International Journal of Maritime Economics, 2001, 3, (351-367)

# 2001 Palgrave. All rights reserved. 1388-1973/01 $15

www.palgrave-journals.com/ijme

Ocean Shipping Alliances: The Wave of the

Future?

EDWARD J. SHEPPARD1 & DAVID SEIDMAN2

1 2
Partner, Thompson Coburn, Washington, DC, USA; Associate,
Thompson Coburn, Washington, DC, USA

Over the last decade, carriers have entered into operational relationships known
as alliances to increase their product offerings and to reduce their costs. Carriers
have been able to do so because alliances enable partners to rely on and to combine
other carriers' operations in addition to their own. Although alliances have
drastically improved operational efficiency, larger carriers will not take the logical
next step and merge for a variety of reasons. Ironically, regulation through the
Federal Maritime Commission is not one of the factors dissuading carriers from
consolidating. This paper explains, from the carriers' point of view, the
advantages and disadvantages of entering into alliances and explores the history
of the US regulatory regime of cooperative agreements, including alliances.
Thereafter, this paper analyses the factors that potentially will influence the future
of alliances and predicts the effect of each of these factors. Overall, this paper
concludes that carriers would prefer to enjoy the benefits of alliances without
having to ally or to merge with another carrier; therefore, the real long-term goal of
large carriers is the improvement of their services without the aid of another large
carrier, regardless of whether the improvement is through an alliance or a merger.
International Journal of Maritime Economics (2001) 3, 351-367.

Keywords: Alliances; mergers and acquisitions; consolidation; Federal Maritime

Commission (FMC).

INT RODUCT ION

Carriers created alliances in reaction to the demands of the global economy. Only
global economies of scale will meet the ever-present demand to move goods at the
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Ocean Shipping Alliances
352

lowest possible prices, and instant global communications necessitate global

networks. Therefore, the ocean shipping industry has evolved to provide the wide
range of services that today's global shippers demand. To do so, carriers have
entered into constructive agreements commonly referred to as alliances.
However, alliances are not a new phenomenon and were used to a lesser
extent before economic globalisation. They are hybrid relationships that allow for
the benefits generated by limited forms of cooperation without requiring a total
integration of operations. As the latest type of cooperative agreement, alliances
serve as a middle ground, enabling carriers to expand service offerings and to cut
costs.
This article analyses the alliance system within two contexts. First, this article
examines alliances within the ocean shipping industry and explains why they
currently are the predominant form of cooperative agreement. Alliances derive
substantial economic benefits for carriers, such as aggregation of cargo volumes
and more efficient asset utilisation, without the sharing of key information. In
addition, to provide a complete picture of alliances, this article examines why
alliances may not achieve their desired outcomes.
Second, this article analyses the regulatory effect on alliances. Because the
conference system dominated the industry until recent times, this section focuses on
US regulation of conferences. Generally, since 1916, Congress has sought to obtain
the advantages of cooperative arrangements while also combating their abuses
through regulation by an independent agency that strives to promote competition
among carriers. For much of this time, regulators have reacted to cooperation in the
industry; however, Congress's most recent legislation, the Ocean Shipping Reform
Act of 1998 (OSRA), encourages the Federal Maritime Commission (FMC) to be
more proactive when approving and monitoring prospective agreements.
Finally, this article looks to the future and asks whether alliances are a
precursor to industry consolidation, a short-term trend that will confirm the
superiority of conferences, or a form of cooperation that will survive indefinitely.
Further, this section analyses external factors that alliances must consider when
formulating their plans for the future.

W H A T I S A N A L L I A NC E?

