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American Shipper

Newcomers tread transpacific

Newcomers tread transpacific

Several niche services offered as shippers seek alternatives, but do they have staying power?



By Eric Johnson



      If variety is the spice of life, the transpacific looks to be getting spicier by the month.

      Over a weeklong stretch in late February and early March, three ocean carriers announced they were jumping in (or returning to) the eastbound transpacific trade. One is a ballyhooed startup promising competitive prices, another is a Jones Act carrier hoping to maximize the potential of its backhaul from Asia, and the third is a former transpacific operator planning to use the smallest ships on the lane.

      All apparently have emerged as alternatives for shippers to the oligopoly that is the Transpacific Stabilization Agreement, whose 15 members control an overwhelming share of transpacific market share.

      Transpacific shippers aren't too happy these days, squeezed on both ends by carriers who have driven up rates and shrunk capacity. So the entry of these players could be well-timed.

      The first new service is that of Pacific International Line (PIL), which on April 6 will launch a weekly service (CTP) connecting major ports in China to Long Beach, Calif. The service will use five 1,350-TEU ships, which would be the smallest ships to operate on the trade and are typically more common in major intra-Asia feeder trades.

      PIL's reentry in the transpacific sees them part ways with partners Wan Hai and 'K' Line. According to the maritime news service Alphaliner, PIL and Wan Hai had first entered the transpacific trade in March 2007 with a joint service that was dropped in November 2008, when the two lines joined 'K' Line on the Japanese carrier's PSW service.

      'The launch of the CTP service is part of our continuing strategic progression following the end of our cooperation with 'K' Line and Wan Hai in the transpacific market,' Ee Pei of the company's research and strategic planning department, told American Shipper. 'This independent service will enable PIL to be more responsive to changing market conditions and thus better serve the needs of our customers.'

      The second new service will be operated by The Containership Co., a startup venture based in Norway with 30 investors, $25 million in capital, and fronted by former Maersk Line and CMA CGM executive Franck Kayser.

      The service, dubbed Great Dragon, will simply be a shuttle between Taicang, a port 30 miles upriver from Shanghai, and Los Angeles.

      The Containership Co. is planning to lure shippers in China's Jiangsu province by offering the first direct service to North America from Taicang, a move Kayser told American Shipper can shave $150 to $200 off trucking transit costs to container terminals in Shanghai. The service is billed as a no-frills shuttle, and has been compared to the model of low-cost passenger airlines.

      'It's the first direct service from Taicang, so it gives us first mover's advantage,' he said.

      To emphasize the potential uniqueness of the service, American Shipper research affiliate ComPair Data has no listing for Taicang for any direct services to North America. However, Taicang is a growing port with more than 1 million TEUs of volume, and Kayser projected that as much as 9 million TEUs of cargo in the region were up for grabs with the new service.

      The Containership Co. is also planning to take advantage of attractive ship charter terms, with the vessel sizes they'll use are among the most extraneous in the market today.

      Kayser said the five vessels for the service have been chartered for three to four years.

      'Of course, when you take them on a longer-term basis, you pay a little bit over the market rate, but we have got a reasonable rate,' he said.

      The third new service is offered by Jones Act carrier Horizon Lines, the nation's largest domestic container line. In December it will begin filling the eastbound leg of the TP1 service it operates from China to the U.S. West Coast on behalf of Maersk Line.

      Horizon told American Shipper that the eastbound rotation and deployment of the service may differ from what's offered now. The current eastbound rotation is Yantian, Xiamen, Kaohsiung, Los Angeles and Oakland.


Brian Taylor
senior vice president of international services,
Horizon Lines
'All the flexibility we can bring as an NVO coupled with the stability piece customers are looking for on the ocean side.'

      'We haven't finalized our deployment,' said Brian Taylor, senior vice president of international services for Horizon Lines. 'We might look at some ports further north in Asia. The rotation might look different. We've spent the last six to eight weeks talking to customers about this. We asked if they noted any sourcing shifts or trade pattern moves we should be aware of.'

      Taylor, who previously ran the Horizon Logistics unit, said the move is a natural transition from the company's two-year-old international non-vessel-operating    common carrier business.

      'In talks with our customers, they were saying, 'you run these ships out of Asia, why are you not filling these ships yourselves,' ' Taylor said. 'The Maersk agreement was working well, but we had a decision to make. From the feedback we were getting from customers, we thought this was a viable option.

      'Maersk said they would take the space, but on different economic terms. They also wanted to wait until later in the year to make a commitment. For us, we couldn't wait so late in the game to make a decision. We've had an agreement in place with Maersk for 10 years and it's been mutually beneficial, but we're looking to do something different.'

      Taylor said Horizon will try to lure shippers with a combination of reliable ocean service and the company's domestic capabilities.

      'There are a multitude of brokers and 3PLs out there that have West Coast transload operations,' Taylor said. 'The opportunity for us is to have control over the ocean transportation and then link to our 175,000-square-foot transload facility eight miles from the port in Los Angeles, and the ability to flow that to our domestic system.'

      He said it gives them options to offer shippers in terms of transit times, delivery options and special needs. He also pointed to a Web-based transportation management system for less-than-truckload freight that can be linked.

      'All the flexibility we can bring as an NVO coupled with the stability piece customers are looking for on the ocean side,' he said.



Bucking Slow Trend. The most noteworthy facet of the planned service is its speed. While virtually every major carrier in the transpacific has slowed the speed of some of their services (or is at least considering it), Horizon's ships will sail fast from Asia. Taylor said the carrier won't be at a cost disadvantage because of it though.

