Co-operation in liner shipping C. Ferrari
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.
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
Containerised fleet deployment: TEU share on main trades in 2001 Source: OECD, 2002
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
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 vessel’s slots • Strategic alliances Co-operative agreements on a global basis among a group of companies
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
An example: the revised TACA agreement More External Competition
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
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
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
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
The core theory (graphically) P D S S1 S2 Ton-miles
The conclusion reached are as follows: • The greater the variation in supplier’s 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 supplier’s 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
Increasing co-operation Increases the oligopoly degree of the market Which effects on relations with port terminals and carriers ? Does it affect competition ?
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
Do alliances affect competition? Organisation for Economic Cooperation and Development (April, 2002): “the German liner freight rate index (1995=100) 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”.
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