Historically, carriers have not needed to cooperate with one another to reach new
markets because shippers did not expect comprehensive worldwide service.
Therefore, cooperative efforts among carriers typically consisted of establishing
rates through the conference system. However, worldwide legal changes have
begun to limit the effectiveness of this kind of cooperation, and ocean carriers
have turned increasingly to alliances designed to increase operating efficiencies.
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In addition, cooperation has increased because few carriers can afford to operate
on trade lanes that are experiencing imbalanced trade flows, and even fewer
carriers can afford unilaterally to expand their networks. With these constraints
on their individual capabilities, carriers have realised that they must cooperate
despite their desires to operate independently.
Moreover, foreign carriers that want to provide adequate service in the US
coastwise trade must team up with US carriers. Because the Jones Act mandates
that only US-built, US-citizen manned, and US-flag vessels operate in the US
coastwise trade, a primary way for foreign carriers to extend their reach into the
United States is through alliances.1
In the ocean shipping context, alliances are defined as cooperative
operational arrangements between two or more carriers that lie anywhere
between a traditional arms-length relationship and an integrated strategic
relationship that amounts to a virtual merger. Essentially, allied carriers combine
their assets to implement a mutually beneficial strategy. However, sensitive
information, such as trade secrets, is not shared because the allied carriers remain
separate corporate entities that compete against one another.
As part of an alliance, carriers enter into a wide range of cooperative
agreements for both ocean and land operations. Oceanborne agreements usually
contain space sharing, slot charter, and sailing arrangements. Space sharing and
slot charter agreements operate under the same concept ± a carrier reserves a
certain amount of room on its vessels for alliance members. This type of
arrangement provides two main benefits. First, it allows carriers to aggregate their
cargoes to reduce the number of vessels that are needed to serve a particular port.
Therefore, the alliance can dedicate the freed vessels to serve other routes,
thereby generating revenues that otherwise would have been unavailable.
Second, it increases the number of service options carriers can offer their
customers at little or no cost because their partners are actually operating the
service.
Scheduling arrangements, another benefit of alliances, also generate greater
efficiency in a different manner. By coordinating schedules, carriers reduce total
transit times because each vessel makes fewer port calls. With all of the vessels in
the alliance combined serving a greater total number of ports than any carrier
could individually, alliances tailor the number of port calls made by each vessel to
serve the greatest number of ports with optimal frequency. In many cases, this
means ships are deployed for direct transoceanic port-to-port calls for heavily
used routes. In contrast, before the advent of alliances, individual carriers had to
make several intercontinental port calls to provide the greatest range of services to
its customers; however, this arrangement was accomplished at relatively higher
expense, creating longer transit times and causing vessels to serve ports with a
minimal amount of cargo.
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For carriers that are interested in closer relationships with their alliance partners,
joint service agreements are used. A joint service agreement is essentially a joint
venture between carriers to establish a new and separate service that is managed
independently from the individual carrier's operations.2 The basic characteristics
of a joint service agreement are: holding out in a separate operating name;
independently making strategic decisions, such as setting rates and schedules;
having the opportunity to publish independently a tariff; and issuing its own bills
of lading. Notably, the joint venturers do not compete for traffic in the joint
service agreement trade, although they remain competitors for all other services.
Alliance partners do more than share and shift capacity; they also cooperate
on land operations through the joint use of ports, terminals, equipment and other
facilities, which account for a substantial percentage of a carrier's total costs. Such
agreements are known as `marine terminal agreements.'3 The consolidation of
these facilities help carriers achieve significant savings by improving their ability
to load and unload, to transship, or to transload containers in the most efficient
manner. At some ports, these efficiencies are created by the alliance's operating a
single, large marine terminal facility rather than several smaller, separate facilities
run by each carrier. Other land-based intermodal efficiencies that have
significantly reduced costs and transit times are: virtual elimination of intraport
trucking of containers between terminals by jointly operating warehouses and
other storage facilities; dedication of these jointly operated storage facilities to
specific trade routes or breakbulk items; and on-dock joint multimodal terminals
where alliance members have their combined land-based needs met at one
facility.
In total, the benefits offered to carriers by alliances are as follows:

1 provision of a seamless, hassle-free service that is attractive to shippers

because it is functionally equivalent to service on a single carrier;
2 expansion of services to more markets in the least expensive way;
3 more efficient operations ± increased revenues and reduced costs through
productivity improvements and scale economies thereby increasing profit
margin;
4 reduction of exposure to risk by offsetting rate reductions in one market with
rate increases in another market;
5 gaining of market share by stimulating new cargo, and diverting traffic from
competitors; and
6 improving the quality of service each individual alliance member offers.

