Executive Briefings

Ocean Carriers Share Assets to Reduce Costs, Enhance Service Offerings

Shipping alliances allow carriers to realize economies of scale while providing customers with more frequent sailings and faster transit times. Some critics, however, question the competitive results.

Up the Pearl River from Hong Kong, there's a section of riverfront in a special economic zone that five years ago was designed to become a large containerport serving many of the 60,000 foreign ventures that flourish around Guangzhou, China. Today, the wind blowing off the river ripples through undeveloped grassland where the port was supposed to rise.

An alliance of shipping lines that once proposed to build and operate the port broke up before the first container crane ever rose along the waterfront, according to zone officials. Hundreds of trucks hauling 40-foot containers still bump their way over roads leading from the zone, but they are headed toward the big container terminals in Hong Kong.

It is a cautionary tale for executives trying to make the best possible choices when setting up foreign manufacturing plants, and one of the reasons why so many people in global business are intensely interested in the major shakeup of ocean shipping alliances that took place earlier this year. Global enterprises, of course, are concerned over the long-term impact such alliances might have on rates and international logistics. But as the Guangzhou scenario illustrates, they are equally interested in seeing alliances survive to deliver on their promises and projects.

"The whole idea behind alliances is to meet the shipper's demand for service," said Gil Roeder, a spokesman for American President Lines in Oakland, Calif. APL and its parent company, Neptune Orient Line of Singapore, are part of the New World Alliance with Mitsui O.S.K. Line of Japan and Korea's Hyundai Merchant Marine.

Improved customer service is certainly one driver of alliances - they provide shippers with more frequent sailings, broader reach and perhaps the ability to make their container volumes count for more when negotiating rate contracts.

Equally compelling, however, are the potential benefits to carriers from better asset utilization. When participating in alliances, shipping lines are able to use the economies of scale of bigger ships and terminals to reduce costs and put off construction of new vessels.
"In the prevailing distressed economic environment of global shipping, alliances are a way for carriers to [meet service demands] without facing the intense fixed-cost investments that have been typical in the past," said Roeder.

At the same time, however, regulators and some logistics managers say it's possible that having a small number of very large players could make it easier for ocean carriers to increase freight rates or limit capacity. Either would be bad news for global companies that rely on containers to move produces from overseas factories.

How Alliances Started
It's hard to get a solid grasp on worldwide shipping alliances without at least some background on what the alliances are, how they developed and how some changed partners earlier this year.

"We wanted to see if we couldn't share assets and provide more frequent service without making huge investments."
- Gary Wollenhaupt of Sea-Land

Sea-Land and Maersk introduced the alliance system in the early 1990s when they began sharing vessels in the Atlantic and Pacific oceans, according to Gary Wollenhaupt, a spokesman for Sea-Land in Charlotte, N.C. "The primary reason we formed the alliance was to cut costs," said Wollenhaupt. "We wanted to see if we couldn't share assets and provide more frequent service without making huge investments."

Their sharing of assets has not been limited to ships. At the Port of Tacoma, Wash., for example, the two carriers have combined terminal operations. Before forming their alliance, Sea-Land had a 107-acre facility on the port's Milwaukee Waterway as its main terminal in the Pacific Northwest. Maersk had a 35-acre terminal about a mile away on Tacoma's Blair Waterway. The two lines began to consolidate operations in 1996, and now use a combined 132-acre terminal at the Sea-Land site.

The consolidation of terminals also helped the two lines achieve further savings by improving their ability to assemble dedicated double-stack trains. The partners eliminated extra trucking of containers between terminals and the problem of having to assemble intermodal unit trains in small sections.

These types of efficiencies, combined with the ability to provide more frequent sailings, led other lines to consider similar arrangements.

The advantages were hard to discount. By combining with other lines to effectively form a mega-carrier, an alliance member can offer departures far more frequently, to more destinations, than it ever could on its own. A line with regional gaps in its service can meet more of its global customers' transportation needs, and one with peaks in cargo volume or seasonal imbalances can likely move that volume aboard a partner's ships without having to build new vessels. In addition, as Maersk and Sea-Land demonstrated, alliances can realize efficiencies at some ports by operating a single, large marine terminal instead of each line having to maintain small, separate facilities.

The idea caught on and after experimenting with several cooperative arrangements - and experiencing a number of shakeups - the major lines settled in the alliances that exist today.

Musical Chairs
The other large U.S. carrier in the alliance system is American President Lines, a West Coast company that in the 1980s pioneered partnerships with railroads to provide combined ocean-and-land service across the North American continent. It was the acquisition of APL last year by Neptune Orient Line that precipitated the latest realignment in the alliance system.

Prior to the merger, APL had been allied with Overseas Orient Container Line of Hong Kong and Japan's Mitsui O.S.K. Line in the Global Alliance. NOL was a member of the rival Grand Alliance. After considering various options, Neptune Orient Line left the Grand Alliance to join APL in the Global Alliance, since renamed the New World Alliance. Hyundai, a large Korean carrier, also joined the grouping, while OOCL dropped out.

