but some of the terminals might also be competitors, in which casecompromises would have to be found on which ports and terminals the ships of the alliances should
call.
There are some differences between alliances with regards to joint procurement for port services,such as cargo handling, and the pooling of risks. The G6 Alliance applied joint procurement with one
tariff negotiated for all alliance partners for the joint services, with each alliance partner negotiating
their own tariffs for the services that they operated outside the alliance. Joint procurement of port
services is in some jurisdictions excluded from the scope of the carrier alliances in operation sinceApril 2017. One alliance – THE Alliance – has extended the cooperation to a risk sharing
arrangement: a joint emergency fund in case of bankruptcies (Box 3).

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18 – WHAT IS AN ALLIANCE?

Box 3. Emergency Fund of THE Alliance
The bankruptcy of South Korean carrier Hanjin in 2016 showed the increased risk related to alliances that will
be explored further in Chapter 2. Hanjin was member of the CKYHE Alliance. At the time of its bankruptcy its
ships carried a substantial amount of containers from the other members of the CKYHE alliance, resulting inelaborate strategies being required to recover the cargo of their clients on board the Hanjin vessels. Following these
events, the other members of THE alliance Hapag-Lloyd, K Line, MOL, NYK and Yang Ming decided to include
an emergency fund within their alliance as a safeguard that could be used in the event that one of their members
collapses, giving some reassurance to the shippers who want to engage in a contract with one of THE Alliance’s
members. The fund allows carriers to bring the ships to the port and unload the containers and therefore assure thecontinuity of the operations in the event of insolvency of one or more member lines. According to their safeguard,
if a liner member collapses the other members have the option to make arrangements directly with entities
providing vessels or space to the affected party that are used by the alliance, to make arrangements directly withagents or subcontractors of the affected party, or to take any other action to assure that the cargo that is on board theships of the collapsed members can be discharged.

Most of the planning within alliances is done jointly and within established structures. This
includes planning of which trade lanes to serve, alliance vessel capacity, service frequencies and port
calls. These decisions are generally taken unanimously. Daily decisions are taken via majority vote.
Global alliances have formal structural set-ups of committees as one of the significant mechanisms
through which operational information sharing occurs. A characteristic set-up consists of principal
committees, steering committees and a series of other support committees. These respective
committees typically include one representative of each alliance member. These form the network for
information flows within an alliance. The major alliances also established joint operational centres toenable closer coordination. However, the sharing of best practices or information on firm-specificorganisational systems generally does not constitute a norm within alliance networks and is conducted
mainly on a bilateral and ad-hoc basis. (Tan and Thai, 2014).

How to determine impacts of alliances?
Strategic alliances in container shipping have a history spanning two decades and have been
fairly well documented. Our literature review showed the presence of hundreds of studies on liner
shipping alliances. Our comprehensive assessment of these studies provides various indications on theimpacts of global alliances since their emergence in the mid-1990s. However, a comprehensive study
on the impacts of alliances for the whole maritime transport logistics chain – as we aim to provide
here – does not seem to exist. Our review of existing literature provides insights in certain elementsthat underline the main findings of our study, but the most important information sources for ourstudy come from industry data and interviews with relevant stakeholders.
Industry data sources give insight into the performance of container shipping within the maritime
logistics chain. We have elaborated on data sources from Sea Intelligence, Alphaliner, Drewry anddata sources that we have collected via individual firms and organisations. Our study has a particularfocus on the fourth generation of alliances that came into force in April 2017. The transition from asituation of four alliances to three alliances as of that date provides an opportunity to assess theimpacts of the new alliances, as all other circumstances – such as trade growth – could be considered
constant. Part of our assessment of the news alliances consists of identifying main differences before
and after this transition. This assessment is embedded in analysis of performance and trends over alonger time span. Complicating this analysis – like many recent analyses – is that the evolution ofalliances in container shipping coincides with the global financial and economic crisis that started in2008 and its aftermath.
A major information source for this study is interviews with representatives from container lines,
short sea operators, port authorities, terminal operators, freight forwarders, trade unions, shippers,
towage companies, ministries, government bodies, academics and other experts. These interviews
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WHAT IS AN ALLIANCE? – 19

were semi-structured and lasted in most cases from one to one and a half hours. Many of thesestakeholders are listed in Annex 2; in some cases interviews were conducted under the condition ofanonymity for the persons interviewed. The series of interviews were part of study visits to specificplaces, including Barcelona, Valencia, Gioia Tauro, Genoa and Hamburg. The perspectives fromthese specific places provide specific examples of the impact of alliances, complemented with
examples from other places to avoid a European bias.
The central question in this report concerns the impact of alliances in container shipping. The
impact on the whole maritime transport logistics chain is treated in Chapter 2. Main elements in theassessment include the impacts on the efficiency of the transport system, the effects for transport
users, alternative instruments to alliances and competition constraints related to alliances. A more
specific analysis per maritime transport stakeholder is provided in Chapter 3, in which impacts for the
shipping sector, ports, terminals, port service providers, freight forwarders and shippers are discussed.
Finally, Chapter 4 describes main policy approaches in various countries and assesses possible public
policy options with respect to alliances in container shipping.

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Impact on transport systems
Global alliances in container shipping have far-reaching impacts on the whole maritime transportsystem and its stakeholders. These impacts are similar to those caused by mega-ships, which we
assessed earlier (OECD/ITF, 2015). The emergence of global alliances in container shipping has often
been treated as a specialised shipping subject, but we think it a mistake to frame shipping alliances asa phenomenon with impacts mostly relevant to the liner shipping sector itself. This chapter focuses on
the impacts these alliances have on the transport system; the next chapter assesses impacts on the
different maritime transport stakeholders.
Alliances have intended or unintended consequences for the whole containerised transportsystem and the container shipping sector forms only part of it: institutional innovations such as global
shipping alliances do not take place in isolation. The question is whether alliances in container
shipping have improved the efficiency of the maritime transport system as a whole; the door-to-doortransport. Efficient transport should create also more value for transport users and consumers.
Therefore, our assessment also explores the effects on transport users and consumers. Even if
alliances would effectively create more value for transport users, one could wonder if alliances areinevitable instruments to achieve these outcomes. Finally, it is relevant to assess if alliances do notconstrain competition.

Do alliances produce more efficient transport systems?
Alliances have allowed carriers to acquire and operate mega-ships, reducing unit costs. Without
alliances certain carriers would not have been able to acquire mega-ships. As it is the ordering of
mega-ships that has fuelled overcapacity, there is a link between alliances and overcapacity. Alliances
have increased the uniformity of the transport offer and limited the possibilities of carriers todifferentiate themselves. The new constellation of alliances since April 2017 - along with the
deployment of mega-ships to which alliances are directly linked - has contributed to a decrease inservice frequencies, less direct port connections, declining schedule reliability and longer waitingtimes. Independent carriers manage to provide more differentiated service levels and thus more value
added to transport users. Moreover, alliances have proved to be inherently instable: considering that
all major carriers are in alliances, changes in one alliance have an impact on the whole sector.
The impacts of alliances on the containerised transport system taken as a whole seem to be
predominantly negative. They contribute to concentration of port networks and related
underutilisation of public infrastructures, in combination with other factors some of which are directly
related to alliances, such as mega-ships and the behaviour of port authorities. Within ports, the buying
power of the alliances can create destructive competition between terminal operators and between
other port service providers such as towage companies.
Economies of scale: mega-ships and overcapacity
Alliances have made it possible for smaller players to get access to big ships that they would
otherwise not have had. Shipping alliances have greatly encouraged the deployment of large
containerships and large-vessel deployment can be identified after the formation of the first strategic
alliances in container shipping (Slack et al., 2002; Fusillo, 2004). The link between vessel size and theattractiveness of alliances is clear from research on the propensity to cooperate: carriers with thehighest average vessel size had the lowest propensity to cooperate – and the largest carriers where lessinclined to cooperate than medium-sized ones (Parola et al., 2014). At the same time, the benefit acarrier experiences by collaborating increases with the network size and the fleet capacity of thepartnering carriers (Houghtalen et al., 2011). Another indication that global alliances facilitate thedevelopment of ever larger ships: alliance services generally deploy the largest-capacity ships, since

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IMPACT ON TRANSPORT SYSTEMS – 21

the emergence of alliances: e.g. the services of the Grand, New World and United Alliances in theearly 2000s were provided by ships that were larger than the average size of the fleets of individual
carriers (Slack et al., 2002). The practice that the largest ships are deployed in alliance services
continues until today.
There are mega-ship orders that seem to have been coordinated within the same alliance. The
determining characteristic of liner shipping is its regularity: the majority of container services isoffered on a weekly basis. In order to be able to offer a weekly frequency, a carrier needs a set ofships, e.g. around 10-11 ships for a weekly Asia-Europe service, taking into account the time needed
for a ship to make the roundtrip. The cost of eleven ultra large container ships could easily reach USD
1.5 billion, which might be difficult to finance for smaller carriers. For this reason, carriers in thesame alliance have coordinated their mega-ship orders, so that they could pool similar-sized vessels
for an alliance service. This seems to have been the case for carriers in the G6 Alliance (Box 4).
Box 4. Coordinated mega-ship orders in the G6 Alliance
Carriers from the same alliance can coordinate the purchase of mega-ships to be deployed in the same service,so that individual carriers do not have to share the burden of a full set of ships needed to service a trade lane.
Therefore, some shipping companies that, under different circumstances, would not have been able to invest inmega-ships have the capacity to do so thanks to coordinated ordering within alliances. In 2015, the ocean carriers
Mitsui O.S.K. Lines (MOL) and Orient Overseas Container Line (OOCL) – part of the G6 Alliance at that time –both ordered six mega-ships to be deployed on the Asia-Europe trade route. The announcement made by OOCL toorder six ships with 21 100 twenty-foot equivalent unit (TEU) capacity followed three weeks after MOL ordered
six mega-ships of 20 000 TEU capacity. The ships had similar delivery dates and were ordered at the same
shipyard, Samsung Heavy Industries, which enhanced the impression of coordination. The ships were used to offer
Asia-Europe services of the G6 Alliance.

Intra-alliance competition might also contribute to orders of new mega-ships. The idea behind
this is that the carrier with the largest fleet and the largest ships will be the dominant carrier in analliance. As the latest generation of alliances all consist of at least two carriers of similar size, thisconstellation is more prone to intra-alliance competition than earlier generations of alliances, in which
there was mostly one dominant carrier partnering with several clearly smaller carriers. The announced
mega-ship order of CMA CGM in Autumn 2017 seems to be a direct consequence of this intraalliance competition, in particular the expansion of alliance partner Cosco that made it of similar size
to CMA CGM.
Mega-ships have driven overcapacity in the sector. Ships with a capacity over 17 000 TEUs
represented around a third of the new-build container capacity during 2015-2018 (Figure 2).
Considering sustained overcapacity in container shipping since 2009, the mega-ship orders haveincreased the oversupply of container ship capacity, despite substantial dismantling of older ships thathas moderated overcapacity somewhat over the last years. Overcapacity – and a net growth rate ofship capacity that exceeds the growth rates of global containerised trade - is one of the main causes ofthe lack of profitability of container shipping. The demand of global containerised trade wasnegatively affected by the global financial and economic crisis that started in 2008. However, the ship
overcapacity cannot be considered to be a result of the crisis, but rather the lack of restraint in shiporders since 2009, which resulted in a growing divergence between demand and supply.
Global alliances have exacerbated the problem of excess investment and overcapacity(Higashida, 2015), which is one of the main causes of the lack of profitability of container shipping. It
has been frequently observed that there is a prisoner’s dilemma related to capacity investment incontainer shipping, where the strategic behaviour by each individual company (to expand capacity)
can lead to mutually destructive effects and overcapacity in the shipping supply (Kou and Luo, 2016).
Container shipping – like shipping in general – is highly cyclical (Stopford, 2008). The increasing
dominance of alliances in the aftermath of the global economic crisis that started in 2008 has
disrupted this cyclicality: instead of the decline of ship capacity it resulted in capacity growth that was
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22 – IMPACT ON TRANSPORT SYSTEMS
completely disconnected from demand for containerised transport capacity (Figure 3). Alliances madeit possible for smaller carriers to follow market leaders in their ordering of mega-ships. Without
alliances, this would not have occurred and container shipping capacity would likely have been closer
to equilibrium with demand.
Figure 2. Mega-ships’ substantial share of container ship orders

Newly built ship capacity (million TEUs)

2.0

1.5

1.0

0.5

0.0
2015
0-7 000 TEU

2016

2017

7-13 000 TEU

13-17 000 TEU

2018
17-22 000 TEU

Source: Own elaborations based on data from Clarksons Research

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IMPACT ON TRANSPORT SYSTEMS – 23

Figure 3: Disconnection of container ship size developments and seaborne trade growth (1996-2015)

Source: OECD/ITF (2015)

Alliances are supposed to improve the utilisation of ships, but this cannot be called a resounding
success. Vessel sharing might have helped to increase what would have otherwise been very poor
utilisation rates, but this has come at the cost of blank sailings, a euphemism for cancelling a service.
During 2015-2017, there were on average 22 blank sailings per year on the Transpacific trade laneand 13-14 blank sailings on the Asia-Europe trade lane (SeaIntel, 2018; 346). On average around 30%of these blank sailings are known less than four weeks in advance, which has repercussions for the
supply chains of shippers. On the other hand, carriers are sometimes confronted with late cargo arrival
or no-shows from shippers, which complicate carrier efforts to maximise ship utilisation. There are
few indications that alliances have helped carriers to improve their financial performance. E.g., ananalysis conducted between 1998-2002 found no conclusive evidence that either the increased
concentration of slot capacity or attempts to boost slot capacity via alliances led to improved financial
performance (Lam et al., 2007).
Less differentiation in services
Container lines have by nature limited opportunity to differentiate their core service, port-to-port
transportation, since it is standardised and homogenous. This homogeneity and the lack of difference
between offerings of container lines have made containerised transport services a commodity-likeservice. The price sensitivity of container shipping is also high since shippers usually look for the bestprice as they perceive the core product identical and as switching costs are considered to be low. Lim(1998) claimed that differentiation is challenging in container shipping and suggested cost leadershipstrategy based on cost reductions that could create a competitive advantage for a carrier. Cost
leadership is also not very evident, as container lines can easily imitate technologies or processes thatprovide a cost advantage; the almost sector-wide deployment of mega-containerships is an example of
this.
However, there are various ways in which container lines could differentiate themselves, if theywanted to. Durvasula et al. (2002) suggested high-quality service is important for carriers todifferentiate themselves from competitors to gain a competitive advantage. Brooks (2000) stated thatcarriers must perform differently on service attributes that are important for shippers. Stopford (2008)

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indicated differentiation in terms of vessel on-time differentiation, transit time door-to-door, carrier
cost per move, cargo tracking, frequency of sailings, reliability of administration and space
availability. Yap (2010) mentioned billing accuracy, responsiveness to customers’ requirements,
ensuring safety and security of cargo, schedule reliability, sailing time to destination port,
connectivity offered and frequency of sailings.
Differentiation in service offerings would enable carriers to better serve their customers. There isa long history of discrepancies between the offerings of carriers and the selection criteria of shippers.
Already in the 1990s, studies revealed significant differences between carrier and shipper perceptions.
Whereas most shippers emphasised service factors, including reliability, on-time delivery and safety,
as more important than costs, most carriers did not recognise prominent shipper selection criteria(Maloni et al. 2016) and continued to focus on cost reductions. Obviously, shippers with different
product characteristics have not the same priorities in terms of service quality (Wong et al., 2008).
Logistics managers in different industries like chemicals, tobacco, machines and electronics assign
different weight scores to service attributes such as quality, time and cost (Danielis et al., 2005).
Further differentiation in service offerings could also help container shipping to attract cargofrom other transport modes or shipping sectors. Container vessels compete with air freight – or
combined sea and air freight - in time-sensitive, high value-added goods such as electronics, fashion
products, sports gear, spare parts, tools, machines, expensive cars and perishable goods. Container
shipping competes with bulk shipping in non-time sensitive, low value added goods, such as fertiliser
and chemicals. Container lines could provide two different services instead of one standardised
service: a fast service to be more attractive for time-sensitive goods and a slow service to be morecompetitive versus traditional types for transport of minor bulk, break bulk, liquid bulk and projectcargo (Lindstad et al. 2016).
Yet, global alliances reduce the opportunities for differentiation among alliance partners.
Differentiation on their core offerings such as transit time, on-time sailings and space availability at
the vessel, are all covered via the vessel sharing and are equivalent across the alliance. Similarly, mostocean carriers rely on the same inland, rail and truck carriers (Maloni et al., 2016). In addition, it has
been observed that the services of container lines have become less flexible and less customeroriented (Murnane et al., 2016). In short, alliances have increased uniformity in container shipping, apoint that was already made more than fifteen years ago (Slack et al. 2002) but that is increasingly
pertinent. In some cases, carriers that get together in an alliance have opposed strategies with regards
to service attributes, which makes it difficult to distil a joint strategy. This point could be made withregards to service reliability of 2M (Box 5).
Schedule reliability has converged to such an extent for carriers in alliances, that it can no longer
be considered a differentiator. Although there are some differences between alliances and between
carriers active in alliances, alliances also decrease the differentiation in this domain: carriers inalliances have a reliability score between 71%-81%, whereas the scores for non-alliances carriers ismore differentiated: ranging from almost fully reliable to very unreliable. The best performing carriers
on all trade routes are without exception non-alliance carriers. Shippers that attach very highimportance to reliability will only find these attributes among non-alliance carriers that might actually
not be active on the relevant trade lane. Similarly, shippers solely motivated by price and indifferent
to unreliability could be better served by low-cost independent carriers. The new alliance structure has
not had a favourable impact so far: the average schedule reliability of container carriers over 2017
ranged from 71%-81% which was considerably lower than the range of 82%-85% achieved in 2016
(SeaIntel, 2018; 360). Overall schedule reliability of carriers has decreased to 66.4% in the firstquarter of 2018, 6% lower than in the first quarter of 2017 (SeaIntel, 2018; 360). This has been thelowest performance documented since the first data record in 2011. The analysis includes abreakdown of on-time performance for alliances, which show that the best performing alliance could
guarantee on-time arrival (including one day deviance of schedule) in only 55.5% of the cases.

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Limited reliability cannot exclusively be explained by alliance formation, or be fully attributed to liner
shipping companies, as their reliability also depends on other stakeholders in the maritime logistics
chain. Yet, the least that can be concluded is that alliances have not resulted in better reliability
scores.
Box 5. Carrier strategies for schedule reliability
Shipping lines have different strategies for dealing with schedule reliability and transit times. An essential
element in such a strategy is a time buffer. The larger the buffer, the higher the probability that the scheduled time
can be realised. The buffer strategies of carriers are different. Mediterranean Shipping Company (MSC) was known
for keeping its buffers low. Despite not having the best record with regards to schedule reliability, it maintained
reasonably good transit time reliability by managing loops and vessels in a “creative” way. This implied ad hocchanges to the order of port calls, the ad hoc transshipment of containers at relay ports in the Mediterranean and theseemingly random cancellation of one or more ports of call during a round voyage (Notteboom, 2006). In contrast,
Maersk Sealand was very strict in respecting scheduled times and the order of ports of call. This was made possible
by sufficiently high time buffers to cope with unexpected disruptions. This resulted in high schedule reliability andhigh transit time reliability. The price of higher reliability was higher price: the rates of Maersk Sealand were
known to be substantially higher than for low-cost carrier MSC (Notteboom, 2006).
Since the creation of the 2M alliance, the reliability scores of the carriers have converged, which is the resultof a declining reliability of Maersk and increasing reliability of MSC. Instead of creating synergies, the allianceformation has in this respect homogenised the service quality, without providing either of the carriers with acompetitive advantage vis-à-vis other carriers.

Service differentiation has also declined in other respects. On the Asia-North Europe trade lane,transit times of all alliance carriers are almost entirely clustered around 29 days in the second quarterof 2018, losing a lot of variety compared to previous years (Figure 4). On Asia-Mediterranean, thechoice of transit times for all alliance carriers is limited to either 19 or 24 days, which has been a trend
since the launch of the new alliances in 2017. On the Asia-North America/West Coast trade lane thespread of the number of offered port pairs narrows quite drastically from a 3 to 25 port-pair range formost of 2015-2016 to a much narrower port pair range of 3-15 since the launch of the new alliances in
April 2017. With regards to the transit times in the port pair Shanghai to Los Angeles/Long Beach asimilar clustering effect has taken place, with 6-7 options narrowing to just 3-4 different options after
the launch of the mega-alliances in 2015 (SeaIntel, 2018, 375/376).

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Figure 4. Scheduled transit time Shanghai to Rotterdam/Antwerp per carrier (2012-2018)

Source: Own elaborations based on data from SeaIntel (2018).

There are various indications that service quality has gone down since the creation of the newalliances in 2017. For example, vessel delays have gone up: the average delay for all vessels in thesecond half of 2017 was 1.02 days; this was 0.60 days in the second half of 2016.4 This category
includes vessels arriving ahead of schedule, on schedule and behind schedule. If we focus on thevessels that arrive behind schedule, the indicators are worse. The average delay for late vessel arrivals
was 3.96 days, considerably higher than the 3.35 days recorded in the second half of 2016. The delaysof both Ocean Alliance and THE Alliance went up considerably since their creation, whereas thedelays of 2M went down slightly.
Customer service and customer relations could be effective differentiators for container lines,
according to various studies (Jang et al., 2013; Maloni et al., 2016). More customer-focused business
policies of the container lines may help carriers to develop and sustain their competitiveness in intraalliance competition (Balci et al., 2018). Yet, most clients of container lines were outright critical of
the level of customer service of most carriers, in particular those that outsourced their customer
service to low-wage countries like India, as this deteriorated customer service to dramatic levels (seeChapter 3).
Significant differences exist in the appreciation of different categories of shippers with regards totransit time, availability of special equipment and cleanliness of containers. Thus, it is very critical forlines to reveal distinct needs of industries, routes and cargo types such as perishables, high-value
products and fragile goods. This could be done via market segmentation (Balci et al., 2018).
Customers of carriers could be divided into at least five groups, according to the service quality
attributes that they find most important (Chen et al., 2017). Although charging higher prices throughsuperior customer service and relations seems to be quite difficult in the current market environment,
but superior performance on this may decrease the price sensitivity of shippers especially if carriers

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IMPACT ON TRANSPORT SYSTEMS – 27

would work on market segmentation strategies, currently underdeveloped in the sector (Balci et al.,2018; Balci and Cetin, 2017).
Outsiders could in theory provide services that are better aligned with shippers’ preferences, but
the fact that the three current alliances now include the eight largest carriers has made this moredifficult, given the operational scale required to enter the market effectively. Moreover, there is somedoubt as to the level of effective demand for higher price/higher quality service combinations in themarket It has been observed that shippers can express demands that they are actually not willing to
pay for (Zhang and Lam, 2014). One possible explanation for this observation is that internal firmlevel incentives for ocean transport procurement managers may not always be well-aligned with the
optimal supply chain design for that shipper. That is, the procurement manager may not haveappropriate incentives to deliver a solution which maximises overall benefits for the shipper, rather
than minimising the core shipping cost component. Another part of the answer is likely related toalliances. Alliance carriers have limited possibilities to differentiate services because of being in analliance. As noted above, carriers left outside the alliance structure are now generally smaller in size
and may struggle to supply an adequate fleet to enable a sufficiently frequent service to operate.
Rationalisation of liner shipping networks
One of the justifications for alliances is the possibility of a carrier to offer a more comprehensive
service to customers. Only a few container shipping companies demonstrate global presence in anindustry that is often assumed to be highly internationalised: based on carrier networks in 2006 only
three of nineteen global carriers could be considered as truly international, by serving the major andminor ports across the world (Gadhia et al., 2011). Joining an alliance made it possible for carriers with the exception of Maersk and MSC - to widen the supplied services from 35% to 150% (Ferrari etal., 2008).
Throughout the 1990s, alliances contributed to an expansion of the number of liner services andtheir coverage. Many of the additional services mounted by the alliances and their members sought towiden the distribution network by adding more port calls: from 18 ports of call on average in 1989,
carriers were serving 78 on at least a weekly basis in 1999, with membership in an alliance facilitating
the expansion of services throughout the 1990s (Slack et al., 2002). However, this spectacularincrease in the number of services did not translate in an increase in the number of discrete ports
served by all of the alliances: 382 ports were connected in 1989, 384 in 1994 and 391 in 1999. Thisstability in the number of port connections was labelled puzzling and completely unexpected (Slack etal., 2012).
The newest generation of alliances is associated with declining weekly service frequencies andless direct port-to-port connections. The decline of weekly service frequency is the result of bigger
ships and alliances and has been ongoing since at least 2006 (Notteboom et al., 2017). Over the last
five years, the average weekly service frequency on the Asia-North Europe trade lane has decreased
from 24 in 2012 to 15 in 2017 (Figure 5). With the currently expected annual capacity growth, one totwo additional Asia-North Europe services are likely to be closed in 2018-2019, according to SeaIntel(2018: 351). Alliances result in less direct port-to-port connections, via the rationalisation of service
networks of different carriers. This is clearly visible when comparing the direct port-to-portconnections in the four alliances constellation (before April 2017) and the three alliances constellation(from April 2017): in the new alliances constellations the number of direct port-to-port connections
significantly decreased in the Asia-Mediterranean trade lane (-8%) and the Asia-US East Coast tradelane (-13%) (Figure 6).
This “rationalisation” of liner shipping networks most likely reflects a fallacy in most shiprouting modelling. The majority of studies on ship routing in liner shipping focus on cost
minimisation of the fleet operator. Alvarez (2012) claims that the level of service experienced byshippers is not properly addressed by such models. He uses the inventory holding cost, which is alinear function of the cargo’s transit time through the liner shipping network, to represent the

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28 – IMPACT ON TRANSPORT SYSTEMS
shipper’s level of service. He suggests that these inventory holding costs should be included in liner
shipping design analysis in order to achieve a balance between fleet operating costs.
Figure 5. Weekly service frequency Asia-Europe 2012-2017

26
24
22
20
18
16
14
12

Asia-N.Eur

Asia-Med

Jan-17

Apr-17Oct-16

Jul-16

Apr-16

Jan-16

Jul-15

Linear (Asia-N.Eur)

Oct-15

Apr-15Jan-15Oct-14Jul-14Jan-14Apr-14Oct-13

Jul-13Apr-13Jan-13

Jul-12Oct-12

Apr-12

Jan-12

10

Linear (Asia-Med)

Source: SeaIntel (2017; 314)

Figure 6. Direct port-to-port connections before and after new alliances (2017)
300
250
200
Jan-17150

Apr-17100
500Asia-Med

Asia-US EC

Asia-N Eur

Asia-US WC

Source: Own elaborations based on data from SeaIntel (2017)

Less port to port connections means that some ports lose out. Generally, ports are often qualified
according to their function, with transhipment ports handling cargo from ship to ship, with a finaldestination or origin in a different port (similar to hub airports) and ports that function as gateways forcargo with origin and destination in the port region – and sometimes extended region. Currently, two

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IMPACT ON TRANSPORT SYSTEMS – 29

sorts of container ports seem to be particularly under pressure. Firstly, the transhipment ports locatedin areas with a lot of competition from other transhipment ports, for example the Mediterranean. A
second category of ports under pressure are the gateway ports located closely to other regional
gateway ports. Adding to the pressure are the requirements to receive ever larger ships and larger callsizes, related to mega-ships and alliances. The consequence is inefficient public investments andallocation of funds to ports that are no longer in use (European Court of Auditors, 2016). In
comparison, successful entry of new container ports is much rarer.
Within ports with multiple terminal operators, a “winner takes all”-model starts to emerge, inwhich the “winner” gets more cargo than he can handle, whereas the “loser” gets no or too little cargo
for its capacity. Terminal operators on major East-West trade lanes had at least twenty potential
customers just a few years ago, so competition between terminals within the same port would
normally – in case of comparable performance of terminals – lead to more or less similar utilisation
rates of the terminals. In the case of three (or less) customers – the alliances – this logic no longer
works. In ports with two similar-sized terminals, calls from alliances will end up in overutilization of
one terminal and underutilisation of the other terminal for reasons that are completely unconnectedfrom the performance of either terminal. In ports with three terminals, each alliance could use a
different terminal, but the shift of cargo from one alliance to another terminal would mean the end of
business for one terminal and too much cargo for another terminal. This leverage of alliances overterminals is used to renegotiate terminal handling charges or additional services. Ports that have morethan three terminals will have difficulty sustaining this, as alliances will prefer not to spread out theircargo over different terminals considering the additional moves this creates between terminals in caseof transhipment and feeder cargo.
As the grip of alliances have become bigger, the cargo shifts between ports has also become
bigger. Carriers generally have an interest in stimulating port competition, as this makes it possible forthem to play out ports against each other, and shift ports if negotiations do not work out. This isnothing new; e.g. during 1989-1999, alliance members served a total of 541 different ports; as a moreor less constant number of 385 ports were served each year, there was a considerable turnover ofindividual ports of call during the decade, reflecting a great deal of internal volatility (Slack et al.,2002). This volatility of port cargo has increased significantly as alliances have become more
dominant: for most East-West cargo, a large package of services – and the connected port calls – isdetermined on the decisions of three alliances, rather than a much larger group of carriers as it was afew decades ago (Figure 7).

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30 – IMPACT ON TRANSPORT SYSTEMS

1.5
1.0
0.5
0.0
- 0.5
- 1.0
- 1.5
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

Deviation from trend-line growth (million TEUs)

Figure 7. Volatility of port cargo

Rotterdam

Hamburg

Antwerp

Bremen/Bremerhaven

Le Havre

Zeebrugge

Dunkirk

Source: Author’s elaborations based on data from port authorities

Instability of alliance constellations
Carriers build collaborative relationships with each other, whilst competing to optimise their own
profits. This dynamic, underlying the practices of carriers operating in global alliances, has been
dubbed the “coopetition game”. Lin et al., 2017 show that carriers choose similar coopetition levels tomaximise their profits and that this coopetition game can reach equilibrium under general conditions.
In practice, this equilibrium seems difficult to attain, as alliance constellations have been
unstable over the last decades. This was particularly true for the first phase of alliance formations;described as a very unstable, repeated process (Midoro and Pitto, 2000) considering that up to 80% of
alliances in the 1990s failed (Song and Panayides, 2002). The constellation of what we have dubbed
the “second generation” alliances, which lasted from the beginning of the 2000s to 2012 is morestable. Although there were some changes to alliance composition during this time, in general themain alliances (New World, Grand Alliance and CKYH) remained in place with more or less thesame carriers. However, since the mid-2010s there has been a reshuffling of alliances almost every
year. The four alliances that were in place from 2015 were widely considered to be an unstable
constellation, despite long official cooperation periods. A wave of cross-alliance mergers andacquisitions since 2015 indeed proved the instability of the “third generation” of alliances.
To a large extent this instability could be explained by the transaction costs of cooperation thatcan counterbalance the benefits of alliances (Bergantino and Veenstra, 2002). These costs generally
rise with competitive intensity, the number of partners in an alliance, the nature of their role andcontribution, the level of mutual trust and the complexity of the task (Killing, 1998; Pirrong, 1992;
Sjostrom, 1989; Midoro and Pitto, 2000; Rau and Spinler, 2017). Alliances also need to find cost andbenefit allocation schemes that do justice to the contributions of each carrier, which might becomplicated if carriers do not share cost information with each other (Box 6). Alliances of firms withprior ties initially appear to have lower withdrawal rates, but this damping effect attenuates over time
(Greve et al., 2010). According to Mitshuhashi and Greve 2009, ship age is the key matching feature:firms had lower performance and greater risk of failure if they formed alliances that were poorly

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IMPACT ON TRANSPORT SYSTEMS – 31

matched on ship age. Partnerships of carriers with strong market overlap are a source of friction anddisruption that may cause it to leave its alliance (Greve et al. 2010).
Box 6. Alliance benefit allocation schemes and information sharing
One of the elements that can lead to friction between alliance partners is a proper cost or benefit allocation
scheme among the participants in an alliance. A common way to cover the alliance costs is to share themproportionally, based on the carrier’s capacity or demand. This method is easy to calculate and balances the budget,
but it does not take the synergies between carriers into account, nor the economies of scale that might be different
for different carriers. Therefore, the common allocation models might cause dissatisfaction for some carriers. In
order to solve this, Zheng et al., 2017 propose an alternative cost allocation model that takes economies of scale
into account and is based on inverse optimisation, by finding the capacity exchange prices that make the central
optimal decision become each individual carrier’s best option at the same time. This model supposes that eachcarrier in the alliance has access to full information on each other’s costs. Although it is not fully improbable thatcarriers have this, cost and revenue information are usually corporate secrets that alliance partners are not likely tosee. The implication of this is that perfect cost allocation in an alliance might not be possible unless carriers areaware of each other’s cost structures.

