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Foundation for Commissioner Lidinsky’s Dissent on the P3 Alliance Vote

April 8, 2014

Contact: Michael J. Gordon, Counsel to Commissioner Lidinsky

In certain trades and circumstances I support the alliance carrier structure. They can assist in rationalizing services and calling new ports. However, this agreement is in reality not an alliance or true vessel sharing arrangement. Rather, it is in effect a merger of the top three global liner companies.

This agreement will allow the controlling carrier the ability, when coupled with existing discussion agreements, to deploy its assets along with those of the other two carriers, to dominate vessel competition and narrow shipper options at U.S. ports. Other than the publicity machine of the three would be partners to rally support, there is nothing in the record before us of Americans clamoring for this proposal.

How does P3 Alliance add value to current market?

Offers nothing to the shipper, and only helps minimize carriers’ losses.
 
Offers no significant improvement in service.
 
Does nothing to stabilize rates.
 
Congests terminals and landside infrastructure.
 
Some observers have stated that projected rates will not cover slot and operational costs.
 

Alliances can actually reduce competition because they bar entry to their markets by new carriers who cannot compete on economy of scale.

When the structure of the Alliance concentrates excessive authority and rate setting powers into the hands of one controlling carrier, it comes at the expense of the other members.

The articulate and experienced comments of American parties involved in our international waterborne trade should have been given greater weight by staff in analyzing the impact of this agreement. However, since the Agency has in essence permitted over 1600 carrier agreements in the last 30 years -- never stopping one -- and sees nothing potentially harmful with the top three companies in an unprecedented combination, then perhaps the time is at hand for a thorough Executive and Congressional review of the 1984 Act to see how U.S. interests are being served by its current procedures.

For nearly a year the international liner community has been awash with news of an Alliance formed by the world’s top three container carriers.

In March last year I wrote the following in CONTAINERIZATION MAGAZINE (March 2013, page 49). "The creation of Alliances by vessel owners, often beyond the reach of any nation’s regulatory authority, has created an attitude of ‘carrier globalism’ – meaning that certain operators want to take on a sense of influence in the domestic maritime affairs of countries or even exert authority equal to or higher than the nation that allows their ships to call at its ports.  Carriers have come to view the Commission as an ATM."

Through the 1984 Shipping Act this Commission has allowed every carrier agreement submitted to them to take effect, under the banner of rate service stability and advancing vessel cargo capability. This allows foreign carriers protection from U.S. antitrust laws.

Five years after enactment of the Shipping Act of 1984, an advisory committee was established to review the initial experiences under the new law. Congressman William J. Hughes of New Jersey foresaw the situation we have today. He noted that at the time of the ’84 Act’s enactment there were no Super Conferences in existence – and today we have "Alliances."  The congressman went on to note, "for a fundamental variable in the equation arriving at the decision to grant such immunity was the preservation of the U.S. fleet.  Obviously, once such a critical variable changes, the balance of the entire equation falls into doubt and the utility of the immunity itself must be questioned."

There were several reasons the P3 Agreement should have been confronted and taken to Federal Court under section 6(g) procedures.

First, the P3 Alliance offers nothing new to the shipper and everything to the controlling carrier, by allowing it to minimize its losses to address the mistake it made when it and its P3 partners misjudged the market and overbuilt. The controlling carrier has in effect merged the vessels and containers of the other two carriers in the Alliance for its sole operational and financial benefit.

The P3 Agreement stands as the poster child of foreign carrier arrangements that must be thoroughly examined, rectified, or even stopped in order to protect American importers, exporters, ports, labor, truckers, railroads, and all other segments of the supply chain, by the FMC.

Proponents of P3 painted it as a natural service evolution with the implication that if the FMC does not support it, it’s somehow against progress and mired in the past.  Nothing could be further from the truth!

Over the years since the 1916 Act, the FMC and its predecessor agencies have witnessed the development of the Conference System, Talking Agreements, Rate Agreements, Super Conferences, and now Alliances. The FMC helped nurture the birth of containerization by making several key decisions in the 1960’s that gave the green light to the whole concept of intermodalism through dual rate contracts, mini-bridge, micro-bridge, FAK rates, door to door rates, and other regulatory aids that insured the eventual success of containerization and globalization ("The Box – How the Shipping Container Made the World Smaller and the World Economy Bigger" by Marc Levinson, Princeton University Press, 2006).

Finally, from observing our industry over forty years from a variety of perspectives, I feel if we allow this agreement to take effect, it will become a model precedent. The United States, the European Union, the People’s Republic of China, or any other regulatory authority will be hampered in protecting their national maritime interests in direct or cross trades. After nearly a decade of turbulence in the liner market, the last thing needed is this device designed solely to fill the largest ships for the controlling carrier at the expense, as one commentator has expressed it, of the world’s maritime architecture. The filing parties have every right to apply for this unique status under our anti-trust laws, however there is nothing in the statutes or regulations we administer requiring we grant the parties’ request to solve self-inflicted operational an commercial problems.

By the controlling carrier’s own admission, P3 is an agreement built on a misjudgment. In a September 26, 2013 interview with the WALL STREET JOURNAL, Soren Skou, the chief executive of Maersk Lines said "the Danish group misjudged the strength in demand for container shipping, when it ordered billions of dollars worth of new vessels two years ago."

The modern maritime truth is that carriers have to stop building ever larger ships which they cannot expect to fill given current market conditions, and those projected for the foreseeable future, on just the premise of lower slot costs. Carriers will continue to lose money until the volume of cargo catches up with available demand. If the parties in the P3 Alliance could fill these ships on their own, there would no need for the Alliance. The reality is that there is no need for an 18,000 TEU ship in today’s market place. In order to minimize the financial cost of their mistake, members of the P3 Alliance are hedging their bets that the structure of the Alliance can fill their ships until market conditions turn around so ships of this size can stand on their own. The terms of this agreement concentrate powerful capacity authority in the hands of the controlling carrier, which will make minimizing the financial risk that much easier, for them, but not the two other carriers.

At the end of the day, the question for the FMC to ask itself is, where is its obligation to allow foreign cross traders to rectify their mistakes and insure profits, which could possibly harm waterborne commerce to and from the United States?