The APL/NOL-Mitsui-Hyundai combination controls 76 containerships, a fleet big enough for APL to offer eight sailings a week between Asia and the West Coast. At the same time, the alliance helped provide the ships for APL's expanded service to developing regions of South America, where container volumes are just beginning to climb.

"Alliances have made it possible for APL to respond to the globalization of many companies, which may now have supply chains dispersed over many countries," said Roeder. "In the old days, your supply chain only went where your ship went."

Without such cooperation between shipping lines, it would have been prohibitively expensive for APL to try to field enough ships to make Atlantic runs.

Formation of the New World Alliance might have been expected to create an immediate opportunity for American President Lines, traditionally a trans-Pacific carrier, to move cargo on trans-Atlantic routes aboard the ships of its partner, Hyundai Merchant Marine, which already operates in that lane. In practice, however, space that might otherwise have been available aboard Hyundai ships is tied up under a previous vessel-sharing agreement that runs through the end of this year, Roeder said.

APL and Mitsui were unwilling to wait that long, however, to meet a commitment to shippers to operate the alliance on a global basis, including on routes across the Atlantic. So in March, the two carriers reached agreement with the new Lykes Line to share space aboard Lykes ships crossing the Atlantic.

"Our customers were expecting us to operate on Pacific, Asia-Europe, Latin American and Atlantic routes," Roeder said. "It's true that only a few years ago, whenever people would say they expected APL to start operating on the Atlantic, we would always say, 'No way,' but since then, the trans-Atlantic has become a much more profitable and attractive market for carriers."

Trade volumes across the Atlantic have remained relatively balanced, the economies of the U.S. and Europe have remained healthy and trade volume has grown at a "high single-digit rate" each year for several years, he said.

Under the agreement with Lykes, APL and Mitsui will put cargo aboard two weekly Atlantic services, each with five ships. "We are going to have a relatively small presence in the market," Roeder said. "The net capacity increase of APL and Mitsui coming in is less than the annual growth rate on the trans-Atlantic."

The arrangement with Lykes is not a full alliance, he said, but is more than just a slot- charter arrangement. "This is a vessel-sharing agreement in which we will be involved in the operating decisions," he said. "This is something in between an alliance and slot chartering."

Without such cooperation between shipping lines, it would have been prohibitively expensive for APL to try to field enough ships to make Atlantic runs, said Roeder.

For Hyundai, advantages of the New World Alliance include shorter transit times and more frequent sailings, according to Bob Magna, Hyundai's marketing chief in North America. He also noted that shippers now have access to the newest and fastest ships sailing to Korea.
The entry of Singapore-based NOL to the New World Alliance helped drive OOCL of Hong Kong out of the fold. OOCL subsequently became a member of the Grand Alliance, where it found what it calls "a better fit."

Other members of the Grand Alliance are P&O Nedlloyd, NYK Line, Hapag-Lloyd and Malaysia International Shipping Corp. These companies control the world's largest group of container ships, with more than 100 vessels.

The Grand Alliance operates five strings of ships between Asia and the West Coast, and has plans for a sixth. The alliance also has two all-water services between Asia and the East Coast.

A fourth shipping group, the United Alliance, links Korea's Hanjin Shipping and Cho Yang Shipping with Europe's DSR-Senator Line. A regional group, the Asia Australia Alliance, is due to be set up in June to run two groups of ships between Southeast Asia and Australia. Malaysia International Shipping, Mitsui, OOCL and Pacific International Lines are expected to take part.

Other lines - China Ocean Shipping Co. (COSCO) of Beijing, "K" Line of Tokyo and Yang Ming of Taipei - have stopped short of an alliance with a combined ocean fleet, but they have expanded agreements to share space on each other's ships. COSCO and "K" Line previously had space-sharing agreements on routes across the Atlantic and from Asia to Europe, but will now do the same on routes across the Pacific.

Mixed Effects
Traffic managers for companies with sites worldwide say that mergers and alliances of ocean carriers are probably inevitable, and have both positive and negative effects.

"The ocean shipping industry is going to have mergers, such as the one between APL and NOL, and is going to see changes in alliance partners," said Tom Eye, international distribution manager for J.C. Penney. "How it comes out depends on how far it goes. If you end up with five mega-carriers, you'll still have good competition. But if you have two or three, then you have problems."

Peter Mangione, executive director of the Footwear Retailers Association, said mergers and alliances to date have done little to reduce what he described as the "extremely competitive environment" in the ocean shipping business.

Even within alliances, competition can be fierce, as information-sharing illustrates. To remain competitive, each alliance partner must be able to track a customer's cargo, including moves on another member's ship. Beyond that essential sharing of information, however, individual shipping lines tend to closely guard details about their customers. Understandably, the lines are not eager to advertise to competitors the key factors shippers use to select a line, nor the key individuals who decide which shipping line to use.

American President Lines, for example, works with its partners to provide cargo tracking, but remains competitive on other information issues. The company believes superior information is the key to APL's effort to differentiate itself as a global transport and distribution company rather than just a steamship line, said Bill Villalon, vice president of global marketing for APL. "That's why we are active in applying information technology that can help manufacturers and retailers improve supply-chain economics," he said, noting that APL operates is own third-party logistics and consolidation units.