At present, four major alliances ± the Grand Alliance, the New World Alliance, the
United Alliance, and Cosco/K-line/Yang Ming ± enjoy the vast majority of these
benefits. The importance of these alliances cannot be underestimated. These four
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alliances account for between 60% ± 65% of slots deployed on the major East-
West lanes (Drewry Reports: Box Ship Strength, 2000). In fact, with the prevalence
of inter-carrier cooperation, `even the alliances are forming alliances' (Dupin,
2001).
It is important to note that alliances deliver these benefits even though their
members remain competitors. Although alliance members work together on a
variety of issues, including marketing, advertising, commonality of service, and
scheduling, an individual carrier's strategic goals are separate from those of the
alliance. Therefore, the carriers, not the alliances, work directly with their
customers to handle issues such as unique transportation needs, delivery, and
payment arrangements.
Regardless, the partners must truly commit to making their multilateral
relationship work effectively or else the alliance will fail. Even loosely allied
carriers must share the same level of enthusiasm or the alliance likely will be
unsuccessful. Failure may be caused by any number of reasons. First and
foremost, there is often a lack of trust between partner companies. Because
members still compete against one another, they often are unwilling to
compromise on issues that must be resolved at the expense of the strategic goals
of the alliance. Even worse, partner companies may abuse the benefits of the
alliance to the detriment of their partners. Therefore, it is often difficult for each
partner to believe that it is benefiting from the alliance and that no other partner is
receiving greater benefits. If a partner believes its needs are not being met, the
partner may abandon the alliance because carriers are usually not formally bound
to the alliance. Similarly, members may leave one alliance to join another if
promised greater benefits from the new alliance.
In the shipping industry, carriers fear that they are strengthening current and
future competitors. As one commentator has explained (Davies, 1998): `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.'
As an example, this commentator noted that American President Lines (APL),
which has since merged with Neptune Orient Lines (NOL), provided its partners
with cargo tracking but did not share information with alliance partners on other
related issues.
Additional examples of carriers working to undermine their own partners
might include cases in which alliance members have obtained space on their
partners' vessels at severely discounted rates and then re-sold the space at prices
high enough to generate a profit for the reseller, but well below the market rate for
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such services. When this reselling happens, the carrier actually operating the
vessel loses a substantial amount of money. To recoup the money, the carrier
reciprocates in kind, causing both partners to lose both money and trust in one
another.
Another common problem has been that carriers ± especially those from
different countries ± often expend substantial amounts of time and money on the
alliance only to realise that they have incompatible operating cultures.
Nonetheless, carriers have decided that the benefits of alliances outweigh the
drawbacks. Alliances generate operational efficiencies and expand services in
ways that could be reproduced only by merging, buying or building ± options that
are unavailable to most carriers. Conversely, failure to enter into an alliance could
transform a major carrier into a niche carrier because it cannot offer the wide
range of services provided by other carriers that have entered into global
alliances.

A HI S T OR Y OF U S R E G U L A T I ON O F I N T E R - C A R RI E R A G R E E M E N T S

The first modern inter-carrier agreement ± the conference ± was formed to end rate
wars that were raging in the mid to late 19th century. This round of rate wars was
no different than most others faced in the history of ocean shipping, in that
capacity surpassed demand. To prevent future rate wars that would drive many
carriers out of business, carriers developed the multilateral conference system
under which associations of carriers operating in specific trades cooperated to
minimise competition in order to ensure their individual survival. Conferences set
common tariffs to control prices, limited the tonnage available in their respective
trade route, shared revenue, and offered rebates to loyal shippers. Thus, carriers
entrenched themselves in their respective market positions at the expense of non-
conference members and shippers who usually had no real choice but to use a
conference carrier.
Because conferences prevented effective competition among carriers, a US
House of Representatives committee launched an investigation into the efficacy of
the practice. The Alexander Committee, which was named after its chairman
Joshua W. Alexander, studied the international ocean shipping industry and
debated whether the industry should be subject to US antitrust laws. The
Alexander Committee concluded that conferences were undeniably anticompeti-
tive but that they also produced substantial benefits because the general stability
provided by conferences resulted in: improved service and fewer rate fluctuations
for shippers; cost reductions; and an improved investment climate for carriers.
Moreover, the Alexander Committee determined that the capital-intensive nature
of the ocean carrier shipping industry limited the amount of healthy competition
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357

