FT060514

Victory At Sea P-3 Networks

    P3 jumped a big hurdle this week as European Commission informed the partners (CMA-CGM, Maersk Line and MSC) that the Commission will not open proceedings in connection with P3.
   The Commission said that it will follow P3 to ensure it remains in compliance with EU competition law.
   P3 still needs China okay, which is expected this autumn.
   But make no mistake, a green light for P3 seems certain to have ramifications for shippers and global logistics strategies for years to come.

Game Is About Dominance

   P3 brings together three family-owned European giants of liner shipping—CMA CGM, Maersk Line, and MSC. The world’s three biggest carriers have pledged to work together on the major East-West trades linking Asia–Europe, Asia–U.S. and the U.S.–Europe. P3 is effectively a vessel sharing agreement—operational rather than commercial in nature—in which the lines will jointly operate 2.6 million TEU of container carrying capacity and some of the world’s largest ships. The competitive advantage the lines hope to gain on rivals will come from the huge economies of scale they will generate, which will cut average slot costs.

All Alone Together

    The lines will continue to run separate services in other trade lanes and have promised regulators they will run independent sales, marketing, and pricing policies on trades where they co-operate.
   On that basis, in March, the U.S. Federal Maritime Commission (FMC) decided to allow the P3 Network agreement to become effective under U.S. law. Most analysts expect China and the EU to take a similar line, which could see P3 start operations in autumn. Proposed schedules have already been circulated to customers and the three lines have promised improved port productivity, network optimization, and cargo consolidation, as well as more direct services due to more port pair connections.
   Other benefits mooted include increased flexibility due to the combined capacity of P3, making it easier to increase or move capacity to meet short-term, sudden changes in demand.

G6 Challenge

Rival alliances in the shape of CKYHE and G6 have since also extended their own vessel sharing arrangements in response to the formation of P3, although as with P3, some of these plans are still awaiting clearance from regulators.
Shippers have been split over the benefits and costs of more vessel-sharing co-operation between lines. Concern focuses on the competitive impact P3 could have on the market, with the three P3 lines set to account for over 40 percent of total container capacity on Asia-Europe and Trans-Atlantic trades and almost a quarter of capacity on Trans-Pacific routes.

Advantage P3

   Especially on the Asia-Europe trades, the economies of scale generated by P3’s network of Ultra Large Container Ships of up to 18,000 TEU capacity is expected to give member lines huge fuel and slot cost advantages. Some fear could be used to force smaller competitors out of the trade, reducing competition, and distorting or inflating the market in the long-term.
   Certainly, some medium-size lines seem set to follow the strategy of Evergreen and join one of the mega alliances (hence the addition of ‘E’ to CKYH) rather than face being left out-gunned on the major East-West lanes.
   The Asian Shippers Council argues that P3 will be far bigger than any other carriers in terms of the number of ships, size of ships, sailing frequency, and port coverage, giving the alliance partners unmatched scale and speeding the demise of smaller players.

Rating Change

    "Such concentration of capacity is untenable. We fear for the worst should the regulatory authorities give approval," said ASC Chairman Mr. John Y. Lu.
    "With fewer service providers, we can only imagine what effect this will have on freight rates and service levels.”
   Shippers are also concerned that other carriers would be forced to order ULCSs to compete, worsening the excess of capacity and increasing rates volatility.
   "Businesses like certainty to allow us to plan ahead, but the shipping environment is anti-certainty,” said Mr. Cai Jia Xiang, Convenor, Greater China Area and Vice Chairman, China Shippers' Association.    “Already shippers have to put up with fluctuating freight rates, longer lead times, and service cancellations."

Better Service In The Cards

    But many liner customers have welcomed more co-operation as the means by which lines can actually improve service levels. Low freight rates allied to violent freight rate volatility have had the twin effects of causing liner service levels to fall as they protect bottom lines, as well as driving up the costs of managing pricing fluctuation for supply chain managers. “The alliances could finally deliver some certainty and stability,” said one executive at a 3PL.
   Many forwarders and shippers also accept that lines need to improve profit levels if they are to deliver the services customers want and agree that some way of managing the excess of capacity that is blighting the market at present is a necessity—although it is worth noting that Maersk Line has continued to rack up sizeable profits even without the benefits of P3.
   The final decision on P3 and the other mega-alliances rests with the world’s regulators. If they give the go-ahead to carriers, then liner customers expect them to take responsibility for policing the new agreements and ensuring competition on the high seas is not mislaid in the search for stability.
SkyKing

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