Such involvement in the flow of information is necessary for APL to provide cost-effective transportation, even during peak periods, and to provide the higher reliability that comes from movement of cargo through proprietary intermodal sites, he said.

Evaluating Results
Now that alliances have been operating for a few years, have they paid off the way the shipping lines expected? In general, executives say that alliances indeed have promoted economies of scale needed to cut costs and upgrade service. Some alliances also have squeezed out savings on fleet operations, terminals and inland transportation, though carriers don't flaunt the size of their savings, lest shippers, longshoreman and other parties use the numbers to press demands for lower charges or higher pay.

"We have seen better asset utilization, not only of ships but also of terminals and equipment and even intermodal networks," said APL's Roeder. "So far, the primary benefits have been on the ocean side."

From the shipper's perspective, one of the primary advantages of alliances is that the combined fleet operations often result in reduced transit times. This is largely due to the fewer number of port calls that each ship has to make.

In the past, a line with a limited number of ships operating on a trans-Pacific route might have had to make several port calls in Asia and several more along the U.S. West Coast, which could lead to a relatively long transit time for cargo moving between the first and last ports. Even before there were alliances, larger shipping lines had recognized this disadvantage and sought to reduce transit times by deploying ships on regional loop services, rather than trying to have a single ship call at every port.

With a larger fleet, each shipping alliance can take this a step further by consolidating freight and scheduling a number of point-to-point express services. In such services, one ship may do nothing but shuttle from a large Asian port to a large West Coast port and back again. Transit times are short because the ship doesn't stop at other ports.

Some of the old routes had so many ship calls that it could take up to 19 days to go from one Asian port to one West Coast port. An alliance replacing such a route with eight-day or nine-day services between two ports might well trumpet the huge improvement in transit times, though in many cases trans-Pacific schedules already had been reduced to two weeks or less.
While not always as dramatic as portrayed, such transit-time reductions can have a significant impact on markets. Fresh produce is a good example. A few years ago, nearly all high-value farm products like cherries, asparagus and strawberries moved from California to Asia as air freight, said John Johnson, a cargo manager for Northwest Airlines in San Francisco. Today, the reduced transit times of express ships, combined with refrigerated containers that have built-in micro-processors to monitor atmosphere and humidity, now make it possible for as much as 70 percent of those perishables to move aboard ship, he said.

Faster ocean transit times have a similar impact on U.S. importers of apparel, another time-sensitive cargo. At one time, nearly all re-orders of styles that proved more popular than expected were shipped by deferred air freight, importers in Seattle said. Now, it's sometimes possible to save money and meet delivery demands by using express ships.

Alliances Have Critics
Still, the verdict is not unanimous that alliances are a success. Executives at "K" Line America, the U.S. branch of one of Japan's three large steamship lines, remain some of the industry's most vocal critics of shipping alliances. Theodore Prince, the line's vice president and chief operating officer until his resignation in April, told an intermodal conference in Hamburg: "Shipping alliances are doomed. Not only are there often no cost savings, but there are additional costs associated with managing and controlling increased overhead." He said obligations of such partnerships can delay responses to customers long enough that less encumbered competitors can grab the business. "Nothing changes the fact that sharing assets with your competitors makes no sense," he said.

Oscar Abello, president and chief executive of "K" Line America, went even further, saying that jumbo ships and fewer port calls won't fix the shipping industry's financial woes. "Some steamship lines make the miscalculation that larger vessels and a limited number of large load centers will result in a more efficient operation," Abello said. "As was the case the last time a carrier opted for a quantum leap in the size of vessels, the results are only going to contribute to economic folly."

The efficiencies of mammoth ships, he said, are only available when those ships are fully loaded, and the savings are quickly absorbed in higher costs at sea and in port terminals. "We believe carriers are dreaming when it comes to many of the promised benefits of joint operation," Abello said.

Officials at "K" Line, which formerly had a slot-charter agreement with Hyundai, continue to believe it's smarter to use slot charters and vessel sharing rather than alliance partnerships to give shippers the larger number of departures they demand.

Don't expect the shipping alliance system to crumble anytime soon, however. Mergers and ownership changes may cause the alliances to alter, but they aren't likely to vanish, said Gunter Casjens, chief executive of Hapag-Lloyd Container Line.

Alliance members say they are working to meet criticisms. Executives at APL noted that they are particularly conscious of charges that alliances sometimes seem slow to act while they seek agreement among all the member lines. They said the New World Alliance deliberately simplified decision-making in an attempt to avoid that problem. In their agreement, APL and its partners established a range of issues on which each line could act independently without consulting the rest of the alliance.

"We were aware of the danger of being too slow and wanted to be able to make decisions faster, so we worked out which things the lines could go ahead with without being unanimous about every single element," Roeder said.

Individual lines have to be able to react quickly on many issues, he said, but still be able to speak together as an alliance when they want to make an important point. Each line tends to have areas in which its service is stronger than that of its partners, and the alliance agreement generally allows carriers to act alone in those areas.

As many of the lines jockey for membership in one group or another, some shippers worry that it may be too easy for a few large alliances to agree to raise rates or reduce capacity. For their part, regulators at the U.S. Federal Maritime Commission and the European Union last year rejected the shipping lines' proposals to artificially cut available cargo capacity in an effort to strengthen rates.

