Move seen as way to combat Maersk’s tightening grip on Asia-Europe trade.
By Eric Johnson
As big news goes, the second and third largest global container lines joining forces on a number of major global trades is pretty big.
Mediterranean Shipping Co. and CMA CGM in early December announced a two-year vessel sharing alliance, effective from March, that will see them share resources on the Asia-Europe, Asia-Southern Africa, and South America trades.
Just what implications the pact might have is tough to tell. Most analysts contacted by American Shipper saw the alliance as a clear attempt from MSC and CMA CGM to keep pace, or even supersede, industry leader Maersk Line and its Daily Maersk product from Asia to Europe, where a rate war and overcapacity have driven revenue levels to the basement.
Ben Hackett, principal of consulting firm Hackett Associates, said the alliance could well have been formed out of some desperation among the two lines.
“CMA CGM is obviously in some financial difficulties, trying to cut $400 million in costs and selling some ships, plus not being able to invest in new, larger ships,” he said. “MSC, of course, is always a mystery, but they must be impacted by the situation as well.”
Hackett said Daily Maersk, in which Maersk offers guaranteed transportation times from key ports in Asia to key Northern European gateways, is putting pressure on the chasing pack.
“Maersk, having started its Daily Maersk service, is not letting anyone slot charter, from what I hear,” Hackett said. “That puts pressure on CMA CGM as they were working with Maersk from Asia to Europe, particularly to the Black Sea. There was no way for either MSC or CMA to compete with the Daily Maersk concept, only by combining can they do so. Beyond that, no one else can match these two giants on slot costs.”
Another impetus for an alliance, speculated some, was to set a chain reaction of liner consolidation into motion. Though MSC and CMA CGM said clearly they had no plans to merge, the knock-on effect of their vessel sharing agreement could easily affect other operators.
“It is clear that the current downturn in the market is driven by the desire to create a consolidation in the market,” said Lars Jensen, chief executive officer of the maritime consultancy SeaIntel. “In that context the two carriers might have arrived at the conclusion that the creation of such an alliance will help accelerate the concentration, and in turn also speed up the point in time where rates can be restored. Basically, (it’s) a choice between seeing yourself as a victim of the current market situation, or taking action to be drivers of the market situation. They now seem to have chosen the latter.”
If the goal of the alliance is indeed to offer a competitive service to Daily Maersk, the Dutch maritime consultant Dynamar said they may be well-placed to do just that.
“The MSC and CMA CGM pair would be able to operate eight ultra-large container ship (ULCS) services of 11 slow steaming units each between Europe and the Far East” by 2015, sufficient for a daily sailing from Asia to Northern Europe plus one Far East-Mediterranean sling for MSC, Dynamar said. “Maersk Line could man six of its seven North Europe-Far East Daily Maersk links with ULCSs. It has more than sufficient 9,000-TEU class ships available for a seventh loop. Combined, the (MSC-CMA CGM) alliance will control 33 percent of the current ULCS (operating and ordered) capacity against 20 percent for Maersk Line.”
The number of services MSC and CMA CGM could offer would increase if loops were run with nine or 10 units, rather than 11.
“Should there still be carriers around who thought that they would be able to carry on with any tonnage smaller than ULCS-size on this route, they would be well advised to give up on this vision now,” Dynamar said.
A European shipper advocate said the move, while not entirely unexpected, is sure to negatively impact shippers.
“The merging of their services on the routes identified demonstrates two things: the lack of volumes out there in the market and the difficulties of managing to utilize the vessels they operate; and secondly, that in order to compete for supremacy head-on with Maersk Line they need to join forces,” Andrew Traill, managing director of the U.K.-based Shippers’ Voice and policy director of the European Shippers’ Council, told American Shipper. “So the move makes some sense if market share is your only real business model.
“Shippers want choices, choices of service and choices in the price of those services according to required levels and standards of service,” Traill added. “Any amalgamation of services or reduction in the number of carriers offering services is going to negatively impact those choices. When such amalgamation involves two of the top three, the concerns of shippers are bound to be heightened even more.”
|“There was no way for either MSC or CMA to compete with the Daily Maersk concept, only by combining can they do so. Beyond that, no one else can match these two giants on slot costs.”|
Hackett, though, said the alliance has to be considered good for the industry as a whole, the implication being that too many operators were negatively affecting rates even for well-managed, profit-focused lines.
