What are they?
If you’re one of the many companies using ocean carriers to fuel your supply chain, there’s a good chance you’ve dealt with a member of a shipping alliance before. After the Great Recession (2007-2009), ocean carriers began forming contractually-bound alliances. These agreements leverage the members’ collective volume and fleet of ships to insulate themselves from the turbulent and cutthroat market of container shipping. Currently, 9 of the largest shipping companies in the world are grouped into 3 alliances (Figure 1), and the allied carriers collaborate to consistently serve their customers and help one another.
What’s the point?
The alliances provide carriers with capacity flexibility without having to add new ships to their fleets. This eliminates significant overhead costs for the member companies. It also enables them to divvy up specific lanes through fleet-sharing agreements to ensure their collective fleet is covering all necessary ports. When certain carriers cut routes to boost efficiency or maintain profits, customers will often be directed to utilize alliance partners to maintain that lane in their supply chain with minimal disruption.
Throughout the COVID-19 pandemic, capacity coordination has been a huge advantage for the alliances. The amount of idled ships reached record highs in April 2020 as the pandemic brought global commerce to a screeching halt. Woes for shippers have continued as carriers cancel sailings and force capacity shortages in order to maintain prices while economic recovery lags. Even before the pandemic, these measures were frequently utilized to cut costs. When demand allows it, carriers blank sailings and park ships to reduce the size of active fleets, sometimes even temporarily eliminating entire lanes. These measures enable carriers to reduce operating costs while keeping prices steady. The pandemic is an obvious example of this type of coordination, but carriers also preserve prices during slower shipping seasons using this strategy.
While this may protect allied companies’ profits during times of lower demand, it also preserves competition in the long run. Larger carriers can draw upon cash reserves during less active periods in the market to remain in operation while less wealthy carriers may end up dropping out of the market. With smaller competitors eliminated, the remaining carriers would be free to drive up prices without fear of losing customers. This is where alliances play a useful role. The member companies are able to lean on each other for financial and operational support, preserving their presence in the market. A catalyst of alliance formation was Maersk’s attempt to employ that exact strategy of squeezing out smaller competitors in the wake of the financial crisis. Since then, so many large companies have bought into the alliance strategy that nearly 80% of all cargo in the world is carried by a member of the big 3 alliances. While they are often accused of fixing prices with or without a pandemic, the clear benefits to customers have kept alliances afloat in the face of scrutiny.
Another side effect of large alliances is regular General Rate Increases (GRIs). A GRI is exactly what it sounds like: a price increase agreed upon by the alliances. When demand allows it or profits are threatened, the alliances will convene to set a GRI that theoretically stabilizes prices and “resets” the market. These increases do effectively elevate prices, but they are never permanent. After a GRI is implemented, there’s usually a period of compliance when the alliances and their members maintain relatively similar prices. This consistency can last anywhere from a few weeks to a few days, and they usually end when a single carrier drops prices. Once a member of any alliance lowers prices and threatens market share of the other members, most follow suit. In times of economic turbulence like the COVID-19 pandemic, GRIs occur more often because carriers are adapting to a fast-changing market. In June 2020 alone, alliances agreed upon and implemented 3 different GRIs.
Why does it matter to me?
When choosing carriers and planning lanes for an international supply chain, it’s imperative to pay attention to the alliances for a variety of reasons. First and foremost, alliances give members a wide range of coverage while ensuring that costs stay low by utilizing vessel-sharing agreements. This means that alliance members can often quote cheaper rates than non-members for the same lane. The agreements in alliance contracts also require a level of consistency from members. While blanked sailings won’t altogether disappear, they can be less common than they are with carriers that don’t belong to an alliance.
Alliances try to protect their customers by building contingency plans should one of their members hit financial troubles. Because of this, working within an alliance can provide a level of security to your supply chain that non-members can’t match. That said, if you are looking to diversify the carriers in your supply chain, it’s important to keep alliances in mind. The nature of alliances means that members will be affected by the success and efficiency of the carriers in their alliance. So, if a carrier is struggling financially or isn’t meeting expectations, you may be better off looking to a different alliance for a new carrier. If you simply shift to another carrier in the same alliance, you may encounter the same problems you tried to avoid.
Lastly, alliances are enduring and legally bound agreements, but they aren’t permanent. Carriers may change their membership or leave alliances, so it’s important to keep tabs on the expiration of contracts and the formation of new alliances. If a carrier in your supply chain forms a new alliance or drops out of all alliances altogether, changes in service and cost are likely to follow. When signing contracts with carriers, make sure you know how your contract overlaps with their alliance membership.
There are a variety of benefits and potential pitfalls to dealing with alliances, so it is most important to be aware of their existence and how your carriers interact with them. Whether you’re most concerned about price, speed, or reliability, alliance memberships of your supply chain partners can have a large impact on the quality and cost of your ocean supply chain.
Photo by Chris Pagan via Unsplash.