the industry could bear. However, the monopolistic nature of conferences also
resulted in carrier indifference to shippers' needs, particularly those of smaller
shippers, and anticompetitive behaviour toward non-conference, or independent,
carriers.
Faced with the mixed results of the conference system, the Alexander
Committee concluded that the advantages of the conferences outweighed the
disadvantages, but that some form of federal regulation of conferences was
needed to protect shippers. This finding served as the basis for the Shipping Act of
1916 (the 1916 Act). The 1916 Act created an independent agency, the US
Shipping Board (later known as the Federal Maritime Board, or `FMB'), to oversee
the industry. Among the pro-competitive provisions in the 1916 Act was the
requirement that carriers file their agreements with the FMB, which determined
whether an agreement should be approved. The three-part standard for approval
asked: is the agreement `unjustly discriminatory or unfair as between carriers,
shippers, exporters, importers, or ports, or between exporters from the United States
and their foreign competitors or [does the agreement] operate to the detriment of
the commerce of the United States or . . . in violation of this chapter?'4 FMB
approval was important because it conferred antitrust immunity on the filed
agreement. Without antitrust immunity, conferences would have been dismantled
for being in violation of the antitrust laws.5
Despite the safeguards of the 1916 Act, the FMB had a pro-conference bias
that gave conferences the opportunity to maintain their dominant market
positions. One of the commonly used methods was the dual-rate contract, under
which shippers received less-than-tariff prices for entering into loyalty contracts
with the conference. Although the Supreme Court ruled in 1958 that dual-rate
contracts were unlawful because they were used to drive competitors out of
business,6 Congress subsequently legislatively overrode the Supreme Court's
decision and breathed life back into the dual-rate contracting system.
Even so, the Supreme Court's decision directed the spotlight on the
industry, leading to significant changes to the laws governing ocean shipping
in 1961. Known as the 1961 Amendments, this legislation was the result of two
US House of Representatives investigations into competition in the industry:
one investigation was conducted by a subcommittee of the House Merchant
Marine and Fisheries Committee (Bonner Committee); and another one by the
Antitrust Subcommittee of the House Judiciary Committee (Celler Committee).
Notably, both committees found that traditional antitrust principles should not
be applied to the ocean shipping industry; however, the Celler Committee was
far more critical. The Celler Committee found a direct relationship between the
power of conferences and their competitive abuses. Therefore, the Celler
Committee expressed a need for healthy competition between conference and
non-conference carriers. Moreover, the Celler Committee stressed that
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358

conferences tended to be run by foreign carriers that disregarded US economic

interests.
The critical nature of the Celler Committee's report led to greater regulation of
the industry by a new independent agency, the Federal Maritime Commission
(FMC), which was created with the sole responsibility to regulate the maritime
industry. To this day, the FMC maintains basic international trade and oversight
responsibilities that affect the regulation of intercarrier agreements, including
conferences and alliances. The FMC is expected to be expert on all industry
practices; to protect all parties from unfair discrimination, preference or other
unfair actions; and to be judicious and effective in its enforcement of laws
prohibiting malpractices.
The most significant change in the law made by the 1961 Amendments for
purposes of this paper was the addition of a fourth standard for a proposed
intercarrier agreement to meet: is the agreement contrary to the public interest?
Likewise, Congress granted the FMC authority to disapprove rates that were so
`unreasonably high or low as to be detrimental to the commerce of the United
States.' The FMC could regulate rates because the 1961 Amendments required all
carriers to file their tariffs with the Commission. Despite the increased regulation,
conferences retained a cherished legal asset ± antitrust immunity.
Unfortunately, the newly formed FMC was welcomed with complaints from
both carriers and shippers. Carriers complained that the FMC took too long to
approve all inter-carrier agreements and that the vague `public interest' standard
made FMC rulings unpredictable. The carriers' complaint concerning the public
interest standard was rejected by the Supreme Court in FMC v. Aktiebolaget
Svenska Amerika Linien in 1968.7
In this case, the Supreme Court affirmed that the FMC's `antitrust standard,
involving an assessment of the necessity for this restraint in terms of legitimate
commercial objectives, simply gives understandable content to the broad statutory
concept of `the public interest'. The Supreme Court also affirmed the FMC's
decision to place the burden of proof on the applicant for antitrust immunity. On
the other hand, the shippers' complaint that conferences retained their antitrust
immunity never was formally heard by the FMC or the courts. Therefore, both
carriers and shippers were dissatisfied with the regulatory regime.
Dissatisfaction grew in the 1970s and led to various proposals to increase
competition and to provide stability in FMC decision making. Eventually,
Congress passed the Shipping Act of 1984 (the 1984 Act), which contained
sweeping reforms to ensure that carriers do not abuse their antitrust immunity or
impose unreasonable rate hikes on shippers; however, an analysis of the 1984 Act
shows that it reversed the trend towards greater antitrust scrutiny.
The 1984 Act reaffirmed the need for shipping conferences and granted them
broad antitrust immunity; however, its language covers other agreements `by or
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Ocean Shipping Alliances
359
8
among' carriers including alliances. Under the 1984 Act, all intercarrier
agreements, including conference and interconference agreements, that are filed
with the FMC and become effective receive antitrust immunity. Unfiled
agreements are also immunised so long as the carriers had a `reasonable basis
to conclude' that they acted pursuant to an agreement already filed with the FMC.
To counter the wide latitude granted to carriers to structure their agreements,
Congress empowered the FMC to seek an injunction to prevent the implementa-
tion of agreements that are likely to be `substantially anitcompetitive.' This
provision replaces the `public interest' standard, stating: `If, at any time after the
filing or effective date of an agreement, the Commission determines that the
agreement is likely, by a reduction in competition, to produce an unreasonable
reduction in transportation service or an unreasonable increase in transportation
cost, it may, after notice to the person filing the agreement, seek appropriate
injunctive relief under subsection (h) of this section.'9
The `substantially anticompetitive' standard responded to the carriers'
complaints that the `public interest' standard was overbroad and vague, but also
granted both carriers and the FMC flexibility to keep up with `new and evolving
forms of cooperative conduct' in the industry (H.R. Conf. Rep. No. 98-600, at 32,
1984). To streamline the FMC's review of agreements, Congress mandated that an
agreement automatically becomes effective within 45 days after its application
unless the FMC seeks more information from the proponents or moves for an
injunction to block the agreement. Further, the FMC bears the burden of proving
that a proposed agreement is likely to be substantially anticompetitive.
Unfortunately, the more liberalised regime of the 1984 Act led to another round
of overcapacity and hyper-competitive behaviour. Plus, the oversight intended by
Congress failed to materialise; the Commission never has sought an injunction
under section 6(g) despite the growing number of discussion agreements and
alliances. These trends prompted Congress to enact the Ocean Shipping Reform Act
(OSRA) in 1998. Most importantly, OSRA introduced a new type of agreement ± the
confidential service contract. For these contracts, key provisions ± such as rates,
intermodal origin and destination points ± will no longer be public information.
Instead, service contract filings will be held confidentially by the FMC and only
certain sections will be available to third parties.
OSRA has weakened the conference system and spurred competition, because
the carriers cannot police each other as they did before. Without this security
blanket, carriers have had to identify means of maximising efficiencies to compete
more effectively. As a result, carriers are entering into alliances to improve asset
utilisation through the sharing of vessels, terminals, equipment and containers
and to employ their collective financial strength for long-term asset procurement
and replacement. Even better, the carriers gain all of these benefits without having
to divulge the terms of their contracts.
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With the emphasis on confidentiality and the greater operational cooperation

