Carrier Alliances Should Not Control Service Prices

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By MarEx 2016-11-11 19:01:03

On October 21, 2016, after several months of deliberation, the Federal Maritime Commission approved the Ocean Alliance vessel sharing agreement between CMA CGM / APL, China COSCO, Evergreen Line and Orient Overseas Container Lines. 

As a commissioner, my main concern during the approval process was that ocean carrier alliances could hurt domestic businesses by using their collective power to negotiate prices downwards. This could effectively create a monopsony (a market situation in which there is only one buyer) for the supply and service firms that do business with container carriers. 

The Ocean Alliance members filed their original agreement with language that would allow them to jointly negotiate and jointly procure services from suppliers like tug operators, barge services, bunker fuel suppliers, feeder services and/or stevedoring services. 

The maritime business community operating in and around the American waterways – rivers, coasts, Great Lakes, and harbors – raised objections to the joint contracting and procurement language. Tens of thousands of family wage jobs are supported by these service providers and the U.S. coastal and inland waterways fleet.

The Federal Maritime Commission has the power to approve ocean carrier alliances, immunizing ocean carriers from certain antitrust related activity, but the Commission does not have the authority to grant immunization for domestic service providers such as tug and barge operators. 

It would not be fair to give ocean carriers the ability to jointly contract and procure services while the domestic service providers cannot negotiate collectively. In addition, allowing the ocean carriers to coordinate purchasing creates a monopsony power concern. Monopsony power increases the ability to drive down the price of a purchased product, depressing output below what would prevail in a competitive free market. 

I have identified below the changes to the Ocean Alliance Agreement from its original filing in July 2016 to the finalized version in October. The changes fall into three general categories: 1) the scope of the agreement, 2) the members’ authority relating to chassis and related services, and 3) the ability of the parties to jointly negotiate and contract.

First, changes were made that clarified the geographic scope, the range of vessel capacity, and the type of information that could be shared between the Parties under the Agreement.  An appendix was added listing the specific countries included in the Alliance trade. 

Final language also provides more specificity in the types of information that can be shared between Parties in Article 5.3 and adds a subsection that prohibits the parties from sharing information on freight rates, prices, tariff items, confidential service contract terms or conditions, individual customer lists, individual marketing plans or proposals, or individual bids.

Second, the changes to Article 5.10 maintain the limited role that carriers have said they wish to have in chassis. Under the original text, Parties could discuss and reach agreement amongst themselves or with third parties on the use and provision of chassis, containers, and related equipment as well as any other related goods or services. The finalized language, however, only allows the parties to meet and discuss matters related to chassis, containers, and equipment.

Third, extensive changes were made to provisions that allowed for joint contracting and procurement. The final language of Articles 5.2(e) and 5.11 removed some joint contracting authorities entirely and limited the remaining authority to jointly contract for transshipment, barge/feeder services, bunker fuel, and facilities by stipulating that those could only occur outside the United States.

Article 5.9 was also significantly altered to follow the framework established in the 2M Alliance Agreement (Maersk Line and MSC). Under that framework, the Parties must negotiate independently and enter into separate contracts with port terminal facilities, marine terminal services (except where a terminal wants to negotiate with the Parties jointly), tug services, stevedoring services, and other services. On the operations side, though, the Parties can still jointly discuss and coordinate on matters such as port schedules, berthing windows, and other operational matters.

Since the Ocean Alliance is allowed to jointly negotiate with terminals that agree to negotiate with the Parties jointly, some terminal operators and port authorities may want to explore options for entering into their own alliances where they could perhaps jointly negotiate terms and conditions with the ocean carriers.  

The Commission is now reviewing the proposed vessel sharing agreement of THE Alliance (Hapag-Lloyd, K Line, Mitsui O.S.K. Lines, Nippon Yusen Kaisha and Yang Ming), and I will continue to ensure that American marine services suppliers are protected from unfair joint purchasing arrangements between carriers.

William P. Doyle is a Commissioner with the U.S. Federal Maritime Commission, which regulates liner companies, ocean transportation intermediaries and marine terminal operators, among its other duties. The thoughts and comments expressed here are his own and should not be construed to represent the position of the Commission or his fellow Commissioners.   


The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.