The deployment of ultra-large containerships has not only increased average vessel size on key east west trades, but has accelerated the consolidation of carriers into vessel sharing agreements and alliances.
A few years back, I did a presentation looking at the effects of increasing containership sizes in the major east-west trades on carrier alliance consolidation. At the time, the first ultra-large containerships were being delivered and deployed in the Asia-Europe trade, and carriers were cascading the vessels serving that lane to the transpacific.
Those behemoth ULCs were ordered primarily in 2011, starting with industry leader Maersk Line’s order for 30 18,000-TEU vessels, what it called the “Triple-E” series, and followed by a slew of orders from other carriers looking to compete on the basis of size and efficiency. The idea was fairly simple: increase economies of scale by using larger vessels in order to cut per container operating costs and increase profits.
Ultimately, however, those decisions proved to be based on a set of flawed premises – namely that global trade growth would someday soon return to the double-digit growth rates seen prior to the Great Recession and that fuel costs would continue to be the single biggest contributor to post-construction vessel operating costs.
The thesis of the presentation, which I called “The Alliance Effect,” was that deployment of ULCs would not only increase average vessel size, but accelerate the consolidation of carriers into vessel sharing agreements and alliances. After all, no one carrier could possibly sell enough slots to fill such large ships on any kind of regular basis, so they would have to continue to learn how to cooperate, as opposed to competing.
I could never have predicted, however, that this trend would snowball the way it did, manifesting itself in the tidal wave of carrier bankruptcies, mergers and acquisitions seen throughout 2016.
Back in 2014, there were already significantly fewer players in the major east-west trades than in 2011 – shortly after Maersk’s Triple-E order, for example, the members of the then Grand and New World alliances joined up to form the G6 Alliance and the CKYH Alliance added Evergreen to its ranks to become the CKYHE – and this trend has only accelerated in the years since. In the transpacific trade lane, for example, just four alliances and six independent carriers remained in 2014, with the alliances controlling a staggering 90 percent of all of the deployed capacity in the trade. Come 2017, that will have dropped to just the three proposed alliances and five independent carriers, not including HMM, which recently signed a slot swap agreement with the 2M but will apparently operate its own vessels and services. The three alliances will control an estimated 92 percent of capacity, 95 percent if we include HMM.
In the even more highly consolidated Asia-Europe trade, the number of players will have dropped from one independent carrier and four alliances in 2011 to just the three proposed alliances in 2017, as all of the remaining independent carriers had already exited the trade a few years ago save for a handful of slot sharing agreements and HMM is expected to focus its vessels primarily in the transpacific.
Shipowners have also been selling younger and younger ships for scrap. The latest record was set at just 10 years old – about half the average age of containerships sent to the scrap heap historically speaking – with the sale of the 5,500-TEU M/V Angeles by Diana Containerships in October. The Baltic and International Maritime Council (BIMCO) estimated in a recent report more than 500,000 TEUs had been taken off the water via demolition as of the end of October, 4.2 times more than in the same 2015 period and another record for the industry.
It’s important to keep in mind, however, that carriers are still receiving new tonnage at a faster rate than they are disposing of it, due in part to the size of the ships being delivered.
Logically speaking, all these factors can only serve to accelerate the trend of increasing vessel size, as carriers are not in the habit of scrapping their larger, more expensive new ships, and the latest figures from ocean carrier schedule and capacity database BlueWater Reporting bears this out.
The chart below, built using data from BlueWater Reporting’s Carrier Trade Route Deployment application, compares average vessel size on direct region-to-region liner services in the transpacific and Asia-Europe trade since 2011.
Source: BlueWater Reporting
At the end of 2011, average vessel capacity stood at 5,665 TEUs in the transpacific and 8,768 TEUs in the Asia-Europe trade. Today, those figures have ballooned to 7,510 TEUs and 13,314 TEUs, respectively. That’s a nearly 33 percent jump in the transpacific and an almost 52 percent increase in Asia-Europe in just five years.
Our so-called “alliance effect” has in many ways become a self-fulfilling prophecy. The trend toward cooperation over competition was largely a product of the ever-increasing size of containerships, and the industry downturn, which brought with it further consolidation via bankruptcies, M&A activity, and the reduction in alliances from four to three, as well as record scrapping of smaller ships, has only served to perpetuate – and even accelerate – the growth in average containership size.