The instability of alliance constellations has impacts on the maritime transport chain. At theminimum, potential cost saving advantages are often not fully exploited due to the frequency withwhich alliance restructurings takes place. Frequently, the transition from one situation to another leads
to a transition period of deterioration of service quality and sometimes disruptive effects. Many
shippers have complained about service problems related to the creation of the new alliances in April
2017 and, more recently, the integration of three Japanese carriers into Ocean Network Express(ONE).
One could wonder if the fourth generation of alliances will be less unstable, considering thecompetitive intensity of alliance carriers with mostly similar profiles. On the one hand, the number ofcarriers in each alliance becomes smaller, and with this decrease the costs of cooperation go down. On
the other hand, the coordination costs increase with the larger company size and the related larger sizeof the network. In addition, the new generation of alliances probably have less complementarities thanthe earlier generations: each alliance has at least two large carriers of about the same size with very
few differences in service offer, which could mean an intensification of the intra-alliance competition
which could undermine the trust that might be necessary to create synergies.

Do consumers benefit?
Transport systems should serve the utility of transport users, so an assessment of alliances should
also focus on the surplus transferred to consumers. In container shipping there is no direct contact
between end consumers and most of the stakeholders in the transport chain. The most direct link is via
shippers (the cargo owners) that import and export the products that consumers might eventually buy.
As such, they are interested in a maritime transport system that delivers them their preferred goods
with lowest costs, in the best conditions and in the most reliable manner.
Price
Containerised freight rates have halved over the last two decades. Average container freight rates
are often used as an indicator for the costs of containerised transport and can be compared over time.
There are differences in these freight rates, for example the average nominal freight rate as measured
by the China Containerized Freight Index (CCFI). The CCFI reflects the average freight level in
China’s export container transport, including spot and contractual rates. Since 1998, the CCFI has
declined by more than 20% and inflation-adjusted freight rates have shown that the costs of shipping acontainer have halved over this period, taking into account that bunker prices have increased morethan five-fold since 1998 (Baker, 2018b).

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There are various explanations for the decrease of the freight rates, one of which might be related
to alliances. A major explanation of the development of freight rates is the balance between supply
and demand for shipping: over the last two decades there have been regularly been periods of fleet
overcapacity, in particular in the 2010s which heralds the era of mega-ships and the fourth generationof alliances. As alliances have facilitated mega-ship acquisitions that have driven overcapacity overthe last years, the case could be made that alliances have indirectly resulted in lower prices for
consumers. Other causes of the decline of freight rates could be higher operational efficiencies, e.g.
via the lower slot costs of larger ships, and an increase in competition between carriers after thedemise of the conference system.
However, freight rates only tell part of the story. Freight rates as reported by indices are based on
averages, thus hiding the significant variations between customers and different destinations on thesame trade route. Other cost elements include additional charges that are not included in the CCFI,
such as bunker surcharges, demurrage and detention (Table 3). Additional surcharges varysignificantly in amount, geographical coverage and time.
In most markets, surcharges represent a very significant addition to base rates and sometimes
even a higher proportion of total costs compared to base rates. For instance, in 2009, surcharges
accounted for more than 50% of the total freight charged to customers in 9 of 14 markets analysed bySlack et al. (2011). There is growing evidence that many of the surcharges are not transparent and that
it is difficult to link those to actual costs incurred by carriers. Studies examining the composition of
freight rates have shown that carriers have been involved in revenue generation in applying higher
surcharges which did not reflect actual costs (Slack et al., 2011). While these additional costs are notsystematically and coherently indexed, they have likely increased over the last years, based onreporting from shippers.
There is a tendency to apply surcharges for service characteristics that would previously beconsidered standard service, such as on-time delivery and guaranteed port calls. In this sense,
container shipping is in a way starting to resemble the low-cost airline sector, with “bare-bone”, cheap
service and surcharges for luggage, seat allocation and meals. As providing service quality beyond thebare minimum could be considered one of the few differentiators that carriers vis-à-vis competitors
within and outside their alliance, it could be argued that the intensification of alliances in recent years
has fuelled this emergence of service differentiation via surcharges.
The multitude of surcharges makes price comparison by customers difficult, so this complicatesthe assessment of whether transport users benefit from transport efficiency from alliances. Following
the concerns of the European Commission (EC) that the practice of fourteen large container carriers
publishing their intentions on future price increases may have harmed competition and customers, in2016 these carriers have engaged in legally binding commitments on price transparency. As part ofthose commitments, carriers will announce figures that include at least five elements: base rate,
bunker charges, security charges, terminal handling charges and peak season charges if applicable(EC, 2016). The emergence of new surcharges makes it difficult for carriers to live up to thesecommitments to be as transparent as possible, applying simple charging formulas and surcharges. The
existence of surcharges also makes it sometimes difficult to assess whether alliances are indeed
passing on price benefits to consumers. This does not need to be the case. In the United States liner
trades, most cargo (roughly 90%) is shipped under service contracts with negotiated rates andsurcharges. In its monitoring of agreements, the United States Federal Maritime Commission (FMC)
collects and analyses average revenue data, inclusive of freight rates, surcharges and charges forinland haulage. Over 2014-2018, average revenue per TEU steadily declined for these trades.

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IMPACT ON TRANSPORT SYSTEMS – 33

Table 3. Overview of possible costs billed to shippers by carriers
Most common surcharges

Surcharges covered by the Shanghai
Containerized Freight Index

Terminal Handling Charges (THC)
Bunker Adjustment Factor (BAF)

Bunker Adjustment Factor(BAF)/
Fuel Adjustment Factor(FAF)/ Low
Sulphur Surcharge(LSS)

Other specific surcharges
Logistical imbalance, Piracy, Water
level, Heavy weight, Chassis Pool,
Winter surcharge, Aden Gulf,
cancellation fee,

Emergency Bunker Surcharge(EBS)/
Emergency Bunker Additional (EBA)
Currency Adjustment Factor(CAF)

Currency Adjustment Factor(CAF)/
Yen Appreciation Surcharge (YAS)
Peak Season Surcharge(PSS)
War Risk Surcharge (WRS)
Port Congestion Surcharge (PCS)
Suez Canal transit Fee/Surcharge(SCS)/ Suez Canal Fee (SCF)/
Panama Transit Fee (PTF)/ Panama
Canal Charge (PCC).

In addition, container freight rates do not take subsidies to container shipping into account,
eventually paid by consumers (in their capacity as taxpayers). These subsidies could take the form ofstate support for ailing container shipping companies, favourable conditions for state-owned container
carriers, shipping funds that allow carriers to acquire new ships and exemptions from taxes and social
contributions. There are indications that these subsidies to the shipping sector have over the last years
intensified in a variety of countries (OECD/ITF, forthcoming).
Moreover, operational efficiencies at the sea-side, such as bigger ships, require land-side
adaptations that are frequently funded by public bodies – often with taxpayers’ money. These
adaptions relate to larger port infrastructures, dredging works, buffer capacity in ports toaccommodate larger peak loads. These infrastructure adaptations require investments that are often inexcess of the operational savings caused by bigger ships (OECD/ITF, 2015). These costs are often
burdened by public bodies and not recovered via fees to carriers.
A large portion of the observed variation in shipping prices across goods can be attributed to theexercise of market power. In Latin America, exporters served by only two ocean carriers faceshipping prices that are 21% larger than exporters in which there are eight carriers competing.
Shipping prices on Latin American imports are, on average, 30% higher than shipping prices on
United States imports. One-third of this difference is explained by the small number of carriers
serving Latin American importers. Another half of the difference is due to much higher tariffs on
Latin American imports that allow ocean carriers room to charge higher mark-ups (Hummels et al.,2009).
Alliances have contributed to an increase in market power. Around 95% of the East-West tradelanes are covered by carriers in alliances, which presents them with considerable market power. On
many trade lanes, market power of carriers is even larger. With rapidly evolving industry
consolidation, the market power of carriers impacting on costs of trade will increasingly have aneffect on consumers and the costs of their imported goods. This not only has impacts on developed
economies, but could also have far-reaching impacts on the economies of small island developing
states (UNCTAD, 2018).

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System resilience
Consumers can be expected to want resilient maritime transport chains, so that the delivery of
their goods will not be disrupted. Various indicators highlighted above, such as schedule reliability,
delays, increased transit times related to less direct port connections, seem to suggest that
containerised maritime transport chains could indeed run more smoothly. In addition, global alliancespose risks for system resilience, due to the limited possibilities for risk diversification, and to theextent that they have contributed to vertical integration between carriers and terminal operators.
Risk diversification by shippers is rendered complicated by alliances. The nightmare of shippers(and shoppers) is to lose cargo or not get cargo at its destination before a crucial time, e.g. Christmas.
In order to mitigate risks, shippers have traditionally spread their cargo over different carriers. The
dominance of alliances means that containers from different carriers can end up on the same ship. In
doing so, alliances have reduced the possibilities for risk diversification. Most shippers now take this
into account and use back-up options from carriers that are not in the same alliance, but the choice
wears thin.
The lack of supply chain visibility is not helping efforts to diversify risk. An example of thelimited visibility is the lack of transparency on what alliance services are and their characteristics.
Almost none of the carriers indicate clearly if their services are operated by the carriers themselves,either as sole operator, through a vessel sharing agreement with competitors, or if the service is a slot
charter operated entirely by their competitors. Shippers have in most cases no way to know who will
move their cargo and it is often not clear which of the alliance members are operating an underlying
service. Moreover, carriers rarely use the same service names across alliances, vessel sharing
agreements and slot charter services, making cross-carrier comparisons difficult for shippers, possibly
on purpose. The exception is THE Alliance where alliance members all use common service names.
Finally, there is no standard for the information provided, e.g. different definitions and codes for ports
and terminals, different calculations for transit times etc. (SeaIntel, 2018; 364). Due to this limited
visibility, shippers are frustrated in their efforts to design diversification in their supply chains.
In addition to alliances, vertical integration risks also reduce system resilience. Integration ofshipping, terminal handling and hinterland transport could mean that whole transport chains are in thehand of just a few players, creating huge leverage for cyber-attacks, especially if parts of the chain are
digitally connected. This became painfully evident during the NotPetya attack that hit Maersk ships
and terminals (Box 7). Vertical integration could be considered to be related to the emergence ofalliances. As service differentiation for the sea-leg is difficult in alliances – as the product is basicallythe same – one of the few remaining possibilities for individual carriers to differentiate is via vertical
integration.

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Box 7. Cyber security and risks associated to vertical integration
On 27 June 2017, a major cyber-attack began hitting firms mainly in France, Germany, Italy, Poland, Russia,
Ukraine, the United Kingdom, and the United States. The attack is suspected to have started when hackers
compromised the update server of Ukrainian tax accounting software company M.E.Doc so that it would distributea malware referred to as “NotPetya” throughout its network. The malware further propagated itself notably via an
exploit using a vulnerable Microsoft Windows network protocol. After analysis of the encryption routine of themalware, experts from Kaspersky came to the conclusion that the attack, although appearing as a ransomware
attack, did not allow victims to recover their data even after paying the ransom, and the aim was therefore suspected
to be directed at major disruption instead of financial gain for hackers (Ivanov and Mamedov, 2017). The carrier
Maersk was presumably contaminated by this malware via software used by one of its offices in Ukraine. Maersk
was forced to shut down many of its operating systems to stop the attack from spreading. The company was unable
to process new orders and cranes were operated manually at some of its 76 container ports. The disruption caused
major delays and led to rerouting of several vessels to ports not, or less, affected (Odell et al./FT, 2017). At least 17
terminals operated by APMT got infected by Maersk’s central IT infrastructure (Reuters, 2017). A number ofterminals were unable to identify which shipment belonged to whom and therefore needed to clear cargo manually.
The largest Indian port JNPT operated by Maersk’s APMT was forced to shut down and the terminal Maasvlakte II
in Rotterdam stopped operations completely for a full week, which led to a highly congested service level.
According to Maersk’s annual report for 2017, the attack mainly impacted Maersk Line, APM Terminals andDamco. The effect on profitability was estimated to be around USD 250-300 million, with the vast majority of the
impact related to Maersk Line in the third quarter (Maersk, 2018). Maersk estimated a 20% drop in volume and lostout on carrying 70 000 40-foot containers within the two weeks of the attack. Besides lost revenue, the attack also
involved high costs of rebuilding its IT infrastructure. At the moment of the cyber-attack, Maersk did not own any
cyber risk insurance. The company reported that 4 000 new servers, 45 000 new PCs, and 2 500 applications had tobe reinstalled (Chirgwin/The Register, 2018). Actual impacts on Maersk’s performance could be higher thanreported and probably stretch beyond the second half of 2017 (Porter/Lloyd’s List, 2017a). In April 2018, analysts
speculated that the attack could have cost Maersk group over USD 500 million in expenses and lost profit. Others
situate the cost between USD 400-500 million because the effect from the attack continued in the fourth quarter of2017 and led Maersk to make investments in new infrastructure and insurances. Furthermore, the cyber-attack
could have had an extended impact on market shares until the first quarter of 2018 (Beck/ShippingWatch, 2018).
Although for most affected terminals it took a few days before they could resume operations completely, shippers
were affected by delays of up to two months, because Maersk reportedly had difficulties in allocating new slots andtracking and assigning correct data to containers. The impact was widely felt by interviewed shippers and Lloyd’s
List reported a similar observation that nearly two months after the attack, Maersk was still dealing with containers
in transit at the time of the attack (Porter/Lloyd’s List, 2017b). One of the interviewed shippers reports having
received additional demurrage invoices due to complications and delays caused by the cyber-attack, which suggests
the carrier might have tried to shift part of the costs of the attack to their consumers.
Maersk’s global coverage, as well as strong horizontal and vertical integration in the sector further facilitatedthe knock-on effect of the cyber-attack. Companies who are reliant upon common IT infrastructure will logically
suffer business interruption simultaneously when that infrastructure is compromised. Since supply chains are highlyinterconnected and even more so with increasing automation and digitalisation, this can result in an insecure
operating environment even for those firms that make cyber security a priority. However, there is not onlyinterdependence in IT infrastructure, but also in the utilisation of common assets. According to SeaIntel analysis, 20
other carriers transported containers on-board Maersk vessels around the time of the cyber-attack (SeaIntel, 2017;319). MSC was the most affected with 23 vessel sharing agreements and four slot-charters, followed by Safmarineand Hamburg Süd. The most affected outside the 2M alliance and Maersk ownership was CMA CGM, with six
vessel sharing agreements and four slot charter agreements with Maersk. The shipping sector is the backbone ofinternational trade and ports are a vital part of every country’s infrastructure. Any major disruptions in supply
chains can therefore have impacts on the overall economy. The scale of the cyber-attack and the many
interconnections that exist vertically and horizontally in this industry could transform the collateral and rather
accidental damage on a firm that was presumably not directly targeted, into a systemic risk for global trade.

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36 – IMPACT ON TRANSPORT SYSTEMSAre alliances indispensable?
The character of alliances has evolved. The first generations of alliances, emerging since themid-1990s, allowed smaller carriers to achieve economies of scale, based on complementarities
between them. The current three alliances each bring together two to three very large carriers thatwould be able to provide all their services outside an alliance, if it were not for the spectacular growthin ship size over the last five years (enabled by alliances). Economies of scale and service
differentiation could also be achieved via mergers and acquisitions – or via the organic growth ofcarriers increasing market shares. For most of the current top ten carriers, alliances will continue to beinteresting arrangements, even if many of the economies of scale in the industry have been realised
via mergers and acquisitions or organic growth.
Alliances are different in character from mergers and acquisitions. Alliances are often
cooperative in nature with negotiated terms and tend to be of lower risk, while acquisition deals tend
to be more competitive in nature with market-based prices and associated with more risk. Higher
synergies are more likely within an acquisition than within alliances. When carriers are faced withmore intense competition, they are more likely to engage in acquisitions rather than partnerships. Thishighlights the strategic motive underlying acquisitions, whereby acquisitions are undertaken toprevent competitors from partnering with the acquired firm (Das, 2011).
Cooperation via global alliances has frequently created the ground for a merger. They havesometimes been used to test if there were sufficient economic conditions for a subsequent merger(Das, 2011). For instance, Maersk Line had a strategic alliance with Sealand during 1995-1998 before
acquiring it in 1999. Despite the fact that the alliance between the two companies was consideredextremely effective by industry analysts, Maersk was clearly pursuing maximisation of the benefits
through a full-scale merger (Panayides and Gong, 2002). Alliances could also be pathways tominority deals: that is, an acquisition results in ownership of less than 50% of the firm being acquired.
An analysis of maritime merger and acquisition deals between 1996 and 2000 found that 20 out of 27
minority deals were the result of alliance agreements (Brooks and Ritchie, 2006). In this respect,
alliances could have two contrasting effects on consolidation: on the one hand they might havefacilitated the increasing concentration in container shipping – as indicated above. On the other hand,cooperation in alliances might also have taken away some incentives for mergers and acquisitions. As
such, reflections on how consolidated the container shipping sector would have been without alliances
could be considered speculative.
In terms of value added for carriers, both alliances and mergers and acquisitions have a mixed
score card. The upsurge in inter-alliance mergers in the early 2000s has been interpreted as shipping
companies’ reaction to the difficulties to achieve cost rationalisation within the alliances (Bergantino
and Veenstra, 2002). Also recent mergers and acquisitions took place despite the intensification ofcooperation in alliances. Yet, the results of shipping mergers and acquisitions are mixed themselves.
Two high-profile mergers in container shipping in the 1990s (the merger of P&O Containers andRoyal Nedlloyd Group and the acquisition of Sealand by Maersk), resulted in rapid stock priceincreases, which can be considered a market perception of value added (Panayides and Gong, 2002).
However, a study on world-wide merger and acquisition activities in the shipping industry during
1980-2007 indicated that these transactions have resulted in an overall loss of shareholder value
within the period of examination (Kammlott and Schiereck, 2011).
It is not altogether clear to what extent the value added for the wider transport system fromalliances or mergers is different. If mergers manage to realise more benefits due to closer integration,
there might potentially be more value to be transferred to transport users. In terms of choice forshippers and service indicators – such as frequency and direct port calls – the effects of alliances andconsolidation could be considered similar. The same applies for the monopsony power vis-à-vis ports.
Ultimately, the relative appreciation could depend on whether alliances are considered facilitator of or
brake on further consolidation. That is: some stakeholders seem to prefer a situation of three alliances
if the alternative would be a consolidated industry with only three - or even five - mega-carriers left.
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IMPACT ON TRANSPORT SYSTEMS – 37

Other sectors, such as the commercial aviation sector, have recently seen the emergence ofprofit-sharing alliances. Such alliances, facilitating collaboration on commercial operations, go
beyond the cooperation that is usual in liner shipping alliances. However, the possibilities of mergers
in the aviation sector are more limited, due to constraints on foreign ownership and control of airlines,
and the strong links between nations and national airlines still in place in many countries. For
example, Japan and the USA place a limit of 33% and 25% on foreign ownership of their airlines
respectively, and the European Union limits non-EU ownership of airlines to 49%. These constraints
are missing in container shipping, which makes mergers and acquisitions a more common avenue forreaping economies of scale than in the aviation sector.

Effects on competition
The emergence of global alliances occurred more or less at the same time as the demise of theconference system. A significant push towards this demise was given by the 1998 United States
Ocean Shipping Reform Act (OSRA). The main innovation of this act was to shift away from public
tariffs and publicly available contract rates to confidential rates packaged in individually negotiatedservice contracts. This confidentiality ensures that conferences no longer have the power to impose
the conference tariff on their members. Although the Act did not forbid the collective fixing of rates
and other terms, the conference agreements were no longer binding (Wang, 2014). Empirical evidence
on freight rates of headhaul and backhaul container shipments on the Transatlantic and Transpacifictrade lane shows that the United States liner market has become more competitive after
implementation of the OSRA (Wang, 2014). In the European Union, the block exemption for
conferences was repealed in 2008, which made alliances the main form of collaboration between
carriers. The EU had a block exemption for liner consortia in place since 1995, this instrument wasadapted in 2009 and became much more important after the repeal of the block exemption for
conferences.
Since the emergence of global alliances, the container shipping industry has evolved into a
concentrated industry, especially over the last five years. Whereas the top four carriers in 1998 had amarket share of less than 20%, this share has increased to almost 60% in 2018 (Figure 8)5. The market
share of the largest carrier, Maersk, is 19% in 2018, which is a larger market share than any global
alliance ever had before 2012. Another measure for industry concentration, the Herfindahl-HirschmanIndex (HHI), tells a similar story, with scores of around 300 in 1998 increasing to almost 1 400 in2018 (Figure 9). These indexes point to a global market situation that could be considered anoligopoly and “moderately concentrated”. In comparison, container shipping clients form a highly
fragmented demand base. Even carriers’ largest clients – large global freight forwarders and multinational shippers with high containerised cargo volumes – reach at maximum 1%-2% of the total
global container shipping capacity.

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Figure 8. Concentration rate (%) in container shipping 1998-2018
90
80
70
60
50
40
30
20
10
0

Top 4

Top 10Source: Author’s elaborations based on data from Alphaliner (1998-2018)

Figure 9. Concentration in container shipping: Herfindahl-Hirschman Index index 1996-2018
1600
1400
1200
1000
800
600
400
200
0

Source: Author’s elaborations based on data from Alphaliner (1998-2018)

On individual trade lanes, the market shares of carriers are much higher. Already in 2010 it was
shown that several containerised trade lanes were highly concentrated, using similar indicators to theones used above, such as the four-firm concentration ratio and the HHI index (Sys, 2010). These
concentration rates have only intensified over the last few years, but are not limited to trade lanes on
which alliances are active. For example, certain North-South routes that are generally outside
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IMPACT ON TRANSPORT SYSTEMS – 39

are highly concentrated, with most routes in the hands of just a few carriers (Figure 10): 91% of thecarrying capacity on the Mediterranean-East Coast South America trade lane in 2015 was deployed byjust one carrier (MSC). In the academic literature, an industry is considered a tight oligopoly when thefour-firm concentration ratio exceeds 60% (Naldi and Flamini, 2014) or highly concentrated if the
HHI-ratio is higher than 1 800 (Shepperd, 1999).
Alliances could be considered additional forms of market power. On all four main East-Westtrade lanes, one or more alliances have a market share of more than 30% (Figure 11). Moreover, thethree alliances together represent around 95% of the market share, with limited activity fromindependent carriers, in particular on the Asia-Europe trade lanes. What are the effects on competition
from this situation? We will argue below that the increased market power of alliances has resulted inbarriers to entry, in monopsony power and in vertical integration.
Figure 10. Four-firm market concentration (%) on selected trade lanes

Mediterranean-South America East Coast

North Europe-South America East Coast

North America-South America East Coast

Mediterranean-West Africa

Far East-West Africa

North Europe- West Africa

Far East-South America East Coast
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Source: Author’s elaborations based on data from Dynamar (2015b and 2016).

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Figure 11. Capacity shares of global alliances on main East-West trade lanes in 2018
100%
90%
80%
70%
60%

Others

50%

THE

40%

Ocean
2M

30%
20%
10%
0%
Asia-N Europe

Asia-Med

Asia-NAm WC

Asia-NAm EC

Source: Author’s elaborations based on data from SeaIntel (2018)

Alliance as a barrier to entry
Two types of structural barriers to entry can be observed in the shipping sector, a combination ofabsolute cost advantages and economies of scale. Absolute cost advantages imply that an entrant willenter with higher unit costs compared to incumbents. Economies of scale restrict the number of firmsthat can operate at minimum cost in a market of a given size. Investing in capacity can, in certain
cases, act as strategic entry deterrence. One of the most striking aspects of excess capacity in thecontainer shipping sector is its persistence (Wu, 2012), which is partially motivated by strategic entry
deterrence, as shown by Wu (2009) and Fusillo (2003). So, building up over-capacity could beconsidered a subtle entry barrier and deter the potential entrant from the market (Wu, 2012; Hirata,2017), related to alliances in so far as they facilitated the overcapacity.
Alliances act as a barrier to entry on the main East-West trade lanes, in particular the AsiaEurope trade lanes. It was already difficult for individual carriers to enter this market ten years ago,
but the rapid size increase of ships operated on this trade lane – which need to be operated in stringsof at least ten vessels – has transformed this trade lane into the “alliances playground” (Dynamar,
2015a). Carriers that do not manage to find alliance partners are practically excluded from thepossibility to offer Asia-Europe services. A rare attempt by Pacific International Lines (PIL) to build
up an independent service was not successful. Moreover, not all interested carriers are admitted toalliances. The Israeli carrier ZIM has long tried to become partner in an alliance, to no avail. ZIM is
now a niche carrier, providing niche services (Dynamar, 2015a). Although it does not operate major
services in the Asia-Europe trade, it deploys vessels and operates services in the United States
Transpacific and Transatlantic trades. Over the last decades, there have been no new carriers active on
the Far East-Europe route.
Alliances also create barriers for collaboration between carriers that do not belong to the same
alliance. Alliance membership imposes restrictions on a member’s use of a non-member carrier (Slacket al., 2002). Therefore, alliances might constrain the flexibility of carriers to engage in vessel sharing
agreements with partners that would present great complementarities, but that do not form part of thesame alliance. This is sometimes the result of government regulation: the EU consortia block

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IMPACT ON TRANSPORT SYSTEMS – 41

exemption includes an obligation on consortium members to refrain from chartering space on vessels
belonging to third parties and an obligation on members of a consortium not to assign or charter space
to other vessel operating carriers except with the prior consent of the other members (Werner, 2016).
Alliance as a vehicle for potential collusion between carriers
The effectiveness of alliances depends on the possibility for carriers to exchange information.
Optimisation of vessel sharing is only possible if information between carriers is shared on stowageplans, schedules and a range of other operational issues. Sustained cooperation in alliances is only
possible if partners find an equitable way of allocating costs and benefits, which is only possible if
carriers are aware of the cost structures of their competitors. Not surprisingly, the carrier
representatives have lobbied for wide-ranging information sharing agreements in the wake of therepeal of the block exemption for liner conferences. The revised EU consortia block exemption inplace since 2009 allows carriers to engage in data sharing and exchange.
As most carriers have operated in different alliances and operate in areas where conferences areallowed, they generally have the information at their disposal that they would need to collude on
prices or capacity. Most carriers have cooperated in alliances with carriers that are now part of otheralliances or of alliances that did not happen, such as P3. As such, most carriers have a pretty detailed
understanding of how other alliances work and what the cost structures are of other carriers. As
conference agreements are allowed in various parts of the world, e.g. in Singapore, carriers candiscuss prices of the services that relate to these jurisdictions. It is even likely that some jurisdictions
have developed into free havens of exchange of shipping prices, so-called hub-and-spoke cartels(Braakman, 2017).
There are some possible indications of joint coordination of capacity. This could have capacity
expanding and constraining effects, both of which could have competition-distorting effects. We
already mentioned the orders of mega-ships by G6 Alliance members that seemed to have been jointly
coordinated (Box 4); such coordinated overcapacity via alliances could create barriers to entry forother container shipping firms. But coordinated constraints on capacity could also be problematic.
Some of the shippers that we interviewed also mentioned instances where the supply of empty
containers might have been artificially reduced by carriers. Another way in which capacity can be
reduced is via demolition of ships. This is an area where one would expect some coordination
between carriers in order to avoid free-rider effects of carriers benefiting from reduction of fleet
overcapacity without scrapping any vessels themselves. Such coordination could possibly take place
within alliances. The timing of ships being scrapped could give some indications of this. Analysis ofdata on ship scrapping per carrier seems to suggest that the demolition dates of ships operated byMaersk and MSC are more closely clustered around each other since 2015 when their cooperation in
the 2M Alliance started (Figure 12).

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Figure 12. Monthly volumes of demolished ships (dead weight tonnes) per month
1000000
900000

Deadweight tonnage

800000700000600000500000Other

400000MSC300000Maersk2000002018-04

2017-112017-082017-05

2017-02

2016-11

2016-08

2016-05

2016-022015-11

2015-032014-12

2014-06

2014-032013-122013-06

2013-032012-03

2011-00

2009-09

2009-03

2006-02

2002-06

2000-010

1998-04

100000

Ship demolition date

Source: Author’s elaboration based on data from Clarksons

Monopsony power of alliances
The dominance of alliances has increased the buying power of a few carriers, also called
monopsony power. Already in the early 2000s it was concluded that the bargaining power of carrier
alliances vis-à-vis ports, terminals and other port service providers had substantially increased(Heaver et al., 2001). Since then, this bargaining position between carriers and ports has become
hugely unbalanced.
Ports are increasingly dependent on just a few carriers. The service network in 2006 showed thatapproximately 32% of the container ports receive services from only one carrier (Gadhia et al., 2011).
This concentration has continued and gotten another dimension with the dominance of alliances. Our
analysis of port networks of the three global alliances since April 2017 shows that the three alliances
use in total 89 different ports on their East-West services: 30 in Asia, 35 in Europe and 24 in North
America. Only 16 of these ports receive calls of all three alliances on the main East-West trade routes:
eight in Asia, five in Europe and six in North America. In Europe, only five ports receive calls fromthe three alliances on Asia-Europe and on North America-Europe trade lanes: Rotterdam, Antwerp,
Le Havre, Valencia, Barcelona and Genoa. Some ports receive calls from three alliances on one ofthese two trade lanes, but not on the other: Bremerhaven has calls from the three alliances on the
Atlantic trade lanes, but only from one alliance on the Asia-Europe trade lane (Figure 13). More thana third of the EU ports with calls from alliances are dependent on just one alliance, including large
ports such as Gioia Tauro in southern Italy (Box 8).