"The big risk today is of a bankrupt intermodal industry, not one basking in monopoly power."
- Michael Graham,
a container shipping consultant

But that did not prevent the New World Alliance - APL/NOL, Mitsui and Hyundai - from redeploying ships this year to eliminate one string of vessels from trans-Pacific runs, an action soon followed by similar redeployment of ships in the alliance between Sea-Land and Maersk.

U.S. importers expect the shift in capacity to help support the alliances in their current campaign to raise trans-Pacific rates about 10 percent, or $300, on each 40-foot container. And some carriers continue to push for withdrawal of ship capacity from the market. Makoto Ishii, chief executive for Mitsui's liner division, in February renewed a plea for limits, though it's unclear how many other lines will press for such action. "Within limits, artificial adjustment of space is needed," Ishii said, arguing that without capacity management, rates are likely to keep falling.

The sharp drop in the value of several Asian currencies is expected to spur an increase in the flow of cargo from Asia to the United States by as much as 20 percent this year. But the same financial crisis is likely to squelch all but the slowest growth in U.S. exports to Asia, pushing down rates on that freight.

Problems in the shipping industry are more the result of blunders by ship operators with government subsidies than directional imbalances, in the view of executives at some independent lines. Michael Beard, chief executive at Australia-New Zealand Direct Line, suggested the shipping industry needs more intense competition, not capacity limits. He complained that alliances and conferences effectively protect inefficient shipping lines.

The alliances also can create a situation in which lines using the same ships may be charging different rates. That can happen when a single group includes both lines that are members of rate-setting conferences and non-conference lines that charge less.

In the New World Alliance, for example, APL and Mitsui are conference members, but Hyundai is not. Some regulators believe that, eventually, conference lines are likely to press for rate conformity. But pricing experts at Hyundai's U.S. offices near Los Angeles pointed out that the shipping line didn't boost rates when it joined the alliance and doesn't foresee membership in the alliance driving its rates up.

"This is not as tight an alliance as that between Sea-Land and Maersk," said a Hyundai manager, who asked not to be identified. "We remain separate entities."

Hyundai is not a member of rate-setting conferences, but does take part in the Westbound Transpacific Stabilization Agreement, which considers capacity issues, the executive said.

There also have been fears that a small number of powerful alliances, meeting in a rate-setting conference, will find it easier to call for rate increases than a large number of independent lines did when they met as a conference. Some regulators even believe that the alliances, meeting in rate discussion groups, could all but replace the current conference system for rate-setting.

Impact on Ports
The impact of shipping alliances also has been felt by the ports. This is particularly true on the U.S. West Coast, where powerful alliances have pressed for the construction of highly efficient mega-terminals.

One example is the 235-acre terminal and railyard that American President Lines opened last year at the Port of Los Angeles. APL already is pushing for expansion of that terminal to 293 acres.

Property managers at the Los Angeles port said they would not be surprised to see an alliance ask for a terminal with more than 300 acres of wharf, terminal and railyard space. Port engineers already are developing plans on how such a terminal, ranging in cost from $250m to $500m, might be laid out.

Several other alliance members at the Los Angeles and Long Beach ports have just signed agreements to expand their terminals by 150 acres to 200 acres to handle larger ships. More space is necessary because a single ship might discharge enough containers to form nine double-stack trains, and it needs to be able to load an equal number of containers almost simultaneously.

Similar pressure is beginning to be felt at U.S. East Coast ports as well. In May Sea-Land and Maersk jointly extended a request for proposal to various East Coast port administrators for a major intermodal container terminal.

"We are very carefully and comprehensively looking at all options for efficient, productive service in the Mid-Atlantic to northeastern sector of the U.S.," said Anthony A. Scioscia, senior vice president-North American Operating Group for Sea-Land.

Sea-Land and Maersk anticipate a facility that can handle 550,000 lifts annually and provide 6,000 contiguous feet of berth, up to 16 post-Panamax cranes, and on-dock or near-dock rail.

The bid process should be complete by mid-summer with a decision soon thereafter, the companies said.

On both coasts, however, individual shipping lines may be bound to their smaller terminals by long-term leases. In addition, some lines feel compelled to hang on to their own sites because of uncertainty over their future role in alliances.

That uncertainty is shared by others as well. Port executives said it's difficult to ignore an alliance request for a huge container terminal, but some property managers worry that such extensive, years-long construction might lead to over-sized and underutilized terminals should alliances break up, or cause all the smaller terminals run by single lines to come onto the market at the same time.

Michael Graham, a container shipping consultant based in Tonbridge, England, said there is justifiable concern about the way such alliances concentrate power in the hands of a few parties. However, he said, shipping lines have very little choice but to form such groups. "The bottom line is that the present trend of regulation tends to induce too great a degree of concentration in the [shipping] industry, because concentration is becoming the only way that operators, including the most efficient, can see a way to earn their living," Graham wrote in a recent issue of the technical journal, Maritime Policy and Management.

"No one wants this," he said. "Traders are haunted by the prospect of development of a monopoly over intermodal services." But the more severe danger is that container lines may be forced out of business, disrupting the service global companies rely upon, he said. "The big risk today is of a bankrupt intermodal industry, not one basking in monopoly power."