      'Fast transit is a piece of what we bring to the table,' he said. From an operational standpoint, 'it will be no different than what we do for Maersk today. The fast transit is based on the need to feed Honolulu and Guam, which are our cornerstones. So what we do in the future is what we're already doing today. And quick transit time encompasses things like fast discharge of containers in Los Angeles, because we are using smaller ships.'

      The service parallels one that fellow Jones Act carrier Matson introduced four years ago, but with a couple key distinctions. First, Horizon already operates the service, unlike Matson, which had to add the extra legs to and from China. And second, Horizon's NVO business has been building a customer base in Asia for the last two years.

      'Going in, we have a base of cargo from which we can draw on to support the service,' Taylor said. 'There are a number of customers with us in the domestic trades who also operate internationally. This is an opportunity for us to leverage those customers. For our NVO customers, this is a natural extension of what we're already offering them.'

      He said the time was right for a niche service because 'there is some stability and upward movement' in freight rates.

      'We believe we are entering the market at an opportune time,' Taylor said when the service was announced. 'China continues to serve as a global economic engine. Burned by sudden capacity shortages over the past four to six months, U.S. importers are looking to diversify their ocean shipping contracts, adding alternatives for peak season capacity and seeking more stable pricing. We will actively engage with our customers during the current transpacific contract season to fully capitalize on these opportunities as a niche player recognized for schedule integrity and customer

service.'

      Unlike the other two services being offered, there's a lag time between Horizon's announcement and when the service will actually begin. That's because Horizon's current contract with Maersk runs through Dec. 10. This lag has made it a priority for Horizon to ensure that eastbound cargo will be waiting for it come winter given that eastbound annual service contracts are traditionally signed in April and May.

      'We want to ensure that there's volume available for Horizon in December,' Taylor said. 'The vast majority of shippers indicated they don't require us to lock in contracts in April and May. A couple of shippers have said we do need to put in an RFP, but the vast majority said that wasn't necessary.'

      Taylor said he's also seen support for the service in terms of shippers who want to support a U.S.-flagged merchant fleet: 'We've found interest in supporting an American-flag carrier in the transpacific.'



Capacity Coming. The introduction of the three new services can't be viewed in a vacuum. Carriers have indicated they will begin reintroducing capacity into the transpacific come spring ' mostly as winter capacity management programs end, but also to take advantage of a perceived recovery in the trade.

      'The fleet of idle containerships will diminish over the next two months as previously laid up vessels will return to active service with the introduction of new services, capacity upgrades on a few loops, and additional extra slow steaming,' Alphaliner said in a March 8 note. 'These moves could lead to the employment of about 40 additional ships of over 3,500 TEUs by the end of April, with more than 15 units drawn from the current pool of idle ships.' The others will be delivered

ex-yard or freed up by their current charterers.

      'Carriers are gearing up for the summer shipping season with optimism nurtured by a revived demand in most main trade lanes. Charter market ships of 4,000-5,500 TEUs are now becoming harder to find after a wave of charters for such ships in the past few weeks. A number of carrier-controlled units of 4,000-7,000 TEUs currently remain idle, but some of these could be reactivated at short notice, if justified by the demand growth,' Alphaliner said.

      While that forecast is applied to all global lanes, some of that capacity will eventually find its way to the transpacific.

      Therefore, the entry of new players, especially the three outside the TSA structure, has the potential to upset a delicate balance that carriers in the trade have struggled to forge.

      In particular, the entry of The Containership Co., with its low-cost model, seems aimed at shippers angry over rising rates without an equal rise in service levels.

      But when asked about how the carrier may affect the competitive landscape on the transpacific, Maersk Line CEO Eivind Kolding said the effect would be negligible.

      'There are 18 global carriers that are our competition,' Kolding said in an interview in early March. 'Then, aside from those, there are 30 niche lines, and whether there is one more of those does not make much difference to Maersk. It will not be significant.'

      On how it will replace the Horizon capacity, Maersk said it would be 'carefully watching market developments and reviewing customer requirements. Once these are made clear we will release a plan designed to replace TP1 capacity. You can expect to see this plan in the third quarter when customer requirements for 2011 will be better known.'

      That jives with Taylor's comments that the Danish line was taking a wait-and-see approach to committing to the capacity past December.

Phillips

      Back to The Containership Co. (TCC), Francis Phillips of ComPair Data was also dubious about the startup's position.

      'That TCC will survive is by no means certain,' he said. 'If it is treated as a genuine new 'outsider' it will have to fight for every stitch of local cargo around Taicang. It will be fascinating to see if it is allowed to prosper unopposed, as Hamburg S'd was when it slipped into the transatlantic a couple of years ago, or not.

      'If seen by other carriers as a genuine low-cost threat, and its shippers are warned off and penalized when shipping from and to other places, it is highly unlikely small-ship TCC will last very long at all.'

      The Containership Co. will apparently slow steam its service, with a 16-day transit       PIL's service could also face some challenges with the size of its ships being much smaller than other lines. With the service covering multiple ports in Asia, fast transit times will only be offered via the last port of call (Shanghai). In the last two years, PIL and Wan Hai have been squeezed out of the transpacific and Asia/Europe trades, with the two now buying slots on COSCO services from Asia to Europe.

      Yet the timing of the launch for the PIL and The Containership Co. services is interesting, given that it comes weeks before new annual transpacific contracts are due to be signed. The capacity to be added by The Containership Co. and PIL is negligible in the context of total transpacific capacity, and Horizon's venture doesn't add any capacity since it is taking over space previously occupied by Maersk. But shippers could perhaps use lower rates offered by the new players in their negotiations with TSA carriers.

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