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IMPACT ON TRANSPORT SYSTEMS – 43

Box 8. Dependence on one global alliance: the case of Gioia TauroWith a handling capacity of 4.2 million TEUs per years, the Port of Gioia Tauro in Calabria, Italy, is one of
the biggest transhipment hubs in the Mediterranean and the 13th biggest container port in Europe. The Medcenter
Container Terminal in Gioia Tauro acts as an almost pure transhipment terminal, with 96% of transhipment activity.
The port is intensely competing for volumes with other transhipment hubs such as Malta, Piraeus and emerging
North African ports. Among the 15 biggest European ports, Gioia Tauro is the only one experiencing a significant
decline in volumes: the Medcenter Container Terminal lost 14.1% of container volumes between the first quarter of2018 and the first quarter of 2017. Whereas volumes have decreased overall in the terminal, the number of TEUs
per vessel call has increased owing to the deployment of ultra-large vessels.
As Gioia Tauro acts as a hub exclusively for MSC, the terminal is entirely dependent on strategic decisions of
the carrier who also owns a 30% share of the Medcenter Container Terminal. MSC’s alliance partner Maersk uses
its own terminal facilities in Port Said (Egypt), Algeciras and Tanger-Med. Maersk stopped calling Gioia Tauro in2011 as it could not use it as a gateway port due to inappropriate rail infrastructure. When Maersk stopped calling
Gioia Tauro, volumes decreased by 30% which caused a temporary lay-off of 1 300 employees. Gioia Tauro –while being entirely dependent on MSC – does not get calls from small and medium-sized operators that would
provide steady business for the port. In order to guarantee that investments in the port would be worth their cost, it
was agreed with MSC that incoming volumes should ensure terminal activities of at least 40 000 moves per week.
This objective appears to have been reached only eight times in the last four years.
While currently Maersk and MSC do not use the same hubs in the Mediterranean, closer integration between
the two alliance partners could mean they rationalise their hub strategy in the Mediterranean. Largely cost-driven
carriers can exercise leverage on ports, which stand in fierce competition to each other. Transhipment ports in the
Mediterranean undercut each other by applying up to 20 times lower port dues. This phenomenon would highlightthe need for a level playing field and a coherent ports policy in Europe that would also extend to non-European
hubs such as Tanger-Med.
As cost competitiveness in the current context is difficult to realise Gioia Tauro has increased its focus ondeveloping more value-added activities. In order to ensure stability and competitiveness of the port, Contship Italia
has invested in its intermodal and rail facilities to attract inland container traffic. The Italian government has madeEUR 275 million available for infrastructure projects at the port. As Gioia Tauro is located in one of Italy’s poorest
regions, the government established a Special Economic Zone (SEZ) at the port of Gioia Tauro in 2003, which has
not had the desired job creation effect.

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Figure 13. Dependence of European ports on alliances (2018)

Rotterdam
Antwerp
Le Havre
Valencia
Barcelona
Genoa
Hamburg
Southampton
Marseille-Fos
La Spezia
Piraeus
Bremerhaven
Leghorn
Algeciras
Felixstowe
Marsaxlokk
Wilhelmshaven
GdanskTriesteRijekaKoper
SalernoGioia Tauro
London Gateway
Sines
Dunkirk
Zeebrugge
Gothenburg
Aarhus
VeniceConstantza
Vigo
NaplesTilbury
Cagliari
01
N America-Europe23

Asia-Europe

Source: Author’s elaborations based on data from SeaIntel (2017)

Some alliances use that monopsony power for joint bargaining with ports, terminal operators andother service providers. This was common practice of the G6 Alliance and is currently frequently
deployed or tried by THE Alliance. Some alliances, like 2M, make a point of not engaging in joint
negotiations. Some terminal operators also refuse to negotiate a joint alliance tariff, whilst others
consider they do not have much of a choice. In some jurisdictions, such as the US, alliances can enterin joint procurement with terminals only if the terminal is agreeable to a joint contract. Even if there is
no explicit joint bargaining, there is always the real threat that an alliance shifts cargo, so alliancecarriers have huge leverage over ports and port service providers, even if there is no explicit
coordination within an alliance.
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IMPACT ON TRANSPORT SYSTEMS – 45

In addition, carrier consolidation leads to continuous pressure on rates. Many ports and port
service providers indicate the same dynamic of rate negotiations following mergers and acquisitions,whereby the merged carriers take the lowest rate as the basis and start the negotiation from that level.
This means that each consolidation has the effect of lowering rates. In addition, many ports provide
some sort of a loyalty bonus to carriers with frequent calls to the port. Even if ports could manage toresist carrier’s pressure for lower rates, they generally receive relatively less rate revenue frommerged carriers because of these loyalty bonuses that are often correlated to the size of carriers.
This dynamic is reinforced by vertical integration between carriers and terminals. Terminals willthen be used as cost centres that help to negotiate tariffs of the other terminals downwards. Carriers
use direct investments in container facilities as a strategy for controlling costs, by creating bargaining
power towards pure – independent – terminal operators (Rodrigue and Notteboom, 2010). Similarly,
the emergence of new transhipment ports has frequently been driven by carrier dynamics. For
example, the rise of new ports in the Pearl River Delta, such as Yantian and Shekou, has been
attributed to the strategy of container shipping companies to gain bargaining power over Hong Kongby also using other transhipment ports (Wang and Slack, 2000). Vertical integration of carriers andterminals has over the last decade increased substantially, as will be shown in the section below.
Vertical integration
Vertical integration could be considered to be related to the emergence of alliances. As service
differentiation for the sea-leg is difficult in alliances – as the product is basically the same – one of the
few remaining possibilities for individual carriers to differentiate is via vertical integration. Vertical
integration activities of carriers have intensified in parallel to more intense cooperation via alliances,as will be illustrated below.
Carriers have recently become more integrated with terminals.6 Some carriers, such as Maersk,
traditionally have strong control over stevedoring operations via dedicated terminals and via APMT,
its terminal subsidiary. Other carriers, such as MSC and Cosco, used to focus on shipping services andused bilateral contacts with stevedoring companies (Cariou, 2008). This has now changed: MSC andCosco, as well as other carriers, have over the last decade acquired stakes in terminals. This has
resulted in an increase of the global market share of carrier-controlled terminals from 18% in 2001 to
38% in 2017. This includes dedicated terminals and multi-user terminals. Dedicated container
terminals are terminals dedicated to the traffic of one or more carriers. These are usually subject to a
private agreement between one or more carriers and a port operator or authority. 7 Multi-user terminals
are terminals that are open to all carriers that would like to use it, so not for exclusive use of thecarrier controlling the terminal. During 2001-2017, the share of independent private terminal
operators has remained stable, whereas the share of other operators, in particular public port
authorities operating terminals, has declined (Figure 14).

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Figure 14. Emergence of carrier-dominated terminals, 2000-2016
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Carrier as terminal operator

Independent terminal operators

Other

Source: Author’s elaborations based on data from Drewry (2002-2017)

Two of the three alliances have members with very large terminal handling capacity. The carriersin both 2M and Ocean Alliance have extensive terminal portfolios: if aggregated at the level ofalliances, this represents around 90 terminals with handling capacity of around 50 mln TEUs for bothalliances. The carriers in THE Alliance are much less vertically integrated: their combined terminal
portfolio consists of little over 35 terminals, with handling capacity of around 10 mln TEUs (Figure15). Vertical integration generally is not pursued via alliances.
Figure 15. The global alliances as terminal operator
100
90
80
70
60
50

Number terminals

40

Equity TEU (mln)

30
20
10
0
2M

Ocean

THE

Source: Author’s elaborations based on data from Drewry (2017)

Carrier-controlled terminals, in particular dedicated terminals, could raise competition concerns.
Acquiring exclusivity within a network industry facing increasing returns to scale and facing
bottlenecks could be a way to deter entry (Cariou, 2008). Dedicated container terminals create

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IMPACT ON TRANSPORT SYSTEMS – 47

substantial sunk costs and thus make liner shipping a less contestable market. Investment in dedicatedterminals could also be seen as a form of limit pricing whereby the operating costs of potential
entrants are raised to such a level that entry is no longer profitable (Haralambides et al., 2002).
Dedicated terminals are afforded to some carriers at a price less than social opportunity costs. Thismeans that other carriers not using the dedicated terminals are placed at a competitive disadvantage,e.g. in the form of longer waiting times and operating costs. Such a situation could be considered as abarrier to entry due to the exclusivity on an essential facility. The price a carrier at a dedicatedterminal will have to pay must also include potential losses born by all other carriers at the port due toincrease in waiting time. So the possible gains to carriers through vertical integration - higher service
rate and smaller variance – must be contrasted with potential losses from the reduction of competition
and from the presence of negative externalities (Haralambides et al., 2002).
Most carriers have ambitions for further vertical integration. These ambitions build on
established policies of carriers to have their own feeder services and hinterland transport operators, aswell as other related industries. Whereas Table 4 provides an overview per carrier, more specificinformation per carrier of their stakes in other parts of the maritime logistics chain are provided in
Annex 3. In addition, many carriers, such as CMA CGM and Hapag-Lloyd, stress their value-added
logistics services. Maersk has engaged in a complete restructuring of its business model, selling its oiland tanker business, fully concentrating on becoming the global integrator of containerised transport
flows. In order to achieve this, Maersk has strengthened the ties with its subsidiaries, such as APM
Terminals, that in the past used to work quasi-independently. Many of these initiatives in vertical
integration are linked to digitalisation of the maritime logistics chain. The idea is that control of
information flows will also make it easier to have a smooth operation of physical flows. The ambition
to become an integrator of the containerised supply chain brings carriers in the same playing field asfreight forwarders.
Such initiatives might increase switching costs for customers and could thus reduce competition.
A choice for a carrier could thus also imply an immediate choice for the feeder, terminals, rail andeven towage services (in the case of Maersk that has its own towage subsidiary in Svitzer). Customers
could thus be locked into one holistic supply chain solution that does not necessarily represent thebest combination of different parts (which is what a freight forwarder would normally present) but
that are chosen because they belong to the same company. Customers would in many cases havedifficulties avoiding this lock-in as they would be confronted with switching costs. In addition,
carriers might be using their client information systems as another way to lock-in clients, as these
impose human capital costs for shippers in case of switching. Vertical integration also increases therisk that carriers use their market power as a carrier to distort competition in other segments, e.g.
terminal operations or towage, vis-à-vis non-integrated service providers.

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Table 4: Vertical integration of selected carriers in the maritime logistics chain
Carrier

Terminal

Logistics

Equipment

Towage

Rail

Barge

Truck

MaerskShipping,
Short-sea
✓

✓

✓

✓

✓

✓

✓

✓

MSC

✓

✓

✓

✓

✓

✓

CMA CGM

✓

✓

✓

✓

✓

✓

Cosco

✓

✓

✓

Evergreen

✓

✓

✓

✓

HapagLloyd

✓

✓

✓

✓

ONE8

✓

✓

✓

✓

Yang Ming

✓

✓

✓

HMM

✓

✓

✓

✓

✓
✓

✓

✓

✓

✓
✓

✓

✓

Note: This table includes activities, subsidiaries, jointly controlled entities and associated companies. It excludes bulk andpassenger transport and local shipping agency subsidiaries. For a more detailed overview, see Annex 3.
Source: own elaboration based on annual reports of individual shipping companies

Implications of digitalisation for competition in the maritime transport sector
Digitalisation might have important implications for competition in the maritime transport sector.
Various initiatives in the industry are currently ongoing (Box 9). The digitalisation of processing
shipping services could indeed allow for the collection of large amounts of data related to various
stakeholders. There are important efficiency gains as shipping companies that have access to suchdata will be able to offer more innovative and effective services to their customers. The capacity toprocess accurately big data can consequently become one of the parameters of competition in themarket. However, the accumulation of large data can also become an asset that could actually be used
to further enhance the market power of a company as it might allow for exclusionary practices, lockin for customers and higher barriers to entry (OECD, 2016). Although it is difficult at this stage topredict how the various digitalisation initiatives in the maritime sector will play out, it is not
unthinkable that digitalisation will organised along the lines of alliances. As such, this could become arelevant element to consider with regards to the regulatory possibilities and constraints for alliances.
The greater use of digital services in maritime transport might pave the way for collusive
practices amongst shipping companies. The latter might find it easier to exchange relevant
information and align their market strategies. What is more, the implementation of platforms open
exclusively to the members of a single consortium could have an anticompetitive outcome. In
principle, platforms tracking the shipping process can be analysed as part of the technical cooperation
between shipping companies. Thus, they could actually fall within the exemption regime forcollaboration amongst competitors. Nevertheless, when implemented in highly integrated strategic
alliances – which is currently not the case, but not unthinkable - such platforms can entail higher
barriers to entry, switching costs and stifle competition, especially when they have strong network
effects.

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Box 9. Digitalisation initiatives in liner shipping
In January 2018, Maersk and IBM announced the creation of a digital joint venture that strives for enhancing
digitalisation in the maritime transport sector. (Maersk, 2018) The new company TradeLens, owned 51% byMaersk and 49% by IBM, will provide a platform connecting a large number of stakeholders in the industry,
thereby covering each stage of the transportation process from shippers to ports and terminals, and national
authorities. Other major companies in maritime transportation have also increased investments in digitalisation.
CMA CGM announced in 2018 the creation of Ze Box, an international incubator for start-ups in maritime
transportation, in addition to several other initiatives part of its digitalisation strategy (CMA CGM, 2018).
Moreover, HMM and SM Line have already piloted blockchain technology for shipping services (Kang, 2017).

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Impacts on transport stakeholders
Whereas the effects of alliances on the transport system are mixed, the effects on most transport
stakeholders seem to be predominantly negative. Carriers that are not in alliances faceunsurmountable barriers to entry on certain trade routes. Ports’ interest in attracting alliance calls
often leads to cross-subsidisation that negatively impacts other shipping sectors (e.g. bulk shipping).
Ports, terminals and other service providers, such as towage companies, are often confronted withdeclining returns on investment, related to the buying power of alliance carriers and destructive
competition within ports related to alliances. Freight forwarders are regularly confronted withincreased transaction costs due to alliances and might face competition from carriers who diversify
into freight forwarding. Alliances limit the available offer of shipping options and have frustrated risk
diversification strategies of shippers and freight forwarders. The following chapter expands on this.

Shipping
Container shipping is becoming increasingly polarised between the small group of very large
carriers in alliances and the rest of the companies. All of the top eight carriers form part of an alliance;these are the carriers that have shown the largest capacity growth, whereas the growth for the smaller
carriers was more modest. The 15 biggest carriers have increased their capacity between January 2017
and January 2018 by almost 18% (Figure 16). While a significant degree of this growth is driven bymergers, the largest carriers have also added a significant number of new ships to their portfolio,
whereas carriers ranked 31 to 75 have downsized their fleet since January 2017. These observations
could suggest that, in the coming years, increased competitive pressure on medium-sized and niche
carriers might lead to further consolidation in markets where small- and medium-sized carriers
operate, but also that overcapacity might remain more problematic on the main trade lanes on which
the largest carriers operate, in contrast to the niche markets of smaller players.
Figure 16. Short-term capacity growth according to size group (01/2017-01/2018)20%
18%
Capacity growth (%)

16%
14%
12%
10%
8%
6%
4%
2%
0%
1-15

16-30

31-45

46-60

61-75

76-90

Carrier rank (1 = largest carrier in Jan 2018)

Source: SeaIntel (2018; 345).

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POLICY ASSESSMENT AND OPTIONS – 51

Impact on independent carriers
Alliances provide barriers to entry that will sustain the polarisation of container shipping. Thesebarriers to entry in the shipping industry are characterised by capital requirement through high fixed
costs and cost advantages, with incumbents of sufficient size being able to offer their products at alower price. Ultra-large vessels achieve economies of scale that no smaller vessels can attain.
Exploiting these economies of scale – under current demand conditions – is possible only by
consolidating cargo through vessel- and slot-sharing agreements. Coupled with unsustainably low
freight rates, such barriers to entry effectively reduce the capacity of independent carriers to compete
in the industry. The strategic use of excess capacity can also signal an aggressive response toincreased competition from smaller carriers, thereby effectively deterring entry by diminishing theprospects of profit for the entrant (Dixit, 1980; Luo et al., 2014; OECD, 2015). This can limit thepressure arising from potential competition and can help the largest carriers maintaining market
power. The case of the Korean carrier Hyundai Merchant Marine (HMM) illustrates the challenges ofsize (Box 10) where the ability to enter into alliances with major carriers is conditioned by the
carrier’s fleet size and vessel capacities. The potential of digitalisation arguably makes software anddigital applications arguably one of the defining competitive features of future liner shipping
companies. These potentials are – for the moment – not being implemented within the framework ofalliances.
Box 10. Hyundai Merchant Marine and the 2M alliance
The ability to approach large alliance groupings requires a large amount of cheap capacity to offer. This
practice makes it particularly difficult for mid-sized and smaller carriers that are not backed by state support togrow and enter an alliance. Further, upgrading and investing in new vessels only grants temporary competitive
advantages but aggravates a spiral into excess capacity and low returns in the shipping industry. Challenged byindustry consolidation, the Korean mid-size carrier Hyundai Merchant Marine (HMM) was not been able to enterthe 2M Alliance in 2016. Instead, a slot agreement was fixed with 2M as HMM fell short of the necessary
negotiating power vis-à-vis the world’s two largest carriers Maersk and MSC. While their slot agreement with 2M
will expire in 2020, HMM attempts to improve its negotiating power with the purchase of 12 new vessels with acapacity of 23 000 TEU and eight new 14 000 TEU vessels. As these purchases are reportedly backed by Koreanstate subsidies, this will allow HMM to sell slots on their vessels at a relatively low price to Maersk and MSC.
Source: Reuters (2016).

The barrier to entry seems to be particularly high on the Asia-Europe trade lane, but less so on
the Transpacific trade lane. There is no independent carrier offering ocean shipping services between
Asia and Europe. However, there still are independent carriers on the Transpacific trade lane. Afterthe alliance re-shuffle in April 2017, a number of independent carriers (Matson, ZIM, SM, Wan Hai
and PIL) increased their combined market share on the Trans-pacific trade lane by 1.6 percentage
points (to a 16% capacity share) vis-à-vis alliance carriers, growing their volume by 34.5% in thethird quarter of 2017. (SeaIntel, 2018; 348). Explanations for the survival of non-alliance carriers on
the Transpacific lane include draught limitations restraining the use of ultra-large vessels(Mongelluzzo, 2018b).
The barriers of entry have pushed the smaller carriers to trade lanes less dominated by alliances.
Examples are PIL, Wan Hai and ZIM, that withdrew from the North Europe-East Asia trade lane butthat are still present on the Far East-Mediterranean and Transpacific (and Transatlantic-Mediterranean
for ZIM). The Israeli carrier ZIM increasingly focuses on trades where it has a competitive advantage,
including Trans-pacific trades and intra-Asia routes (Baker, 2018a). In order to remain profitable, thecompany reportedly focuses on choosing gateways based on equipment repositioning opportunities
and existing relationships with rail transport providers and where the company is able to offer valueadded services (Mongelluzzo, 2017b). While a specialisation strategy can enhance the financial
sustainability of mid-size carriers, presence on all trade lanes is no longer possible. Further, nichemarkets are by nature relatively restricted and leave only limited space for market followers.
However, operating on a niche market could be considered as a possible profitable business strategy
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52 – IMPACT ON TRANSPORT SYSTEMS
for carriers that are not able to realise more economies of scale (BCG, 2015). An example of this is
Wan Hai Lines that has achieved satisfactory performance on the basis of low financial leverage tosupport small capacity. Its fleet strategy was concentrated on the intra-Asia trade market and it
enjoyed a high revenue turnover in a niche market. By operating small ships, Wan Hai was able toachieve lower costs by calling directly at ports not served by mega-ships. Thus, Wan Hai eliminatedthe cost incurred in the extra handling of containers (Huang et al., 2017).
Operating outside alliances could provide advantages to some carriers, with higher flexibility
being one of them. Cooperative agreements such as slot and vessel sharing provide opportunities for
big liner shipping companies to benefit from higher flexibility in adjusting supply to demand.
However, major independent carriers may ultimately find it easier to cope with volatile demandconditions, as these usually face less overinvestment in capacity. Further, carriers that operate
independently do not face the same obligations of factoring in the customer requirements of partnerlines. Carriers such as ZIM claim they “enjoy the best of both worlds” by engaging in slot sharing
agreements without losing flexibility within an alliance (Baker, 2018a). Independent and niche
carriers aim to sell this flexibility to their clients. Some very small players trust that a number ofcustomers will ultimately prefer reliability and service quality to low rates and try to market theiradded value providing highly personalised services, complete visibility and a level of liability thatlarger carriers are often unable to guarantee for their customers (Baker, 2018a).
Instability created by alliance reshufflings has benefited independent carriers. They could bridge
operational challenges of carriers during the restructuring phase of alliances. ZIM for instance claims
to act more flexibly and could immediately communicate new service schedules to customers while
alliances were still rearranging services. SM Lines mainly grew by taking over volume from Hanjin,
but has recently struggled and lost important volume in the Asia-U.S. trade (Mongelluzzo, 2018a).
PIL in contrast acted rather as a semi-independent carrier given the close working relationship withCOSCO. While this does not seem to lead to a major shift towards independent carriers, it signals
however that niche carriers could be able to compete for the customers that are dependent on morereliable alternatives and are willing to pay higher rates in order to decrease their dependence on
alliances (Mongelluzzo, 2017a; Knowler, 2017).
Impact on feeder shipping companies
Feeder shipping companies collect and drop containers with small- and medium-sized container
ships and provide volume to mega-vessels, as these cannot call at many ports. A product oftranshipment, feedering is the first or last leg of sea-borne transport. While feeders are distinct fromregional liners, most short haul operators engage in both feedering and regional shipping given thegeographical overlap. A usual distinction in feeder services is between dedicated services andcommon services. Dedicated feeders exclusively work for one carrier, whereas common feeders
carry containers from a variety of customers (mainlines). Currently, there are 13 purely dedicatedfeeder operators and 107 common carriers. However, among the top five feeder operators (thoseexceeding 2 million TEU of annual trade capacity), there is only one pure common feeder operator.
All large ocean shipping carriers are large feeder operators: only the Japanese carrier ONE is notfeaturing in the top 20 of feeder operators (Figure 17). Most of the largest carriers are active as
dedicated feeder operators for their own vessels, such as MSC, Evergreen, Hapag-Lloyd and Cosco.
However, Maersk and CMA CGM offer both dedicated and common services. Almost all mainliners
who are operating own feeders are also using common feeder carriers to ports where their own feeder
tonnage is not calling. In terms of capacity, MSC and Maersk are far ahead of the other carriers.

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POLICY ASSESSMENT AND OPTIONS – 53

Figure 17. Top 20 feeder operators by annual trade capacity (2018)7

Annual trade capacity (in mln TEUs)

6
5
4
3
2
1
0

Source: Author’s elaborations based on data from Dynamar (2018).

Alliance carriers do not usually operate joint feeder services. Exceptions were a joint feeder
service by the G6 alliance linking Gothenburg to the main loop in 2012 and the establishment of aBlack Sea feeder loop in 2013. Although there are no alliances among shortsea shipping companies
and feeder operators, cooperation exists in the form of slot charter agreements. Similarly, shortsea
operators use these agreements to diversify, broaden their transport networks and offer additional
services to customers (Styhre, 2010). To benefit from maximum efficiencies, the mainline operatorsneed a large enough volume to justify deploying its own vessels. In the past, some common feeders
have been integrated into larger shipping companies, for instance in the deal between P&O Nedlloyd
and Maersk in 2005. Other companies such as CMA CGM have outsourced part of their feeder
services but still hold substantial own feeder capacity. In 2015, CMA CGM acquired OPDR, a feeder
operator active in the Europe-Iberia/Canaries, which was integrated into a CMA CGM subsidiary
MacAndrews. The company also acquired Mercosul Line from Maersk who was obliged by Brazilian
competition authorities to sell Mercosul as a condition for the approval of the acquisition of Hamburg
Süd (Waters/Lloyd’s Loading List, 2017). And in June 2018, CMA CGM announced the acquisitionof the Finnish feeder operator Containerships. The tendency of the biggest shipping companies toeither outsource or establish and acquire own dedicated feeder services “swings back and forth”(Andersen, 2018).
The emergence of carrier alliances and stronger consolidation has impacted feeder services inseveral ways. Feeder operators are required to quickly adapt to fundamental changes in routes andports of call of mainlines. The demand of feeder services has increased in some regions and declined
in others, as the deployment of even bigger vessels has imposed a hub-and-spoke structure on anumber of routes. This system is based on the development of some hub ports for the transhipment ofcargo from mother to feeder vessels or vice-versa. In other areas, ports have been added to mainlines,

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54 – IMPACT ON TRANSPORT SYSTEMS
pushing feeder services to the extremities of trade lanes. Another major impact is caused by peakvolumes at gateway ports affecting feeder schedules.
Feeder networks experience shifts induced by alliance networks
The network rationalisations caused by alliances could create the need for more feeder operations
in some parts of the world. The deployment of larger vessels has led to higher consolidation of
volumes on a fewer ships. The resulting lower service frequency owing to higher consolidation of
volumes led to into higher transhipment incidence in some parts of the world. Especially, container
short-sea services in the North Europe range are expected to increase at short- and medium-term
reflecting this scenario (European Commission, 2015). The biggest feeder trades are currently in the
Far East with 33% total vessel capacities and North Europe-Mediterranean with 28% of total
capacities. Around half of the feeder operations in Europe and Asia are from dedicated feeders; inAfrica almost all feeder operations are done by dedicated feeders (Figure 18).
Figure 18. Market shares of dedicated and common feeders in different world regions (2018)
100%
90%
80%
70%
60%
50%
40%
30%

Dedicated feeders
Common feeders

20%
10%
0%

Source: Author’s elaborations based on data from Dynamar (2018).

Alliance shifts require high degrees of flexibility and adaptation from feeder operators. Alliances
regularly reshuffle their networks by adding or cancelling calls in certain ports. In various instances,
feeder services have been replaced by mainline calls. For instance, Gdansk transformed into a
regional hub relocating feeder networks closer to the final destination or origin, whereas in Jakarta,
volumes rose to a level that made direct calls viable for large carriers (Dynamar, 2018). It remains tobe seen whether large network relocations on a global scale will push common feeders to theextremities of global networks or whether, on the contrary, higher transhipment incidence due tomega-vessels will lengthen feeder networks and increase relay services.
Consolidating in ocean shipping has reduced the client pool of feeder operators. Considering thelarge capacity of the remaining mainline carriers, they are naturally able to exert more influence thanpreviously, thereby driving down feeder rates (Dynamar, 2018). As a result of growing pressure fromalliances, a few common carriers have moved into the regional cargo segment and scale up theirpresence in different markets to become a global feeder operator. An example for this is X-Press
Feeders who operate in Asia, as well as the Europe-Mediterranean and the Middle East-Indian
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POLICY ASSESSMENT AND OPTIONS – 55

Subcontinent trade lanes. Others are Arkas (North Europe-Mediterranean and Africa), Samudera(Asia and Middle East-Indian Sub-Continent) and Simatech (Middle East-Indian Sub-Continent andAfrica).
Peak volumes in ports have affected feeder and barge schedules
Alliances, consolidation and mega-ships have led to greater peak volumes in ports. This has
exacerbated congestion risks in ports that might have multiple causes not solely related to carriers.
With a higher volume to be brought to the port, feeders risk missing the large ocean-going vessel at
the hub port as many feeders line up to off-load cargo or take in cargo from larger vessels. In the past,
feeder companies have struggled with the low priority accorded to them by ports as compared to theever-bigger mainline vessels. Particularly at congested hub ports, feeder operators have experienced
difficulties in securing berth space, severely affecting their schedules and causing additional costs ofcalling a port (Dynamar, 2018). According to Dynamar, low priority given to feeder vessels at berth isprobably caused by the fact that feeder operators are not direct clients of the terminal but contract withmainline carriers through “Free In and Out” (FIO) agreements in which the carrier bears the costs ofloading and unloading the feeder with their volumes. In practice, this often means that when themainline vessel leaves the berth, another mainline ship might claim priority before the feeder vesselthat is to be loaded, because the feeder operator is not a direct customer of the terminal. Common
carriers have reported that priority is given to dedicated feeder vessels, as large carriers are able toexert bargaining power on terminal schedules. In some tidal ports, this phenomenon becomes evenmore of a problem, as short berthing windows additionally affect schedules. Some feeder operators
therefore need to carefully weigh in each case whether volumes make it worth to wait for a delayedmega-vessel, as waiting times and missed tidal windows cause further costs to feeders. As aconsequence, feeder operators have lamented that they face additional costs that are “out of theircontrol”.
Congestion has important repercussions for feeder vessels and barges, as well as their clients.
One of the shippers interviewed for this study has reported that, at least once a week, cargo does notreach the originally scheduled vessel because of congestion in a major European port. In that case, thecontainer is rolled to the next vessel and shipping companies may apply additional detention anddemurrage charges. In the reverse situation, important delays occur for containers at Rotterdam boundto inland Europe. In April 2018, the operator Contargo reported waiting times for barges of up to 48
hours at the port of Rotterdam (Knowler, 2018).
Port congestion also requires more coordination and alignment between the different parts of themaritime logistics chain. There are many of such stakeholders, whose actions need to be aligned.
Alignment is particularly needed at the interfaces between organisations. Examples are: when the ship
arrives in the port, when the cargo moves through the port, when trucks, trains or barges deliver orpick up cargo in the port, and when the land transport company reaches the final customer. Limited
communication and coordination on these interfaces can quickly result in port congestion, particularlyin the case of mega-ships. For these ships to realise the economies of scale intended when ordered byshipping companies, collaboration between various actors in the supply chain is needed: between
carriers, shippers and freight forwarders to ensure reliability; between carriers, terminals and ports toassure productivity and adaptability of infrastructure; between carriers, terminals, ports and hinterlandtransport companies to provide smooth movement out of the port. As new ships will come available,
planning on deployment of these vessels merits coordination with ports and terminals that need to beprepared to handle these ships efficiently.

Ports, terminals and port services
Whereas alliances might create value for some carriers, Chapter 2 illustrated that they likely
destroy value for ports, terminals and port services, by undermining their return on investment. This is
public investment for most port authorities, and private investment for terminal operators and port
service providers, such as towage companies. Most ports depend on one or two alliances and the risk
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56 – IMPACT ON TRANSPORT SYSTEMS
of losing the alliance calls provides these with huge leverage over ports to reduce rates and invest in
additional infrastructure. Within ports, alliances have frequently resulted in simultaneous overutilisation and under-utilisation of terminals, related to a “winner takes all” dynamic related to thedominance of the three global alliances. Rationalisation of alliance networks has reduced the numberof direct port connections. Alliances and consolidation of the industry have contributed to thedisappearance of smaller container ports, various independent terminal operators and drive
consolidation in the towage sector.
Declining return on investment
The extent to which public money has been misspent on port infrastructure has been well
documented for Europe in a series of reports by the European Court of Auditors, who identified
various ports financed by EU-funds that were underutilised or not utilised at all (ECA, 2011; ECA,
2016). Underutilisation of ports is not reserved to Europe; many world regions have more port
capacity than needed (OECD/ITF, 2016). Port infrastructure is lumpy and maritime trade projections
frequently inaccurate, so there is an inherent challenge in providing the appropriate amount of port
capacity. Moreover, the relation between carriers and container ports is subject to hold-up problems,
which increase the bargaining power of carriers (Box 11). However, this challenge has been amplified
by the effects of alliances, as will be set out below.
Buying power of carriers
The buying power of carrier alliances stems from the fact that only a few world-wide ports seemtruly inevitable. In North America only six ports receive calls from the three alliances on the two main
trade lanes with Asia and Europe (Figure 19); this is 9 ports in Asia (Figure 20) and 5 ports in Europe(Figure 11). This implies that most large container ports are dependent on just one or two alliances; adecision of alliances to revise their port networks has large effects for the ports, which gives themhuge leverage over these ports. Apart from a very select group of ports that seem inevitable for all
alliances, most of the other ports have the constant risk that the alliance carriers will review theirschedule and stop calling the port. Even the largest ports are not immune to the pressure and leverage
from carriers.
Moreover, many ports compete with each other, so they provide carriers with real alternatives
that they can use as leverage. Cargo shifts between ports are very frequent. Carriers and alliances very
regularly update their service schedules and often change ports. The effects of these changes havemuch larger impacts than one or two decades ago, considering that much larger flows are now
involved. We illustrated this with Figure 6 in Chapter 2 for the case of North-West European
container ports. The relation between shipping lines and ports is per definition asymmetric, as ships
are movable assets, whereas ports cannot be moved and have a longer investment repayment span.
This asymmetry has increased due to the combined effects of alliances, consolidation and mega-ships.