Up the Pearl River from Hong Kong, there's a section of riverfront in a special economic zone that five years ago was designed to become a large containerport serving many of the 60,000 foreign ventures that flourish around Guangzhou, China. Today, the wind blowing off the river ripples through undeveloped grassland where the port was supposed to rise.

An alliance of shipping lines that once proposed to build and operate the port broke up before the first container crane ever rose along the waterfront, according to zone officials. Hundreds of trucks hauling 40-foot containers still bump their way over roads leading from the zone, but they are headed toward the big container terminals in Hong Kong.

It is a cautionary tale for executives trying to make the best possible choices when setting up foreign manufacturing plants, and one of the reasons why so many people in global business are intensely interested in the major shakeup of ocean shipping alliances that took place earlier this year. Global enterprises, of course, are concerned over the long-term impact such alliances might have on rates and international logistics. But as the Guangzhou scenario illustrates, they are equally interested in seeing alliances survive to deliver on their promises and projects.

"The whole idea behind alliances is to meet the shipper's demand for service," said Gil Roeder, a spokesman for American President Lines in Oakland, Calif. APL and its parent company, Neptune Orient Line of Singapore, are part of the New World Alliance with Mitsui O.S.K. Line of Japan and Korea's Hyundai Merchant Marine.

Improved customer service is certainly one driver of alliances - they provide shippers with more frequent sailings, broader reach and perhaps the ability to make their container volumes count for more when negotiating rate contracts.

Equally compelling, however, are the potential benefits to carriers from better asset utilization. When participating in alliances, shipping lines are able to use the economies of scale of bigger ships and terminals to reduce costs and put off construction of new vessels.
"In the prevailing distressed economic environment of global shipping, alliances are a way for carriers to [meet service demands] without facing the intense fixed-cost investments that have been typical in the past," said Roeder.

At the same time, however, regulators and some logistics managers say it's possible that having a small number of very large players could make it easier for ocean carriers to increase freight rates or limit capacity. Either would be bad news for global companies that rely on containers to move produces from overseas factories.

How Alliances Started
It's hard to get a solid grasp on worldwide shipping alliances without at least some background on what the alliances are, how they developed and how some changed partners earlier this year.

"We wanted to see if we couldn't share assets and provide more frequent service without making huge investments."
- Gary Wollenhaupt of Sea-Land

Sea-Land and Maersk introduced the alliance system in the early 1990s when they began sharing vessels in the Atlantic and Pacific oceans, according to Gary Wollenhaupt, a spokesman for Sea-Land in Charlotte, N.C. "The primary reason we formed the alliance was to cut costs," said Wollenhaupt. "We wanted to see if we couldn't share assets and provide more frequent service without making huge investments."

Their sharing of assets has not been limited to ships. At the Port of Tacoma, Wash., for example, the two carriers have combined terminal operations. Before forming their alliance, Sea-Land had a 107-acre facility on the port's Milwaukee Waterway as its main terminal in the Pacific Northwest. Maersk had a 35-acre terminal about a mile away on Tacoma's Blair Waterway. The two lines began to consolidate operations in 1996, and now use a combined 132-acre terminal at the Sea-Land site.

The consolidation of terminals also helped the two lines achieve further savings by improving their ability to assemble dedicated double-stack trains. The partners eliminated extra trucking of containers between terminals and the problem of having to assemble intermodal unit trains in small sections.

These types of efficiencies, combined with the ability to provide more frequent sailings, led other lines to consider similar arrangements.

The advantages were hard to discount. By combining with other lines to effectively form a mega-carrier, an alliance member can offer departures far more frequently, to more destinations, than it ever could on its own. A line with regional gaps in its service can meet more of its global customers' transportation needs, and one with peaks in cargo volume or seasonal imbalances can likely move that volume aboard a partner's ships without having to build new vessels. In addition, as Maersk and Sea-Land demonstrated, alliances can realize efficiencies at some ports by operating a single, large marine terminal instead of each line having to maintain small, separate facilities.

The idea caught on and after experimenting with several cooperative arrangements - and experiencing a number of shakeups - the major lines settled in the alliances that exist today.

Musical Chairs
The other large U.S. carrier in the alliance system is American President Lines, a West Coast company that in the 1980s pioneered partnerships with railroads to provide combined ocean-and-land service across the North American continent. It was the acquisition of APL last year by Neptune Orient Line that precipitated the latest realignment in the alliance system.

Prior to the merger, APL had been allied with Overseas Orient Container Line of Hong Kong and Japan's Mitsui O.S.K. Line in the Global Alliance. NOL was a member of the rival Grand Alliance. After considering various options, Neptune Orient Line left the Grand Alliance to join APL in the Global Alliance, since renamed the New World Alliance. Hyundai, a large Korean carrier, also joined the grouping, while OOCL dropped out.

The APL/NOL-Mitsui-Hyundai combination controls 76 containerships, a fleet big enough for APL to offer eight sailings a week between Asia and the West Coast. At the same time, the alliance helped provide the ships for APL's expanded service to developing regions of South America, where container volumes are just beginning to climb.

