Ocean Three vs. Other Mega-alliances

The formation of the “Ocean Three” alliance confirmed one of the worst kept industry secrets. But what will be its impact on the competition?

By MarEx 2014-09-15 09:26:00

The coming together from late 2014 of CMA CGM with CSCL and UASC was widely anticipated after the decision in June of Maersk Line and MSC to jettison CMA CGM in their 10-year “2M” VSA that replaced the original P3 Network plan.

Having been left out in the cold by its erstwhile P3 partners, CMA CGM had to find new carriers to help fill its big ships and with virtually every other carrier already part of an alliance there were few alternatives available.

Despite sounding like a low-budget “Rat-Pack” movie (admittedly far better than the originally touted CUC Alliance brand), the Ocean Three agreement will cover the key East-West container trades out of Asia to and from North Europe, the Mediterranean and both coasts of North America, effective end 2014 or early next year, see the proposed service network in Table 1.

Table 1
Proposed Ocean Three Service Network, Pending Agreements on the Transatlantic Trade

Note: Service names as per CMA CGM. CSCL and UASC likely to use different aliases Sources: Drewry Maritime Research (www.drewry.co.uk), derived from CMA CGM presentation

Note: Service names as per CMA CGM. CSCL and UASC likely to use different aliases
Sources: Drewry Maritime Research (www.drewry.co.uk), derived from CMA CGM presentation

Based on Drewry’s analysis of the service network supplied by CMA CGM, the Ocean Three will initially operate 15 weekly services using a total of 138 containerships. Discussions are also taking place to possibly extend the agreement to cover the Transatlantic trade, which if fruitful would mark new entry into the lane for both CSCL and UASC. Moreover, each carrier will continue to offer services outside of the agreement under existing service agreements with other carriers.

In terms of net changes from the three carriers’ existing service structures, essentially there is little change in the Asia-North Europe trade other than general vessel upgrades so that all four services will be tonnaged at a minimum of 14,000 teu average. For Asia-Mediterranean, the number of weekly services will come down to four from five, but again the average capacity of the remaining loops is expected to increase with the Black Sea service (BEX) for example being upgraded from 6,500-7000 teu to 9,400 teu.

In the Transpacific, the main changes will occur on the Asia-USEC lane with greater focus on the Suez routeing to allow bigger ships. We expect CMA CGM to transfer its 8 x 8,500 teu ships from the TP3/TP9/Columbus joint service it currently operates jointly with Maersk Line into the new Columbus Suez along with three additional units that could well be provided by CSCL and UASC from existing Asia-USWC ships of similar size.

CSCL’s and UASC’s existing Asia-USEC service AAE1/AUC1 deploying 10 x 4,250 units will be suspended with the ships either returned to owners or deployed elsewhere.

Ocean Three is subject to regulatory approval but they should have no problem as its current market share is less than 30% on all routes, see Figures 1-4. Drewry’s analysis shows that Ocean Three will have its largest share on the Asia- Mediterranean trade route with 27% share of all effective westbound vessel capacity, based on current service offerings of the three partner lines.

Figure 1
Capacity Shares of 4 Mega-Alliances in Asia-North Europe Trade

Notes: Based on effective headhaul vessel capacity as of August 2014. Effective capacity = total vessel capacity less estimated space allocated to wayport and out of scope cargo Source: Drewry Maritime Research (www.drewry.co.uk)

Notes: Based on effective headhaul vessel capacity as of August 2014. Effective capacity = total vessel capacity less estimated space allocated to wayport and out of scope cargo
Source: Drewry Maritime Research (www.drewry.co.uk)

Figure 2
Capacity Shares of 4 Mega-Alliances in Asia-Med Trade

Notes: Based on effective headhaul vessel capacity as of August 2014. Effective capacity = total vessel capacity less estimated space allocated to wayport and out of scope cargo Source: Drewry Maritime Research (www.drewry.co.uk)

Notes: Based on effective headhaul vessel capacity as of August 2014. Effective capacity = total vessel capacity less estimated space allocated to wayport and out of scope cargo
Source: Drewry Maritime Research (www.drewry.co.uk)

Figure 3
Capacity Shares of 4 Mega-Alliances in Asia-WCNA Trade

Notes: Based on effective headhaul vessel capacity as of August 2014. Effective capacity = total vessel capacity less estimated space allocated to wayport and out of scope cargo Source: Drewry Maritime Research (www.drewry.co.uk)

Notes: Based on effective headhaul vessel capacity as of August 2014. Effective capacity = total vessel capacity less estimated space allocated to wayport and out of scope cargo
Source: Drewry Maritime Research (www.drewry.co.uk)

Figure 4
Capacity Shares of 4 Mega-Alliances in Asia-ECNA Trade

Notes: Based on effective headhaul vessel capacity as of August 2014. Effective capacity = total vessel capacity less estimated space allocated to wayport and out of scope cargo Source: Drewry Maritime Research (www.drewry.co.uk)

Notes: Based on effective headhaul vessel capacity as of August 2014. Effective capacity = total vessel capacity less estimated space allocated to wayport and out of scope cargo
Source: Drewry Maritime Research (www.drewry.co.uk)

The same charts reveal how much of the East-West routes are now completely locked down by alliances with virtually no room at all for independents. Therefore the Ocean Three can be seen as the last piece in the alliance jigsaw for the foreseeable future. This is not to say that there will be only four competitors left on these routes; each carrier will continue to compete against all other carriers inside and outside of its alliance.