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POLICY ASSESSMENT AND OPTIONS – 57

Box 11. The hold-up problem of carriers and container ports
A hold-up problem can be defined as a situation where two parties would derive benefits from cooperating, but refrainfrom doing so because they fear that they may give the other party increased bargaining power, which could reduce their own
profits. This is pertinent in the case of infrastructure investment: when firm A makes an investment from which firm B derives abenefit, this could be considered “sunk investment”, so firm B could change the rules of cooperation after the investment to
implicitly or explicitly expropriate the investor (OECD/ITF, 2018). The ex post bargaining position of the investor will be
weaker if the share of sunk investment is larger. In other words, the risk of a hold-up problem is larger with high asset
specificity: the assets cannot be redeployed elsewhere because they are specific to that transaction. The risk of hold-up problems
is higher in cases of high uncertainty because contracts cannot foresee every potential eventuality (they are “incomplete”). In
case of competition amongst buyers and repeated transactions the hold-up risk is lower. In the latter case the investor’s next
investment could be used as a threat to contain the buyer’s incentives to behave opportunistically (CRA, 2015). Hold-ups also
tends to be less severe in situations where both parties could take some of the other side’s specific investments “hostage”(Williamson, 1983).
The relation between shipping lines on the one hand and container ports and terminals on the other hand, could also be
considered a hold up problem. Ports hold some market power over shipping lines before investing in new infrastructure, but assoon as they have made this investment, the bargaining power balance shifts in favour of shipping companies. These companies
behave opportunistically and ask for lower port fees, with the threat of reducing the number of port calls (the hold-up). The
proportion of sunk investment is high: container ports that can handle mega-ships require deep access channels and berths(hence high dredging costs) that are not needed for most other ships. In addition, a container port has certain specific design
features, which makes redeployment only possible after expensive adjustments. As there is enough container port capacity
available now and in the foreseeable future (OECD/ITF, 2016), liners not calling the port is a realistic threat: carriers havemoveable assets and face no switching costs from changing one port for another. New expansions of the same port generally
take decades to materialise; which means that future port investment can hardly contain carrier incentives for opportunistic
behaviour. The only reason that so many port investments still take place, despite the risk of hold-ups, is that governments
owning the ports absorb the risk of hold-up problems. So, the problem to be solved here is not only the behavior of the carriers,
but also the “disloyal” competition between countries, some of which are willing to go below full cost recovery of port andhinterland infrastructure investment to become attractive. If countries were not to do that, the “extortion” of the carriers would
not work and only competition would be at play. The result of governments absorbing hold-up risks even below full cost
recovery is over-investment in port infrastructure, resulting in empty or under-utilised ports financed with taxpayers’ money(ECA, 2016). Liner shipping alliances have aggravated the hold-up effects, as they limit the possibility for port authorities tofind alternative users of their port infrastructure. There are generally two solutions to mitigate hold-up problems: vertical
integration and more complete contracts:Vertical integration between container carriers and terminal operators – via dedicated terminals, joint ventures andequity stakes - is common, but that is no guarantee for port authorities, as this gives carriers even more leverage topress for lower port fees, more infrastructure spending and – moreover – to renegotiate terminal concession fees.
Vertical integration between carriers and port authorities is very uncommon, and probably also not desirable,considering the regulatory power of port authorities (almost exclusively public authorities), which would transform thecarrier into a regulator.

More complete contracts with carriers could help both terminal operators and port authorities. Carrier-terminal
operator contracts are generally relatively short-term contracts, with fairly loose commitments from carrier side thatare not really enforceable. The challenge for terminal operators would be to strengthen the commitments of carriers inmore long-term strategic contracts and cooperation. The commitments of carriers towards port authorities are usually
not part of a contract, but informal and oral. More formalised commitments from carriers towards ports – e.g. on
guaranteed volumes - could help to reduce hold-up risks for ports. Such commitments would “kill” competition
between ports as the carriers could no longer switch between ports with minimal cost, which is unfair if ports are not
performing well. A way to solve this could be to define a port performance score below which the carrier-port“contract” could be nullified. Considering that ports are often backed up by governments, there is some room for twosided relationships in which investments of the other side are taken “hostage”; governments could decide to only
provide subsidies and tax exemptions to their shipping sector under the condition that they make use of domestic ports.

It is important to realise that this requires cooperation between governments. No unilateral solution attempt by any country
would work, considering that ports often compete beyond national borders. If only one country would insist on full cost
recovery, carriers would simply go to other countries that are less strict and willing to spend taxpayers’ money on port
infrastructure without full cost recovery.

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58 – IMPACT ON TRANSPORT SYSTEMS
Figure 19. Global alliances and their preferred North American ports on East-West trade routes (2017)

New York
Norfolk
SavannahCharleston
Los Angeles/Long Beach
Seattle/Tacoma
Vancouver
Miami
OaklandJacksonville
HoustonNew Orleans
MobileBostonTacomaWilmington
Baltimore
Halifax
St Rupert
Freeport
Port Everglades
Philadelphia
Montreal01Europe-N America

23Asia-N America

Source: Author’s elaborations based on data from SeaIntel (2017)
Note: Due to their proximity and functional integration Los Angeles and Long Beach, as well as Seattle and Tacoma, arehere considered to be part of two single port complexes: Los Angeles/Long Beach and Seattle/Tacoma.

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POLICY ASSESSMENT AND OPTIONS – 59

Figure 20. Global alliances and their preferred Asian ports on East-West trade routes (2017)

ShanghaiSingapore
NingboHong Kong
Yantian
Busan
XiamenTianjin
QingdaoKaohsiung
Vung Tau
Yokohama
DalianLaem Chabang
NanshaTanjung Pelepas
ChiwanShekouNagoyaKobe
Tokyo
Port Klang
Taipei
Shimizu
Kwangyang
Sendai
Keelung
FuqingLianyungang
Jakarta0

1
N America-Asia

2

3

Europe-Asia

Source: Author’s elaborations based on data from SeaIntel (2017)

Pressure on rates and investments
Carriers will use their own terminal assets as cost centres, which helps them to negotiate
downwards the rates in other terminals. In other words, carriers use direct investments in container
facilities as a strategy for controlling costs, by creating bargaining power towards pure – independent– terminal operators. This strategy can be applied within the framework of alliances, as carriers inalliances will predominantly use the terminals that they control. E.g. a study on port choice in North-

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60 – IMPACT ON TRANSPORT SYSTEMSWest Europe showed that carriers in alliances predominantly chose ports where they have terminalinterests, with the exception of UK and Hamburg where carriers do not have stakes (Notteboom et al.,2018).
This tactic can be particularly effective in countries where a large share of the terminals is
controlled by carriers, such as Spain, whereas this would be much more difficult to realise in countries
with higher shares of independent terminal operators, such as Germany (Figure 21). Some countries,
such as the UK, have no carrier-controlled container terminals, so private returns on investment in UK
terminals are not affected by rate pressures from terminals that act as cost centres.
Figure 21. Different types of terminal operators in European countries (2017)

Handling volume (mln TEUs, 2016)

16
14
12
10
8
6
4
2
0

Carriers as terminal operators

Independent terminal operators

Others

Source: Author’s elaborations based on data from Drewry (2017) and interviews

If carriers also have positions in other shipping segments, they can use these to put additional
leverage on ports. For example, MSC is not only a container carrier but also active in cruise shipping,with multiple port calls and stakes in cruise terminals in Italy, a position it uses to advance its
container shipping interests, such as a call for public investment in a new breakwater in Genoa tosupport a MSC-controlled container terminal (Box 12).

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POLICY ASSESSMENT AND OPTIONS – 61

Box 12. Construction of a new dedicated container terminal at the Port of Genoa
In June 2018, a 33-year concession was signed for the container terminal at Calata Bettolo, in the Port ofGenoa, involving an agreement between MSC and Gruppo Investimenti Portuali (GIP). The Consorzio Bettolo isformed by Itaterminaux Sàrl (65%) and Seber Srl (35%). The first is a terminal company based in Luxemburg,
controlled by MSC, the second is an Italian terminal operator controlled by GIP (TrasportoEuropa, 2018). Seber
also controls the South Europe Container Hub (SECH), located directly next to the planned Bettolo terminal. MSC
is also completing the acquisition of the major stake of Ignazio Messina & C., a company that operates a terminal in
the Sampierdarena basin (Molo Ronco and Molo Canepa), known for its advantageous rail connections (Alphaliner,2018). The Bettolo terminal will be operational in 2022 after the finalisation of infrastructure works. The design
capacity of the terminal is 750 000-800 000 TEU per year and should host container ships of up to 20 000 TEU.
The 760 meter deep-water pier will be equipped with six gantry cranes (Genova24, 2018).
In order to accommodate ultra-large container vessels, large infrastructure costs will be imposed on the Portsof Genoa, the Port Authority of the Western Ligurian Sea. A landfill was constructed to provide the necessary widthand length of the terminal and the currently existing breakwater protecting the city port of Genoa will need to be
replaced by a new five kilometres-long breakwater - 500 meters from the coast, compared to its current 160 meters– in order to accommodate larger vessels (Scaletti/BJ Liguria, 2018). The design and construction cost of the new
breakwater is estimated at around EUR 1 billion (Autorità di Sistema Portuale del Mar Ligure Occidentale, 2017),
excluding costs for demolishing the current one. According to media reports, the construction of the new
breakwater –if confirmed – would be the largest port work ever made in an Italian port since the war. The design ofthe new breakwater should take two years and reportedly involves the use of eight million cubic meters of stonematerials and 150 reinforced concrete cubes (20x20m large and 30m high) to be placed on an (on average) 40m
deep seabed and covered with around 250 000 cubic metres of concrete (Dell’Antico/MediTelegraph, 2018).
The demolition of the current breakwater is highly controversial, as the sole rationale for replacing it is toconform to access requirements of mega-vessels into the city port. As the current breakwater obstructs entry formega-vessels and Calata Bettolo is in direct vicinity to the inner city of Genova, the use of the new terminal islikely to bring even higher inland congestion risks, increase shipping emissions and could hence aggravate air
pollution levels in the inner city. Considering these risks, other locations outside Genoa could have been moresuitable for calls from mega-ships. Further, there is a high cost compared to the potential benefit of attracting morecontainer volumes, which are subject to demand fluctuations. Although the interest of the Port of Genoa is tomaximize the potential of Calata Bettolo and Ronco-Canepa and to strengthen the competitiveness of the port, theseprojects, especially under the conditions of replacing the breakwater, remain uncertain as to whether long-term
benefits will outweigh the costs. In addition to the cost of transferring to the new breakwater, the construction of the
Bettolo quay has cost the authorities EUR 35 million; EUR 136 million will reportedly be provided by the terminal
operator (Primocanale Genova, 2018). The required landfill to realise the Ronco-Canepa terminal is estimated tocost the authorities EUR 16 million (Scaletti/BJ Liguria, 2018). Given the already overstretched capacities ofhinterland connections, public authorities would need to make extra efforts in terms of road and rail connectivity inorder to absorb and reap the benefits of additional cargo volume at the city port. Considering current demand, thiswould also mean growing capacities in Genoa at the expense of other terminals. The new Bettolo terminal will
primarily compete with PSA’s Voltri Terminal (with GIP as a minority shareholder), but it could also compete with
LSCT La Spezia, depending on the stability of the joint-venture between Contship Italia and MSC which has been
described as “difficult” in recent media reports (Alphaliner, 2018). As a main provider of container and cruise
traffic in Genoa MSC has strong leverage over the port authority.
MSC’s strategy of vertical integration is particularly visible in Italy where MSC or holdings owned bymembers of the Aponte family have been active in acquiring stakes in terminals. MSC has acquired the company
Conateco in the port of Naples, taking over the controlling interest from COSCO and owns stakes in Contship
Italia, which has terminal concessions in Gioia Tauro, Ravenna and La Spezia. MSC participates also in the Trieste
Marine Terminal Pier VII. Venice’s Terminal Intermodale Venezia (TIV) is a subsidiary of Malta-based Marin Hill
Holdings and Marinvest, a unit of Mediterranean Shipping Company (MSC). With its participation in terminal
operator Lorenzini, MSC expanded its influence to Civitavecchia and Livorno (Savelli/Corriere della Sera, 2017).

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These carrier strategies work because there is limited countervailing power from ports. Even if
ports can have a natural catchment area, most container ports compete for cargo of alliances cargo, so
seem unwilling to cross their main clients. This will make it difficult for them to recoup infrastructure
investment costs via port fees, so port authorities will either compensate via public money or more
revenues from concessions with private terminal operators. Considering that terminals have sunkinvestment in ports, port authorities have more bargaining power vis-à vis terminal operators than visà vis carriers, so they are tempted to renegotiate concession fees, so that they can lower port fees. E.g.
in the port of Rotterdam, the share of port revenue from port fees has decreased from 56% in 2008 to
41% in 2017; or – using a different indicator: the revenue from port fees per tonne of cargothroughput has decreased from EUR 0.70 in 2008 to EUR 0.62 in 2017. Due to pressure on port rates,
ports might be tempted to add terminal concessions, so as to increase port revenue, even if there is notenough demand.
Corporatisation of ports in some parts of the world has tended to strengthen this competitive
focus, possibly to the detriment of focus on the public interest that could be achieved by joint
coordination of ports. Ports could coordinate to avoid terminal overcapacity being developed thatenables carriers to play off terminals against each other. Ports might also benefit from jointly adopting
explicit and comprehensive principles on port pricing which would seek to ensure that all relevantcosts are taken into account in setting port fees e.g. dredging needs for larger ships). In certain ports of
the world, there is already a tendency for ports to act to increase their bargaining power, e.g. bymergers – as exemplified by major Chinese ports – or port alliances, as in the US. The last chapter ofthis report elaborates on these initiatives.
There is also an asymmetric relationship between carriers and terminal operators, albeit lessasymmetric than between carriers and ports. Terminal operators have consolidated like carriers andthe largest of them have developed into global groups with world-wide coverage. This has led someauthors to describe the relation between carriers and terminal operators as a dual oligopoly. However,this seems more like a theoretical construct than an adequate description of reality, for a variety ofreasons. First, the market concentration of terminal operators is far lower than the concentration rates
of carriers (Figure 22). Moreover carriers operate in three alliances, which is not the case for terminal
operators. The ten largest carriers have an 80% market share, whereas ten largest terminal operators
only have a 40% market share. Second, the competitiveness of terminals depends to a considerable
degree on local circumstances, such as port policies, port-hinterland connections and regional trade
growth. This means that global terminal operators hardly negotiate with carriers on the whole
package of rates that carriers are confronted with, so terminal operators have limited control over theattractiveness (for shippers) of the total package of services. Third, carriers have movable assets
whereas terminals are mostly fixed assets, so the risk allocation between carriers and terminals is
skewed. Finally, terminal operators have only rarely been able to introduce higher handling charges
for better or faster service; in most cases the bargaining power of carriers is such that the threat of
their potential shift to another terminal gives them enough leverage to require faster service.

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POLICY ASSESSMENT AND OPTIONS – 63

Figure 22. Concentration rates of container lines and container terminal operators (2018)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1

2

3

4

5

6

7

8

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Terminal operators

Carriers

Source: Author’s elaborations based on data from Drewry (2017) and Alphaliner (2018)

Destructive competition
Alliances can create destructive competition between terminals within ports. Competition
generally enhances efficiency and there is a substantial literature that illustrates the benefits of intraport competition (see e.g. De Langen and Pallis, 2005). The dominance of the three alliances haschanged the character of that competition, as it provides a lot of leverage to alliances. A port withcalls from the three alliances would ideally have three or more competing terminals that have exactly
the right capacity to serve the calls from the respective alliances. Needless to say, this is rarely everthe case. Ports with three terminals and calls from three alliances can find themselves confronted withthree alliances that predominantly use two terminals. Other ports might have two terminal operatorsthat will have to deal with the cargo from three alliances. Often the outcome of such dynamics is a“winner takes all” phenomenon, where one terminal is over-utilised whereas the competing terminal
will be underutilised. This is for example the case in a large European port where the reshuffling ofalliances calls has brought down the utilisation rates of one terminal to around 30%, whereas theutilisation rate of the competing terminal has reached 90%, which is above the utilisation rate that is
generally considered to be optimal by the industry (Figure 23). Before the dominance of alliances theamount of cargo was much more fragmented with a large amount of potential carriers, so the characterof terminal competition was less binary.

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64 – IMPACT ON TRANSPORT SYSTEMS
Figure 23. The effect of alliances on utilisation rates of a port with two terminals
100%
90%
80%
70%
60%
Operator A

50%

Operator B

40%
30%
20%
10%
0%
Jan-16 May-16 Aug-16 Nov-16 Mar-17 Jun-17 Sep-17 Dec-17 Apr-18

Source: Author’s elaborations based on data from Drewry (2017) and quarterly reports of the terminal operators

Decline of smaller container ports
The effects of alliances on different types of ports are comparable to the effects of slow steaming– which also leads to rationalisation of networks – namely: transhipment ports could benefit, medium
to small sized ports will be negatively affected, and gateway ports could have a good chance toincrease their traffic by attracting new services only if their catchment area and infrastructure allows
for substantial call sizes (Ferrari et al., 2015). The increase in ship size and the reduction of possible
calls due to network rationalisation in alliances can pose big threats for port authorities. They could
also constitute a new competitive barrier for ports that cannot assure a minimum traffic volume or thathave physical limits on their terminals (Ferrari et al., 2015). In case rationalisation of port networks
results in more feeder traffic, certain smaller container ports could benefit from more feeder traffic.
The last decade has seen the withering away of various container ports. Certain smallertranshipment ports that were dependent on one carrier or one alliance lost these calls and have sincethen no longer been used as container ports; this was the case of Mediterranean ports like Malaga(Spain) and Taranto (Italy). This situation is a constant risk in areas with an abundance of wellequipped transhipment ports. Gateway ports can, to a certain extent, always rely on their own
catchment areas, but smaller regional gateway ports have also been vulnerable when there are larger
gateway ports close by that could absorb their traffic, e.g. in the case of Barcelona and Tarragona.
Regularly, governments invest in port infrastructure at the request of carriers, who in the end do not
use the port (Box 13). Only rarely do new container ports manage to get established in mature
markets; one of the recent exceptions is the London Gateway port. Contrary to common knowledge,
carrier-dominated terminals operators do not necessarily help as their alliance partners might oppose
using that port considering their own terminal interests; this was one of the reasons why Amsterdam
never managed to develop its ambitions as container port, despite the interest of NYK Line.

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Box 13. Public investment to support carrier strategies: the case of Malaga
The origin of the container terminal in Malaga was the demand of Maersk in early 2000s to create a mediumsized overflow terminal for the APM terminal in Algeciras, the port in southern Spain that is located close to
Malaga. The idea was to develop Malaga as a transshipment port in tandem with Algeciras. The Malaga container
terminal became operational in 2004 after public investment in port infrastructure by the Malaga Port Authority andprivate investment in terminal pavement and equipment by the concessionaire, Dragados, later re-named Noatum.
Container volumes from Maersk managed to boost volumes from scratch to 0.5 million TEUs in 2007.
As the global financial crisis of 2008 began to take its toll, traffic flows contracted and volumes in Malaga
started to decrease. By 2009, the container throughput had fallen to 0.3 mln TEUs as Maersk concentrated its trafficon Algeciras and the Moroccan port Tanger-Med, its main container terminal hubs in the area. Although volumes
started to go up again in 2010 and 2011, Maersk’s increased focus on the APM terminals in Algeciras and Tanger
Med left Malaga without much container traffic, despite an agreement with local stevedores to reduce costs by 35%
on all Maersk traffic. Over the years, the port of Malaga cumulated debt partly related to investments in the
deepening of the draft at the container terminal to 14 metres, necessary to attract large containerships (PortStrategy, 2014), so it had to cut down its investment plans to almost zero for several years. In 2015, only 43 000
TEUs were handled in Malaga and in 2016 the concession agreement was changed so that the Noatum terminal
could handle other cargo types. The container cranes were removed. The concession stipulated minimum container
throughput volumes, so Noatum had to pay a fine to Malaga Port Authority to cover this. In 2017, a 51% stake ofNoatum was sold to Cosco, with a terminal portfolio that included the Malaga terminal. This had an impact on thestrategy for Malaga. In 2018, Noatum and the port authority of Malaga decided to develop Malaga into a terminalfor gateway traffic serving shippers in the local hinterland of Andalusia. In June 2018, Noatum installed three newcontainer cranes in Malaga to achieve that ambition.

Concerns for independent terminal operators
Commoditisation of container shipping, in part driven by alliances, has increased the motivation
for individual carriers to acquire terminal operators, as this presents them with a way to differentiatethemselves from their competitors. Although carrier-dominated terminal operators participate in bids
for new greenfield terminals, many carriers also buy existing terminal operators, in particular smaller
and medium-sized independent terminal operators. This has for example happened in Spain in recent
years, with the acquisition of TCB by APM Terminals and a majority stake of Noatum by Cosco.
Carriers that have been very active acquiring container terminals over the last few years include
Cosco and MSC. As we mentioned in Chapter 2, this has increased the share of carrier-dominatedterminal operators from 18% in 2001 to 38% in 2017. Although, the acquisition of terminals by
carriers like Cosco is likely to continue, considering their global and holistic supply chain ambitions, amore established player like Maersk has recently started to sell some of the terminals that are notessential to its service network.
This acquisition of independent operators by carriers sometimes happens via an intermediarystage of acquisition by financial investors. The Spanish terminal operator Dragados was acquired in2010 by a consortium of investment bank J.P. Morgan and Dutch pension fund ABP, and rebranded as
Noatum in 2011. In Italy, similar consortia of financial investors have acquired small - often familyowned - terminal operators. Although they can provide injections of capital that could improve theproductivity and capacity of these terminals, there is also a risk that these consortia will after a few
years sell their terminal assets to the highest bidder, which often turns out to be a carrier from China.
Certain large independent terminal operators, such as PSA, have tried to develop long-term
relations with carriers, via terminal joint ventures (with MSC), dedicated terminals (for CMA CGM
and Cosco) and other forms of cooperation. However, these forms of cooperation are generally fairly
loose and they do not bind carriers.

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Concentration of the towage sector
The globalisation and consolidation of shipping is mirrored in the towage sector. A similar
movement is now taking place, resulting in the emergence of a few multi-national players, such as
Kotug Smit and Fairplay being present in many ports. Vertical integration is less frequent than in theterminal handling sector, yet the largest towage company, Svitzer, forms part of Maersk. The result ofconsolidation is the disappearance of smaller, family-owned towage companies, particularly inNorthern Europe. Competition for towage services within ports has emerged after 1993 in Europe,with the entry of companies such as Kotug and Smit in Hamburg, and Fairplay in Rotterdam. The
dominance of alliances and mega-ships in major ports has similar effects as for terminal operators: theneed for more capital investments, more peak and troughs, pressure on rates and declining returns on
investment.
Similar to developments in the terminal segment, the deployment of ultra-large vessels has
increased pressure on towage operators to increase the capital investments required to serve thesevessels. The number of tugboats and human capital needed to serve a single ultra-large vesselincreases while the frequency of these vessels calling a port has decreased, leaving assets idle for theremaining time. As a consequence, size and scale has become a requirement in the towage sector toensure profitability. Combined operation allows towage companies to meet the increasing demands oftheir clients, especially when this allows flexibly deploying tugboat fleets in different ports. This has
led to mergers, such as Kotug Smit or, in some tidal ports where entry windows are limited, tooccasional cross-charters among towage providers.
Although there is no joint purchasing of towage contracts by alliances, consolidation has reduced
the number of customers in ports, thereby increasing the pressure on towage rates. Most large
container ports are dependent on just one or two alliances. Often, there is one vessel operator
representing an alliance in a specific port, which often reduces the number of towage contracts to 1-2.
In the case of a merger, the towage company serving the target carrier will likely lose the contract if
the acquiring carrier has a contractual relation with another towage competitor. This has effectively
increased the leverage carriers can exert on port services such as towage. In ports where several
towage companies compete, such as in Hamburg, rates have gone down significantly. As a towage
operator interviewed for this study reports, rates to serve container ships in Europe generally do notcover their incremental costs anymore, which has led some companies to cross-subsidise their towage
activities for container vessels with the bulk trade and tanker business. Other companies have exitedthe market or have been acquired by other operators, leading to increasing concentration in the towage
market. In some ports, due to local or state monopolies of some towage companies, rates haveremained at a higher level. However, increased inter-port competition has also impacted local
monopolies. While low rates temporarily benefit carriers, market exit of smaller towage companies
favours concentration in the towage market, which, in the future, could lead to the re-emergence of
local towage monopolies.
In response to rate declines, tug owners have started to cut costs which has led to consolidationsof their operations. Towage companies are increasingly broadening their networks and have engaged
in joint ventures across Europe in order to be able to access a bigger tugboat fleet and move aroundtugboats. However, an obstacle to further cut costs in response to carriers’ demands is the inability forsome European towage companies to access similar tax exemptions as ship owners, especially on thecosts of the crew. This has had the effect that some towage companies have now registered tugboats
under foreign flags, which has allowed them to save costs – however to a lesser extent than tax rebates
could offer, as reported by a towage operator.
The towage sector in Europe might have witnessed practices of predatory pricing. Predatory
pricing as part of the deliberative strategy of dumping, usually involves setting very low prices orselling below the firm’s costs in order to drive competitors out of the market or to hurt rivals in order
to increase chances for future acquisition. In Portugal, towage services have been offered at around
5% of the estimated cost in a Portuguese port, according to a towage company. Similar practices have

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been observed in Denmark and Sweden. Vertical integration means for towage companies that theyeffectively compete with a customer owning the strongest competitor in towage. This has effectively
impeded competitors not backed by a large carrier and without a certainty to be able to recoup losses
at a later time to compete in this market. Although complaints have been filed in the past, previous
legal procedures and investigations have taken up to four years – a time period during which towage
companies might not be able to survive.

Freight forwarders
Freight forwarders organise shipments and perform a variety of value-added services related to
documentation of shipments. Freight forwarders are comparable to the so-called non-vessel operating
common carriers (NVOCCs) that often act as cargo consolidators that might offer freight forwarding
services in addition. Both freight forwarders and NVOCCs do not own physical assets, in contrast tologistics companies. In this sector, when referring to freight forwarders, we will cover both freight
forwarders and NVOCCs.
Freight forwarders have been mainly impacted by decreasing schedule reliability and service
quality owing to rationalisation strategies of carriers and alliances. A satisfaction survey with 400
freight forwarders and shippers published by Drewry in June 2018 showed that transit times,
reliability of booking and cargo shipped as booked were considered to have deteriorated since 2016
and attracted scores of around 2.9 out of 5. None of the 16 categories rated received a score higher
than 3.4. Assessing the performance of the carrier industry in general, over 60% of respondents
noticed deterioration in the range of different carriers available and over 40% observed a decreasing
availability of different services (Drewry, 2018). These findings are in line with our own assessments,
as presented in Chapter 2 and public statements from leading freight forwarders (Box 14).
Box 14. Benchmarking performance and managing low reliability
Multinational freight forwarders, such as Kuehne+Nagel (K+N) have strongly criticised decreasing schedulereliability in the past. Although a variety of factors impact vessels during sailing, e.g. waiting time in ports orweather conditions, K+N has attributed the deterioration of reliability mainly to the transition phase of the newalliance structure. In order to better manage the effects, freight forwarders and shippers have developed own
performance comparisons on individual services. K+N has developed their own scoring system for all route
networks, ranking services from A to E based on vessel arrival. The company adjusts cargo allocation accordingly.
Freight forwarders have resorted to spreading risk and taking more informed allocation decisions, ascompanies such as K+N are increasingly concerned that their complaints with carriers are not being heard. This
reflects their low bargaining power despite a substantial supply of volumes to carriers. Although issues related to a
prolonged transition phase from four to three global alliances may disappear once the three alliances are wellestablished, a new round of alliance restructuring could be the consequence of further industry consolidation in the
future. Competition within alliances and possible future merger rounds make alliances an inherently instable
construct (Pico, 2018).

The use of slot sharing and high volume consolidation – both direct effects of shipping alliances– can negatively impact visibility into the logistics chain. This is case because cargo is loaded oneither vessels of alliance members or on feeder vessels that do not belong to the same company. In thecase of cancelled sailings or rollovers of containers, both freight forwarders and shippers haveexperienced low quality of information flows, which complicates the activities of freight forwarders.
During the alliance reshuffle in early 2017, they report to have faced refusals of bookings, rollovers ofcontainers and blank sailings. Missing information on these incidents further complicated the task for
freight forwarders. In 2017, the CEO of K+N criticised that information on delays or rollovers, atbest, arrived too late and at worst, relevant information was never transmitted. Further, as it wasargued, K+N were able to get the required information before the carrier provided it. Although
increased digitalisation could potentially solve or at least mitigate this difficulty, it does seem tosuggest underlying problems of service quality and visibility issues within the alliance setting
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68 – IMPACT ON TRANSPORT SYSTEMS(Kristiansen, 2017). Low visibility complicates risk management of freight forwarders and shippers(Box 15).
The increasing market power of alliance carriers translates into stronger leverage over contracts.
Carriers have tightened and insist on stricter application of contract clauses. A specific issue observed
by some freight forwarders are lower free times for pickup of containers acknowledged by carriers intransport contracts. In the case of South African major ports, containers stored by shipping companies
were charged about USD 100 per day after exceeding five days of free time, but both freight
forwarders and shippers have witnessed that the charges included a tenfold mark-up of the actual
storage cost for the carrier, with charges climbing quickly the more time containers remained instorage premises. This has led a group of freight forwarders to file a complaint with the South African
Competition Authority for abuse of power and dominant position expressed in excessive land-side
demurrage charges. The group suspects that carriers use the strategy of charging higher land-side feesin order to compensate low freight rates. Due to carrier consolidation, freight forwarders face lesschoice and consider it inevitable to work with all major carriers, even if they are not satisfied with thequality of their services.
Consolidation and cooperation among container lines have also affected availability ofequipment and vessel slots. The availability of containers appears to be a concern for various
forwarders and shippers. Empty containers are not commonly shared among carriers, not even thosewithin the same alliance. In order to obtain equipment, forwarders and shippers are often faced withadditional container surcharges, such as container availability fees. Avoiding these fees on the spot
market would oblige the shipper to book volumes in advance without knowing whether there will be
demand from customers.
Some carriers are also active in freight forwarding, or have announced ambitions in this area.
Although some of the largest freight forwarders do not consider this to be a competitive threat yet,carriers that start to operate as freight forwarders could present concerns. One could wonder aboutlevel playing field conditions, especially since many carriers receive state aid and subsidies, whereas
freight forwarders are not subsidised. The emerging digitalisation initiatives could potentially provide
carriers with information on land-side transportation and logistics that they could use to strengthen
their position as global integrator. One of the actors that we interviewed claims that a large carrier has
sought to access his clients directly, proposing finance solutions and transport without him as anintermediary. The company fears that vertical integration of carriers in forwarding could potentiallythreaten business models of intermediaries that are partly based on providing value-added financial
products to customers.

