Global alliances are strategic cooperation agreements between major linear shipping companies around the world.
Alliances are a critical part of modern shipping. Their arrangements allow carriers to avail of economies of scale and economies of scope, which are essential components of efficiency in a cross-continental industry. By combining both physical resources and service offerings, carriers can increase revenue, extend their coverage, and experience benefits across a variety of operations. Collaboration can reduce high fixed-costs, making shipments more cost-effective.
The International Transport Forum assessed the impact of alliances on the container shipping industry in their 2018 report. They found that global alliances are having a profoundly negative effect on the shipping industry. While they bring some benefits, the power structure creates industry barriers and promotes inefficiency.
Here is a more detailed look at their findings.
Four Generations of Alliances
Since the first alliance was established in 1996, there have been four generations of alliances.
First Generation (1996 – 1998)
The first generation consisted of three core alliances: Global, Grand, and Maersk/Sealand. While their intentions were big, they lacked stability, causing the first generation to fail.
Second Generation (1998 – 2012)
The second generation was a lot more stable, lasting 14 years. It also included three core alliances: New World, Grand, and CKHY.
These alliances differed structurally to those of the first generation as they generally combined one primary carrier with several smaller carriers.
Third Generation (2012 – 2017)
With the third generation of alliances came the first mega-ships. These are enormous ocean carriers aimed at maximizing shipping volume among the major shippers.
The main alliances formed throughout this period were G6, CKHYE, 2M, and O3. They were able to consolidate on a scale like never before.
Fourth Generation (2017 – present)
The larger-scale consolidation and the use of mega-ships brought about the beginning of the fourth generation of alliances.
The three fourth-generation alliances are 2M, Ocean, and THE. No alliance has a single dominant carrier, making them significantly different from previous generations.
Impacts of Alliances on Transport Systems
Overall, alliances have negatively impacted transport systems’ efficiency, the customers’ experience, and the variety of competition.
There is a distinct link between alliances and overcapacity. The latest generation of alliances has contributed to fewer service frequencies, direct port connections, declining schedule reliability, and longer waiting times.
Alliances bring instability to the maritime transport industry. They are partly responsible for the concentration of port networks, underuse of public infrastructure, and unhealthy competition between terminal operators and other port services.
Impact on the Customer
Customers are most affected by the price and speed of shipping. Although freight rates have halved over the past two decades, this doesn’t necessarily translate to reduced prices for customers. Surcharges, many of which are hidden, make up a significant amount of the final price.
Impact on Competition
The container shipping industry has become very concentrated. The top four carriers have a market share of around 60%. The size of these carriers has created an unbalanced power structure, making things difficult for smaller carriers.
The market imbalance is even more apparent on individual trade lanes covered by carriers, particularly on the East-West trade lanes.
It’s likely that the increased market power of alliances has led to industry barriers and an unfair marketplace.
Impact of Alliances on Stakeholders
Impact on Shipping
There’s an increasing gap between the alliances and the rest of the competition. All eight carriers within the alliances have experienced considerable capacity growth. In contrast, the lower-ranked carriers are downsizing. Small and medium-sized carriers may be forced into further consolidation to survive while the industry leaders continue to grow.
In the current market, overcapacity seems likely to continue. Entry barriers will maintain the gap between alliances and smaller carriers.
Impact of Ports, Terminals, and Port services
Although alliances bring benefits for some carriers, they have a negative impact on ports, terminals, and port services by undermining their return on investment. Alliances and increased consolidation have partially caused the closure of smaller ports, terminals, and port services.
Impact on Shippers
Shippers focus on several key areas when it comes to freight transport. They usually prioritize cost, reliability, choice, and speed of transport. Alliances have created less choice and service differentiation and lower quality for shippers. As a result, prices have increased due to supply chain issues, reduced bargaining power, and more difficult risk management.
A Step Too Far?
Most people can recognize that a certain level of cooperation is necessary for international shipping’s efficient operation. Carriers must work together to reach a capacity utilization high enough for mega-ships. However, the negative impacts across the industry suggest that carriers may have gone too far.
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