“It begins the process of consolidation which it needs, as too many players have been competing with too much capacity,” he said. “A drop in capacity is a must for future survival, which means scrapping of ships, but to do so means not being able to offer weekly services unless there is consolidation.”
When asked which of the two lines might benefit more from the alliance, Jensen said it’s CMA CGM.
“CMA CGM was facing a strategic challenge, as their order book was insufficient to allow them a competitive position in the market when we look to 2014,” he said. “With this alliance, that problem has indeed been solved. Now the pressure is on the other Asia-Europe carriers, and particularly those who have vessel sharing agreements or slot charters with CMA CGM. Hence I would not think the consolidation or re-arrangement of alliances is over yet, but I do not have a clear guess as to exactly who might buy or partner with whom.”
Simon Heaney, with London-based maritime consultancy Drewry, said he too expected this to be the first shoe to drop.
“I suspect that we will see a lot more partnerships and alliance reshuffling over the next few months as carriers decide how they can be cost competitive in Asia-Europe,” he said. “I also think there will be a few planning exit strategies as they realize the rewards, or losses, are not worth the effort and expense.”
A number of container lines contacted by American Shipper for this story declined to comment on the alliance.
Though the MSC-CMA CGM alliance doesn’t affect the key east-west trades to and from North America, the two lines have an existing vessel sharing agreement with Maersk Line on the transpacific, an arrangement both CMA CGM and Maersk Line said has worked well for their businesses.
According to Dynamar, MSC’s global network can be divided as: 46 percent in east-west trades, 36 percent in north-south trades, and 18 percent regional. CMA CGM’s network is 51 percent east-west trades, 38 percent north-south, and 11 percent regional.
While the merger would ostensibly give MSC and CMA CGM a larger market share and fleet capacity than Maersk, those calculations ignore Maersk’s key network advantages through its hub-and-spoke model. Aside from its Daily Maersk network, Maersk enjoys strong positions in Africa and South America, the other areas where MSC and CMA CGM plan to make combined inroads.
Dynamar speculated that the MSC-CMA CGM alliance could dent Maersk and Hamburg Süd’s control of South America trades, for example.
“Perhaps even more than in the North Europe-Far East trade, the MSC-CMA CGM pact impact will be felt in South America and may not bode well for the rates,” Dynamar said. “At this moment already, the two combined are involved in 19 operations covering the relevant routes. CSAV cooperates with both lines here (where it, despite its current problems, is a strong factor) and it may well join them. Hamburg Süd and Maersk Line, together with MSC the current market leaders, may well look forward to difficult moments here.”
Dynamar said MSC and CMA CGM complement each other well in South America, where they already cooperate.
“MSC has no direct service between the Far East and East Coast South America,” Dynamar said, “CMA CGM is involved in two such operations (with partners).CMA CGM doesn’t operate between North America and South America. MSC has ample connections here. They are both involved in two Far East-West Coast South America loops.”
The most direct consequences of the alliance fall on those lines partnering with MSC and CMA CGM on the affected trades. CMA CGM is especially laden with partners on the Asia-Europe trade.
“It will be interesting to see what will happen to the great many of cooperations which CMA CGM currently has with other carriers,” Dynamar said. “It seems obvious that many of those will be ceased, unless the companies involved would be interested/willing to join the alliance.”
Which isn’t out of the question. Diego Aponte, son of MSC founder Gianluigi Aponte, told the Financial Times as the pact was announced that he would welcome other carriers into the alliance.
“Should other carriers want to join us, we would be delighted, because at the end of the day we need to fill up the vessels,” he said.
Peter Keller, a Vermont-based consultant and former president of NYK Line (Americas), told American Shipper that he saw more changes ahead in the liner alliance landscape. He cautioned that forming alliances is complex, but said the pairing of MSC and CMA CGM would benefit from the strong decision-making of its long-time family owners.
“I would imagine this partnership between Aponte and Saadé will allow for better management so the companies can react more quickly and be more competitive,” he said. — Chris Dupin contributed to this report