Shippers
While many shippers prioritise low cost, reliability, choice and fast transit times are often
considered as important for the smooth functioning of their supply chains. We noted in Chapter 2 thatalliances can be associated with less choice, less service differentiation and less service quality. These
challenges are recognised by many shippers and they perceive a deterioration of service quality since
the new alliances structure was introduced (Drewry, 2018). The direct impacts for shippers include
higher costs related to supply chain disruptions, eroding bargaining power and constrained risk
management.
Supply chain disruption costs
The eroding service quality, associated with alliances, creates disruption in supply chains that
represent considerable costs to shippers. This is especially the case for those commercially dependent
on just-in-time deliveries or the trade in perishables. Further, it was observed that frequent
spontaneous cancellations of calls to main ports have led to cargo being discharged elsewhere thaninitially foreseen. The limited shelf life of products coupled with important delays has led to adevaluation of the product once arrived at its destination. In the case of important delays, some

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POLICY ASSESSMENT AND OPTIONS – 69

companies that use containers to source their raw materials have switched either to local suppliers ororder deliveries by truck, which can significantly increase overall transport costs. For some shippers,such occasional modal shifts, although costly, have become the norm in dealing with delays and port
call omissions.
In order to face the risk of delays, the costs of stock holding and inventory management haveincreased for some of the shippers. In order to avoid fluctuations and delays in deliveries to thecustomer, shippers need to increase inventories and provides additional warehousing at destinations.
Inconsistent lead times however reserve the possibility that shipments arrive as planned, which means
shippers need to strike a balance between too few and too many stocks in order not to face spaceissues. While generally longer, but consistent lead times could be beneficial for some shippers, thosetrading with reefer cargo or perishables would also need speed.
A range of studies have showed that improving transport service frequency and reliability would
allow shippers to reduce supply chain inventories. More reliable liner shipping services can provide
significant inventory cost savings to shippers (Saldanha et al., 2009). Low schedule reliability makes
it difficult for shippers to deploy just-in-time production and supply chains. With low reliability,
shippers have to keep more safety stock, or from time to time use more expensive transportation
modes for cargo to catch up lost time. Offering short transit times are particularly important for
perishable goods and consumer goods with a short life cycle and elevated economic or technicaldepreciation, such as fashion and computers (Notteboom, 2006). Improving schedule reliability (from
70% to 99%) and offering higher service frequencies (from weekly to daily sailing) could enable
inventory cost savings of 25% according to Zhang and Lam (2015).
Estimating inventory cost increases due to liner shipping delays could be related to the value oftransit time. Many of the shippers we interviewed have not been able to quantify the impacts ofdeclining reliability on their inventory costs. A promising approach in the academic literature isrelated to estimating the value of transit time (VOTT). The cost of the cargoes associated with transit
time is directly borne by the customers and could be considered as a proxy of inventory costs. The
idea is that an extra day at sea creates opportunity costs related to fixed capital that could lower the
economic value of the goods concerned (Notteboom, 2006). Various studies, referenced in Table 5,provide estimations of these different sorts of value of transit time, indicating that the average value oftransit time for containerized cargo falls within the range of 15-30 USD per TEU per day. Futurestudies might be able to assess the relative costs and benefits of the reduction of ocean freight rates inrecent decades and the supply chain disruption costs incurred by shippers as a result of the consequentchanges in industry operations.

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Table 5. Overview of studies on the value of transit time
Studies
Notteboom 2006
Bakshi and Gans 2010
Cariou 2011
Wang and Meng 2011
Bell et al. 2013
Wang et al. 2015

Value of transit time
(USD/TEU/day)
19
272
26
14 – 38
20
5 - 30Bargaining power of shippers under pressure
There is a growing difference in size of carriers and the size of shippers: even the volumes
associated with the largest shippers hardly ever represent more than 1% of the total number ofcontainers carried by major carriers. Although large shippers may have some leverage via the volumesof the cargo that they own, this is different for the large base of small and medium-sized shippers.
Considering the limited range of carriers and the even more limited number of alliances, customers
have only limited possibilities to “vote with their feet” as it would usually be the case in highly
competitive industry sectors.
Many shippers have noticed that the terms of their contracts have become more restrictive,
allowing less container free time and applying higher detention and demurrage charges. As there isless free time acknowledged in the contract, the majority of the interviewed shippers receive
additional bills for storage and container rental costs depending on product value, even in cases where
the responsibility for exceeding cargo dwell time in ports was the responsibility of the shipping
company, e.g. when a delay led to missing the feeder service or when cargo was discharged at thewrong port. Detention and demurrage charges not caused by the shipper are often difficult to claim
back and various shippers prefer quickly settling the dispute in order not to lose additional time andavoid costly detention charges, which rise fast with each additional day that the container is stored by
the shipping company.
Constraints to risk management
Alliances generate risks for the resilience of supply chains. In order to avoid delays anddisruption in the supply chain, shippers tend to spread risk and avoid “putting all eggs in one basket”.
Alliances limit these possibilities, by providing less choice, but they also affect supply chain
visibility: it has become more complicated to know precisely on which vessel of a vessel- or slotsharing partner (even outside an alliance) cargo has been loaded. Whenever possible, most shippers
tend to distribute risk across the different alliances. Nonetheless, it appears to happen that all of acustomer’s shipments appear on the same vessel even if booked with different carriers. In the case of
the Hanjin bankruptcy in autumn 2016 and following dissolution, shippers who booked cargo spacewith other THE Alliance members automatically had risked their cargo being loaded on a Hanjin
vessel, causing major supply chain disruptions and months-long delays, leaving roughly 520 000
containers stranded (Barnard, 2017). This incident affected beneficial cargo owners who had bookedwith Hanjin directly, but also those who booked with alliance partners and those engaged with looser
vessel- or slot-sharing agreements with Hanjin. Similar problems arose during the cyber-attack
affecting Maersk Line and APMT, whereas in this case the close integration of IT infrastructure
highlighted not only the risk of horizontal, but also vertical contamination of the attack’s operational
impact (Box 7).
Alliances have constrained the possibilities for risk management by shippers. Inter-dependence
increases not only the scope and gravity of issues in the supply chain, but coupled with low visibility,
these issues also reduce the possibility for shippers to manage risks accordingly. For example, this has
led some shippers to spend additional resources on risk management. Given the uncertainty attached
to knowing on which partners’ vessel the cargo would be loaded, Electrolux states that it is “a risk

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impossible to manage” (Box 15). Some large shippers, have developed own internal rankings on thefinancial health of carriers. Some shippers have started to require a specified percentage of cargo to betransported on the carrier’s own vessels and demand a guarantee from carriers not to place the cargo
on a vessel operated by an alliance partner (Inbound Logistics, 2017). Carriers’ own risk management,
which entails fixed allocations from a single shipper under a specified threshold, has had the effectthat a major shipper and one of the biggest global forwarders interviewed for this study have been
faced with difficulties in “getting cargo on-board” even in times of overcapacity.
Box 15. Risk management in the context of alliances
In 2016, the large Swedish appliance manufacturer Electrolux voiced fierce criticism of container alliances.
The shipper reportedly faces major challenges in terms of risk management for the transport of its 180 000 TEU
annually and laments the decrease of differentiation between carriers, which has made it difficult for shippers totake decisions based on performance levels and reliability. Bjørn Vang Jensen, Vice President of Global Logistics
at Electrolux, criticised that “the alliances have reduced all the carriers to a basic service” and that container
shipping “has become a watered down product”. While the shipper acknowledged that it would be impossible toexpect excellent service, he notes that “There is nobody doing it worse than anyone else, and nobody delivers well”.
The shipper disagreed on the benefits that alliances could provide their customers. “Today, it doesn't make adifference whether you sail your container on a Cosco or a Hanjin vessel. The differences between carriers which
existed before, where you could for example count on the fact that Maersk always arrives on time, have gone out
the window. Today, nobody comes on time.” He further explained “What the alliances give us, is a headache – amajor headache – within risk management. We waste huge amounts of time trying to find out who is incollaboration with whom, and how it relates to our booked cargo.”
Electrolux reported on an accident in November 2014 in which two vessels collided and caught fire at Port
Kelang in Malaysia. While only 15 containers had initially been sent with one of the involved vessel operators, itturned out that 98 containers of the company’s containers were on the same vessel, all sent with different carriers
and that the number of containers made up more than half of the Christmas sales to Brazil. While such incidents
stand in no comparison to the large impact caused by the Hanjin bankruptcy or the cyber-attack on Maersk, theshipper reported a number of incidents of a smaller scope which all expose the same patterns of low visibility anddifficult risk management. “We have learned from the episodes, that it is necessary to use many resources and a lotof time on risk management. Otherwise you risk that an event is not just limited to one carrier, where you might
incidentally have some containers sailing.” The Electrolux executive added that “In many cases, it is a risk which isactually impossible to manage.”
Source: Schoer (2016).

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Policy assessment and options
Alliances in container shipping have been enabled by government policy. This chapter gives an
overview of these policies, in particular with respect to competition law, but it also covers port
strategies and transport policies necessary to successfully adapt to liner shipping alliances. As
alliances have changed in character over the last decades, increasingly yielded adverse impacts on thetransport chain, the question is how government policies could be brought up to date with thischanging reality of liner shipping alliances. We formulate policy recommendations based on our
analysis of this question.

Competition policy frameworks
There is a long history of shipping-specific exemptions from competition law, in particular
related to “conferences”. Conferences can be considered as classic, closed cartels, in which liner
shipping companies can collaborate on all sorts of issues, most importantly fixing prices andregulating capacity. The first liner conference emerged in 1875 and since then many trade routes havewitnessed the formation of conferences. Such conferences were in many cases facilitated bygovernments, convinced that this would be necessary for the emergence of reliable services, stable
freight rates and a profitable shipping sector. The idea was that the shipping industry had specificcharacteristics that could give rise to market failure. Principal among these are high fixed costs andregularity of sailings (i.e. the need to follow the sailing schedule irrespective of whether a ship is full).
These factors would lead carriers to apply marginal cost pricing, which would lead to destructive
competition that would threaten sustainability of the sector in the long term (Haralambides, 2007). A
particular strand of literature sometimes used for justifying “conferences” was the “empty core”
theory, consisting of the argument that competition would result in instability and inefficiency if thecore of the market is empty, that is: a lack of unique cost allocation that satisfies all participants(Sjostrom, 1989). This perceived market failure was used to justify liner conferences. Conferenceswere authorised either via specific shipping laws or specific exemptions from generic competition
law. One particular form of such an exemption is a “block exemption”. This exempts the whole
sector from key competition law provisions, provided that certain criteria are met. For example, theEuropean Union had a block exemption for liner conferences in force from 1987 to 2006 (Council
Regulation 4056/86) that allowed liner shipping companies to set common freight rates, to take joint
decisions on the limitation of supply and to coordinate timetables.
The current treatment of shipping in competition law can be broadly divided into three categories
below. Table 6 provides a fuller list of countries that adopt each of these three approaches:
1.

2.
3.

Several countries have no sector-specific antitrust exemptions for shipping companies. In
these countries, agreements between shipping companies can be accepted as long as they arecompatible with the relevant antitrust rules, usually via the operation of an exemption regime.
In Turkey, for example, there is currently no block exemption covering maritime transport
services. Nevertheless, the Competition Authority is competent to grant individual
exemptions to agreements that lead to economic efficiencies with benefits that outweigh thecost of their anticompetitive effects.9
Other countries without shipping-specific antitrust exemptions include Chile, Brazil, South
Africa, Russia, Vietnam, Indonesia and China.10
Some countries have a block exemption for alliances. This group includes the European
Union, Hong Kong, New Zealand (from 2019 onwards) and Israel. Malaysia could also be
considered to be part of this group although its block exemption also extends to voluntary

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4.

discussion agreements that provide for the broad exchange of information and theestablishment of non-binding price guidelines.
Various countries have specific shipping legislation that allows for conferences. A prominent
example is Singapore where the exemption regime for liner shipping cooperation agreements,
including conferences, was extended in 2015 for another five years, until the end of 2021. In
Japan, the 1949 Marine Transportation Act exempts international ocean shipping from the1947 Antimonopoly Act. This exemption regime applies to conferences, discussionagreements and alliances and is motivated by the assumption that the Japanese shipping
sector would not be globally competitive without the exemption. In various Reviews, theJapanese competition authority argued for repealing the exemption, most recently in 2016
(Japan Fair Trade Commission, 2016). In both the United States and Canada, conferences are
not prohibited in the relevant legislation, but reforms, such as the Ocean Shipping ReformAct (OSRA) in the US, have resulted in the disappearance of most conferences on traderoutes touching United States and Canada.11
Table 6. Liner shipping and competition law in selected countries

Treatment in competition law
No shipping-specific exemptions
Block exemption for shipping alliances
Exemption for all agreements (including on prices)

Countries
China, Chile, Turkey, Brazil, South Africa, Russia,
Vietnam, Indonesia
EU, Hong Kong, New Zealand, Israel, Malaysia
US, Australia, Singapore, Japan, South Korea, Canada

Shipping-specific exemptions for liner conferences have largely disappeared over the last two
decades. Major reforms in this respect were the 1998 Ocean Shipping Reform Act (OSRA) in the
United States and the repeal of the EU Block Exemption for liner conferences in 2006. The OSRA
stipulated the right for shipping companies to enter into independent confidential service contracts,
which meant that the authority of liner conferences in keeping compliance with the agreed freightrates was significantly eroded. In the European Union, the block exemption for liner conferences(Council Regulation 4056/86) was repealed in 2006, following a 2002 OECD report that showed that
there was no justification for continuing to allow liner conferences (OECD, 2002).
In various jurisdictions, block exemptions for conferences have been replaced by block
exemptions for alliances. The rationale for these is not so much a perceived market failure (as was thecase for the block exemption for conferences) but a desire to facilitate alliances - as they would allow
for economies of scale - and to reduce administrative burdens for the industry (by avoiding the needfor case-by-case assessments). The model for this institutional arrangement is the EU Block
Exemption exclusively covering consortia and other types of operational cooperation agreements.
This consortia block exemption has been in force since 1995 – in parallel with the EU Block
Exemption for liner conferences – but gained more strategic importance for carriers after the block
exemption for conferences was repealed. This repeal resulted in a revision of the consortia block
exemption in ways that made it more favourable to liner shipping – as shown below in the section on
the EU Block Exemption Regulation. The regulatory framework adopted in the EU was used by otherjurisdictions as a benchmark when adopting block exemption regimes for shipping agreements. Thiswas particularly the case for the exemption regimes adopted in Israel and Hong Kong (OECD, 2012;
Hong Kong Competition Commission, 2017).
The most recent move to reduce the extent of competition exemptions for the shipping sector was
adopted in late 2017 in New Zealand. Shipping agreements will become fully subject to the general
antitrust rules in New Zealand in August 2019, with the exception of vessel sharing agreements,
which will continue to benefit from a block exemption regime.

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74 – IMPACT ON TRANSPORT SYSTEMSBlock exemptions for liner shipping alliances: the case of the EU
EU regulation provides for an exemption regime for certain categories of cooperationagreements, notably consortia agreements (EC, 2009a). The latter are defined as agreements whose
objective is to promote or establish cooperation in the joint operation of maritime transport services
between liner shipping companies, for the purpose of rationalising their operations by means oftechnical, operational or commercial arrangements. In the regulation, consortium agreements are
considered to contribute positively to the overall productivity and quality of maritime transport
services. Although the regulation is called consortia regulation, it also covers global alliances.
In practical terms, the regulation allows shipping companies to conclude cooperation agreements
for the joint operation of liner shipping services such as sharing of vessels or other shipping
equipment, and cooperation related to space and slots on vessels. The exemption gives room forcapacity adjustments due to market fluctuations and for joint operation or use of port terminals andservices, as well as the services connected to the infrastructure (Werner, 2016). The Regulation also
allows for the conclusion of agreements on ancillary activities. The block exemption does not coveragreements related to price fixing, capacity limitation (other than capacity adjustments in response totemporary fluctuations in supply and demand that are allowed) and market or customer allocation.
Nor does it cover exchange of any commercially sensitive information. Agreements on these items
would fall in the category of hardcore restrictions on competition and cannot be declared procompetitive in the EU. EU consortia regulation subjects exemption to two cumulative conditions: (i)the combined market share of all consortium members should not exceed 30% and (ii) there should bea right to withdraw from the agreement. The EU’s general guidelines on horizontal cooperation
between undertakings remain applicable in all cases not covered by the block exemption regulation
for consortia.
A block exemption could be considered as a categorical “free pass”: as long as the alliance has
certain characteristics, the block exemption provides the guarantee that cooperation in these alliancesis allowed. This is different from individual exemptions that require filing by the relevant companies
and approval from the relevant authorities. As such, block exemptions are – in theory - considered toprovide legal certainty, thus taking away transaction costs. E.g. the EU Block Exemption regulation
provides that liner shipping alliances with a market share below 30% and a withdrawal clause areautomatically deemed to meet four cumulative criteria of paragraph 3 of article 101 Treaty on the
Functioning of the European Union (TFEU) that make exemptions from antitrust law possible. Firstly,
it should contribute to improving the production or distribution of goods or to promoting technical or
economic progress. Secondly, it should also allow consumers a fair share of the resulting benefit.
Thirdly, the agreement should not impose on the undertakings concerned restrictions that are notindispensable. Finally, it should not allow the complete elimination of competition in respect to a
substantial part of the relevant market. Without block exemption regulation, shipping alliances might
still have been exempted from antitrust rules in the EU. Nevertheless, in that case companies would
have to conduct in-depth assessment for each of their agreements and there would be less certainty
that these are effectively immune from antitrust-related investigations.
The EU consortia block exemption has existed since 1995, but underwent considerable revisionin 2009.12 The revised consortia block exemption (Commission Regulation No.906/2009) came into
force the 26th April 2010, it applied until 25th April 2015, and was extended in 2014. The exemption
regime put in place by the extension will remain applicable until 25 th April 2020, unless extended by
the Commission. The 2009 regulation takes into account the repeal of the EU Block Exemption ofconferences, agreed to in 2006. In addition, it defines the relevant market share ceiling as 30% insteadof the 35% share for non-conference consortia in the earlier regulation. Apart from these elements, the2009 regulation provides considerably more leeway to consortia than the previous regulation, inparticular on the following elements (Table 7):
 Joint capacity adjustments. In the revised regulation, consortia have more freedom to makejoint capacity adjustments. In the 1995 regulation, joint capacity planning is only allowed in

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POLICY ASSESSMENT AND OPTIONS – 75

case of temporary capacity adjustments; in the 2009 regulation this has changed into “capacity
adjustments in response to fluctuations in supply and demand”, which potentially provides for amuch broader application. Moreover, the 1995 exemption regulation that prohibits consortia to
jointly arrange the non-utilisation of existing capacity no longer applies in the 2009 regulation.
It should be noted that these provisions give the room allowed for capacity adjustments which
do not constitute capacity limitation under “hardcore restrictions” of Article 4 of the TFEU.
However, the wording of Article 3 (2) on joint capacity adjustments in the current EU consortia
block exemption regulation has been qualified as “opaque” and “legally uncertain”, because of
unclarity on where the exemption of Article 3 (2) ends and where the prohibition of capacity
restrains in accordance with Article 4 (2) starts (Werner, 2016).
 Price discrimination. The 1995 regulation stipulates that consortia and consortia members
shall not cause detriment to ports, users or carriers by applying different rates and conditions
according to the country of origin or destination or port of loading or discharge, unless suchrates or conditions can be economically justified. Such a section is absent from the 2009
regulation.
 Obligation to consult transport users. The 1995 regulation stipulates that there be real andeffective consultations between transport users (or their representative organisations) and theconsortia, for the purpose of seeking solutions on all important matters concerning “conditions
and quality of scheduled maritime transport services offered by the consortium or its members”.
These consultations shall take place whenever requested by one of the parties. The regulation
sets out the procedure of these consultations and also gives the Commission the right to request
consortia members to demonstrate that conditions and obligations in the regulation are still met.
Such an obligation is absent from the 2009 regulation. According to EC (2008) suchconsultations did not take place as shippers contacted individual members of a consortium
directly.
 Possibility of withdrawal of the exemption. The 1995 regulation mentions the possibility ofwithdrawal of the block exemption in case of ineffective competition and insufficientconsultations with transport users. Such a possibility of withdrawal in individual cases of noncompliance is absent from the 2009 regulation, but is covered by other EU rules, in particular
Article. 29 of the EU Framework legislation related to competition law.13
Table 7. EU consortia block exemption regulation: 1995 and 2009 version
Characteristics
Applied:Maximum market share
Joint capacity planning allowedfor:
Other conditions forconsortia/liners

Obligations for consortia

1995 regulation
1995-201030% for consortia in conference
35% for non-conference consortia“temporary capacity adjustments”
Joint arrangements of non-utilisation ofexisting capacity are excluded
Not “cause detriment to certain ports, users or
carriers by applying to the carriage of thesame goods (…), rates and conditions which
differ according to country of origin or
destination or port of loading or discharge(…)”
To conduct real and effective consultations
between transport users (or theirrepresentatives) and consortia.

2009 regulation
2010-202030%“capacity adjustments in
response to fluctuations in supply
and demand”
No other conditions

No explicit obligations

Source: Author’s elaborations based on EC (1995, 2000, 2005, 2009, 2014)

Block exemptions in other countries are similar to the EU consortia block exemption, with someminor differences. In the Hong Kong regulation, in place for 2017-21, the combined market share
shall not exceed 40%, whereas 30% is applicable in the EU. In the New Zealand scheme, that will
become operational in 2019, only the offshore activities of liner shipping companies are covered by
the block exemption.

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76 – IMPACT ON TRANSPORT SYSTEMSBlock exemptions of alliances: are these still justified?
A key question is whether block exemptions of liner shipping alliances are still justified. In atleast two cases – the EU and Hong Kong – the block exemption could be considered as a transitional
measure that facilitates the removal of exemptions for conferences, rather than necessarily
constituting new permanent features of the regulatory regime. These two block exemptions include asunset clause that makes it possible to reassess the usefulness of the exemption. For example, theEuropean Commission will start a public consultation in 2018 on whether the consortia block
exemption regulation should be extended after April 2020. Such extensions have occurred in the past:
the 2014 extension was granted on the basis that the original justification for the block exemption was
still valid and that the conditions on which that 2009 regulation was based had not substantiallychanged. Considering the substantial changes in the alliance system that have occurred since thattime, the evidence of the adverse impacts of alliances on the transport system and the considerable
changes in the container shipping industry, illustrated in earlier chapters, the continued validity ofthese arguments can be questioned.
Block exemptions for alliances require certain crucial conditions to justify them. Within theEuropean Union (EU) as well as other jurisdictions such as Hong Kong and Turkey, cooperationagreements amongst competitors can be exempt from the relevant antitrust rules when they provide
for sufficient efficiency gains. The specific EU requirements were cited above. Similar provisions
apply in Hong Kong.
The four conditions that justify a block exemption in the EU have been extensively discussed in
Chapter 2, which concludes that there is no convincing evidence that these four cumulative conditions
are still met. Although alliances were initially a key enabler of economies of scale, consolidation in
the industry suggests that this is no longer a major factor. Thus, the size of any efficiency gains has
become questionable while, at the same time, the exemptions have facilitated a business model –based on ever larger ships – that has yielded offsetting efficiency costs, by enabling overcapacity,
reducing the number of destinations and limiting actual and potential service differentiation. Thus,
while the official freight rates have halved over the last two decades, suggesting significant efficiency
gains, other price increases, which include various surcharges by carriers, such as for demurrage anddetention, have partly offset these gains. The deterioration of service quality, encompassed in lower
frequencies, less direct port connections and lack of service differentiation, has yielded further costs.
The increased bargaining power of carriers in alliances has put pressure on rates for ports andport service providers. Moreover, the evolution of the alliances has resulted in a model where theterminal or service operators that manage to get the alliance calls are frequently overutilised, whileothers that do not get these calls are underutilised. Alliances have also been accompanied by vertical
integration of carriers with terminals: Chapter 2 showed that the market share of carriers in global
terminal operations increased from 18% in 2001 to 38% in 2017. Such vertical integration could
increase risks to supply chain resilience: for example, the NotPetya cyber-attack affected not only the
carrier’s ship movements but also its terminal operations in a wide variety of ports (Box 7).
Many of the negative impacts of alliances have emerged since the 2009 revision of the EU
consortia block exemption regulation, which provided carriers with fewer restrictions than theprevious consortia block exemptions. As a result, the block exemption enabled carriers to order megaships in the reasonable expectation that their alliance members would also contribute to the efficient
capacity utilisation of such mega ships and achieve a reasonable return on their investment. In
addition, carriers were allowed to engage in mega-ship orders without consulting transport users on
the consequences, play off ports against each other and do so knowing that the exemption would not
be withdrawn until at least 2020. It is likely that several of the negative developments in the industry
described in Chapters 2 and 3, such as declining returns on public port investments and reductions inservice frequencies and numbers of port calls, would have been less severe if, instead of the 2009
regulation, the previous consortia block exemption had remained in place.

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POLICY ASSESSMENT AND OPTIONS – 77

One of the arguments used in favour of a block exemption regulation is that it provides greater
legal certainty for carriers engaging in alliances, and possibly lowers compliance costs for business.
However, these compliance costs might actually be fairly limited in practice. Moreover, the shipping
sector would not be confronted with a legal vacuum if consortia block exemptions were repealed (Box16).

Box 16. Legal certainty and block exemptions
The liner shipping industry fears that repealing the block exemption will introduce legal uncertainty, resulting
in higher compliance costs. The block exemption provides the liner industry with more certainty on what
collaborative practices are allowed and repealing the exemption would reduce some of this certainty (WSC et al.,2018). Repeal of the block exemption would mean that carriers engaging in collaboration would need to conduct a
self-assessment on how their collaboration fits in with generic competition law. Depending on country and legal
system, carriers could submit notification or seek clearance from the regulator for the collaboration proposed. In theEU, repeal of the block exemption would mean that carriers would need to self-assess their alliance agreements
under the Commission’s Horizontal Guidelines (Guidelines on the applicability of Article 101 of the Treaty on the
Functioning of the European Union to horizontal co-operation agreements).
It is sometimes argued that other transport stakeholders might also feel more secure in a regulatoryenvironment in which the possibilities of market abuse are specifically constrained, like in a block exemption.
Many shippers, ports, terminal operators or other stakeholders perceive themselves to be in an unfavourable
position to complain about treatment by carriers, considering their market power: carriers have huge leverage overthese actors via their decisions where to call and which cargo to accept. A regular review of a block exemption
could – at least in theory – correct abuse of market power via intervention of representative organisations in
consultation processes, whereas individual firms would be very reluctant to file a complaint in individual cases.
However, the increase in compliance costs might be fairly marginal. A regulatory impact statement of newcompetition regulation of international shipping in New Zealand estimated that the increase of compliance costs incase of a full repeal of block exemptions for liner shipping would be in the order of NZD 1-4 million, based on 30
known agreements between liner companies that relate to New Zealand. In the case of larger markets, such as theEU, there might be more agreements, so the compliance costs might be higher, but this might also incentivise
carriers to streamline their various agreements into fewer but more comprehensive agreements.
If higher compliance costs resulted in fewer or less dominant alliances, this might actually be desirable fromthe perspective of maritime logistics chain performance. Since the EU consortia block exemption regulation
amendment in 2009 regulation brought little benefit to transport users, one question whether the sanction of notextending the exemption is an effective incentive for improving performance of the maritime logistics chain. Itshould also be noted that some alliances are already in a position where they are supposed to conduct selfassessments. The EU Block Exemption applies to alliances that remain below the relevant market share of 30%;
alliances need to conduct self-assessments in case they exceed this ceiling. Both 2M and Ocean Alliance exceedthat threshold for certain relevant markets, so could already be expected to conduct self-assessments.
Moreover, repeal of the consortia block exemption does not create a legal vacuum. In the case of the EU, there
are guidelines on horizontal co-operation agreements (the Horizontal Guidelines). Industry associations haveindicated that these Horizontal Guidelines might not be perfectly applicable to the liner-shipping sector (WSC et al.
2018). Within that context, the Commission could consider providing temporary guidelines for the application of
the Horizontal Guidelines to liner shipping, similar to the temporary guidelines put in place after the repeal of theblock exemption for liner conferences. Such Guidelines could focus on the need for alliances to ensure the transfer
of a fair share of the benefits from their operations to the consumers and downstream supply chain operators inaccordance with the requirements of Article 101 (3) TFEU and thus satisfactorily deal with the concerns identified
in the previous chapters.

Applying the generic antitrust rules could result in lower risks of anti-competitive conduct andhigher probabilities of customers getting a fair share of any cost savings arising from alliances. Even
without sector-specific rules, shipping companies can still have collaboration arrangements. However,these would be placed under greater scrutiny with regard to their effects on competition, productivity

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78 – IMPACT ON TRANSPORT SYSTEMS
and consumer welfare. For this reason the New Zealand Ministry of Business, Innovation and
Employment considered applying full application of generic antitrust rules a more effective policy
than a targeted block exemption for alliances (Box 17).

Box 17. The case of New Zealand
The New Zealand government reformed its competition treatment of the shipping sector in 2017. During thedevelopment of the new legal regime, several options were considered, most notably the full application of thegeneral antitrust law and the introduction of a targeted block exemption for operational collaborations. The initialtext of the relevant Bill provided for the full applicability of the generic antitrust rules to maritime transport
services, on the recommendation of the Ministry of Business, Innovation and Employment. The rationale for this
proposed change was that the full application of antitrust rules would increase the scrutiny over agreements
between shipping companies. It was assumed that more agreements would have to be reviewed by the CommerceCommission under the formal authorisation procedure, which would ensure that only those agreements that yielded
genuine pro-competitive effects would be implemented. The Ministry believed that this would help to ensure that
customers also benefited from the efficiencies generated by collaboration. Conversely, it was not expected that thefull removal of the antitrust immunity would substantially hinder cooperation between shipping companies. For
these reasons, the Ministry of Business, Innovation and Employment recommended full application of the general
antitrust law.
This proposal was amended after concerns were expressed by shipping companies and shippers. Their mainconcerns included the supposed administrative costs of filing for authorisation at the Commerce Commission andcompliance costs that were expected to be higher without a specific exemption specifying the types of collaborative
activities that would be allowed. While the government did amend the original proposal to take account of theseconcerns, it nevertheless indicated an expectation that a result would be a reduction in the incentives for shipping
companies to pass on the cost-savings achieved to customers. |It also considered that some of the exempted
agreements might have anti-competitive effects, due to specific circumstances of the relevant market, so that theblock exemption could negatively affect the potential for ensuring competitive markets and enhanced productivity.
In light of these concerns, the government chose to retain limited antitrust immunity for shipping companies for
only a brief period, which will end on 17 August 2019. After that time the generic antitrust rules will apply to all
activities in the shipping sector, with the exception of operational and vessel sharing agreements, which willcontinue to be subject to a block exemption.