"Alliances have made it possible for APL to respond to the globalization of many companies, which may now have supply chains dispersed over many countries," said Roeder. "In the old days, your supply chain only went where your ship went."

Without such cooperation between shipping lines, it would have been prohibitively expensive for APL to try to field enough ships to make Atlantic runs.

Formation of the New World Alliance might have been expected to create an immediate opportunity for American President Lines, traditionally a trans-Pacific carrier, to move cargo on trans-Atlantic routes aboard the ships of its partner, Hyundai Merchant Marine, which already operates in that lane. In practice, however, space that might otherwise have been available aboard Hyundai ships is tied up under a previous vessel-sharing agreement that runs through the end of this year, Roeder said.

APL and Mitsui were unwilling to wait that long, however, to meet a commitment to shippers to operate the alliance on a global basis, including on routes across the Atlantic. So in March, the two carriers reached agreement with the new Lykes Line to share space aboard Lykes ships crossing the Atlantic.

"Our customers were expecting us to operate on Pacific, Asia-Europe, Latin American and Atlantic routes," Roeder said. "It's true that only a few years ago, whenever people would say they expected APL to start operating on the Atlantic, we would always say, 'No way,' but since then, the trans-Atlantic has become a much more profitable and attractive market for carriers."

Trade volumes across the Atlantic have remained relatively balanced, the economies of the U.S. and Europe have remained healthy and trade volume has grown at a "high single-digit rate" each year for several years, he said.

Under the agreement with Lykes, APL and Mitsui will put cargo aboard two weekly Atlantic services, each with five ships. "We are going to have a relatively small presence in the market," Roeder said. "The net capacity increase of APL and Mitsui coming in is less than the annual growth rate on the trans-Atlantic."

The arrangement with Lykes is not a full alliance, he said, but is more than just a slot- charter arrangement. "This is a vessel-sharing agreement in which we will be involved in the operating decisions," he said. "This is something in between an alliance and slot chartering."

Without such cooperation between shipping lines, it would have been prohibitively expensive for APL to try to field enough ships to make Atlantic runs, said Roeder.

For Hyundai, advantages of the New World Alliance include shorter transit times and more frequent sailings, according to Bob Magna, Hyundai's marketing chief in North America. He also noted that shippers now have access to the newest and fastest ships sailing to Korea.
The entry of Singapore-based NOL to the New World Alliance helped drive OOCL of Hong Kong out of the fold. OOCL subsequently became a member of the Grand Alliance, where it found what it calls "a better fit."

Other members of the Grand Alliance are P&O Nedlloyd, NYK Line, Hapag-Lloyd and Malaysia International Shipping Corp. These companies control the world's largest group of container ships, with more than 100 vessels.

The Grand Alliance operates five strings of ships between Asia and the West Coast, and has plans for a sixth. The alliance also has two all-water services between Asia and the East Coast.

A fourth shipping group, the United Alliance, links Korea's Hanjin Shipping and Cho Yang Shipping with Europe's DSR-Senator Line. A regional group, the Asia Australia Alliance, is due to be set up in June to run two groups of ships between Southeast Asia and Australia. Malaysia International Shipping, Mitsui, OOCL and Pacific International Lines are expected to take part.

Other lines - China Ocean Shipping Co. (COSCO) of Beijing, "K" Line of Tokyo and Yang Ming of Taipei - have stopped short of an alliance with a combined ocean fleet, but they have expanded agreements to share space on each other's ships. COSCO and "K" Line previously had space-sharing agreements on routes across the Atlantic and from Asia to Europe, but will now do the same on routes across the Pacific.

Mixed Effects
Traffic managers for companies with sites worldwide say that mergers and alliances of ocean carriers are probably inevitable, and have both positive and negative effects.

"The ocean shipping industry is going to have mergers, such as the one between APL and NOL, and is going to see changes in alliance partners," said Tom Eye, international distribution manager for J.C. Penney. "How it comes out depends on how far it goes. If you end up with five mega-carriers, you'll still have good competition. But if you have two or three, then you have problems."

Peter Mangione, executive director of the Footwear Retailers Association, said mergers and alliances to date have done little to reduce what he described as the "extremely competitive environment" in the ocean shipping business.

Even within alliances, competition can be fierce, as information-sharing illustrates. To remain competitive, each alliance partner must be able to track a customer's cargo, including moves on another member's ship. Beyond that essential sharing of information, however, individual shipping lines tend to closely guard details about their customers. Understandably, the lines are not eager to advertise to competitors the key factors shippers use to select a line, nor the key individuals who decide which shipping line to use.

American President Lines, for example, works with its partners to provide cargo tracking, but remains competitive on other information issues. The company believes superior information is the key to APL's effort to differentiate itself as a global transport and distribution company rather than just a steamship line, said Bill Villalon, vice president of global marketing for APL. "That's why we are active in applying information technology that can help manufacturers and retailers improve supply-chain economics," he said, noting that APL operates is own third-party logistics and consolidation units.

Such involvement in the flow of information is necessary for APL to provide cost-effective transportation, even during peak periods, and to provide the higher reliability that comes from movement of cargo through proprietary intermodal sites, he said.