resulting from alliances, Congress expressed concerns about industry consolida-
tion. To address these concerns, Congress empowered the FMC to play a more
proactive role when approving intercarrier agreements under section 6(g) of the
1984 Act. Although the FMC still bears the burden of proof, Congress wants it to
act `prospectively to block anti-competitive carrier plans before they result in
adverse effects on shippers and foreign trade' (S. Rep. 105-61 at 14, 1997). Factors
the FMC will consider include: the nature of the proposed agreement; the resulting
market share; market concentration; historical rate and utilisation models; and the
promotion of comity with US trading partners. Therefore, Congress now expects
the FMC to be more vigilant in its role of ensuring the competitive nature of the
ocean shipping industry.

P RE D I C T I O N S

Due to the complexity of the ocean shipping industry, this paper focuses on four of
the factors that potentially could have the greatest impact on alliances in the 21st
century: 1. consolidation; 2. vessel efficiency and transshipment; 3. US regulatory
priorities; and 4. on-line exchanges. Each of these factors could lead to either the
continued rise or ultimate fall of alliances.

Consolidation
As carriers realise the benefits of rationalising their services through alliances,
they will consider taking the next step and merge their operations to create a
single entity. In so doing, carriers believe they can fulfil their integrative promise
by consolidating their operations and by sharing previously confidential strategic
assets. Even greater synergies are created for consolidated carriers who combine
their ocean and land operations because they are controlled by a single carrier that
is solely concerned with the carrier's performance. Therefore, the consolidated
carrier reaps all the benefits of greater product diversification, greater breadth of
income sources, wider geographic reach, and more efficient asset utilisation.
On the management side, the consolidated carrier no longer has to worry
about the alliance's unstable relationship. Nor does the merged carrier concern
itself with balancing the interests of former partners. Even better, the merged
carrier does not fear that another carrier is trying to steal its customers. As a
result, the newly consolidated carrier can concentrate its efforts exclusively on
improving its own operations to obtain the benefits of its larger scale. When this
occurs, the sum of the consolidated carrier is greater than its previously separate
parts. That is why the last decade has seen several notable mergers between major
carriers.
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It is no surprise that mergers or acquisitions typically occur in situations where