Given the widespread phasing out of block exemptions for other sectors internationally, there
must be a strong presumption in favour of adopting a similar approach in relation to liner shipping. In
the EU, in contrast to shipping alliances, airline alliances are subject to generic antitrust rules, and thisdoes not seem to impede their creation and effective implementation (Box 18). In a letter to the New
Zealand Productivity Commission, the European Commission argued that the liner industry does notdiffer from other transport industries with high fixed costs and fixed schedules. The European
Commission’s guidelines in application of Article 101 TFEU to the tramp shipping sector have beensuperseded by general, non-specific guidelines as of 26 September 2013 (Werner, 2016). Given the
EC’s recent decision not to extend the block exemption for the insurance sector, liner shipping is the
only sector in Europe that still has a block exemption. In addition to being consistent with the general
direction of change in EU competition law, repealing sector-specific exemptions is in line with OECD
recommendations to restrict exemptions from competition as much as possible, e.g. as expressed in
the OECD Council Recommendation on Competition Policy and Exempted or Regulated Sectors(OECD, 1979).
Over the last decades, the EU has acted to remove the sectoral exemption from competition
policy long enjoyed by liner conferences, but the remaining block exemptions for alliances haveenabled a rapid evolution of these arrangements and the industry has, as a result, recently reached aposition of high concentration when assessed on key measures. One could wonder if there are still
welfare benefits from maintaining block exemptions.

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Box 18. Regulatory framework applicable to airline alliances
In a report on competition policy in liner shipping, the OECD questioned the existence of specificities in themaritime transport sector that require special treatment under competition law (OECD, 2002). Several transportindustries have similar cost structures and returns on investment to those in maritime shipping. Airlines also operatewith high fixed costs and fixed schedules. Air carriers often enter into cooperative arrangements that are very
similar to those in the maritime transport sector. In fact, alliances of international airlines are particularly common,
especially in the international transport. Cooperation among members of the three biggest airline alliances, Star
Alliance, SkyTeam, and Oneworld, ranges from sharing sales offices, maintenance and operations facilities to codesharing agreements. Countries regulate airline alliances in different ways. The OECD (2014b) distinguishes
between an immunity regime, merger control, and cartel enforcement. The United States has an immunity regime inplace to assess potential code-sharing agreements. The Office of International Aviation of the Department ofTransportation (DoT) is responsible for processing all airline applications for antitrust immunity. The DoTdetermines whether granting such immunity could substantially reduce or eliminate competition. If this could
indeed be the case, then the DoT determines whether there could be sufficient public benefit of granting immunity.
If that is the case, the DoT has the authority to exempt the airlines in the proposed agreement from antitrust law.
In the EU, some agreements between airlines were subject to a block exemption regulation 14 until 2007. These
are no longer in force. In 2009, the Council of the European Union adopted a regulation that empowers theEuropean Commission to adopt exemption regimes for air carriers in respect of, amongst other things, agreements
on joint capacity planning and consultation on tariffs (EC, 2009b). As the Commission has so far not adopted suchblock exemption regulation, the air transport sector is currently fully subject to the generic antitrust rules. In
practical terms, air carriers can establish alliances without notification to the Commission unless they constitute a
concentration and therefore fall within EU merger control rules (EC, 2004). If an airline alliance has the potential toinfringe EU antitrust rules, the Commission might open an ex officio investigation regarding the agreement andeventually impose fines or accept commitments from the concerned undertakings. 15

Co-existence of different regulatory regimes
As noted above, there is a wide range of regulatory regimes for competition in international
shipping. These approaches range from no shipping-specific exemptions on one end of the scale tospecific exemptions for shipping conferences at the other. Despite this divergence in approaches, it isclear that repeal of the EU consortia block exemption would be in line with a growing trend incountries to limit special treatment of shipping.
There is a risk that the current regulatory heterogeneity will leave the door open to collusion.
Braakman (2017) has suggested that there might be “hub-and-spoke cartels” in the container shipping
industry, defined as the exchange of strategically sensitive information between competitors through athird party that facilitates the cartelistic behaviour of the competitors involved. An example of such a
hub could be Singapore, where carriers are allowed to cooperate on prices. The idea is that exchangeof strategically sensitive information on the intra-Asia leg of a voyage could aim to align the market
conduct of lines with regards to the contingents of cargo that remain on board and are destined forports in Europe. Such a hub-and-spoke-cartel might be facilitated by the Shanghai Shipping Exchangethat on a weekly basis publishes the freight rates and surcharges in which the rates and surcharges forthe intra-Asia trade are incorporated and that could have the effect of policing the agreed rates andsurcharges.
Competition law in various countries has extra-territorial application, but one could wonder if
this currently is enforced. Extra-territorial application means that anti-competitive conduct directed atforeign markets – e.g. markets outside the EU - may come within the jurisdiction of the European
Commission, even when the conduct would be permitted under the foreign jurisdictions. What isrelevant is the effect of that conduct on other undertakings inside the EU; not the location of that
conduct (Braakman, 2014). The EU leaves it to firms to conduct a self-assessment of theextraterritorial application of its competition laws, but has not formulated specific guidelines for thisTHE IMPACT OF ALLIANCES IN CONTAINER SHIPPING — © OECD/ITF 2018

80 – IMPACT ON TRANSPORT SYSTEMS
self-assessment. Considering the global nature of the liner shipping sector and the heterogeneity ofcompetition regimes for shipping, one wonders how shipping companies could carry out such a selfassessment. The sector would be provided with more legal certainty if such specific guidance were
provided.
The main relevant competition authorities have initiated coordination of their activities thatmight help to address these issues. Regulators from the EU, United States and China have met several
times since 2013, spurred by their divergent approaches to the proposed P3 alliance, to discuss market
developments and competition law. Such coordination has become increasingly important withconsolidation and market concentration, and might benefit from the participation of regulators fromother major maritime countries such as Singapore.

Asymmetry of treatment of shipping and ports
One of the main concerns regarding strategic alliances in liner shipping is the bargaining power
the members collectively acquire vis-à-vis ports. This leverage over ports makes it possible foralliances to pressure ports to decrease rates or invest in infrastructure provided free at the point of use.
This dynamic seems to explain, at least in part, the observed pressures on returns on investment inports and related services, such as terminal operations and towage (see Drewry, 2017).
The asymmetry between liner shipping and container ports is increased by public policies thatprovide specific competition treatment for the shipping sector, but not for the port sector. Thisasymmetry goes beyond the different treatment of liner shipping and ports in competition law in many
countries, and extends to the domain of subsidies, taxation, labour requirements and social security
contributions, where liner shipping is often exempted, but not the ports sector. Key examples are:








Subsidies; liner shipping benefits from a variety of subsidies (such as for shipbuilding,short sea shipping, green shipping) that considerably lower their costs and increase their
net profitability. In some cases ports are also subsidised, but the effects of these aremostly beneficial to shipping companies as it decreases their costs.
Favourable tax treatment; shipping companies in many countries are exempted frompaying corporate taxes, but instead pay tonnage taxes, which are tax schemes linked tothe company’s fleet capacity and always considerably more favourable for shipping
firms than a regular corporate tax would have been. Ports are exempted from taxes only
if they form part of public administrations, which is less and less the case. Terminal
operators are generally not exempt from any tax.
Labour requirements; shipping companies employ a large share of foreign labour and are
generally not bound by national labour legislation, as a large share of their ships fly theflags of open registries (flags of convenience). Domestic ship registries frequently haverequirements to employ domestic seafarers, but these required shares are usually limited.
Ports and terminals use local labour and are constrained by the relevant local andnational labour regulations.
Social security contributions; various countries exempt their shipping companies fromthe payment of social security contributions, so that they can be more competitive. Ports
and terminals are not exempted from such social contributions.

Moving toward more equal treatment of the two sectors in these policy dimensions would be one
way to tackle the asymmetric power relationship between liner shipping and ports.
Another way to re-balance the relationship between carriers and ports would be increased
cooperation between ports. In order to cope with simultaneous overutilisation of one terminal andunderutilisation of another terminal commonly caused by alliances exercising a preference to locate
all their port visits at a single terminal, more cooperation between terminals could be enabled bygovernments. The section below describes potential means of cooperation and the way regulation
constrains or facilitates this.
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POLICY ASSESSMENT AND OPTIONS – 81

Coordination between ports
Collaboration between ports can be seen as a direct and necessary response to the increased
operational cooperation between shipping companies. Port cooperation could, similar to cooperation
between shipping companies, theoretically range from cooperation on technical and operational issues
to coordination of capacity and prices. In various other parts of the world, strong cooperation between
major ports is emerging. For example, in the United States the ports of Seattle and Tacoma formed
strategic alliances aimed at intense operational cooperation and joint planning of port capacity, inreaction to shipping alliances (Box 19). In addition to achieving efficiencies, cooperation between
ports could allow for economies of scope as they might be operating on different markets withdifferent customers and it could also galvanise inter-port competition. For example, the recently
formed alliance between the ports of Savannah and Norfolk could strengthen the position of the two
ports vis-à-vis the port of New York and New Jersey, currently the largest port in the United States
East Coast in terms of container traffic. In other words, strategic alliances with rival ports can help
ports to guarantee market share and profit. Cooperating rather than competing with nearby regional
ports can also have advantages, as port capacity can be constrained by geography and neighbouringports could serve as overflow modes (Asgari et al., 2013).
Alliances between ports are relatively rare, but emerging. Most of the cooperation between ports
does not go beyond the exchange of good practices or joint marketing. In Europe, the dominant idea –also pushed by successive EU port package proposals – seems to be a concern about perceived lack ofcompetition in and between ports, rather than a lack of coordination and cooperation between ports.
This focus on port competition coupled with over-investment in terminal capacity, in combination
with carrier concentration and alliances, has resulted in considerable waste of public spending inEuropean ports (ECA, 2016).

Box 19. The Northwest Seaport Alliance
In 2015, the ports of Seattle and Tacoma (Washington, U.S.) formed the Northwest Seaport Alliancestrategic partnership agreement, the first of its type in the U.S., the Alliance enables the two ports to cooperate in
the management of their marine cargo terminals, especially with regard to investments, operations, planning andmarketing. This cooperation is facilitated through the creation of a common Port Development Authority that
effectively allows operating certain marine facilities jointly, mostly related to handling containers and breakbulk
cargo. The creation of the Alliance was presented as direct response to the changes in the shipping industry (Portof Tacoma, 2015). There is an increased competition from expanding ports to improve efficiencies and lower
costs. Moreover, the consolidation in shipping lines, through mergers and alliances, leads to fewer port calls,
thereby increasing the competitive pressure. The two ports also emphasised the need for strategic coordination incapacity-related investments, particularly in response to the greater use of ever larger vessels. In thesecircumstances, the Alliance is seen as a means to expand handling capabilities and protect market share while
adopting a sustainable financial business model. In August 2016, the Alliance issued an open letter disclosing themain achievements for the first year of cooperation between the two ports (NW Seaport Alliance, 2016). The
letter brought attention to the recovery of cargo volumes and the first planned joint investment for handling verylarge vessels. One year after launching the Alliance, the overall growth of cargo volume was 2.4%; full imports
increased by 6% and full exports by 13%. The increase of cargo volume continued throughout 2017 with a rise of
4.1%. While this increase in cargo volume can partly be explained by the overall burgeoning United States
economy, it also shows the improved capability of the Alliance in maintaining and attracting customers.

Mergers between ports do not take place very often either. Whereas smaller ports have over time
more easily integrated in larger ports, the last decade has also seen mergers of large ports, e.g. invarious Australian ports, in China (Ningbo-Zhushan) and in Japan, where the Keihin port was createdas a result of the amalgamation of the ports of Yokohama, Tokyo and Kawasaki. This trend reflects
the fact that larger than ever ships and the greatly increased bargaining power of carrier alliances have
posed challenges to ports in terms of critical size needed in order to accommodate mega-ship calls,
which includes ensuring adequate hinterland transport infrastructure is present. There is also an
increasingly clear imperative to avoid duplication in building up port and hinterland infrastructure.

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82 – IMPACT ON TRANSPORT SYSTEMS
Mergers could help to build critical size and avoid duplication in port and hinterland infrastructure.
Port mergers are often stimulated by national governments, which directly bear a large part of thecosts of duplicating infrastructures in many cases, as they are frequently called upon to fund thenecessary infrastructure investment. A recent example of port mergers stimulated by a national
government is Italy (Box 20). Port mergers could provide a way for national governments toconcentrate their port and hinterland infrastructure investments in fewer ports.

Box 20. Port reform in Italy: In search of economies of scale
In August 2016, the Italian cabinet gave the green light to the “Ports Decree” establishing the “reorganisation,
rationalisation and simplification of Port Authorities”. This decree includes mainly the abolition of local port
authorities, creating Port System Authorities (PSAs) based in Italian “core” ports as set out by the EU TEN-T
policy, grouping together 57 ports of national importance. See Annex 4 for the 15 new PSAs and the ports they
cover.
The decree also foresees administrative reorganisation and bureaucratic simplification. For example, therespective authorities’ presidents are no longer appointed in consultation between local municipalities andChambers of Commerce, and with the opinion of the regional authorities, but are now chosen directly by the Italian
Ministry of Infrastructure and Transport in agreement with the President or the Presidents of the affected Regions.
Each PSA is now also fitted with a national coordination board in order to guarantee that local decisions are
consistent with the national ports strategy.
The background of this reform were inefficiencies and fragmentation of the Italian port system, redundancies
and function overlap, a lack of overarching strategic planning, neglected land-side development, instability andfrequent conflicts of interest in local port governance, and a fierce climate of competition between Italian ports,
broadly resulting in a waste of resources, as highlighted in a 2015 ITF discussion paper (Ferrari et al., 2015).
Further, the average size of Italian port authorities – mainly in comparison with other European competitors – did
not seem fit to attract major investments or to exploit potential economies of scale. With the increase of average
ship size and higher volumes per call, terminal size became crucial in order to be able to compete internationally.
Other shifts, such as vertical and horizontal integration, as well as new North African competitors also exposed
Italian ports to a variety of new challenges that were difficult to meet in a context of institutional rigidity and slow
decision-making. In addition, the centralised financial resources allocation process did not reward efficiency andmade port projects less attractive for private investors.
Overall, the Italian port reform has helped to decrease the fragmentation of the Italian port system, increasing
the focus on links with hinterland and dry ports (interporti), especially rail connections (see Box 22), and has been
implemented with a view to award efficient projects instead of dividing the budget country-wide among all
authorities. As such, the reform also provided for a better integration of Italian ports within the European TEN-T
network. Nevertheless, some doubts remain regarding the long-term effectiveness of the reform. While the reform
aimed at avoiding problematic inter-port competition, some ports that compete within a close geographical spacehave not been integrated into a single PSA, e.g. the ports of Ravenna, Venice and Trieste.
Source: Ferrari et al. (2015); Italian Ministry of Infrastructures and Transport (2018).

Cooperation between terminals
Cooperation between adjacent terminals could both help increase the utilisation of port assets andreduce waiting time for shipping companies, thus benefiting both parties. Alliances have increased thephenomenon of peaks and troughs in terminals: they bring call sizes to terminals that need large
amounts of equipment, and labour and space that is not needed at many other moments in the week.
As these peaks occur rarely at the same time among different terminals in a port, terminals might
benefit from asset sharing arrangements, in which terminals could use equipment, labour and spacefrom an adjacent terminal when they are confronted with peak loads. Such cooperation could
particularly make sense for adjacent terminals and could be achieved by “taking away the fence”
between the two terminals, which could allow for sharing of berth space, when needed. Someterminals already apply such cooperation on equipment, but there are still large potential savings to be
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POLICY ASSESSMENT AND OPTIONS – 83

made. Simulation for the Hong Kong port shows that collaboration and facility sharing among
terminal operators could reduce inter-terminal transfers – necessary because of alliances - by 49%,
bring down waiting times and reduce negative environmental impacts (Wong et al., 2018).
Cooperation could also make sense for terminals that are not located immediately next to eachother. Sharing equipment for peak loads is not an ideal option as the costs to move equipment could
outweigh cost savings. These terminals could still cooperate on back-up space, labour and overflow
functions. Many countries have a labour pool system that makes it possible to share dock labour
forces according to needs in terminals. Terminals could also have overflow functions for each other incase of peak loads from alliances and mega-ships.
Mega-ships and alliances might make it necessary to merge certain port terminals. Ever larger
ships require larger terminals, with quay lines that are long enough and have a big enough yard space.
Various ports have a large number of carrier-dominated terminals. With intensification of alliances,these ports have multiple terminals served by the same alliance, which leads to many unproductive
inter-terminal moves. In such cases, it could make sense to merge terminals or start discussions on
coordination of terminal activities, as currently initiated by the port authority of Los Angeles, who
considers that it has the convening power to bring together its terminal to explore collaboration
between the terminals in the port.
At the macro-level, there also seems to be increasing collaboration between terminal operators. A
growing amount of container terminals are operated as a joint venture between different actors, often
between terminal operators, between terminal operators and carriers, or other combinations.
OECD/ITF (2015), shows that the largest number of joint venture terminals are between Cosco andHutchison, and between APMT and Bolloré. Such joint ventures might create trust and goodwill for abroader cooperation. It should be noted that PSA has participation in Hutchison and that Terminal
Link is a terminal joint venture of CMA CGM and China Merchants Holdings.
Antitrust regulation remains essential to competitive markets in container terminal services but
competition policy towards terminal ownership and collaboration needs to keep abreast of thegeographic scale of port hinterlands as they grow with increasing ship size.
Regulations of alliances of ports and terminals
Some countries, such as the US, allow wide-ranging port and terminal cooperation, including on
capacity and pricing. Marine terminal operators in the United States can benefit from sector-specificantitrust exemptions similar to those for shipping companies after filing their agreement with theFederal Maritime Commission (FMC). The Shipping Act of 1984 allows marine terminal operators(MTOs) to enter into an agreement for discussing, fixing or regulating rates or other conditions ofservice. Nevertheless, concerted actions between MTOs such as discrimination in the provision ofterminal services to shipping companies are prohibited. The FMC remains competent to challenge
each port’s agreement, even if it is already in effect, if it results in unreasonable reduction intransportation service or an unreasonable increase in transportation cost. Moreover, all amendments toexisting agreements require refiling with the FMC. Currently, there are twelve agreements between
MTOs providing for rate fixing that are filed with the FMC. The geographical scope of theagreements varies from terminals located in a single port - for example, the New York Terminal
Conference (NYTC) Agreement - to all ports within one or several federated states, for example, theWest Coast MTO Agreement. Most of the agreements explicitly provide for an indefinite effective
period. The most recent agreement allowing rate fixing is the Tacoma Marine Terminal Operator
Conference Agreement between Washington United Terminals and Husky Terminal and Stevedoring.
Such antitrust exemptions for ports and terminals do not exist in the EU.
Cooperation between terminals in some countries is complicated by regulations aimed atpromoting competition between terminal operators. In Chile, if a consortium owns more than 15% of
a port terminal, the group or its branches are not allowed to own directly or indirectly more than 15%

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84 – IMPACT ON TRANSPORT SYSTEMSof another concessionaire of a terminal in a public port of the same region. This also applies to abusiness group owning more than 15% of the shares of a private port. If these conditions are notrespected, port authorities have the power to end a concession (OECD/ITF, 2016a). Some countries or
ports prohibit incumbent operators from bidding from new concessions in the port, sometimes even in
a competitor port. For example, the port of Sydney barred the incumbent operators Patrick Stevedores
and DP World from bidding for the third container terminal. In Chile, the concession frameworkprohibited the incumbent container terminal in Valparaiso, a joint venture led by the Chilean port
operator Ultramar, to bid for the second container in Valparaiso and in San Antonio, considered
competitor port to Valparaiso. Ongoing practice of many large ports in the EU appears to befavourable towards new operators during bidding procedures for new terminals.
Regulation of vertical integration
Vertical integration is generally subject to merger control rules. In general, the acquisition ofcontrolling stakes in other parts of the transport chain should thus be notified to the competent
National Competition Authority (NCA), which will evaluate whether there are any possible antitrust
concerns with the transaction (Box 21). In addition to this ex-ante control of vertical integration,
NCAs can also intervene ex-post if abusive conduct occurs. For example, in the EU, companies with adominant position cannot, without justification, refuse access to infrastructure essential for operating
in a given market. In such a case, NCAs can oblige the company to grant access to the facility(Braakman, 2015a). Finally, NCAs can intervene in the port privatisation process and recommend theexclusion of vertical integration strategies. This was the case during the privatisation of the Ports ofIzmir and Mersin when the Turkish Competition Authority recommended successfully that theoperating rights should not be transferred to liner transport services companies (OECD, 2011). Somecountries have specific regulations to limit vertical integration in ports. For example, Chile’s 1997
Port Law stipulates that port users cannot own more than 40% of the shares in the corresponding
concessionaire (OECD/ITF, 2016). Some countries have mechanisms for screening foreign
investments in ports, which might hinder the acquisition of controlling stakes by foreign shipping
companies in domestic ports (Box 22).

Box 21. Merger control rules in case of carrier acquisition of terminals; two recent examples
One recent example is the acquisition of sole control by Cosco Group in the Port of Piraeus. In 2016, theHellenic Competition Commission (HCC) cleared the transaction subject to two conditions: the withdrawal of
exclusivity terms in the provision of port services, and the freezing of some ports tariffs until 31.12.2017. It isnoteworthy that the HCC did not express concerns about the vertical integration. It was emphasized that risks ofrestricted access to ports services were mitigated by the low importance of stevedoring costs in the overall shipping
costs and the volatility in cooperation arrangements in the sector (Kyriakides Georgopoulos, 2017). More recently,
the acquisition of controlling shares by Cosco in the Noatum Ports in Spain was cleared without conditions by the
Spanish Competition Authority (CNMC, 2017).

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POLICY ASSESSMENT AND OPTIONS – 85

Box 22. Cosco and the Orient Overseas Container Line terminal in Long Beach
The merger of Cosco and Orient Overseas Container Line (OOCL) is subject to regulatory approval fromcompetition authorities in various countries. The merger has also undergone a review by the Committee on Foreign
Investment in the United States (CFIUS), an inter-agency committee of the United States Government that reviews
the national security implications of foreign investments in United States companies or operations. In a context oftense relations with China, CFIUS has recently blocked take-overs such as the sale of MoneyGram International
Inc.to the Chinese Ant Financial Services Group. The take-over of OOCL would make Cosco the second-biggest
mover of United States imports with an 11.8% market share. In July 2018, CFIUS stated that there were no“unresolved national security issues” with regards to Cosco’s plan to take over the Hong Kong-based carrier, under
the condition that the parties were to sell off the container terminal in Long Beach. Cosco and OOCL reached anational security agreement with the United States Department of Homeland Security and Justice to sell all entities
that directly or indirectly operate the Long Beach Container Terminal business to an unrelated third party. Pending
the sale, the ownership of LBCT is to be transferred to a United States trust, under which OOCL is the beneficiaryand of which the principal trustee will not be a shareholder of OOCL (Baker, 2018c).

Ports policies
Although not all countries have explicit port policies, governments generally make either implicit
or explicit policy choices that determine how the national ports system is adapted to developments inshipping and trade. Containerised maritime trade has been characterised over the last decades by acontinuous quest for economies of scale that has translated into ever larger ships, industry
consolidation and alliances. Many countries are attempting to find appropriate adaptations to thesedevelopments, acknowledging the desire of national industries for well-functioning maritime logistics
chains and the need for efficient public spending. These policy responses often focus on three related
issues: which ports have priority (port hierarchies), which port does what (port specialisation) andwhich port is connected to which hinterland (hinterland connectivity).
Port hierarchies
A considerable number of countries have defined an explicit national port hierarchy. Such ahierarchy identifies ports of national importance or strategic interest and other categories of ports thatare not considered of national importance. These latter ports could be of regional significance or
secondary ports. OECD/ITF (2017) identifies such explicit port hierarchies in at least elevencountries, including Canada, France, Greece, India, Indonesia, Ireland, Italy, South Korea, Poland,
Portugal and Spain. Other countries have not translated a port hierarchy into legislation, but still givepriority to certain ports, e.g. the Dutch “mainport”-policy that has favoured the port of Rotterdam. At
the EU level, a ports hierarchy is provided via the classification of ports as either “core ports” or“comprehensive ports”, as defined in the TEN-T networks.
Such port hierarchy policies can help to set priorities for public infrastructure investment.
However, port hierarchies need to be sufficiently selective if they are to be effective. The number ofports of national importance is generally associated with population numbers, the concentration ordispersion of population, geography and the length of a coastline. For example, Poland with its fairly
limited coastline has only three ports of national importance, whereas the archipelago state ofIndonesia counts 25 strategic ports. In addition, there is also a regional political dimension, as ports
are often perceived as infrastructure that can help achieve inter-regional equity. However, if the groupof “strategic” ports becomes too large, there is a risk of fragmentation of the ports system andinefficient public infrastructure spending.
Countries frequently decentralise the management of the ports that are not considered to be ofnational importance. France enacted a port reform in 2008 in which a number of ports weredecentralised to regions that could chose to take on the responsibility as port authority or shared it

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86 – IMPACT ON TRANSPORT SYSTEMS
with other local governments in mixed governance structures. In Canada, a port decentralisation
reform that started in the 1990s resulted in the transfer of 65 ports to other federal departments, 40
ports to provincial governments, 123 ports to local interests and 239 de-proclaimed as public harbours
or demolished (OECD/ITF, 2017).
The combination of alliances, mega-ships and consolidation requires more selective port
hierarchies. The higher call sizes – facilitated by alliances and larger ships – can only be
accommodated in larger ports that are especially equipped for the largest ships. The substantiallylarger investment requirements of these ports can necessarily be accommodated at relatively fewer
ports.
Port specialisation
Different ships are associated with different forms of cargo handling. For example, container
ships are mostly handled using specific container gantry cranes and yard equipment that cannot be
used for other cargo handling operations. Similarly, there are specialised terminals for liquid bulk, drybulk and cars. Some of the world’s largest ports contain all these specialised terminals. However, inorder to avoid duplication of infrastructure, most countries adopt a degree of port specialisation: ports
build up specialised infrastructure, equipment and expertise in a particular cargo type and leave othercargo types that would require different infrastructure to other ports. Not all ports can be container
ports and only a few can be container ports equipped to handle mega container ships.
Some countries have explicit port specialisation policies. For example, South Korea identifies theports that are supposed to handle certain cargo categories. This has allowed Busan to become a prime
global container hub port. Other countries, e.g. South Africa, have policies that attempt to direct cargo
to specific ports in their system, sometimes even via decisions on port tariffs. Governments can also
adopt implicit port specialisation policies via their infrastructure investments. For example, public
investments in infrastructure connecting North Brazil with the grain producing regions in the centre of
the country can be considered indirect policies to shift these cargo types to the north, away from theports that traditionally handled these goods, such as Santos, Rio de Janeiro and Paranagua(OECD/ITF, 2017).
Alliances and mega-ships have increased the need for port specialisation policies. Alliances andmega-ships arguably created a new port category: the port that is able to handle the largest container
ships that are used by alliances on the main East-West trade routes. Most container ports are not able
to handle these vessels, as they need large terminal areas, deep access channels, longer berths,
sufficient dockworkers and enough equipment to handle the peak loads associated with mega-ships.
This requires another level of port specialisation. The question is not only: who handles whichcargoes, but also: who handles the mega-ships of the alliances?
Decisions on port specialisation require a balanced interplay between state and market.
Governments cannot unilaterally decide which ports should handle which cargo, as market forces(carriers or shippers) ultimately decide on this. However, these market decisions are necessarily
influenced by governments’ public infrastructure expenditure choices. The objective for carriers is tohave a sufficient number of efficient ports available at the lowest rates possible. For governments theobjective is to minimise port capacity and expenditure which ensures that cargo – including that
unloaded by mega-ships – is unloaded efficiently and at the lowest possible costs for taxpayers andother supply-chain participants.
Port hinterland connectivity
Port policies are increasingly focused on port hinterland connectivity. With the privatisation of
port operations over the last decades, the role of the public sector in ports has been reduced toprovision of basic port infrastructure, regulatory functions and the assignment of concessions or leases
to private operators. Although this still provides some room for governments and public port

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authorities to define some form of hierarchy and specialisation in the national ports system, the main
public policy that structures the place of ports in national or supra-national port systems is theprovision of hinterland corridors, such as freight railway infrastructures and other connections of ports
with hinterlands.
Good hinterland connectivity cannot only attract but also “bind” alliances. The reason is that
good hinterland connectivity increases the natural catchment area of the port, which makes port shifts
by carriers less attractive, because it will imply additional costs. Port hinterland connectivity will
likely also increase the share of gateway traffic of a port, which by definition is more difficult todisplace than transshipment traffic. As such, port hinterland policies could be effective ways to adapt
to consolidation and alliances in container shipping. However, there is also a risk of duplication andwasteful public spending in hinterland transport infrastructure. Selective port hierarchies could help tominimise this risk, for example with regard to infrastructure investment in southern Italy (Box 23).
Box 23. Infrastructure investment in the ports system of southern Italy
Some economic areas of Southern Italy are still peripheral in relation to national and international traffic flows and someareas located within the region remain marginalised. In order to strengthen social, economic and territorial cohesion, the Italian
government has identified a strong need to connect the various industrial districts in the zone with the existing logistics nodes
and port systems in Southern Italy. In the context of the TEN-T, a European Union (EU) directed towards the development of aEurope-wide connected network of roads, railway lines, waterways, shipping routes, ports and airports, the Italian Ministry of
Infrastructure and Transport identified and selected five Integrated Logistics Areas (ALI - Aree Logistiche Integrate) in Southern
Italy that will benefit from investments in port and inter-port connectivity in the framework of the Programme Infrastructures
and Networks 2014-2020. The logistics areas are defined as follows:
•
•
•
•
•

South-Eastern sector of Sicily
Gioia Tauro Logistics Pole
System in Puglia
Campanian logistics area
Western Sicily sector

As defined in the agreement concluded between Italy and the European Commission, measures relating to improving
competitiveness in these five logistics areas include harbour constructions and inter-port infrastructures, with corresponding
connections to the multimodal corridors of the European transport network. These investments are made with the objective ofimproving competitiveness and reducing marginalisation of Southern Italian regions, increasing accessibility and connectivity of
the nodes, favouring modal diversion towards the rail system, enhancing integration between the various types of infrastructure
and transport modes, and better connecting various industrial areas to rail, road and ports. The budget for the Programme
Infrastructures and Networks 2014-2020 is EUR 1 843 733 334 of which EUR 1 382 800 000 is provided by the European
Regional Development Fund and EUR 460 933 334 from national funds (Fondo di Rotazione). Beneficiaries are five port
authorities (four of them cover several ports), national road, air navigation and rail providers, and the Italian customs agency.
In order to avoid overly fierce competition and duplication of roles between ports in Southern Italy, a Central
Coordination Committee has been established by the Italian Ministry of Infrastructures and Transport, which aims to help South
Italian Port System Authorities coordinate their strategies. Strategic documents for each logistics areas should help define thespecialised role, priorities and needs of each of the areas. This approach of centralised coordination and prioritisation, as well as
the provision of integrated logistics corridors to increase connectivity of sea ports, could ultimately help to mitigate the risks ofport shifts by large carriers in the context of alliance strategies. Most importantly, attributing specific roles and importance tocore ports helps to avoid duplication of public investments that risk becoming stranded assets once important port shifts takeplace. These ports or port systems should benefit from investments that increase their long-term attractiveness for carriers byproviding ample hinterland connectivity, particularly providing for efficient freight rail connections.
Source: Italian Ministry of Infrastructures and Transport (2018).

