Forming an Alliance with Ocean Shipping
After the 2016 Hanjin Shipping bankruptcy, carriers banded together to form alliances. Today, these alliances dominate ocean cargo shipping. Here's how they affect your shipments and contracts.
Without ocean cargo, there would be rough seas ahead for the U.S. import-export business. Water is the leading international transportation mode in terms of both weight and value, according to the U.S. Department of Transportation's Bureau of Transportation Statistics. In 2015, ships transported 71 percent of international trade weight and 48 percent of its value.
But the ocean cargo waterfront changed for shippers earlier in 2017 when most major ocean carriers further consolidated from four alliances to three: 2M, Ocean Alliance, and THE Alliance (see sidebar).
While carrier alliances existed already, the new partnerships are more than the slot charter or vessel-sharing agreements of the past. "These alliances are much more proactive about planning what the future holds for members," says Molly Bailey, director, international, for Transplace, a non-vessel-operating common carrier (NVOCC) based in Frisco, Texas. "It's not just about how they can share getting cargo from Point A to Point B. There's much more proactive thought going into how these carriers are collaborating."
Today's ocean alliances can be traced back several years to Maersk Line's investment in a fleet of ships that were larger than any other carrier's. Because the expanded capacity helped the company lower operating costs per container, it could reduce its rates. To remain competitive, other carriers followed suit with larger vessel purchases—which led to too much capacity in the marketplace. It became harder for carriers to remain profitable, as evidenced by the 2016 Hanjin Shipping Co. bankruptcy.
So carriers began banding together to manage capacity and routes. The current alliances now represent more than three-quarters of all global container capacity. The remaining volume is spread over niche operators serving smaller regions.
The impact of the new relationships on shippers remains to be seen, but some had to adjust when new partnerships forced alliances to change some lanes and ports served. "Shippers were tolerant of the changes and accepted that they had to find alternatives for certain lanes, even when contracts were in place," Bailey says.
Those same changes have had an impact on timelines, too. "In some cases, transit times are longer because some ports are losing direct calls," says Nerijus Poskus, vice president of global pricing and procurement at Flexport, a web-based freight forwarder headquartered in San Francisco.
For example, Portland, Oregon, generally doesn't have enough cargo to fill the largest vessels, so freight destined for the city is often delivered to Seattle and transported to Portland by ground.
Capacity and Congestion
In addition, increased capacity and port congestion can cause delays. "Once freight moves to the level of a 22,000 TEU (20-foot equivalent unit) vessel, the time to unload at the port will increase," says Vince Santinello, ocean business development and route manager, global forwarding, at C.H. Robinson, a Minnesota-based third-party logistics provider. "Having a chassis available for that freight also becomes an issue."
Shippers can feel reassured that their carriers are less likely to repeat the Hanjin bankruptcy scenario, where container delivery was delayed for months in some cases, Bailey says.
"While it's still to be determined, it seems that these carriers working together through alliances must trust that each partner is financially solid," she says. A March 2017 announcement from THE Alliance reinforces that message, stating that the group has a contingency plan designed to protect shippers from risks associated with any participant carrier's bankruptcy.
Getting on Track
The alliances offer greater potential for capacity management, according to Fauad Shariff, CEO of The CoLoadX Corporation, a New York company that provides a technology platform used by both freight forwarders and NVOCCs.
"The black hole of logistics has been tracking," he says. "Partners have an opportunity to develop a unified tracking standard within the alliance that integrates with railroads and trucks, creating better access to information about container capacity at inland ports."
To help shippers get the most from their relationships with the ocean alliances, experts recommend the following best practices:
- Spread cargo across all three alliances. "The ability to work across all alliances will be critical," says Santinello.
Bailey agrees, adding, "When negotiating rates and space, divide your business as equally as possible across all three alliances so you don't have all your eggs in one basket."
- Look for dedicated space allocations with specific carriers. An allocation is a commitment from the carrier that the space will be there when you need it.
It's a solution to a problem caused by a shipper's ability to cancel a booked shipment, even at the last minute, without being penalized. That leaves the carrier with reserved space that is now empty. As a result, carriers overbook.
"It's not unusual for an ocean carrier to book 100 percent more than it can transport," Poskus says "If you don't have an allocation, your cargo could get bumped." Allocations are with carriers, not alliances, he adds.
- Pay attention to alliance partnerships on the ground. Because ocean carriers manage the inland portion of the cargo's journey, too, alliance contracts with rail lines will determine how your cargo moves to its post-port destination. Contracts that fall outside of the shipper's control will have an impact on cargo timelines.
"Rail lines offer potentially different transit times," cautions Poskus. "Some have better connection points than others, and some have on-dock rail while others don't. Be certain to take all of this into account when making carrier decisions."
- Revisit contract language. Deal with potential risks by addressing them in the contract.
"In the past, a shipper's biggest risk was predicting and locking in freight rates for the upcoming year," says Cory Margand, co-founder and CEO of SimpliShip, a Rochester, New York, technology company that develops APIs—software-to-software connections—with companies such as Kuebix, a transportation management system provider. "The potential for carriers to change alliances and/or form new ones creates risks associated with capacity and port callings as well."
Because of the Hanjin bankruptcy crisis, Bailey has seen shippers now require that a certain percentage of cargo be moved on the carrier's own vessels rather than those of others in the alliance. "It can give some peace of mind, but could cause logistical challenges or delays if a partner vessel is in the rotation when you need to ship," she says.
Some shippers are adding contract language that allows them to negotiate to reduce the committed volume if the carrier's performance metrics, such as on-time delivery, fall or the carrier changes direct port calls.
- Leave it to the experts. Managing ocean transportation can be a complicated, detail-oriented business. One carrier's cut-off date for the port of loading on a certain day might be different from another carrier's for the same day. Miss that cut-off and cargo sits for one week, waiting for the next sailing. Or, changing carriers at the last minute means you've got an empty container you can no longer use because it's a different carrier's asset.
Freight forwarders and NVOCCs are skilled at managing costs, meeting all cargo requirements, and guiding strategic decisions.
"We see more shippers working with freight forwarders and NVOCCs because they can make changes seamlessly," says Margand. "The shipper, to a lesser extent, doesn't have to deal with the problems that result from capacity or port changes. It's the most efficient way to manage these risks."
As ocean freight volumes continue to grow, implementing these and other best practices will lead to smooth sailing for both shippers and carriers.