the carriers' relationship has already produced significant results and the carriers
have worked well with one another. Otherwise, the carriers would never consider
permanently combining their operations. However, most alliances do not spark
relationships that make consolidation a realistic possibility. Although the allied
carriers work together to provide sophisticated transportation services, their
cooperation remains at a certain distance. Carriers tend to be individualists that
are not amenable to consolidating into an entity that they cannot control. Clashing
managerial personalities and greater dedication to the carrier than to the alliance
tend to keep allied carriers apart. Indeed, these are the very reasons why carriers
enter into alliances in the first place ± each carrier gains the benefits of their
carrier-to-carrier collaboration without forfeiting managerial control.
Moreover, other issues can make merging with an alliance partner
impossible. For example, countries will not want to sell their government-owned
and operated carriers that employ thousands of citizens in their home countries in
both the operational and shipbuilding sectors. Similar legal concerns ± tax,
ownership, antitrust ± also serve as countervailing factors that preclude the
possibility of consolidation for many carriers.
Therefore, alliances will not result in another round of `mergermania' that
will consolidate the industry into an oligopoly of a few large carriers in the near
future. If anything, alliances are more likely to influence large carriers to purchase
niche carriers whose operations can be integrated easily without any managerial
discomfort. In so doing, individual carriers can gradually build their individual
global networks while they enjoy the benefits of global alliances in the interim.
Once a carrier grows large enough to operate a comprehensive global network, it
will abandon its alliance partners.
The irony of this situation is that both the advantages and disadvantages of
alliances will result in future consolidation. Clearly, every carrier wants the
economies and efficiencies of scale enjoyed by alliances. But carriers want to
enjoy these benefits on their own terms to the exclusion of their competitors.

Vessel Efficiency and Transshipment

It is impossible to discuss these two developments individually because they are
so closely related. One main reason why global alliances operating over multiple
trade lanes are able to reduce consistently their port calls is the use of bigger
container vessels. Today's jumbo container vessels dwarf their Panamax
predecessors, carrying a substantially greater number of containers. And the size
of future vessels continues to grow at a rapid rate. Further, technological advances
such as vessel automation and Global Positioning Systems have made operation
of these jumbo vessels less expensive than older vessels. In addition, vessels
capable of crossing the ocean at twice the speed of conventional ships that can
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provide trans-Atlantic service in approximately four days are closer to being a

reality.
The other main reason why alliances are able to reduce substantially the
number of port calls made by a vessel is the transshipment of containers at
megaports. At megaports, containers are unloaded for transfer to other vessels or
land-based transportation and then leave shortly afterwards to their ultimate
destinations. Thus, megaports are switching centres that handle intermediate
flows between multiple origins and multiple destinations and commonly
contribute trade flows of their own. Essentially, the megaport system mimics
the hub-and-spoke system developed by airlines to transport both cargo and
passengers.
Under the megaport system, only alliances or carriers with the greatest
economies of scale can transport containers between megaports, to reap the
rewards of the more profitable portion of the ocean transportation. For containers
travelling between megaports and feeder ports and exclusively between feeder
ports, alliances will enter into agreements with niche or small regional carriers for
the provision of these short-haul and medium-haul services. Under these
agreements, niche carriers and alliances will have reciprocal responsibilities to
feed their traffic on to the other's vessels. So long as the FMC does not consider
such an agreement `substantially anticompetitive,' they will receive antitrust
immunity.
However, alliances looking for Jones Act carriers for feeder services in the
coastwise US trade will not have many options from which to choose due to the
small number of US-flag vessels. However, there are industry groups actively
working to promote the development of that fleet. Until such a fleet develops,
wholly foreign alliances will continue to rely on land transportation. To do so,
ocean shipping alliances will either enter into alliances or consolidate with motor
or rail carriers to create intermodal alliances. These intermodal relationships will
extend the rationalisation of operations throughout the entire transportation
process. In so doing, these intermodal alliances will provide the same integrated
service as freight forwarders and express shipping companies like Federal Express.
In the United States, intermodal relationships would not be immunised by the
Shipping Act; instead, the Antitrust Division of the Department of Justice would
be responsible for ensuring that an intermodal alliance does not restrain trade
under the Sherman Antitrust Act. Assuming that the parties did not enter into an
intermodal alliance with an improper motive, the Antitrust Division would review
the alliance to ensure that it would not have an anticompetitive effect.
In addition, it is important to note that ports will be forced to compete against
one another to lure carriers to use their facilities as a megaport. Port authorities
fear being bypassed and turned into feeder ports for large load centres. Even
worse, port authorities fear losing much of their business because port-to-rail
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transshipment will in many cases be faster than port-to-port transshipment.