Policy options
Considering the diversity of policies in place in different countries, there is no uniform policy
recommendation that would fit the circumstances of all countries. Policy options need to be alignedwith the local circumstances and the most pressing concerns. E.g. our comparison shows that policy
frameworks in the United States allow for more countervailing power of ports vis-à-vis carriers thanin Europe, so in the EU it could be more important than in the United States to restrict cooperation
between carriers and facilitate the collaboration between ports. The policy options provided below
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aim to present possible generic policy responses that require fine-tuning according to local
circumstances.
Adopt a presumption in favour of the repeal shipping-specific block exemptions
Liner shipping does not have unique characteristics that justify exemptions from competition
law, neither for conferences nor for alliances. Generic antitrust rules should apply to all agreements
between liner shipping companies, as for any other industry, with regard to the cooperation that isallowed. This is in line with the global long-term trend to dismantle sector-specific exemptions fromcompetition law and in line with OECD regulatory principles. Thus, countries where “conferences”
are still allowed should reconsider their position.
The same logic also applies to shipping-specific block exemptions from competition law. The
European Commission should carefully consider allowing the EU Consortia Block Exemption
Regulation to expire in April 2020, as currently scheduled, rather than extending it. Without a block
exemption, the generic antitrust rules will apply to all agreements between liner shipping companies,
thereby strengthening antitrust monitoring in the maritime transport sector. As has been amply
demonstrated, e.g. during the consultation process of the EU repeal of the block exemptions for liner
conferences, the liner shipping sector does not have unique characteristics that justify the continued
existence of exemptions for price-fixing. The same line of argument also holds for block exemptions
for alliances in liner shipping, which is the focus of this report and the recommendations below.
The specific feature of a block exemption regulation is the assumption that agreementscomplying with a set of criteria are automatically valid and enforceable. However, some agreements
which conform to the exemption conditions might nonetheless have anticompetitive effects, due toidiosyncratic features of the relevant market. By repealing block exemption regulations, authorities
will have greater opportunity to scrutinise and challenge individual agreements between shipping
companies where these have unjustified or undesirable restrictive effects, thereby more effectively
deterring anticompetitive conduct in the sector. In addition, this will allow the authorities to verify
that the agreements put into action do generate their alleged efficiencies and assess whether consortia
agreements between shipping companies are adversely affecting other actors of the global supply
chain, notably ports and shippers. The repeal of the block exemption regulation could also allow otheractors in the maritime transport sector to challenge more easily agreements with undesirable market
effects.
A repeal of the block exemption regulation will likely not result in the termination of actual andfuture consortia agreements between liner shipping companies. In fact, currently, consortia
agreements between liner shipping companies that do not fulfill the conditions in block exemption
regulations can still benefit from individual exemptions in accordance with the general exemption
regime for agreements between competitors. Moreover, alliance agreements are currently
implemented by companies in many other sectors, e.g. in civil aviation while being subject to thegeneric antitrust rules. Repeal of the consortia block exemption regulation in the EU will restore theregulatory neutrality in antitrust enforcement in the transport sector. Alliances of shipping companies
are the only agreements in the transport sector – actually in any sector - that still benefit from anantitrust block exemption regulation.
In order to guarantee some legal certainty, regulators could introduce some sector-specificguidance to mark the transition to full application of the generic antitrust policies. In the case of theEU, this could take the form of temporary guidance for the application to liner shipping of theguidelines on horizontal co-operation agreements (the Horizontal Guidelines). This could be similar to
the temporary guidelines put in place after the repeal of the block exemption for liner conferences.
Such guidelines could focus on the need for alliances to ensure the transfer of a fair share of thebenefits from their operations to the consumers and downstream supply chain operators in accordancewith the requirements of Article 101 (3) TFEU and thus satisfactorily deal with the concerns
identified in the previous chapters.

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POLICY ASSESSMENT AND OPTIONS – 89

If existing consortia block exemption regulations are extended, their scope should be strictly
limited. Similar limitations of scope would also be appropriate inclusions in the sector-specificguidance to the Horizontal Guidelines mentioned above. Any remaining block exemptions shouldtackle concerns related to information exchange, market definitions, data exchange, joint purchasing,
performance conditionalities and consultation requirements. The following sets out the key reasonsfor excluding such provisions from authorisation:










Market definitions. Most consortia block exemptions deploy market definitions that mightneed to be aligned to the developments of vertical integration and increasing ship size. One
could also argue that the relevant product is no longer a port-to-port maritime transport
service, but rather a door-to-door transport service. This could alter the perspective onmarket power. It also raises the question as to why carriers could be allowed certain formsof collaboration (e.g. data exchange on land transport) that would not be allowed tocompetitors.
Joint negotiation. Excluding the possibility of jointly negotiating with ports and shippers
could be envisioned in order to mitigate the market power of alliances. Such limitations
might have as an additional positive effect to encourage greater competition between
consortia members. In the US, joint purchasing of terminal handling services by alliances
can only happen if the terminal is agreeable to a joint contract.
Performance conditionalities. Consortia block exemptions assume performance
improvements due to alliances that are actually never monitored. If policy-makers see
continued justification in consortia block exemptions, we recommend linking their extension
to rigorous monitoring of impacts on the maritime logistics chain, including comprehensive
assessment of maritime transport and logistics costs, service frequency and quality.
Consultation requirements. Alliances – and related to this the rapid increase in container
ship size – have large impacts on transport users and downstream supply chain operators, on
which they have not been consulted. A joint vision of the maritime logistics chain could help
to generate win-win situations and thus ensure users reap some of the benefits of alliances.
In that context, reintroduction of the obligation for alliances to consult with transport users(and extension of this requirement to consultation with ports and terminals), could beconsidered. This requirement was part of the former EU consortia block exemption, in force
between 1995 and 2010.
Withdrawal clause. Although most consortia block exemptions have a sunset clause theirduration is generally five years, which does not provide the regulator with leverage torequest improvements in the meantime. Regulators should consider introducing clauses thatmake it possible to withdraw the block exemption if its goals or agreed performanceindicators are clearly not met. A condition of the maintenance of the block exemption could
be the provision by carriers of clear evidence – on an annual basis –that other transport users
obtained benefits from their alliances.

Improve infrastructure project appraisal and port pricing
Much of the investment required to upgrade ports to handle mega-ships is publicly funded, either
directly or indirectly. It is essential that these public expenditures be based on sound economic
assessments and that risk-minimisation strategies are in place. Approvals of new port and hinterlandtransport projects should be based on sound projections of predictable cargo flows, particularly fromshippers. It is the demands from shippers that ultimately drive cargo flows, yet these are notfrequently taken into account during decision-making on new port infrastructure. Port infrastructure
planning should be flexible, so that new capacity can be phased in, aligned to demand conditions.
Demands from carriers for new facilities should be backed by enforceable commitments to actually
use the new port, to minimise the risk that publicly financed ports are underused. In the European
Union, this could be achieved by imposing stricter conditions on funding for port projects using EUfunds and those of the European Investment Bank. A reduction in the number of EU “core ports” inthe Trans-European Network as part of the elaboration of a clearer and more detailed port strategy
would also reduce over-capacity risks in respect of container ports for mega-ships.
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90 – IMPACT ON TRANSPORT SYSTEMSThe adoption of common principles for port pricing – ideally at a global level but at least atregional level - could help to offset the monopsony power of alliances and support sound project
analysis in cases where new facilities are proposed to accommodate mega-ships. A key requirement is
to address the current position in which many of the additional costs imposed in accommodatingmega-ships are commonly covered by other port users (via cross-subsidies) or by the taxpayer (viasubsidies), as competition between ports for the alliance calls makes them wary of seeking tointernalise costs such as dredging, buffer capacity and other adjustments. Such common principles
could include cost coverage, the polluter-pays-principle and the internalisation of the external costs ofmega-ships and alliances.
Establish more coherent ports policies
Establishing clear focus in port systems – both nationally and supra-nationally - could help tominimise the development of further overcapacity of container ports for mega-ships. Particularly inlight of the frequent taxpayer subsidisation of the costs related to mega-ships, states could define moreclearly which ports are expected to service mega-ships and which ports have different roles. Despite
the political complexity of prioritisation of ports, various countries have established an explicit port
hierarchy that translates into a public investment hierarchy. However, some of these hierarchies do
not prioritise strongly enough a limited and selected number of ports (OECD/ITF, 2017). Although astrong port hierarchy does not exclude the possibility that alliance carriers will not use the prioritised
ports anyway, it should minimise the risk of ports being played off against each other, resulting in low
returns on public investment and underutilisation of infrastructure. In the EU, the port hierarchy
provided by the “core ports network” and the “comprehensive ports network” could be strengthened
by introducing a more limited and clearly defined group of “gateway ports” that could include themain inevitable European container ports, as evidenced by calls from all three alliances.
Government policy has frequently focused on introducing competition between and within ports.
Although competition has often increased efficiency, it is also likely to have limited the propensity forports to cooperate. This dynamic should be addressed, as cooperation between ports provides apotentially significant source of countervailing power in a context of the rapidly increasing
concentration of the shipping industry resulting from the growth of liner shipping alliances, as has
already been shown via the actions of various governments that have facilitated this cooperation. Thisfacilitation can take different forms, depending on local circumstances and on different port
governance models. In countries with centralised port systems, port mergers have been stimulated bycentral governments. Examples of such approaches include the creation of the Keihin port in Japan,
which amalgamated the ports of Yokohama, Tokyo and Kawasaki. Other examples of centrally
arranged port mergers include China and Italy. In countries with more decentralised port governance,
central government and its bodies have provided the regulatory space needed for local entities toinitiate intensive cooperation, like in Seattle/Tacoma and Savannah/Norfolk.
Within ports, collaboration between terminals could improve the efficiency of the maritime
supply chain. Governments could consider how – and under which circumstances – they could allow
facility sharing in ports, without introducing new sector-specific block exemptions from competition
law. In some cases this would require liberalisation of certain regulations, e.g. the regulation in Italy
that does not allow terminal operators to operate more than one terminal per port.
More collaborative approaches in the maritime logistics chain at large could also help to unlock
value. One of the ways to do this would be a more constructive and continuous dialogue amongst
main stakeholders in the maritime logistics chain. Following the recommendations in OECD/ITF(2015), the International Transport Forum has initiated a Global Maritime Logistics Dialogue withmain stakeholders to identify good collaborative practices that could help to increase the performanceof the maritime logistics chain. These and other initiatives could be expanded.

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92 – REFERENCES

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Annex 1: Case Studies – Shippers
Our analysis of impacts of alliances on shippers is based on a series of in-depth interviews. These
were semi-structured interviews on the supply chain of the shipper, their supply chain policies, theirperspective on container shipping and their assessment of the role of alliances within this context. The
focus of these interviews was on shippers with considerable activity and employment in Europe. The
representatives of the shippers interviewed are in charge of the maritime supply chain and ocean
shipping procurement in their company. The selection of companies was diverse, providing a snapshot of European manufacturing and trading activity (Table 8), presented here on an anonymisedbasis.
Table 8. Overview of case studies of shippers
Case

Size

Sector

1
2
3
4
5
6
7

SME
SME
Multinational
Multinational
Large multinational
Large multinational
Large multinational

Hygiene products
Wholesale
Construction and insulation
Recyclable and finished materials
Food products
Chemicals
Chemicals

Demand for sea transport(TEUs per year)
900
7 000
10 00090 000100 000
300 000> 700 000

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Box 25. Impact of alliances on shippers: Case 2
Headquartered in a European capital, the company has a turnover of around EUR 1 billion and employs 150 people. The
main activity is development and marketing of food and non-food products. Of the goods that the company markets in the
country, 60%-70% are sourced from inside the country and transported by truck. The remaining 30%-40% of goods are imported
and mainly transported by sea. The company is not active in the export business. Oversea imports are mainly sourced from Asia,
North America and the Mediterranean region. The main country of origin in Asia is China. Goods from Asia are mainly shippedfrom South China ports, i.e. Qingdao, Shanghai and Bangkok to Northern Europe. The company is not affected by extreme
peaks in demand and therefore covers almost 100% of the volume under a service contract. While the products are not timesensitive, the company maintains safety stocks. The shipper normally negotiates with carriers via a third party (freight
forwarder), because the shipping lines have proven less competitive during the past years. The company uses a consortium ofwholesalers to procure shipping services in order to increase volumes and hence bargaining power. For its supply chain, thecompany prioritises cost in order to keep product prices competitive, although reliability, space and container availability are
considered as important.
While most goods are imported via a medium-sized Northern European port served only by feeder vessels with relatively
stable schedules, lead time from main ports of origin and European major ports are subject to important fluctuations. The
company deals with these fluctuations by maintaining safety stocks and has invested in greater storage capacity in response todelays. Irregularities of +/- five days are usually taken into account. Storage however can be costly and increases the price of
products. As many products are used for daily consumption, demand is very sensitive to price increases which can reduce thecompetitiveness of the products sold by the wholesaler. Delays of more than five days occur regularly and happen several times
per month.
According to the shipper, reliability has decreased in the last ten years. This, for example, is illustrated by frequent delaysin schedules and omissions. For the shipper, this implies that the cargo will not be discharged at the foreseen port and will missthe feeder service. To counteract this, the shipper must evaluate shipping lines according to reliability as well as for price, and inmany cases pay a premium to assure that shipping schedules are kept. The main issue for the shipper is the visibility. The
company claims that most of the time, delays are discovered later and that there is a great lack of visibility where the cargo islocated. The shipper claims to be unable to develop reliable KPIs because of this visibility gap and has issues identifying themost reliable services, as the shipments are mainly managed by their intermediary freight forwarder. As a relatively small
customer, the shipper affirms that in terms of bargaining power, he is the price taker (he has no say in the price and must accept
what is offered) and finds it harder to negotiate more favourable conditions. He has observed that contract clauses have gotten
stricter in recent years.

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Box 26. Impact of alliances on shippers: Case 3
Headquartered in a Northern European capital, the company has 40 manufacturing facilities worldwide and employs over
11 000 people. Most factories are close to the consumer base, within a radius of about 300 km. 95% of products are transported
by road, especially building insulation. The remaining share consists of exports shipped by container, which include mostly
value-added products. Most are low value and lightweight goods (six-eight tonnes per 40’ container). Exports are directly
delivered to consumers without warehousing. Imports are limited, as manufacturing relies on local resources. There isseasonality for a certain product line that is time sensitive, with a week maximum possible delay. The company often has
fluctuating volumes, related to sudden orders for new port pairs, which differ from the ones agreed in the tender contract. Since
2015 the procurement of ocean shipping has been centralised, with the exception of intra-Asia services that are procured locally.
The company’s procurement negotiates shipping tenders (one-year contracts) directly with the carrier. Priorities in the annual
tender of ocean shipping are: price, transit time and minimum transhipment (in the order of priority). There is a large amount ofdaily inquiries related to project business, but a low percentage is turned into business: these are also procured centrally withsmaller validity terms. The booking is done via a third party booking agent. Price and volumes are fixed in the tender. An
approximate transit time is also declared in the tender, although the de facto length can vary significantly.
The shipper observes that delays have become regular. The Hanjin bankruptcy and the almost concurrent restructuring ofAlliances and schedules led to price increases by a variety of carriers (up to five times the price that was agreed in the tender).
Reportedly, the cyber-attack on Maersk led to IT issues provoking delays of up to two months in some cases. The company also
reports having received additional, unjustified demurrage invoices from a carrier (e.g. in a port in Ivory Coast). Schedulereliability is very low when compared to the road and air freight modes. Delays can in the worst case lead to supply disruptions
for clients (that need to adjust their building or plant growing schedules). For the shipper, this can result in overall reputational
damage and complaints from customers, which are estimated to occur around five times a year. Such complaints can incur
additional costs for the shipper if penalty clauses form part of the contract with the customer. A high premium is paid to carriers
for shipments with a very high time sensitivity (agricultural supply), exceeding standard prices by multiples of five. There isoccasional shipment by air in order to ensure on-time delivery. Visibility into the supply chain is reported to be very low.
Information on delays is often lacking and visibility on the location of containers is limited, which makes anticipation difficult.
With regards to the reduction of alliances from four to three alliances, the shipper reports the lack of service options as amain difficulty. The company’s procurement allocates specific volumes in each port pair to two carriers from different alliances,in order to have different service options. Alliances have led to rapidly decreasing schedule options, according to this company.
Although the shipper declares five-six different schedules would be desirable, only three are available per trade lane due toconsolidation of cargo volumes on bigger vessels. The shipper notices a decrease in direct voyages and more transhipment calls,
which tend to increase the risks of late delivery because delays reduce the time available in a transshipment port to shift thecargo to a different vessel. If the cargo misses the vessel, it might have to wait one week in the transshipment port. According to
the shipper, increased concentration in the liner shipping industry increasingly affects small and medium-sized shippers’
bargaining power, leading to imbalances. In addition, global carriers have become more adept in managing capacity (supply ofvessels and space) and can thus influence prices much more than two or three years ago. The Intra Asia market is an exception,
as there is strong competition for a multitude of very small carriers. The shipper observes that the Mediterranean, Baltic andIntra-Europe trades are also relatively competitive due to smaller carriers present but not as much as intra-Asia trades.
Carriers seem to have become increasingly rigid on the application of tender clauses. Free time has become more limited,which becomes a problem in countries with long bureaucratic procedures that lead to long dwell times in yards (e.g. in Mexico).
Despite booking and documentation improvements, some carrier IT systems are antiquated, while customer service has- in somecases (due to cost pressures)- been outsourced to LCC thus creating serious problems, especially in an industry where there canbe as many as 30 different entities involved in the transport lifecycle of one container. Only the top carrier is seriously
considering digitalisation. The shipper also reports non-compliance with agreed tenders, especially with regards to transit timeand prices, towards which the shipper feels defenceless. In addition, resolving disputes around invoices can take several months.
Since the transition from four to three alliances, the shipper has observed a reduction of vessel sharing agreements that carriers
conclude with others from a different alliance. He sees a link between alliances and increasing ship size, leading to growing
congestion in ports. The shipper observes that the prices for a service between main hubs are becoming more similar, as well as
those for connections with smaller ports. He believes that information systems could become more integrated within alliances
via a common vessel management centre), which would make it easier for carriers to converge. At the same time, the shipper
observes that the differentiation in service among the carriers has decreased. A redesign of the whole supply chain could help toreduce the high administrative costs (e.g. by blockchain or better tracking platforms). The shipper declares to be willing toaccept higher prices if this would lead to a healthier shipping sector that refrains from “undercutting each other”.

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Box 27. Impact of alliances on shippers: Case 4
Headquartered close to a major European port, the company operates in 18 countries and employs more than 200 people.
The main business of the company (in the order of volume) is the export of finished or recyclable steel, rubber products (such as
tires and tubes), plastics (recyclable plastic scrap, PET and engineering plastic) and timber. The company is mainly engaged inWest-East trade with major exports shipped from the EU, U.S., UK, Central America and Australia to destinations such as India,
Pakistan, Turkey, South-East Asia, Southern America and North Africa. While most customers are located in Asia, timber isalso shipped to North America. The company sources from around 1 500 inland locations and uses more than 240 ports
worldwide. The major proportion of exports leaves from Antwerp, Hamburg and UK ports. Major traffic also concerns Spanish
ports such as Bilbao, Valencia, as well as Koper in Slovenia. In the U.S., the company ships from the entire East Coast, as well
as Long Beach, Los Angeles. Sea transport procurement is carried out in-house, in direct negotiation with carriers. The majorityof supply contracts are short-term monthly or quarterly contracts. Approximately 50 % of container transport is purchased on the
spot market. Average loading per TEU is around 26 tonnes. Goods are valued between USD 5 000 – USD 10 000 per container.
Main priorities for the company’s procurement are ocean freight rates and the availability of containers. The shipper keeps twothree options not to rely on one single carrier.
A major concern for the shipper is the availability of containers. In high season, between March and May, while sufficient
containers are often available at the time of the request, the shipper reports having received notification that containers are
finally not available, suspected to be due to an artificial shortage (because a different company has agreed to pay more).
Unavailability of containers has resulted in the fact that the shipper is unable to conclude deals in many cases. The company
reports that in 15%-20% of the cases annually, no containers are available upon request and deals are postponed. In the seasonfrom March to May, reportedly 40% of deals are postponed due to this issue. Delays and postponements threaten the deal
because particularly in plastics recycling, collectors face limited storage space and therefore leave the materials to thosecompanies which are able to collect and resell the material in periods as short as one week. The company declares to work
closely with container depots (such as in Stuttgart, Germany) and to know their inventory situation. In addition to providing acontainer based on an agreed price, shipping companies allegedly charge container surcharges or container availability fees on aregular basis, according to the shipper. In consequence, the shipper feels obliged to book early in advance without knowing
whether there will be business to fill the reserved container space. According to the shipper, this does not seem to happen very
often. Another solution would be to hire a freight forwarder to increase the chances to secure containers. The shipper underlines
however that the company loses around USD 280 000 in its European business because of container rental surcharges due to thelack of container availability. While the shipper’s goods are not particularly time-sensitive and two-three weeks of delay inreaching the consignee do not pose a problem, considerable delays can become an issue, especially under conditions of low
visibility into the logistics chain. For example, the shipper has faced considerable delays to South Africa in 2016 in which casethe company was informed four months later that the goods had not reached the consignee. Apart from such cases however, theshipper believes tracking services of carriers are overall satisfactory.
In terms of bargaining power, the company perceives decreasing flexibility and a tightening of carriage contracts withextended liability for the shipper. According to the shipper, detention and demurrage fees are frequently applied even though thecarrier had committed an error. For example, a shipment that was supposed to arrive in Jebel Ali arrived in Salalah instead,where additional fees for detention and demurrage were applied by the carrier. The shipper notes that strict bill of lading clauses
allow carriers to apply detention charges in case of dispute. This has effectively led the shipper to quickly settle the dispute inorder not to lose additional time and avoid costly detention charges, which would amount to around USD 150-200 per container
per day after four weeks of detention. Each month, the shipper counts two-three of such cases, which cost the company
approximately USD 40 000 – USD 50 000. Due to the difficulty of proving the company’s innocence, the shipper claims not tohave the capacity to present each case to the insurance. In addition, the company notes that vertical integration could potentiallyreduce the bargaining power of shippers once carriers control freight forwarding, insurance and maritime finance activities.
Given the extensive data that carriers can access, the shipper claims that a large carrier has sought to access his clients directly,
proposing finance solutions and transport without the shipper as an intermediary. The company therefore fears that vertical
integration could potentially also threaten the shippers’ business model. As a general trend, the shipper observes a convergenceof prices amongst alliances and carriers. While there is no effective collaboration between carriers yet, this could become
problematic once carriers collaborate more efficiently within an alliance. The shipper also observes a reduction of directconnections and a drop in service quality. According to the shipper, there are no reliable forecasts for container freight rates, as
opposed to commodity prices, which are covered by commodity indices and benchmarks. Given the difficulties the company
encounters with regards to container shipping, the shipper is looking at innovative solutions that are still in a development phasebut might become viable alternatives, i.e. plywood and Oriented Strand Board (OSB) containers that could be transported inbulkers.

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Box 28. Impact of alliances on shippers: Case 5
The company is headquartered in a North European country, has a turnover of more than EUR 10 billion and employs
more than 20 000 people. Its principal activity is the export of ambient food products. Around 12% of the containers needed forexport are reefer containers. Production takes place in more than 20 countries. Products are exported in sea containers from morethan ten countries to around 500 port pares globally. The company counts on a large distribution network in which distribution iscarried out by fixed service suppliers (external parties). The company operates mainly on the North Europe-Asia trade lane, as
the company’s main customer base is located in China. The company does not use freight forwarders and negotiates directlywith 15 different carriers. As the company produces constant output, 99% of volume is covered under a service contract. The
firm’s preferences for shipping are, in the order of importance: reliability, speed, price and frequency. Reliability and speed areparticularly important to the company, as the products have a limited shelf life (between 3 and 12 months) and therefore losepart of their value when transport times exceed a fixed duration. The company therefore tends to book direct shipments for theirreefer segment whenever possible.
The shipper has observed a steady decrease in choice over time, which makes it increasingly difficult to spread volumes(and hence risk) among different carriers. According to the shipper, the decline of direct port-to-port connections has increasedtranshipment and decreased the reliability of schedules since the alliance restructuring in April 2017 and parallel delivery ofultra-large vessels. This has made it more and more difficult for the shipper to book reefer cargo on direct calls. Coupled with adecrease in reliability (schedule reliability dropped to 65% in 2018 according to the shipper’s KPIs), the shipper is confronted ona daily basis with an increase in local costs at destination of around 5% to 10%. As there is less free time acknowledged in thecontract, the shipper receives additional bills for storage and container rental costs depending on product value and interest rates,
even though the responsibility for exceeding cargo dwell time in ports is in most cases the responsibility of the shipping
company. The company experiences rollover of cargo and rescheduling without prior notification on a daily basis. The shipper
notes that a reason for this is the high transit time, which increases the risk of missing the feeder service, or frequent spontaneouscancellations of calls to main ports, which leads to cargo being discharged at a different port. Generally, longer transit time also
generates additional costs for the shipper, particularly in terms of working capital.
Bargaining power vis-à-vis shipping companies has eroded, as experienced by the shipper. The firm’s key accountmanagers find it increasingly challenging to negotiate with carriers. Although the firm generates important volumes, he claims
not to be able to rely on contracts and agreements with carriers. According to the company, aforementioned issues have led todaily disputes with carriers. Settling claims has become increasingly difficult, which the shipper also links to service andcommunication obstacles. From the shipper’s perspective, a reason for this is the outsourcing of booking, pricing anddocumentation desks to a variety of countries such as Poland, the Baltic States, India, or the Philippines. In the worst case, theshipper’s claims get redirected between service centres in different countries, with an increasingly difficult information anddocuments flow. Due to the general tendency of increasing ship size and volume peaks in the ports of call, the shipper notices
that many times, because of congestion, the cargo, delivered by truck or barge, cannot make it into the port on time and needs towait for the next vessel. This is particularly striking in Rotterdam where barges line up to deliver cargo to the mega-ship. The
shipper observes similar issues in ports of destination where it becomes increasingly difficult for cargo pick-up. Worldwide, theshipper deals with additional costs generated by congestion at least once a week. Considering the variety of issues, the shipper
finds it increasingly challenging to make informed choices on carriers, alliances and ports. Distinction of services becomesdifficult since the shipper might not always know on which vessel the cargo is transported, given the slot sharing agreements
between carriers.

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Box 29. Impact of alliances on shippers: Case 6
The company is headquartered in Germany with its core business in basic and specialised chemicals. The company mainly
imports bulk raw materials and exports finished products mainly in containers. Total container volume per year is roughly
300 000 TEU. Instead of shipping from single points, production is relatively fragmented worldwide. Sea transport procurement
is divided globally with procurement teams operating in Europe, North and South America and Asia/Pacific. The company’s
priorities in terms of procurement are satisfactory service quality, space and equipment availability, transit times, flexibility andprice. The company has specific operational requirements and commercial conditions which acceptance is a precondition for
carriers to participate in a tender.
Lower availability of direct connections has increased the risk of delays for the company. For example, the number of
direct calls from European Ports to Dalian went down from three in 2016 to one in 2018. A similar trend toward a hub-andspoke system was observed at a range of other Asian ports and on Trans-Pacific lanes, except for Trans-Atlantic trade wheresuch phenomenon has not been observed yet. Beside the higher risk for delays, the shipper laments difficult information flow
especially in feeder ports. They observe that the monitoring and tracking quality was satisfactory only until transhipment after
which the information flow is less steady and reliable. The sea transport procurement managers state that in many cases, they are
not even aware of transhipment delays when they occur. Consequences could then be a slow-down of a client’s production, orthat the customer seeks for alternative products that are available locally. While on some trade lanes, such as Europe to Mexico,
service is direct and mostly reliable, other trade lanes such as from Europe to the Caribbean, reliability reaches only 50%-60%.
As a result, shippers suffer a global reliability across all trade lanes of only 65%. Delays of more than one week can become
problematic for all shippers and customers, especially as global supply chains become leaner and safety stocks lower.
To reduce risks, the company spreads their volumes between carriers and make use of all services available in the market.
However, this is not always possible on trade lanes where the choice of high quality service products is limited. In the past thecompany discovered a continuous drop of customer service performance and accountability. Nevertheless since a few years
some core carries started to focus back to customer relationship management and customer service on operational level. The
shipper welcomes that trend while acknowledging a lot of room for improvement. A recurrent issue for the shipper is the often
impersonal communication with outsourced service centres via electronic ticket systems, less qualified staff and unsatisfying
solutions. According to the company, carriers would need to differentiate themselves by other factors than comprehensive
alliance networks, such as service quality and customer orientation, since shippers would prefer to pay more for increased
service, reliability and visibility. In their view, the steps before and after the ocean leg also seem to become increasingly decisive
for a carrier’s competitive advantage. With a better pre- and on-carriage network, they were often better able to solve recurrent
supply chain issues, which made a tangible difference for shippers. However, the lack of resources to build comprehensive
networks in the country was cited as a barrier to generating more integrated services. In terms of information systems, thecompany thinks a global open standard to offer digital information within one standardised system could bring important
improvements.