Evaluating Results
Now that alliances have been operating for a few years, have they paid off the way the shipping lines expected? In general, executives say that alliances indeed have promoted economies of scale needed to cut costs and upgrade service. Some alliances also have squeezed out savings on fleet operations, terminals and inland transportation, though carriers don't flaunt the size of their savings, lest shippers, longshoreman and other parties use the numbers to press demands for lower charges or higher pay.

"We have seen better asset utilization, not only of ships but also of terminals and equipment and even intermodal networks," said APL's Roeder. "So far, the primary benefits have been on the ocean side."

From the shipper's perspective, one of the primary advantages of alliances is that the combined fleet operations often result in reduced transit times. This is largely due to the fewer number of port calls that each ship has to make.

In the past, a line with a limited number of ships operating on a trans-Pacific route might have had to make several port calls in Asia and several more along the U.S. West Coast, which could lead to a relatively long transit time for cargo moving between the first and last ports. Even before there were alliances, larger shipping lines had recognized this disadvantage and sought to reduce transit times by deploying ships on regional loop services, rather than trying to have a single ship call at every port.

With a larger fleet, each shipping alliance can take this a step further by consolidating freight and scheduling a number of point-to-point express services. In such services, one ship may do nothing but shuttle from a large Asian port to a large West Coast port and back again. Transit times are short because the ship doesn't stop at other ports.

Some of the old routes had so many ship calls that it could take up to 19 days to go from one Asian port to one West Coast port. An alliance replacing such a route with eight-day or nine-day services between two ports might well trumpet the huge improvement in transit times, though in many cases trans-Pacific schedules already had been reduced to two weeks or less.
While not always as dramatic as portrayed, such transit-time reductions can have a significant impact on markets. Fresh produce is a good example. A few years ago, nearly all high-value farm products like cherries, asparagus and strawberries moved from California to Asia as air freight, said John Johnson, a cargo manager for Northwest Airlines in San Francisco. Today, the reduced transit times of express ships, combined with refrigerated containers that have built-in micro-processors to monitor atmosphere and humidity, now make it possible for as much as 70 percent of those perishables to move aboard ship, he said.

Faster ocean transit times have a similar impact on U.S. importers of apparel, another time-sensitive cargo. At one time, nearly all re-orders of styles that proved more popular than expected were shipped by deferred air freight, importers in Seattle said. Now, it's sometimes possible to save money and meet delivery demands by using express ships.

Alliances Have Critics
Still, the verdict is not unanimous that alliances are a success. Executives at "K" Line America, the U.S. branch of one of Japan's three large steamship lines, remain some of the industry's most vocal critics of shipping alliances. Theodore Prince, the line's vice president and chief operating officer until his resignation in April, told an intermodal conference in Hamburg: "Shipping alliances are doomed. Not only are there often no cost savings, but there are additional costs associated with managing and controlling increased overhead." He said obligations of such partnerships can delay responses to customers long enough that less encumbered competitors can grab the business. "Nothing changes the fact that sharing assets with your competitors makes no sense," he said.

Oscar Abello, president and chief executive of "K" Line America, went even further, saying that jumbo ships and fewer port calls won't fix the shipping industry's financial woes. "Some steamship lines make the miscalculation that larger vessels and a limited number of large load centers will result in a more efficient operation," Abello said. "As was the case the last time a carrier opted for a quantum leap in the size of vessels, the results are only going to contribute to economic folly."

The efficiencies of mammoth ships, he said, are only available when those ships are fully loaded, and the savings are quickly absorbed in higher costs at sea and in port terminals. "We believe carriers are dreaming when it comes to many of the promised benefits of joint operation," Abello said.

Officials at "K" Line, which formerly had a slot-charter agreement with Hyundai, continue to believe it's smarter to use slot charters and vessel sharing rather than alliance partnerships to give shippers the larger number of departures they demand.

Don't expect the shipping alliance system to crumble anytime soon, however. Mergers and ownership changes may cause the alliances to alter, but they aren't likely to vanish, said Gunter Casjens, chief executive of Hapag-Lloyd Container Line.

Alliance members say they are working to meet criticisms. Executives at APL noted that they are particularly conscious of charges that alliances sometimes seem slow to act while they seek agreement among all the member lines. They said the New World Alliance deliberately simplified decision-making in an attempt to avoid that problem. In their agreement, APL and its partners established a range of issues on which each line could act independently without consulting the rest of the alliance.

"We were aware of the danger of being too slow and wanted to be able to make decisions faster, so we worked out which things the lines could go ahead with without being unanimous about every single element," Roeder said.

Individual lines have to be able to react quickly on many issues, he said, but still be able to speak together as an alliance when they want to make an important point. Each line tends to have areas in which its service is stronger than that of its partners, and the alliance agreement generally allows carriers to act alone in those areas.

As many of the lines jockey for membership in one group or another, some shippers worry that it may be too easy for a few large alliances to agree to raise rates or reduce capacity. For their part, regulators at the U.S. Federal Maritime Commission and the European Union last year rejected the shipping lines' proposals to artificially cut available cargo capacity in an effort to strengthen rates.

