Cooperation in liner shipping

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Co-operation in liner shipping

• C. Ferrari

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Liner shipping a definition
Liner shipping refers to maritime transport
services that are provided on a regularly
scheduled basis to pre-determined ports. Ships
involved in these trades can be general cargo
carriers, specialised cargo carriers (e.g. car
carriers or refrigerated goods carriers) and/or
partially or fully dedicated container carriers.
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Four important characteristics of liner shipping

• Fully containerised vessels represent an
  important part of the general cargo fleet and
  carry a large majority of containerised trade
• Top 20 liners account for 72 of world container
  capacity the top 5 account for 34
• The growth in the fully containerised fleet has
  far outstripped growth in global economic
  activity and trade
• 2001 2741 vessels for a capacity of 4.99 million
  TEU
• 1990-99 containerised trade 200 GDP 50
• Ships have been getting larger as operator seek
  to benefit from economies of scale

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Containerised fleet deployment TEU share on main
trades in 2001
Source OECD, 2002
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Why should liners co-operate?

• To exploit scale economies of ships
• To face Hub spokes system
• As a response to the globalization of the world
  economy
• To face competition

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Which forms of co-operation ?

• Conferences
• price-fixing agreements (today about 150) between
  liners
• Consortia
• arrangements between liners aimed at supplying
  jointly organised services by means of various
  technical, operational, or commercial
  arrangements (joint use of vessels, port
  installations, marketing organisation)
• Slot charters and slot agreements
• agreements for mutual reservation of part of the
  vessels slots
• Strategic alliances
• Co-operative agreements on a global basis among a
  group of companies

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Liner conferences today
There are about 150 liner Conferences operating
throughout the world with membership ranging from
2 to 40 separate lines In the late 90s
Conferences accounted for approximately 60 of
the TEU capacity in major trades Today there is a
growing participation of non-conference operators
(independent carriers) that have sufficient
resources to duplicate the capacity, frequency
and level of equipment that has generally been
the province of the conference carriers
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An example the revised TACA agreement
More External Competition
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Not all carriers are equal
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From Conferences to Strategic Alliances
In the 90s a new form of co-operation among liner
companies appeared the (so-called) strategic
allieances They group companies operating on
different routes around the world in order to
offer a worldwide service to their
clients Companies belonging to a certain alliance
may well belong to different conferences
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Strategic alliances

• These agreements cover
• employment and utilisation of vessels
• Joint vessel route assignments, itineraries,
  sailing schedules, type and size of vessels,
  ports and port relations
• charters, space/slot charters
• the use of joint terminals
• co-ordination of containers, pooling of
  containers, establishing of container stations
• vessel feeder routes and co-ordination with
  inland services
• information and procedures exchanges

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Strategic alliances

• They do not cover
• joint sales, marketing, or joint
  maritime/multimodal pricing
• joint ownership of vessels or maintenance or
  assurance
• joint or common bill(s) of lading
• common tariffs or the sharing of profit/losses
• joint management and executive functions
• revenues pools or cargo pools

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1999
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Alliances and mergers (1995/1999)
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13 Ship-owners-517 vessels on East/West Trade in
1997 (.000 teu)
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The core theory
Why strategic alliances are so unstable? Because
the core of the market is empty (Sjostrom, 1991
Button, 1996)
Sjostrom There is an empty core when capacity
defined as the level of production associated to
the minimum average cost exceeds demand for a
price equal to that minimum cost Competition
pushes some firms out of the market, so price
goes up Every time there is an overcapacity in
the short run there are few possibilities for a
competitive equilibrium
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The core theory (graphically)
P
D
S
S1
S2
Ton-miles
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The conclusion reached are as follows

• The greater the variation in suppliers minimum
  average costs, the more likely it is that there
  will be a competitive equilibrium
• There is more likely to be an empty core when
  demand is less elastic
• The larger a suppliers capacity is relative to
  the market, the more probable is that the core
  will be empty
• Agreements to create a core are more likely to
  occur during an economic recession
• Wide variability in demand or costs increases the
  probability of agreements
• Agreements are less likely when there are legal
  restrictions to entry

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Different conditions for rent seeking and
stability collusion
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Increasing co-operation
Increases the oligopoly degree of the market
Which effects on relations with port terminals
and carriers ? Does it affect competition ?
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Alliances vs. port terminals

• Alliances have a great market power in respect
  of each single port terminal
• Due to
• overlaps of ports market basins
• Hub Spoke scheduling of services
• Competition among port terminals
• Alliances force for terminals overcapacity
• Alliances have interests in dedicated terminals
• Alliances may have interests in direct
  management of hub terminals
• Alliances have interests in time savings instead
  of cost savings

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Source Blomme, 2000
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Do alliances affect competition?
Organisation for Economic Cooperation and
Development (April, 2002) the German liner
freight rate index (1995100) at the beginning of
2000 reached 105 and in the first 6 months of
2001 is around 120. The widespread adoption of
containers allowed for decreased handling costs,
more efficient loading and off-loading and
greater economies of scale. Normally, one might
have expected these changes to contribute to
increased productivity and lower shipping prices.
However, this is not reflected in this liner
price index.
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Towards forms of co-opetition ?
Co-operation limiting supply guarantees to
carriers the existence of a liner
service Moreover, a certain degree of competition
still exists in the liner market. In fact, the
maritime transport cost has decreased in the long
run. Co-operation is the most effective way that
liners have to reinforce themselves and then
struggle with competitors. Or co-operation
assures that some competition in the market exist