Main Impediments for Carriers to be Involved in Alliances

Main impediments of alliances for carriers

Alliance membership comes with challenges and impediments for the carriers involved, as summarized in the above scheme.

Alliances come with a loss of some operational independence for their members. While alliances play a key role in capacity management on the main East-West routes, carriers, therefore, show an increased level of pragmatism when setting up vessel sharing agreements (VSA) with other carriers on these and other trade routes. The design of joint liner services and the selection of ports of call can sometimes result in hefty negotiations between alliance members, particularly when one or more alliance members operate their own carrier-owned global container terminal networks. Alliance membership can overcome a lack of economies of scale and network effects of individual carriers. However, the more extensive the global service network and fleet of a member becomes, the fewer benefits alliance membership brings in this respect.

Alliances also imply a certain loss of strategic independence. Alliance membership becomes more difficult to reconcile with far-reaching vertical integration strategies of carriers. Alliances typically play a strong role in company survival during depressed market conditions. However, the added value of alliances might be less obvious during ‘good times’ when carriers enjoy healthy financial positions.

Alliance membership can imply regulatory headaches for its members. For example, alliances are under legal scrutiny by the EU. In 2009, the EU adopted a Consortia Block Exemption Regulation (Commission Regulation (EC) No 906/2009), allowing shipping companies to operate joint liner shipping services. This regulation was prolonged in 2014 by five years and was due to expire on 25 April 2020. After a lengthy and heated public consultation launched in September 2018, the EU decided in late 2019 to prolong the regulation for another four years till 25 April 2024. In August 2022, the EU launched a new review round of CBER, inviting all parties concerned – container shipping companies, customers of logistics service providers, freight forwarders, and operators of ports and terminals – to provide their feedback to the European Commission by October 2022 on the possible extension of the regulation beyond 2024. In October 2023, the EU decided not to extend the CBER beyond 25 April 2024. The EU’s move to remove the industry’s exemption marks a first step towards ensuring more competition in the container sector in the years ahead. Since late April 2024, shipping companies continue to be able to cooperate after the end of the CBER with the alliances now falling under the existing EU competition rules in this area, which apply to all industries. In other words, liner shipping alliances serving European trades now fall under the EC’s general competition rules for horizontal cooperation between companies. Alliances are not illegal in the EU context. Instead, they are evaluated under an existing set of rules. Still, the end of the CBER might lead carriers to re-evaluate the benefits and costs of alliance formation and could eventually results in the disappearance or restructurering of the large existing alliances covering East-West trade routes.

Regulatory scrutiny is also found in the US. The supply chain crisis in the US of 2020-2022, which was particularly felt in the ports of Long Beach and Los Angeles, incited US President Biden to take aim at the shipping’s exemption from competition law during his State of the Union in early March 2022. He announced his administration would target regulations that allow carriers to collaborate on vessel sharing and other elements in the supply chain. However, the strong stance of President Biden against carriers and alliances is at odds with the results of an investigation by the Federal Maritime Commission (FMC). The Chair of the FMC has made several statements in favor of alliances. The idea that alternative arrangements might be worse than alliances, is a much-stated notion in regulatory circles. In May 2022, a new Ocean Shipping Reform Act was passed, addressing many of the grievances of users and service suppliers to the container shipping lines.

Customers of carriers might act against alliances in case they feel their interests are negatively affected. In a 2022 communication, the global forwarders’ association (FIATA) called for a rethinking of regulatory antitrust exemptions and vessel-sharing agreements in support of shipping lines to ensure they remain fit for their intended purpose. FIATA considers that a more appropriate regulatory response would be to grant permissions to shipping lines, rather than exemptions, to deviate from antitrust law in certain prescribed situations. This would retain the regulatory intent, whilst allowing for certain criteria to be developed for such benefits to ensure they are not misused.