Ocean bid tip: diversify your carrier alliances!

With so many container lines out there to choose from it’s easy to forget that despite their numbers there really are fewer choices than it seems when you consider carrier alliances and vessel sharing partners. If you are large enough to deal in direct carrier contracts with container lines, then you would be wise to consider the various alliances and vessel sharing agreements when choosing carriers. As carriers’ fortunes (or misfortunes) become increasingly volatile the bonds of cooperation become even closer and decisions about capacity withdrawals and service changes are increasingly being made at the alliance level and not at the individual carrier level. More than a few Trans-Pacific importers learned this the hard way back in 2009-2010 when alliances suspended or withdrew capacity completely on major trade lanes. Those importers who only contracted with carriers of the same alliance were distressed to find that NONE of their contracted carriers were servicing the particular lane they needed. I have heard stories like this again and again, where an alliance made a significant change leaving the importer out to dry because they failed to diversify their carrier base beyond a single alliance.

So the first thing we need to do is identify: What is the difference between an alliance and a vessel sharing agreement?

  • Vessel Sharing Agreement (VSA): Member carriers simply agree to share space on each others vessels in particular trade lanes. Space is allocated to each carrier on each others vessels at an agreed upon price on specific trade lanes.
  • Alliance: Member carriers agree to not only share space on each others vessels but also jointly operate and decide on major service routes, new services being introduced, transit / service levels, and capacity controls. Each member carrier agrees to contribute a certain amount of resources (vessel size and number of vessels, space on each vessel, equipment distribution, etc.)

Obviously carrier alliances are a much tighter-knit group then casual vessel sharing agreements (VSAs) and the impact of their decisions will be greater on the individual carriers and their customers than would be under a VSA. The next question: who are these alliances / VSAs and which carriers belong to them? Based on current information (December 2011) here is a list of the various carrier alliances and vessel sharing agreements in the Trans-Pacific market:

New World Alliance: APL, Hyundai Merchant Marine (HMM), and MOL (Mitsui OSK Lines)

To the best of my knowledge, the dominant member and largest contributor to the alliance is APL. MOL is the smallest carrier of the three but offers some of the fastest and most direct services from Asia that the other two piggy-back on. APL has, in my opinion, the best network and fastest connections from Southeast Asia. From my personal experience, the New World Alliance has the fastest transits from Asia to the West Coast.

Grand Alliance: Hapag-Lloyd, NYK Line, and OOCL

To the best of my knowledge, the largest contributor to the alliance is Hapag-Lloyd, although all 3 lines are much closer in size (from a Trans-Pacific perspective) than the New World Alliance. Strong and dependable service from the Trans-Pacific and good transits overall.

CKYH Alliance: COSCO, K-Line, Yang Ming, and Hanjin

This alliance is the easiest to remember thanks to their generic name – the first initial of each carrier makes up the alliance. To the best of my knowledge Hanjin is the largest contributor to the alliance but COSCO, Yang Ming, and Hanjin are all somewhat similar in size and each has their unique strengths and weaknesses depending on the trade lane. From a financial standpoint, probably the riskiest alliance based on the individual carriers’ Financial Z-Score, a financial benchmark developed by Drewry. With the exception of K-Line all of the alliance members are in the Z-Score distress zone with Yang Ming and Hanjin near the bottom of the zone with low scores. I should note this is based on data on/about September 2011 and is obviously subject to change. And I am sure the individual carriers involved would dispute some of the figures used going into that Z-Score.

All that being said, the CKYH is a big alliance and has a wide variety of Trans-Pacific services to both coasts.

VSA – Evergreen and China Shipping

The two companies share vessel space to and from China and a few other major trade lanes. Evergreen is easily the much larger of the two and with far more reliable service. Quite honestly, I do not know what Evergreen’s benefit in this is, while China Shipping gets to market reliable Evergreen service with China Shipping rates.

VSA – CMA-CGM, Maersk Line, and MSC

The three largest carriers in the world in terms of global capacity, and also, ironically enough, all of European origins, this VSA has the largest capacity and import volume into the United States from Asia. That being said, they also tend to have longer transits to the East Coast than average and MSC lacks 45′ high cube containers. They also tend, in my experience, to be a bit more bureaucratic and sometimes difficult to deal with. However, they have a lot of capacity to share with each other and hence can often provide space and rates that people need.

These 3 carrier alliances and 2 VSAs cover over 80% of the import container volume coming into the U.S. As a general rule, you can worry about VSAs less than Alliances.

With alliances, they can, and will, withdraw services as an entire group, completely ending a specific trade lane to a specific U.S. port. Now if you do all of your importing into Long Beach / Los Angeles, or possibly New York for those of you on the East Coast, you probably have little to nothing to worry about. But any other port in the U.S. – Oakland, Sea/Tac, Savannah, Charleston, or any inland inter-modal, etc. – and you should be aware that the possibility of one of the alliances ending, temporarily or permanently, services to your port / CY from one or more of your origins is possible. One company I knew had contracts with Hapag, NYK, and OOCL back in 2009 into Oakland only to be completely screwed when the Grand Alliance made a decision to completely stop calling Oakland out of Shanghai. Did they diversify their carrier base? Absolutely. But they made the mistake of unintentionally choosing carriers who all cooperate with each other in the same alliance.

Now, if your volumes are somewhat small and your origin lanes limited. this may not be a concern; you’d actually be doing yourself a disservice from a relationship and rate perspective to try and split up your cargo amongst too many carriers. However, for any large import shippers out there with multiple carriers and significant volume from key lanes, you absolutely should consider carrier alliances when making carrier decisions.

For example, if Yantian to Seattle and Savannah are two of your top lanes and you have a choice between 3 carriers, all within $100 in price of each other, but two of them belong to one alliance and one of them belongs to another, you’d be better off splitting some of your volume to the carrier in another alliance rather than assigning it all to one carrier or to all the same carriers in alliance.

Another thing you could do would be to allocate to the best value carrier but make sure you give some other origins to another carrier in another alliance whom you can rely upon as a backup should the other carrier alliance make decisions that would affect your business.

My general rule of thumb, if you have the volume, is to make sure you have contracts with carriers from at least two different alliances and one of the VSAs. Not only that but, if possible, try not to commit too much volume to one alliance or VSA over the other. That’s not always possible, but to the best of your ability you don’t want to do that. It’s difficult to count on a backup carrier to suddenly absorb a huge increase in volume when you only have a small MQC committed to in the contract.

For my company’s current contracts I think we fared very well from this standpoint, which we weren’t always able to do in the past because the numbers were not economically feasible. We have at least one carrier from each of the 3 alliances and 2 VSAs. So from a network coverage we truly have all our bases covered from a diversification standpoint. However, two of the carriers are small contracts so if we do run into trouble with the others and need to call on them to pick up the slack, we could have a problem. But with such a diversified carrier base the risk of that is very low.

We’ll try to keep this post updated from time to time as the Alliances and VSAs change. Bookmark this post as a handy guide to who’s-who in the Alliances and VSAs and remember to keep that in mind when negotiating with carriers and deciding which carriers you are going to do business with. Remember: you can easily diversify your carrier base and yet still put all your eggs in one risky basket if they are all of the same alliance.

Twitter RSS Facebook
SwizStick

About The Author:

Co-Contributor

Leave a Comment