Therefore, alliances have been able to extract attractive arrangements from port
authorities that include improved multimodal access, deeper ports, and inland
infrastructure that were previously unavailable.
Port authorities have entered these arrangements reluctantly because
alliances tend to be unstable. But port authorities have little choice because
without having a global alliance call at their port, the port's very existence will be
jeopardised.

US regulatory priorities
Since Congress enacted OSRA in October 1998, only one serious call for a
substantial change in the regulatory scheme governing carriers has been
introduced. This bill was entitled the Free Market Antitrust Immunity Reform
(FAIR) Act of 1999 and was introduced by Rep. Henry Hyde, then Chairman of the
House Judiciary Committee. As Rep. Hyde has long advocated, the FAIR bill
sought to repeal the current antitrust immunity for ocean carriers. Rep. Hyde
opposes antitrust immunity because it `now almost exclusively benefits foreign-
owned carriers at the expense of Americans' who are mostly shippers' associations
and NVOCCs.10 A primary example of the unfairness to NVOCCs is that OSRA
allows carriers, but not NVOCCs, to enter into confidential service contracts.
The FAIR bill did not get very far in Congress. Rep. Hyde's Judiciary
Committee held a few hearings on the subject, but neither the bill nor the issue
received serious consideration by Congress. Congress appears to be taking a wait-
and-see approach to determine the success of OSRA before tinkering with it.
Although the FAIR Act was reintroduced in the 107th Congress by Rep. Hyde and
the new chairman of the House Judiciary Committee, Rep. James Sensenbrenner,
carriers will not alter their alliance-related decision making based on congres-
sional action over the next two years.
Therefore, the governmental body that will have the greatest effect will be
the FMC. As discussed earlier, the legislative history of OSRA shows that
Congress wants the FMC to take a more proactive role in policing the shipping
industry. To perform its activist role, the FMC published an Interim Status Report
in June, 2000 to analyse how OSRA has affected the industry thus far (Ocean
Shipping Reform Act: An Interim Status Report, 2000). The report notes that
alliances have become `prominent' but offers little guidance as to how FMC post-
OSRA regulation of alliances will differ from pre-OSRA regulation. To date, the
FMC has not publicly questioned any proposed alliance agreements under its
section 6(g) authority.
But carriers should expect the FMC to become more active. Public comments
by several Commissioners illustrate that they are interested in playing the more
active role that Congress intended. Further, the FMC showed that it understands
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Ocean Shipping Alliances
364

the importance of alliances in its September, 2001 report explaining the impact of
OSRA on the shipping industry. In this report, the FMC expressly states that it is
``acutely aware'' of the operational agreements that comprise alliance relation-
ships (The Impact of the Ocean Shipping Reform Act of 1998; 2001). The FMC
recognises that alliances carry 60-65% of all slots in the main east-west trades;
however, it also considers alliances a competitive alternative to the super-carriers
that may result from increased mergers and acquisitions. Because the FMC is
closely scrutinizing alliances, carriers should expect the agency to follow
Congress's orders and closely scrutinise proposed alliances.

On-line exchanges
The Internet may either transform the competitive landscape of the industry or
have little effect whatsoever. The key determinant will be whether carriers decide
to use the Internet as a competitive or facilitating tool. For a web portal to have a
pro-competitive effect, it must serve as an auction where carriers bid for the right
to carry a shipper's goods. Of the three major web portals currently in existence or
existed, only GoCargo.com serves as an on-line auction that includes major
carriers. As of April 25, 2001, GoCargo.com ceased operations, leaving only two
major web portals.
To avoid another round of rate wars, most major carriers are shying away
from competing with the use of the Internet. The two non-auction major web
portals under construction do not offer any competitive benefits for shippers;
instead, they merely facilitate contracting. Nevertheless, there are significant
differences between these two projects. Several carriers first combined to create
`Inttra', a web site that operates like a traditional alliance in that it is purely an
operational relationship. As such, this web site will provide a shipper's basic
needs: tracking and tracing of containers; container booking requests; proactive
event notification; exception management; activity plans; bill of lading informa-
tion; and various reports and statistics.
Next, rival carriers announced the formation of the `Global Transportation
Network' project. In contrast to Inttra, the Global Transportation Network will
allow one-on-one rate negotiations between shippers and carriers and offer rate
quotations to shippers. Because all interaction is with the carrier of the shipper's
choice, the carriers do not directly compete with each other for business.
It is interesting to note that the two major web portals do not generally cut
across existing alliances. For example, the New World Alliance carriers (APL and
Mitsui) were members of GoCargo.com and are members of the Global
Transportation Network, but were not invited to join Inttra. Likewise, United
Alliance carriers Hanjin and Senator both belong to the Global Transportation
Network. However, cross-alliance web alliances existed, eg Senator belonged to
both GoCargo.com and the Global Transportation Network.
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 E. J. Sheppard & D. Seidman
Ocean Shipping Alliances
365

