Possible Service Impacts of Carrier Mergers in 2016

From JOC.com

With two and possibly three mergers or acquisitions among container lines scheduled to occur this year, beneficial cargo owners are wondering how their supply chains will be impacted.

French carrier CMA CGM will acquire Singapore’s NOL for about $2.4 billion; the Chinese government has approved the merger of Cosco and China Shipping Container Lines into a single entity called Cosco Shipping Group; and the South Korean government has been encouraging Hanjin Shipping and Hyundai Merchant Marine to engage in some kind of consolidation.

The merger of some or all of these lines could be the start of a wave of mergers that would reshape the mostly money-losing and overtonnaged shipping sector. BCOs are divided on the impact of more consolidation. Some think it will help provide stability and better services, while others worry about the impact on competition.

“Capacity is out of control right now, and we could wind up seeing as few as six to eight carriers,” said Pat Moffett, vice president of global logistics at electronics company VOXX International. “If the carriers handle it right, they will improve their services and balance their rates so that everyone can reach a comfortable level.”

In the long run, Moffett said shippers may be better off with stable freight rates, even if they rise over time, rather than the kind of volatility of the last year or two. “When rates drop 30 percent, carriers can’t expect to get the whole megillah back in six months,” he said. The consolidation of the fragmented industry into a few major carriers wouldn’t result in a global monopoly, because they’d still be in stiff competition with each other, Moffett added.

Other shippers disagree. “More services, more differentiation of the market is better than less in terms of the steamship line business,” said Alison Leavitt, managing director of the Wine & Spirits Shippers Association and a participant in this issue’s Shipper Roundtable that begins on page 6. “As steamship lines merge or consolidate, it cuts down on the options. Our preference is that there are a lot of options in the marketplace and that steamship lines have freight rates that keep them viable. Unfortunately, that’s not necessarily the case right now, so I think the mergers and acquisitions will continue.”

Lars Jensen, CEO of research firm SeaIntel Maritime Analysis in Copenhagen, said he’s not surprised by the merger activity. “I have been saying that by 2020 there will be only eight big carriers, and this is gradually what is beginning to unfold,” he said. “It will take a long time.” He said the CMA CGM-NOL consolidation and the merger of the two Chinese carriers will result in a shakeup of the five major vessel-sharing alliances.

Over the next year, one of BCOs’ biggest concerns is the reconfiguration of the major alliances resulting from mergers. APL, which will keep its name, will remain in the G6 Alliance through 2016, but will eventually withdraw and become a member of the Ocean Three Alliance as part of CMA CGM.

The new Cosco-CSCL entity could join the Ocean Three, which consists of China Shipping, CMA CGM and United Arab Shipping Co., or it could remain in the CKYHE Alliance of Cosco, “K” Line, Yang Ming, Hanjin and Evergreen Line.

“All of the carriers talking about mergers are in different alliances, so what happens to the alliances? Whose ships come out? Whose ships stay in?” said Greg Boyle, director of forwarding and distribution for Philips and another participant of this year’s Shipper Roundtable. “When we do our allocations, it’s based on carrier first, but then alliance second. So we have to make sure that we have alliance coverage. And now you’re talking about redoing almost every major alliance in the industry. That’s very concerning.”

Boyle is worried about the transition period during which the mergers take place and the alliances are reshaped. “It’s a matter of timing, how quickly and efficiently they can do the merger and bring the extra benefits to the market,” he said. “It’s not a matter of whether we see them as good or bad. We just see them as how quickly they can incorporate the new company.”

Another shipper’s strategy for coping with the reshaping of the industry is to stay in touch with the carriers it has always worked with. “We stay pretty close to what’s happening with each of the five carriers we do business with, in terms of the district they serve and any kind of speed constraints that may result from vessel-sharing alliances,” said Susan Pellechio, vice president of transportation and supplier collaboration at Staples, and the third member of the Shipper Roundtable. “We’ll stay on top of the mergers during the course of the year, which helps us protect the house. Obviously, there will be ripple effects from any period of consolidation and vessel-sharing, so we’ll be speaking to some new providers as well. But given the volume of containers we move on an annual basis and the reliability of our freight, we’re in pretty good stead.”

Contact Peter Leach at peter.leach@ihs.com and follow him on Twitter: @petertleach.

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