1. 13th Annual Northeast Cargo Symposium
Ocean Freight – Are the
mega alliances finally
established?
1
November 6, 2014
Comments by John G. Reeve

2. 2
Agenda
2
 Background on Alliances
 Current Situation
 Implications for the Future

3. Vessel Sharing Alliances are operational, not
commercial agreements
 An “operational” agreement between ocean carriers for the sharing of
space on vessels – no authority to discuss or agree on freight rates
 By necessity, container terminal operations are also included as well as
feeder services
 Carriers retain separate sales, pricing, and customer service functions
 Been around for a while – e.g. Maersk/Sea-Land/P&O/Nedlloyd
agreement in early 1990’s
 Early days of containerization (1960’s) saw development of full scale
carrier consortia/joint ventures (e.g. OCL, ACT, ACL)
3
Vessel Sharing Alliances:

4. 4
2M
Current “Global” Vessel Sharing Alliances
4
 Maersk and MSC
 Covers FE/Europe, Transpacific, and
Transatlantic
 2.1 million TEU capacity¹
 Average vessel: 10,800 TEU
Ocean Three
 CMA CGM, China Shipping, and
UASC
 Covers FE/Europe, Transpacific…
Transatlantic possible
 1.5 million TEU¹
 Average vessel: 9,000 TEU
G6
 APL, MOL, Hyundai, OOCL, NYK,
and Hapag-Lloyd…CSAV pending
 Covers FE/Europe, Transpacific, and
Transatlantic
 1.8 million TEU capacity¹
 Average vessel: 8,000 TEU
CKYHE
 Cosco, K Line, Yang Ming, Hanjin,
and Evergreen
 Covers FE/Europe, Transpacific, and
Transatlantic
 1.9 million TEU¹
 Average vessel: 7,600 TEU
These alliances control 97% of major trade east-west capacity²
¹ Capacity deployed in FE/Europe and FE/No. America trades – source: Alphaliner, September 2014 and IHS Maritime
² Journal of Commerce

5. 5
Source: Drewry World Container Index
No growth in freight rates on major container
trades…lower costs critical to survival
Trend in Major Liner Trade Headhaul Freight Rates
(Index: Year 2000=100)
0
20
40
60
80
100
120
140
160
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Asia to USWC Asia to Europe Europe to USEC

6. 6
Key drivers for alliances
“Commoditization” appears to have won
6
 Lower cost vessel operations – scale economies of mega ships
 Broad service scope – multiple sailings in key port combinations
 Barriers to entry
 Some joint consultation on future capacity
A Marriage of Opposites?

7. 7
Maersk and CMA CGM seem to have benefitted
financially from their mega ship strategies
Operating Profit Margins for Major Carriers
(first half 2014)
But there may be more to profitability than big ships…
Source: Alphaliner

8. Vessel costs and fuel now account for
almost half of major operators’ expenses
8
Source: A. P. Moller Maersk Annual Report, 2013.
Breakdown of Major Containership Operator Costs
26%
11%
5%
27%
21%
10%
Marine Terminals
Inland Transportation
Equipment
Vessels
Fuel
Sales & Admin.

9. Containership economies of scale are
impressive…but only up to a point
9
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2,500
TEU
4,000
TEU
6,000
TEU
8,000
TEU
10,000
TEU
14,000
TEU
18,000
TEU
TCE* Fuel
Containership Cost per TEU Slot Mile
(cents per TEU mile)
* TCE denotes “Time Charter Equivalent” that includes vessel operating costs (e.g. crew, maintenance, insurance, etc.) and capital costs.
Fuel costs based on $480 per ton MFO in October 2014.
Source: Reeve & Associates analysis

10. Bunker prices have recently dropped…however,
this impact will be tempered by MARPOL Annex VI
10
Further Implementation of MARPOL
Annex VI in 2015
 Container lines have announced Low-
Sulfur Fuel Surcharges to offset costs
from implementation of IMO Emission
Control Areas (Northern Europe and 200
miles from American and Canadian
coasts) that require carriers to switch to
fuel with a sulfur content of 0.1 percent
in 2015, from the current 1.0 percent
limit within ECA’s
 Carriers required to burn MDO (currently
around $800 per ton) versus MFO ($480
per ton) within the ECAs
High Sulfur Marine Fuel Oil Average Price
Source: Journal of Commerce
Outlook on energy prices is extremely uncertain…LNG a
good bet for Jones Act carriers

11.  Major surges in handling volumes
 Carrier consolidation via alliances
forcing terminal consolidation
 Increased requirements for port and
terminal capacity
 Slowing container velocity,
increased dwell time in ports
 Lower vessel schedule reliability
11
Mega containerships are significantly stressing
marine terminal operations

12. 12
Terminal operators ought to be able to afford
necessary investments
Operating Margin of Major Container Terminal Operators
(FY 2013)
Source: Alphaliner

13. 13
Implications for the future…
13
 Alliances are here to stay
 Possible adjustments to future
memberships but major changes unlikely
 May slow down further mergers/
acquisitions between major carriers
 Alliances’ quest for scale economies will
continue to drive ship sizes upward
 Ports/terminals must adjust to meet
alliance/megaship requirements
 Downward pressure on freight rates will
continue from excess capacity and strong
competition…within alliances as well as
without
Outlook
Thank you