The tangled web of Internet relationships, though, cannot produce any

competitive benefits for customers, if the carriers refuse to compete. Thus, the
effect of the e-alliances will probably be minimal. Web portals serving only as
sources of information or points of communication merely provide a duplicate
means of communication that already exists on each individual carrier's web site
or by e-mail correspondence.

CONCLUSION

Alliances are rational responses to both the historical problems faced by the ocean
shipping industry and the new issues presented by today's global marketplace.
Moreover, alliances address the problems presented by the panoply of legal
environments in which carriers operate. With all of the benefits flowing from the
alliance system, the success of alliances may depend, in large measure, on the
likelihood that they will lead to mergers ± the ultimate alliance ± where smaller
carriers are acquired by the larger.
At the same time, the instability of many alliances results in the unwillingness
of carriers to make long-term investments in shared facilities or marketing
strategies. The fluidity of these relationships provides another reason for allied
carriers to consolidate, because they may never work closely enough together to
attain the long-term benefits of economies of scale.
Yet, the instability of alliances illustrates why large carriers will tend not to
merge with one another. As large corporate entities with a distinct corporate and
national cultures, large carriers are confident that their operations are superior
and are often unwilling to compromise in their beliefs. Although these traits can
be the very reason why a carrier is successful, ironically, it can also be the reason
why a carrier should not merge with a carrier of the same size.
Regardless, to ensure that the benefits offered by alliances are enjoyed by
shippers, regulators must pay close attention to these agreements. In the United
States, this means that the FMC must follow its mandate to pay closer attention to
the formation and operation of alliances. Carriers should expect the FMC to take
this responsibility very seriously, now that it has acquired the requisite
background information. Therefore, in total, the greatest fear alliances should
have is the carriers' own behaviour.

E N DNO T ES
1
The other way has been through mergers. The most notable mergers have been between: 1) AP Moller's
Maersk Line and Sea-Land Services to form `Maersk-SeaLand'; and 2) Neptune Orient Lines, Ltd. and
American President Lines, whereby APL became a wholly owned private subsidiary of NOL.

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 E. J. Sheppard & D. Seidman
Ocean Shipping Alliances
366
2
46 C.F.R. } 535.104(o).
3
46 C.F.R. } 535.307(a).
4
Section 15 of the 1916 Act, 39 Stat. 728, 733, (former 46 U.S.C. 814).
5
The Supreme Court noted: At least by 1913 it was recognised that such agreements might run counter to the
policy of the anti-trust laws; several cases were pending against foreign and domestic water carriers for
alleged violations of the Sherman Act.' FMB vs. Isbrandtsen Co., 356 U.S. 481, 487-88 (1958).
6
Id. at 481.
7
390 US 238 (1968).
8
Section 4 of the Shipping Act of 1984.
9
Section 6(g) of the Shipping Act of 1984.
10
Statement of Chairman Henry Hyde at a Hearing on the FAIR Act of 1999, March 22, 2000. http://
commdocs,house.gov/committees/judiciary/hju67304.000/hju67304_0.HTM5visited February 21,
20014

REFERENCES

Legislative Materials
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Act of Oct. 3, 1961 [Ocean Common Carriers ± Dual Rate Contracts], Pub. L. No. 87-346, 75 Stat. 762 (1961).
Shipping Act of 1984, Pub. L. No. 98-237, 98 Stat. 67 (1984) codified at 46 U.S.C. App. §§ 1701 et seq.
Ocean Shipping Reform Act of 1998, Pub L. No. 105-258, 112 Stat. 1902 (1998).
House Committee on Merchant Marine and Fisheries, Report on Steamship Agreements and Affiliations, H.R.
Doc. No. 805, 63d Cong., 2d Sess. (1914).
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Cases
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Other
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International Journal of Maritime Economics