"The big risk today is of a bankrupt intermodal industry, not one basking in monopoly power."
- Michael Graham,
a container shipping consultant

But that did not prevent the New World Alliance - APL/NOL, Mitsui and Hyundai - from redeploying ships this year to eliminate one string of vessels from trans-Pacific runs, an action soon followed by similar redeployment of ships in the alliance between Sea-Land and Maersk.

U.S. importers expect the shift in capacity to help support the alliances in their current campaign to raise trans-Pacific rates about 10 percent, or $300, on each 40-foot container. And some carriers continue to push for withdrawal of ship capacity from the market. Makoto Ishii, chief executive for Mitsui's liner division, in February renewed a plea for limits, though it's unclear how many other lines will press for such action. "Within limits, artificial adjustment of space is needed," Ishii said, arguing that without capacity management, rates are likely to keep falling.

The sharp drop in the value of several Asian currencies is expected to spur an increase in the flow of cargo from Asia to the United States by as much as 20 percent this year. But the same financial crisis is likely to squelch all but the slowest growth in U.S. exports to Asia, pushing down rates on that freight.

Problems in the shipping industry are more the result of blunders by ship operators with government subsidies than directional imbalances, in the view of executives at some independent lines. Michael Beard, chief executive at Australia-New Zealand Direct Line, suggested the shipping industry needs more intense competition, not capacity limits. He complained that alliances and conferences effectively protect inefficient shipping lines.

The alliances also can create a situation in which lines using the same ships may be charging different rates. That can happen when a single group includes both lines that are members of rate-setting conferences and non-conference lines that charge less.

In the New World Alliance, for example, APL and Mitsui are conference members, but Hyundai is not. Some regulators believe that, eventually, conference lines are likely to press for rate conformity. But pricing experts at Hyundai's U.S. offices near Los Angeles pointed out that the shipping line didn't boost rates when it joined the alliance and doesn't foresee membership in the alliance driving its rates up.

"This is not as tight an alliance as that between Sea-Land and Maersk," said a Hyundai manager, who asked not to be identified. "We remain separate entities."

Hyundai is not a member of rate-setting conferences, but does take part in the Westbound Transpacific Stabilization Agreement, which considers capacity issues, the executive said.

There also have been fears that a small number of powerful alliances, meeting in a rate-setting conference, will find it easier to call for rate increases than a large number of independent lines did when they met as a conference. Some regulators even believe that the alliances, meeting in rate discussion groups, could all but replace the current conference system for rate-setting.

Impact on Ports
The impact of shipping alliances also has been felt by the ports. This is particularly true on the U.S. West Coast, where powerful alliances have pressed for the construction of highly efficient mega-terminals.

One example is the 235-acre terminal and railyard that American President Lines opened last year at the Port of Los Angeles. APL already is pushing for expansion of that terminal to 293 acres.

Property managers at the Los Angeles port said they would not be surprised to see an alliance ask for a terminal with more than 300 acres of wharf, terminal and railyard space. Port engineers already are developing plans on how such a terminal, ranging in cost from $250m to $500m, might be laid out.

Several other alliance members at the Los Angeles and Long Beach ports have just signed agreements to expand their terminals by 150 acres to 200 acres to handle larger ships. More space is necessary because a single ship might discharge enough containers to form nine double-stack trains, and it needs to be able to load an equal number of containers almost simultaneously.

Similar pressure is beginning to be felt at U.S. East Coast ports as well. In May Sea-Land and Maersk jointly extended a request for proposal to various East Coast port administrators for a major intermodal container terminal.

"We are very carefully and comprehensively looking at all options for efficient, productive service in the Mid-Atlantic to northeastern sector of the U.S.," said Anthony A. Scioscia, senior vice president-North American Operating Group for Sea-Land.

Sea-Land and Maersk anticipate a facility that can handle 550,000 lifts annually and provide 6,000 contiguous feet of berth, up to 16 post-Panamax cranes, and on-dock or near-dock rail.

The bid process should be complete by mid-summer with a decision soon thereafter, the companies said.

On both coasts, however, individual shipping lines may be bound to their smaller terminals by long-term leases. In addition, some lines feel compelled to hang on to their own sites because of uncertainty over their future role in alliances.

That uncertainty is shared by others as well. Port executives said it's difficult to ignore an alliance request for a huge container terminal, but some property managers worry that such extensive, years-long construction might lead to over-sized and underutilized terminals should alliances break up, or cause all the smaller terminals run by single lines to come onto the market at the same time.

Michael Graham, a container shipping consultant based in Tonbridge, England, said there is justifiable concern about the way such alliances concentrate power in the hands of a few parties. However, he said, shipping lines have very little choice but to form such groups. "The bottom line is that the present trend of regulation tends to induce too great a degree of concentration in the [shipping] industry, because concentration is becoming the only way that operators, including the most efficient, can see a way to earn their living," Graham wrote in a recent issue of the technical journal, Maritime Policy and Management.

"No one wants this," he said. "Traders are haunted by the prospect of development of a monopoly over intermodal services." But the more severe danger is that container lines may be forced out of business, disrupting the service global companies rely upon, he said. "The big risk today is of a bankrupt intermodal industry, not one basking in monopoly power."