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ONE more step along the consolidation road.
Carrier consolidation is moving apace with the merger of Japanese carriers, which have been given a new name.
Japanese carriers NYK, MOL and K Line have announced the new name of their merged containership entity - Ocean Network Express (ONE). As well as confirming that the new joint-venture is on track to start operations on 1 April 2018 (pending anti-trust reviews), details were given of the locations with a holding company to be set up in Tokyo, the global headquarters in Singapore and regional offices in Hong Kong, London, Richmond, Va., and Sao Paulo.
When ONE becomes operational it will be the world’s sixth largest carrier when measured by containership fleet with close to 1.4 million teu, giving it a market share of approximately 7% based on today’s fleet. Assuming no changes to the orderbook (in terms of new orders or delivery delays) by 2021 it will leapfrog Hapag-Lloyd to become the fifth largest carrier.
Under the terms of the joint-venture agreement – covering only the three companies’ containership activities and non-Japanese terminals – NYK will be the largest shareholder with 38%, while MOL and K Line will both have 31%. The distribution reflects NYK’s greater number of owned ships (active and on order) and terminals (10) that it is putting into the JV. Based on the same criteria MOL might have expected to have gained a bigger share than K Line with a similar number of owned ships, but contributing more terminals (seven versus three).
On the same token, MOL has the largest container-related revenues of the three over the past five years, generating calendar-year sales of $33.5 billion since 2012. Over the same period NYK and K Line each had container sales of approximately $29bn. Between them, the ONE carriers have seen annual container sales diminish by around 20% since the 2014 peak of $20bn to $15.7bn in calendar-year 2016. Moreover, since 1Q15 through 1Q17 the three lines have suffered some $1bn in collective operating losses from container operations. It is these heavy losses that spurred the ONE lines to finally come together after years of speculation and seek the cost savings to reverse their fortunes.
The creation of ONE is in keeping with the rising trend of consolidation in the container industry, following on from recent M&A deals involving CMA CGM and APL, Cosco and CSCL, Maersk Line and Hamburg Süd, and Hapag-Lloyd with UASC. When treating all of these newly merged carriers as single entities (even though in some cases the acquired company has retained its separate brand) we can see just how concentrated the power is becoming at the top of the ladder.
As things stand in terms of active and ordered ships, by 2021 when all newbuilds in the system are due to have been delivered the top five carriers will control a little under 60% of the world’s containership fleet. Back in 2005 the same bracket of carriers held around 37%. Come 2021 the top 10 lines will control 80% (55% in 2005) while the three leading carriers in Maersk Line, MSC and CMA CGM will take about 42% (26% in 2005).
Inevitably, as the gap between the leading seven carriers and everyone else beneath gets wider speculation will mount about whether the smaller players can keep up and remain cost-competitive. Of the carriers beneath the line, OOCL has recently been linked to a takeover by Cosco, while financially troubled Yang Ming has thus far resisted all suggestions of a merger with its Taiwanese compatriot Evergreen. It seems that there is still room for even more consolidation, which would very likely give even more control to the elite group at the top.
The obvious consequence of all of this is that shippers have fewer options to choose from. It is the unfortunate price that has to be paid for years of non-compensatory freight rates that have driven carriers to seek safety in numbers, either through bigger alliances and/or M&A. Again, when treating all takeover carriers as single entities (including the ONE carriers) Drewry research shows that the number of vessel operators on the two biggest deep-sea trades, Transpacific and Asia-North Europe has reduced significantly over the past two years. As of June 2017 there are only nine different carriers deploying ships in Asia-North Europe, compared to 16 in January 2015. In the Transpacific the number has reduced from 21 to 16 over the same period. Shippers can also call upon non-operating slot charterers on a service-by-service basis but there is no question that the pool is getting much shallower, handing greater pricing-power over to carriers.
The amalgamation of the Japanese carriers into ONE also shifts the balance of power within its new carrier grouping, THE Alliance. Previously, Hapag-Lloyd was very much in pole position, but as outlined earlier ONE will overtake it in the Top 5 over the course of the next few years. The German carrier has previously welcomed the Japanese merger and with fewer participants the decision making process within the alliance should be expedited. However, as ONE increases in size so presumably will its ability to dictate where and when the alliance should call. This could well lead to THE Alliance selecting more of ONE’s international terminals, which as Table 2 shows apart from some overlap in Los Angeles-Long Beach and Oakland in the US are complementary.
They are unlikely to face too much resistance as the other THE Alliance members don’t have many terminals interests. Hagap-Lloyd only has a minority stake in one terminal in Hamburg, while Yang Ming currently has stakes in three terminals in Taiwan, one in Antwerp and two in North America (Los Angeles and Tacoma).
The opportunities for further M&A among Top 20 carriers are receding with each new deal, but there is still a high likelihood that a second wave involving medium size carriers will follow soon. With fewer carriers, that in time will become financially stronger; the pendulum is swinging back towards those that can stick it out.
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