The trend towards these so-called “mega-alliances” is a defensive response to the prolonged down cycle for industry profits, as carriers have realized there is safety in numbers. With little prospect for M&A among the major players, alliances are the half-way house towards consolidation that many in the industry believe is necessary to secure future profitability. However, with the game of musical chairs now over it could be that these mega-alliances actually set up a barrier to large-scale M&A as buying a rival from a different alliance could well increase the market share balance to unacceptable (at least to regulators) levels.

The mega-alliances are often reported as global in scope, but actually they are only the next stages in the evolution of alliances; from the early days of trade-specific groups such as Trio to the East-West focus of today’s VSAs. To properly go global and incorporate North-South routes is very unlikely in the near future in Drewry’s opinion as the same pressures do not apply in those trades.

Jorn Hinge, UASC President and CEO: “We are very pleased to have signed these agreements with partners whom we know well and appreciate. These agreements enable UASC to continue to focus on being a leading provider of the highest levels of customer service in the industry. We recognize that without our customers’ support we can never achieve our goals and we always ensure that the customer comes first.”

Rodolphe Saadé, CMA CGM Vice Chairman: “We are very pleased to have signed these three agreements with such reputable partners, whom we both know and appreciate.  This will allow us to propose to our clients a high quality and reliable alternative to existing services on the market.  CMA CGM will continue its global development.”

The spin in the accompanying media releases from the Ocean Three carriers centered on the benefits to customer service and reliability that the new agreement would provide. In this regard, the Ocean Three carriers have an advantage over the 2M carriers Maersk and MSC who have vastly different track records on ship reliability. Figure 5 shows that the Ocean Three carriers have been broadly on a par for ship reliability based on Drewry’s research since 1Q12 with each carrier’s on-time average close to 69% over the course of the 10 quarters. In contrast, Maersk averages approximately 84% on-time whereas MSC lags well behind on just 57%, indicating the 2M partners have much work to do to align their operations, see Figure 6.

Figure 5
Quarterly Containership Reliability of Ocean Three Carriers, All Trades, 1Q12-2Q14

Note: Measures percentage of on-time ship arrivals whether ship operator or slot charterer; On-time is defined as ship berthing at port +/-24 hours from original ETA Source: Drewry Maritime Research (www.drewry.co.uk)

Note: Measures percentage of on-time ship arrivals whether ship operator or slot charterer; On-time is defined as ship berthing at port +/-24 hours from original ETA
Source: Drewry Maritime Research (www.drewry.co.uk)

Figure 6
Quarterly Containership Reliability of 2M Carriers, All Trades, 1Q12-2Q14

Note: Measures percentage of on-time ship arrivals whether ship operator or slot charterer; On-time is defined as ship berthing at port +/-24 hours from original ETA Source: Drewry Maritime Research (www.drewry.co.uk)

Note: Measures percentage of on-time ship arrivals whether ship operator or slot charterer; On-time is defined as ship berthing at port +/-24 hours from original ETA
Source: Drewry Maritime Research (www.drewry.co.uk)

The reality of course is that the underlying motivation of the Ocean Three, as with all of the other mega-alliances is the quest for economies of scale and to reduce slot costs. Looking at the existing fleet of Ultra Large Container Vessels (ULCVs) of 10,000 teu and above, the Ocean Three carriers currently rank second behind the 2M lines, see Table 2. Ocean Three’s orderbook for ULCVs is not as large as that of the five members of the CKYHE Alliance, but is of sufficient magnitude that when all said vessels are delivered the average size of its biggest ships will be around 13,200 teu, second only to the 2M’s average of 14,800 teu.

Table 2
ULCVs Per Alliance, Current Fleet and Orderbook

Source: Drewry Maritime Research (www.drewry.co.uk)

Source: Drewry Maritime Research (www.drewry.co.uk)

So, in Drewry’s view, Ocean Three will have an extensive East-West network (although not quite as wide as 2M’s), a large share of the East-West markets, superior access to big-ship costs advantages and no apparent incompatibility between the schedule reliability objectives of its members.

Yet, ultimately the success of each alliance will depend on how these often disparate companies in terms of ownership structure, nationality and culture can operate together. How quickly they are able to react to market developments is also a significant factor. Having a single leader, like the fictional character Danny Ocean from the Ocean’s 11 movie franchise, to orchestrate operations, is preferable when needing to make quick decisions, hence why the P3 wanted to set-up a single independent operational center. On the basis of the fewer the chiefs the better, 2M would appear best placed of the alliances, with Ocean Three not far behind.

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Ocean Three is the final piece in the “mega-alliance” jigsaw. Its success, like all other VSAs, will depend upon not only achieving the unit cost savings but also on how well the partners can work together.

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Source: Drewry Maritime Research - Container Insight Weekly http://ciw.drewry.co.uk/