Alliances in have been around in shipping for decades but there has been a seismic shift in the various alliances over the past 3 years or so. For a long time, Maersk Line and MSC did not participate in any major alliances because they were much bigger than their rivals and so had no need to share vessels on a large scale (they did participate in some smaller Vessel Sharing Agreements (VSA’s) but they were always the dominant partner in these VSA’s, so they could never really be called alliances.
An alliance in container shipping is pretty much the same as is seen in the aviation industry. Why does Singapore Airlines want to be part of the Star Alliance Network? Simple, it means that they can offer flights to many more destinations than they actually fly to themselves. You can book your flight from Singapore to Berlin but it’s likely that you’ll actually fly to Munich or Frankfurt with Singapore Airlines and then have an onward connection with Lufthansa.
Alliances are also a way for the smaller carriers (Top 4 and down) to compete with the likes of Maersk, MSC and CMA CGM. Let’s make it really simple and say that you have 5 container vessels, 10,000 TEU each, and you want to offer a weekly service from Europe to Asia. The problem is that the complete voyage will take 10 weeks and so, at best, you can offer a bi-weekly service. This is less attractive to customers who don’t want to wait 2 weeks for the next vessel.
The answer, would be to pair up with another carrier who also has 5 ships of 10,000 TEU each. The combined service can now operate every week. The way it works in my example is that on every sailing you, as the carrier, are allocated 50% of the space on every vessel, regardless of whether it’s your vessel or your alliance partners. Your customers may book a container on your service but it will actually be carried on your partner vessel. So long as you don’t exceed your 50% space allocation, you won’t pay anything extra even though the container is not on your ship.
Now, obviously, that is a very simple example of an alliance, but it’s basically how they all work. I started by saying there had been a seismic shift over the last 3 years, what did I mean?
For a long time, Maersk Line had been funded by Maersk Oil. This allowed them to build more and more ships as well as buying up other companies in the bid to maintain the number 1 slot, in terms of capacity. Then the Maersk Oil tap got turned off. Maersk Line were told that they would have to fund themselves. Make a profit and you can expand, simple. This left them in the precarious situation that they may not be able to increase their capacity as before and so some new thinking would have to be done.
Shortly after, Maersk Line, MSC and CMA CGM announced they would be seeking to form an alliance with one another. Named the P3 (3 Partners) Alliance, it would dwarf the next biggest alliance, the G6. This was a major shift for both Maersk and MSC, less so for CMA CGM, as they had been operating in alliances for many years. Ultimately, the P3 Alliance was stopped in its’ tracks by the Chinese government who would not approve such an alliance. This was just a minor issue. Very quickly after the P3 Alliance was killed off, Maersk Line and MSC agreed to partner up with each other and operate the 2M Alliance, without CMA CGM.
CMA CGM, in turn, regrouped and launched the Ocean Three Alliance – CMA CGM, UASC & CSCL. The difference here was that this was only a 3 year agreement whereas the 2M agreement was 10 years. As we move into 2017 we will see another shift in that Ocean 3 will come to an end and be replaced by the Ocean Alliance, the remaining carriers in the G6 Alliance and CKYHE Alliance will mostly come together under the umbrella of “The” Alliance (nobody in the room appears to have been particularly creative with the naming).
This is just a snapshot into why alliances exist and what they are for. In the next post I will expand on how they actually operate and how radically different the behavior of each partner can be.