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Box 30. Impact of alliances on shippers: Case 7
As one of the world’s biggest multinational companies producing mainly chemicals and plastics, this company has a highdemand for bulk and container transport. Looking only at container demand, the company exports more than 700 000 TEU
annually. Primary material imports are mainly bulk shipments. The company’s container exports include mainly polyethylene,
polyurethane such as foams and construction materials (20%-30%), as well as membranes, coatings, etc. (remaining share). The
value per container varies roughly between USD 45 000 and USD 100 000. Most goods have relatively low shelf lives (ofaround a few months), so are somewhat time sensitive, although some are more delicate and therefore shipped by reefer (<5%).
Monthly forecasts in terms of volume are provided to the carrier. The shipper observes relatively stable volumes, although henotices an increase by the end of each month, quarter, and year, as an attempt of the company to fulfil its business objectives.
Due to its global weight the company disposes of key accounts with the majority of the large shipping lines. Global transport
procurement is carried out via a matrix organisation, with officials based on four different continents in charge. The tender forcontainerised ocean transport takes place every year. The shipper uses stand-alone booking partners, so switching from one
carrier to another is not complicated. Main ports used in Europe include Antwerp, Rotterdam, Barcelona, Hamburg andBremerhaven, Le Havre and Fos-sur-Mer/Marseille. While the company negotiates tenders directly with the carriers, container
space is booked via different freight forwarders and booking agents, which mainly fulfil documentation and administrative tasks.
The company’s priorities for container shipping procurement are cost, transit time, transhipment and service (e.g. costs to reachinland destinations).
The shipper explains that it has seen the choice of carriers for EMEA trade lanes erode, reducing from 20 to 15. The
shipper uses a wide range of them to spread risks. Similarly, even the largest carriers are not interested in transporting thecomplete cargo volume of the shipper. In the selection of carriers, the carriers that are in the same alliance are generally nottaken as a back-up option. While the company frequently uses the top six biggest carriers, some smaller, mid-range carriers areseen as much more reliable. The shipper laments for example that mid-range or small carriers had offered to provide a service
from a closer port not called by bigger carriers. The shipper observes different industry structures in Asia where a range of small
carriers persist with a main interest in contracts with freight forwarders avoiding direct negotiations with shippers. In terms ofservice, the company receives satisfactory assistance from carriers, including support when additional space is needed andadvice on which vessel to use in order to be able to meet the delivery commitment. If there is differentiation between carriers,
this mainly takes the form of differences in documentation and booking management. Some negative service experiences haveoccurred mainly with outsourced service centres that were unable to deliver practical solutions. The shipper acknowledged that
key accounts benefit from better service, whereas smaller shippers often need to bear inferior service levels. In terms of
reliability, internal KPIs of the company show that on-time delivery (OTD) figures are declining. The company therefore
commits to a fixed delivery date estimated with sufficient time to cover eventual delays. The consequence of not delivering intime to customers could mean they would have to temporarily shut down a factory which generates significant costs. The shipper
observes that carriers always assume that the weekly containerised volume is the equivalent of the annual volume divided by 52
weeks, even if the shipper is able to show the seasonal variations of their export flows and gives monthly updates.
The company also reports that in some cases, their strategy consisted in avoiding a certain carrier when there was a
possibility that the cargo would be loaded with a different carrier that shared the same lane and that was perceived as less well
performing in terms of reliability. As transhipment further increases the risk of delay, the company also attempts to avoid
unnecessary transhipments and allocates more volume to carriers that – according to their own experience – have proven to deal
efficiently with transhipments. Around 30% of the main containerised flows (the 1 000 trade lanes where shipper has a volume
of more than 10 TEUs per week) involve transhipment; double transhipment is rare and triple transhipment is never accepted.
The company also watches the shipping sector closely and take precautions to avoid allocating important cargo volumes withfinancially vulnerable carriers. The shipper is sceptical about the usefulness of the mutual financial safety net of the THE
Alliance. The shipper sees carriers with their own terminals not necessarily advantaged, as their terminals might be more
expensive and less productive than nearby competing terminals. The shipper observes that carrier strategies are in many cases
not well aligned with their terminal or freight forwarding subsidiaries. The shipper thinks perspectives for independent terminal
operators remain bright. The company representative observed that during 2017, carriers would have had an opportunity torecover in terms of profits; however, they decided to undercut each other’s rates, which would make the sector vulnerable tofurther bankruptcies. He describes the alliances as a “necessary evil” that helps carriers to manage their costs, but anticipates asplit up on the long run. As carriers are increasingly working together on costs, the shipper suspects their rate structure toconverge gradually. Considering additional effects on the supply chain, the shipper notes the important challenge of port
congestion related to bigger and fuller vessels as a consequence of alliances. The consequence of this is that the shipper will
increasingly put pre-carriage in its own hands, increasing the share of merchant haulage.

THE IMPACT OF ALLIANCES IN CONTAINER SHIPPING — © OECD/ITF 2018

ANNEX 2: PEOPLE INTERVIEWED – 119

Annex 2: People Interviewed
SergioBarbarino

Procter & Gamble

GuntherBonz

Eurogate GmbH

José Alberto

Carbonell

Port of Barcelona

ManuelCarlier

ANAVE, Spanish Shipowners Association

Ennio

Cascetta

Italian Ministry of Transport

MarziaCicchietti

PSA International

Marco

Conforti

Assiterminal, Association of Italian Terminal Operators

Juan ManuelDiez

Port of Valencia

Jens Kristian

ElversHamburg Port Authority

Claudio

Ferrari

University of Genoa

Agostino

Gallozzi

Salerno Container Terminal

Karl

Gernandt

Kühne + Nagel

Chris

Gillespie

Gillespie-Munro Inc.

Ramón

Gómez Ferrer

Port of Valencia

Rolf

Habben Jansen

Hapag-Lloyd

Hans-Jörg

Heims

Hamburger Hafen und Logistik AG

Jorge

Hernández

Remolcadores de Barcelona

Jarle

Kjelingtveit

UNIL AS

Alejandro

Lopez

OHL Concesiones

Vittorio

MarzanoUniversity of Naples

Jens

Meier

Hamburg Port Authority

Francesco

Messineo

Central Tyrrhenian Port System Authority

Santiago

Mila

Port of Barcelona

Wolf von der

Mosel

Hamburg Port Authority

Lluis

París

Port of Barcelona

MilindPathareATC Global Logistics Private Ltd.

THE IMPACT OF ALLIANCES IN CONTAINER SHIPPING — © OECD/ITF 2018

120 – ANNEX 2: PEOPLE INTERVIEWED
Eva

Perez

Fundación Valenciaport

Björn

PistolHamburg Port Authority

René

Raaijmakers

Kotug Smit

Oscar

Rodriguez

Noatum TerminalsÁlvaroRodríguez Dapena

Puertos del Estado (Spain)

Otto

Schacht

Kühne + Nagel

GiulioSchenone

Gruppo Investimenti Portuali

Sven

SchröderFairplay Towage

TorbenSeebold

Ver.di Trade Union

Gene

SerokaPort of Los Angeles

Paolo

SignoriniPorts of Genoa

Laurent

Spiessens

PSA International

PietroSpiritoCentral Tyrrhenian Port System Authority

Antonio

Testi

Contship Italia

DanieleTesti

Contship Italia

AngelaTitzrath

Hamburger Hafen und Logistik AG

Mike

WalwynNexlog Supply Chain ManagementDavid

Van Eynde

PSA International

Benjamin

Weinacht

TEAM LINES

Boris

WenzelTerminal Link

Additional interviews were conducted with representatives of five multinational shippers, a
global forwarder, and a large ocean carrier who wish to remain anonymous. In addition, the reportbenefits from two roundtables with shippers, organised in the UK and Switzerland.

THE IMPACT OF ALLIANCES IN CONTAINER SHIPPING — © OECD/ITF 2018

ANNEX 3 : VERTICAL INTEGRATIONOF SELECTED CARRIERS – 121

Annex 3: Vertical Integration of Selected CarriersThis table includes activities, subsidiaries, jointly controlled entities and associated companies. It excludes bulk andpassenger transport and local shipping agency subsidiaries, as well as other subsidiaries not falling into below categories.
The information below is extracted from financial statements of the companies and may not provide an exhaustive list ofcompany activities.
Carrier

Shipping, Shortsea, cabotage
Maersk Line &subsidiaries,
Hamburg Süd &subsidiaries, P&O
Nedlloyd &subsidiaries,
Safmarine, Seago,
MCC Transport
Singapore Pte.
Ltd., Aliança
Navegação e
Logística Ltda.
Brazil (cabotage)

Terminal

Logistics

Equipment

Towage

Rail

Barge

Truck

Other

APM
Terminals &subsidiaries

Damco &
subsidiaries,
Maersk Logistics,
Anchor Storage
Ltd. Bermuda(51%), Smart
International
Logistics
Company Ltd.
China (49%),
Inttra Inc. (25%)

Maersk Container
Industry & subsidiaries,
Addicks & Kreye
Container Service
GmbH & Co. KG
Germany, CES Servicosde Manutencao em
Guindastes e
Equipamentos Brasil
Ltda. (cranes andequipment
maintenance),
Brigantine Group
Container
Equipment Maintenanceand Repair (30%)

Svitzer &subsidiaries/
joint
ventures,
UnitedSalvage Pty.
Ltd.
Australia,
Tyne
TowageMarine Ltd.
UK

Bridge Intermodal
Transport S.A. Chile

CaribbeanTug &Barge Ltd.
BritishVirginIslands(50%);
CoastalTug &Barge Pty.
Ltd.
Australia(50%)

Maersk SouthAmerica Ltd., Bridge
Intermodal Transport
S.A. Chile

MSC

MSC

Terminal
Investment
Limited Sàrl
(TIL)

MSC MEDLOG,
MSC
warehousing

MSC
barges

MSC intermodal andhaulage, MSC
MedlogCMA
CGM

APL, ANL, CNC,
MacAndrews,
Mercosul Line,COMANAV,OPDR GmbH &Co. KG, CHENG
LIE
NAVIGATION
CO, LTD,SOFRANA
Unilines Oceania& South Pacific,
Containerships
plc Finland(approval
pending)

CMA
Terminals
Holding,
CMA
Terminals
Investments,
Terminal Link
SAS (51%) &participations/joint ventures,
SAMP, Eagle
MarineTerminal
Holdings PTELTD

CMA CGM
Logistics, CC
Log, ANL
Logistics PTY
LTD, APL
Logistics, CMA
CGM Transit
SARL, CC
Terminal
Conteneurs Dakar(TCD), LCL
Logistix India
PVT LTD, USL
Logistics LLC,
FIRST
LOGISTICS
DEVELOPMENT(JV) COMPANY
Viet Nam (47%),AMEYA
LOGISTICS
PRIVATE LTD
India (50%),
Pacific Maritime
Services U.S.
(10%), INTTRA
Inc. (percentage
share notprovided),
TRAXENS,CEVA Logistics(investment,
convertible bonds,
24.99% of
CEVA’s capital)

MSC RAIL &acquisitions,partners/joint
ventures, ie CP Carga- Logística e
Transportes
Ferroviários deMercadorias SA,
TransContainer
Russia (acquisition ofcontrolling stake, notconfirmed), MSC
MedlogCMA CGMIntermodal services(CC Log throughpartners), i.e.
partnership with all
major rail service
providers in the U.S.
and Canada (BNSF,
Norfolk Southern,
CSX, Canadian
Pacific, Canadian
National, Union
Pacific)

Maersk Trade
Finance, Barkentine
Insurance Company
Ltd. Bermuda, StarAir (air cargo),
Maersk Aviation
Holding A/S, Atlantic
Pacific Marine
Corporation U.S.
(marine engineering),
U.S Marine
Management Inc.
(operations andmaintenance), BMSC
Thailand (repair andmaintenance),
Bermutine
Management
Company Ltd. (shipmanagement), Höegh
Autoliners Holdings
AS Norway (39%)
Marinvest (Cypriot
financial company ofGianluigi Aponte)

CMA
CGM
Intermodal
services(CC Logthroughpartners),
CMA
CGM
bargesCMA CGMIntermodal services(CC Log throughpartners)

MaerskANL CONTAINERHIRE AND SALESPTY LTD Australia,
PROGECO France,
Investment and
Financing Corp. Ltd(container leasing
company, percentage
share not provided)

THE IMPACT OF ALLIANCES IN CONTAINER SHIPPING — © OECD/ITF 2018

Global Ship Lease
Inc. Marshall Islands(44.41%), Merit SAL
Lebanon (cost andrevenue control,
audit, percentage
share not provided),
Shone (investment instart-up, artificial
intelligence on board
ships)

122 – ANNEX 3: VERTICAL INTEGRATIONOF SELECTED CARRIERS
Carrier

Shipping, Shortsea, cabotage
COSCO
SHIPPING LinesCo., Ltd.,
Shanghai Pan
Asia ShippingCo., Ltd, China
Shipping Agency
Co., Ltd., CSCL,
China Shipping
Ports
Development
Co., Limited(CSPD)

Terminal

Evergreen

Evergreen Marine
Corporation,
Uniglory
Shipping
Corporation,
Hatsu Marine Ltd.
UK, Italia
Marittima S.p.A.

Hapag
Lloyd

United Arab
Shipping
Company(UASC) Ltd.,
Hapag-Lloyd
Denizasiri
Nakliyat A.S.
(65%), Consorcio
Naviero Peruano
S.A. (47.93%)

Evergreen
International
Storage &Transport
Corp. (EITC),TTSC (cargoloading anddischarging,
55%),
Everport
Terminal
Service Inc.,
Subsidiaries
of Peony:
Clove
Holding Ltd.
(investments
in container
yards and port
terminals),
Armand N.V.
(investments
in container
yards and port
terminals,
70%),
investments
and leases ofoperatingmachineryandequipment ofport terminals(various subsubsidiaries) ,Colon
Container
Terminal
S.A., Taiwan
Terminal
Services Co.,
Ltd., Taipei
Container Port
Terminal(investee)
Djibouti
Container
Services
FZCO(19.06%),
HHLA
Container
Terminal
AltenwerderGmbH(25.1%)

Cosco

Logistics

Equipment

COSCO
SHIPPING
Ports Limited(13 oversea
terminals and
22 in China),
China
Shipping
Ports
Development
Co., Limited,
Piraeus Port
Authority
S.A., COSCO
Ports(Holdings)
Limited(percentage
share notprovided)

Towage

Rail

Barge

Truck

COSCO SHIPPINGPorts investments:
Khorgos Gateway dry
port Kazakhstan(49%), Conterail
Madrid, Noatum Rail
Terminal Zaragoza(NRTZ),
coordination/
partnerships with
China Railway
Engineering
Corporation (ie PeruBolivia), COSCO
Trains (GreeceBalkans)

Evergreen
Logistics Corp.,
Evergreen
International
Storage &Transport Corp.
(EITC), EGH(container
shipping andagency services
dealing with port
formalities, 79%),
Peony
investments:
GMS (container
shipping), EMU(container
shipping, 51%),MBPI (container
storage andinspections at
customs, 95%),
agency services
dealing with port
formalities(various subsubsidiaries),
Ningbo Victory
Container Co.,Ltd.
(warehousing,associate,
percentage sharenot provided),Evergreen
agencies (various
subsidiaries)

EHIC(M)(manufacturing of dry
steel containers andcontainer parts),
84.44%), KTIL
(loading, discharging,storage, repairs andcleaning, 20%), MBT(inland transportation,
repair and cleaning ofcontainers, 17.93%),
Qingdao Evergreen
Container Storage &Transportation(associate), Whitney
Equipment LLC,
Evergreen Heavy
Industrial Corp (M)Berhad (container
production)

Aratrans
Transport andLogistics Service
LLC,

Middle East Container
Repair Company LLC

Evergreen
International Storage& Transport Corp.
(EITC)

Evergreen
International Storage& Transport Corp.
(EITC)

Other
Faulkner Global
Holdings Limited
British Virgin
Islands, COSCO
SHIPPING Financial
Holding Co. Cayman
Islands, COSCOL,COSCO SHIPPING
Finance, COSCO
SHIPPING
Development,
COSCO SHIPPINGTechnology Co., Ltd.
(sells software andhardware forintelligent
transportation
systems, industrial
automation, shipping
information, andsecurity protectionengineering in
China), Florens
Capital Management(50%), China Cargo
Airlines Co., Ltd.
(percentage share notprovided)Evergreen
International
Corporation, EVA
Air/Uni Air,
Evergreen Aviation
Technologies
Corporation,
Evergreen Air
Services Corporation,
Evergreen Air Cargo
Services Corporation,
and Evergreen
International Storageand Services
Corporation, Peony
Investment S.A.
(investments intransport-related
business), LuantaInvestment
Netherlands, Balsam
Investment(Netherlands),
Evergreen Insurance
Company Ltd.,
Evergreen Security
Corp. (private
security guards
services),Greencompass
Marine S.A. Panama(shipowner, indirect
subsidiary), Gaining
Enterprise SA
Panama (shipowner)

United Arab Shipping
Engineering & Ship
Repair Services LLC

ONE (see
MOL,
NYK and
K-Line)THE IMPACT OF ALLIANCES IN CONTAINER SHIPPING — © OECD/ITF 2018

ANNEX 3 : VERTICAL INTEGRATIONOF SELECTED CARRIERS – 123

Carrier
MOL

NYK

Shipping, Shortsea, cabotage
MOL Liner, Japan
Express Co., Ltd.
(86.27%)

Terminal

Asia Pacific
MarineCorporation,
NYK Line North
America Inc.,
ACX Pearl Corp.

NipponContainer
Terminals Co.
Ltd. (51%),
NYK
Terminals(NorthAmerica) Inc,YUSEN
Terminals
LLC,

Ube Port
Service Co.,
Ltd. Japan(99.39%),
Utoc
Stevedoring
Corp Japan,
Rotterdam
World
Gateway B.V(20%), Tan
Cang-Cai
Mep
International
Terminal Co.
Ltd Vietnam(21.33%),
TIPS Co., Ltd.
(operates
container
terminals andcontainer
depot,
21.33%)

Logistics

Equipment

TowageMOL Logistics,
Asia Utoc Pte.
Ltd Singapore,
BangpooIntermodal
Systems Co., Ltd
Thailand(74.62%), Shinyo
Kaiun Corp.
Japan (36%),
Chiba Utoc Corp
Japan, Euro
Marine Logistics
N.V. Belgium(50%), Hong
Kong Logistics
Co., Ltd.,International
Container
Transport Co.,
Ltd. Japan(customs
clearance, 51%),
International
Transportation Inc
U.S. (51%),
Shanghai Huajia
International
Freight
Forwarding Co.,
Ltd. (76%), Thai
Intermodal
Systems Co., Ltd.,Utoc Logistics
Corp, World
Logistics Service(U.S.A.), Inc,,
PKT Logistics
Group Sdn. Bhd.
Malaysia(20.86%),
Shanghai Longfei
International
Logistics Co., Ltd(22.05%)YUSEN Logistics
Americas/ China/
UK/ Hong Kong,
YUSEN Logistics
Co. Ltd. Japan(59.73%),YUSEN KOUN
Co. Ltd. (81%),YUSEN Logistics
Thailand(84.48%), UNI-X
Corporation(83.6%), GENEQ
Corp (55.14%),KINKAI YUSEN
KAISHA Ltd.,ASAHI UNYU
KAISHA Ltd.
(95%),CAMELLIA
LINE Co. Ltd.
(51%)

Bangkok Container
Service Co., Ltd(depot), MOL Container
Center (Thailand) Co.,
Ltd. (99.6%),
Nishinihon Sogo
Setsubi Co., Ltd(equipment
maintenance services)

Kitanihon
Tug-boatCo., Ltd.
(62%),
Kobe
TowingCo., Ltd.,
Nihon TugBoat Co.,Ltd.
(87.26%),
Tokai
TugboatK.K. (70%),
South China
TowingCo., Ltd.
(25%), Tan
Cang-Cai
Mep
TowageServicesCo., Ltd.
Vietnam(40%)

THE IMPACT OF ALLIANCES IN CONTAINER SHIPPING — © OECD/ITF 2018

NAKAI
Tug Boat
Service Co.
Ltd.

Rail

Barge

Truck

Other

ShosenKoun Co.,
Ltd. Japan(79.98%)

Blue Highway
Express Kyushu Co.,Ltd Japan, Blue
Highway Service
K.K. JapanMOL Techno-Trade,Ltd., MOL
Information Systems,
Ltd., MOL
Engineering Co., Ltd,
Japan Hydrographic
Charts & Publications
Co., Ltd (95.25%),
Vibank-Ngt Co. Ltd.
Vietnam, Linkman
Holdings Inc. Liberia,
Mitsui Kinkai Kisen
Co., Ltd. Japan(shipowner), MOL
Ship Management
Co., Ltd,
Minaminippon
Shipbuilding Co.,
Ltd. (24%),
Shipowner/Chartering
companies (50companies) in
Panama, MarshallIslands, Liberia,
Hong Kong, Cayman
Islands, Singapore
and Isle of Man

YUSEN KOUN Co.
Ltd. (81%), NIPPONCONTAINER YUSO
Co. Ltd. (51%)

Nippon Cargo
Airlines Co. Ltd.,SANYO Trading Co.
Ltd. (46.04%), NYK
Trading Corporation(79.25%), BOLTECH
Co. Ltd.

124 – ANNEX 3: VERTICAL INTEGRATIONOF SELECTED CARRIERS
Carrier“K”-LineYang
Ming(ownershipshares notavailable)

HMM

Shipping, Shortsea, cabotage
Kawasaki Kinkai
Kisen
Kaisha,Ltd.(51%),
Asahi Kisen
Kaisha Ltd.,
Shibaura Kaiun
Co. Ltd.

Terminal

Yang Ming
MarineTransport
Corporation, All
OceansTransportation
Inc., Kuang Ming
(Liberia) Corp.,
Yang Ming Line(Singapore) Pte.
Ltd., Kuang Ming
Shipping Corp.,
TaiwanNavigation Co.
Ltd., YoungCarrier Company
Limited (HongKong), Jing Ming
Transportation
Co.

Olympic
Container
Terminal LLC(U.S.), West
Basin
Container
Terminal LLC(associate),
UnitedTerminal
Leasing(associate,U.S.), Taipei
Port Container
Terminal Co.
Ltd., United
Stevedoring
Corp.,
Honming
Terminal andStevedoring
Co. Ltd.
Taiwan,Corstor Ltd.
(forwarding
agency, UK),
Manwa &
Co., Ltd.
(forwarding
agency,Japan),ANSHIP-YES
Logistics
Corporation
Ltd (terminal
operation &stevedoring,
Thailand)
Total
Terminal
International
Algeciras
S.A.U. (20%),
HT Algeciras,
Washington
UnitedTerminals
Inc.,
Rotterdam
World
Gateway(20%)

Hyundai
Merchant Marine,
Hyundai Ocean
Service Co. Ltd.,
Hanjin PacificCorporation, HT
Algeciras Co.
Ltd., HMM
Pacific“K” Line
European Sea
HighwayServices
GmbH (portservices),
International
Transportation
Service, Inc.
(70%), Husky
Terminal &Stevedoring,
Inc. (70%),

Logistics

Equipment

Towage“K”LINE
Logistics Ltd.
(91.9%), Rinko
Corporation(25%),
Kawasaki Kisen
Kaisha, Ltd.,
Kawasaki Kinkai
Kisen
Kaisha,Ltd.(51%),
Daito
Corporation,
Japan Express
Transportaion Co,
Ltd.,
Nitto Total
Logistics Ltd.,
SeagateCorporation),
Nitto Total
Logistics, Hokkai
Transportation
Co. Ltd. (80.1%),
Tokyo Kokusai
Koun Kaisha Ltd.,
Century
Distribution
Systems, Inc.
(cargoconsolidation),
Universal
Logistics System,
Inc.
(warehousing),
Universal
Warehouse Co.,
Connaught
Freight
Forwarders
LimitedYes Logistics
Corp., YES
LIBERAL
Logistics Corp.,
Sino Trans PFS
Cold Chain
Logistics Co.
Ltd., Triumph
Logistics Inc.
(U.S.), TranscontIntermodal
Logistics, Inc.
(U.S.), Golden
Logistics USA
Corporation, YES
MLC GmbH(import, export,
storage,warehousing,Germany), Merlin
Logistics GmbH(storage &logistics, Austria)

Intermodal Engineering
Co. Ltd. (container
repairing), Bridge
Chassis Supply LLC.

Nitto Tug
Boat Co.
Ltd.

HyundaiIntermodal Inc.,
Hyundai & C Butt
Solutions Ltd(warehousing,UK, 51%),
Shandong C&T
Hyundai Logistics
(50%)

Rail

Hyundai Intermodal(HII) International
Rail Operations, NEO
EXPRESSTRANSPORTATION
Inc. (49%)

Barge

Truck

Other

Japan Express
Transportation Co.
Ltd., Shinto Rikuun
Kaisha Ltd., Maizuru
Kousoku Yusou Co.
Ltd., James Kemball
Limited, ULS
Express, Inc., PMC
Transportation
Company, Inc.

“K”LineShipmanagement Co.
Ltd., Tayo Nippon
Kisen Co. Ltd.,
Escobal Japan Ltd.,SAL Heavy Lift
GmbH, “K” Line
Ship Management(Singapore) Pte.Ltd.,
Cygnus Insurance
Company Limited,“K” Line Auto
Logistics Pty Ltd.

ToplineTransportation Inc.
(U.S.)

Ching Ming
Investment Corp.,
Sunbright Insurance
Pte. Ltd., LogiTrans
Technology Private
Ltd. (IT joint venture,
India)HII Trucking
Operations, Hyundai& C Butt Solutions
Ltd (51%), Netruck
Franz Co. Ltd. (40%),
NEO EXPRESS
TRANSPORTATION
Inc. (49%)

Haeyoung Maritime
Services Co. Ltd.
(support services,80%), Hyundai U&I(port/marine IT
technology, 18.95%),
Hyundai ResearchInstitute (17.68%)

THE IMPACT OF ALLIANCES IN CONTAINER SHIPPING — © OECD/ITF 2018

ANNEX 4: THE NEW ITALIEN SEAPORT AUTHORITIES – 125

Annex 4: The New Italian Seaport Authorities
Port System Authorities
Western Ligurian Sea Port Authority
Eastern Ligurian Sea Port Authority
North Tyrrhenian Sea Port Authority
Centre-North Tyrrhenian Sea Port Authority
Central Tyrrhenian Sea Port Authority
Strait Port Authority

Sardinian Sea Port Authority

Ports covered
Genova, main office
Savona, Vado Ligure
La Spezia, main office
Marina di Carrara
Livorno, main officeCapraia, Piombino, Portoferraio, Rio Marina e Cavo
Civitavecchia, main office
Fiumicino, Gaeta
Napoli, main office
Salerno, Castellamare di Stabia
Gioia Tauro, main office
Crotone (new and old port), Corigliano Calabro, Taureana di Palmi,
Villa San Giovanni, Vibo Valentia, Reggio Calabria, Messina,
Milazzo,Tremestieri
Cagliari, main officeFoxi-Sarroch, Olbia, Porto Torres, Golfo Aranci, Oristano,
Portoscuso-Portovesme, Santa Teresa di Gallura (only commercialquay).

Western Sicilian Sea Port Authority
Eastern Sicilian Sea Port Authority
Southern Adriatic Sea Port Authority
Ionian Sea Port Authority
Central Adriatic Sea Port Authority

Centre-North Adriatic Sea Port Authority
Northern Adriatic Sea Port Authority
Eastern Adriatic Sea Port Authority

THE IMPACT OF ALLIANCES IN CONTAINER SHIPPING — © OECD/ITF 2018

Palermo, main office Termini Imerese, Porto Empedocle, Trapani
Augusta, main office Catania
Bari, main office
Brindisi, Manfredonia, Barletta, Monopoli
TarantoAncona, main office
Falconara, Pescara, Pesaro, San Benedetto del Tronto (excluding
tourism harbour), Ortona
Ravenna
Venezia, main officeChioggia
Trieste126 – NOTES

Notes

1

The South Korean carrier HMM is associated to 2M via vessel sharing agreements, which makes someobservers consider HMM an associate member of 2M.

2

The O3, G6 and CKHYE alliances.

3

Another way to express the importance of alliances is by measuring the alliance intensity of different
carriers. Not all ships of carriers in an alliance are shared. Alliance intensity indicates the ratio of shipsthat are contributed to the alliance in relation to the owned fleet. In 1998, alliances provided 84% to
96% of the capacities of Hanjin, K Line and Yang Ming, but they chose to reduce their reliance on
alliances substantially in 2002, favouring instead slot charters (Hanjin and K Line) and joint service
agreements (Yang Ming). In 2010, this ratio ranged between 35% and 75% (Panayides and Wiedmer,
2011).

4

This is based on the Global Liner Performance database by SeaIntel, which measures the average delayof all vessels (which includes vessels arriving ahead of schedule, on schedule and behind schedule) andthe average delay of the vessels that arrive behind schedule.

5

Assuming that the merger of Cosco and OOCL will receive regulatory approval from the relevant
competition authorities.

6

A reverse – although rare – example of vertical integration is the acquisition of Unifeeder by the global
terminal operator DP World.

7

A carrier can have direct or indirect control over the terminal operations. Direct control means that thecarrier is part of the company operating the terminal. Indirect control means that the carrier allows theterminal operator to run the terminal.

8

Through its individual members MOL, NYK and “K” Line

9

Undertakings can notify their agreement to the Competition Authority on a voluntary basis. In 2016,
the Competition Authority granted seven exemptions in the Transport, Vehicles and Services sector.

10

In China, antitrust rules became applicable in 2008 with the adoption of the Anti-Monopoly Law. In
principle, the Anti-Monopoly Law does not provide for any immunity applicable to liner shipping
companies. Nevertheless, pursuant to article 20 of the Regulations of the People’s Republic of China on
International Maritime Transport, international shipping companies that operate on Chinese ports haveto file with the competent authorities all conference or other cooperation agreements. In 2014, therejection of the proposed P3 Alliance by the Chinese authorities illustrated the diverging approaches tocooperation between shipping companies as an agreement analyzed as horizontal cooperation in the EU
and US can actually be qualified as a merger in China and be subject to the relevant merger control
rules. It should be emphasized, however, that there is an increasing cooperation between the
aforementioned three countries aimed at achieving a more harmonised approach on competition mattersin the maritime transport sector.

11

In the United States consortia and other type of cooperation agreements can become effective after afiling to the Federal Maritime Commission (FMC) without the necessity to obtain a prior approval. It isthus incumbent upon the FMC to prove that an agreement has adverse effects on competition. The
Shipping Act of 1984, as amended by the Ocean Shipping Reform Act (OSRA) of 1998, explicitly lists
in its Section 40301 the categories of agreements that may receive immunity from U.S. antitrust rules.
Shipping companies can conclude agreements related to, among others, capacity adjustments, sharingof vessels or other type of technical cooperation. Agreements on the joint operation of marine terminals
based in the United States are not covered by the antitrust exemption.

12

The 1995 regulation is almost similar to the 2000 regulation that was applicable until 2005 andextended until 2010.

13

Council Regulation 1/2003/EC of 16 December 2002 on the implementation of the rules oncompetition laid down in Articles 81 and 82 of the Treaty (OJ L 1/1,4.1.2003) amended by Council
Regulation 411/2004/EC of 26 February 2004 (OJ L 68/1,6.3.2004) and Council Regulation

THE IMPACT OF ALLIANCES IN CONTAINER SHIPPING — © OECD/ITF 2018

NOTES – 127

1419/2006/EC of 25 September 2006 (OJ L 269/1 28.9.2006). Article 29 (1) of this regulation states:“Where the Commission, empowered by a Council Regulation, such as Regulations 19/65/EEC, (EEC)
No 2821/71, (EEC) No 3976/87, (EEC) No 1534/91 or (EEC) No 479/92, to apply Article 81(3) of theTreaty by regulation, has declared Article 81(1) of the Treaty inapplicable to certain categories ofagreements, decisions by associations of undertakings or concerted practices, it may, acting on its own
initiative or on a complaint, withdraw the benefit of such an exemption Regulation when it finds that inany particular case an agreement, decision or concerted practice to which the exemption Regulation
applies has certain effects which are incompatible with Article 81(3) of the Treaty.”
14

Commission Regulation (EC) No 1459/2006 of 28 September 2006 on the application of Article 81(3) of
the Treaty to certain categories of agreements and concerted practices concerning consultations on
passenger tariffs on scheduled air services and slot allocation at airports

15

An interesting example is case AT.39595 concerning cooperation agreements between four air carriers,
members of the Star Alliance. Pursuant to the cooperation arrangements, competition on price andcapacity was eliminated between the four companies. Nevertheless, the Commission accepted thearrangements after the concerned companies offered commitments addressing the identified competition
concerns.

THE IMPACT OF ALLIANCES IN CONTAINER SHIPPING — © OECD/ITF 2018

The Impact of Alliancesin Container ShippingThis report assesses the impact of alliances on the maritime transport
chain and its main stakeholders. Alliances have become a dominantfeature of container shipping, with around 95% of the major
East-West container trades covered by carriers that form part of threeglobal alliances. The report discusses the impacts on competition
and asks whether alliances bring benefits, and for whom. Finally, it
presents policy options for governments based on the findings.

Published: 11/2018 | Photo credit: anekohoThis report is part of the International Transport Forum’s Case-Specific
Policy Analysis series. These are topical studies on specific issues
carried out by the ITF in agreement with local institutions.

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