Recently, the European Commission decided not to extend the antitrust regulation exemption rights held by shipping alliances, known as the “Consortia Block Exemption Regulation” (CBER). The current exemption rights are set to expire on April 25, 2024. Under the previous CBER regulations, it allowed shipping alliances with slot-sharing agreements to hold no more than 30% of market share. The European Commission’s rationale for not extending it is that the integration of shipping alliances has created new market conditions, particularly evident during the COVID-19 pandemic.
Alliance cooperation has not changed market conditions
The state of the container shipping market, which is currently dominated by shipping alliances formed under slot-sharing agreements. These alliances have led to certain monopolistic behaviors among shipping companies, such as synchronized imposition or cancellation of fees like Bunker Adjustment Factor (BAF), Currency Adjustment Factor (CAF), and Peak Season Surcharge (PSS). However, due to the practical necessity of sharing capacity to cover global routes, these shipping companies are exempt from antitrust regulations to accommodate industry realities.
In this legal environment, shipping companies can open various routes at lower costs to meet economic development needs. Small shipping companies can also compete with industry leaders through collaboration. Despite some identifiable monopolistic practices, these companies cannot achieve monopoly profits. The industry witnessed several significant events in 2016, like bankruptcies and mergers, which increased market concentration, but profitability for shipping companies remained largely unchanged.
Therefore, the reasons provided by the European Commission regarding “shipping alliances creating new market conditions” lack persuasive power within the industry. The fundamental reason, especially during the COVID-19 pandemic, is revealed. During the pandemic, increased demand and congestion led to a significant depletion of shipping capacity, causing a surge in sea freight prices and increased tension between shippers and carriers. Most investigations, however, attribute these price changes to market forces, acknowledging that shipping companies acted diligently during the crisis. The consolidation of the container shipping market through alliances did not alter market conditions but rather highlighted societal dissatisfaction with the benefits that shipping companies gained incidentally during the pandemic.
More flexible transfer of benefits
The fundamental reason for this regulatory adjustment is the European Union’s demand for shipping companies within shipping alliances to concede benefits. The EU has taken a more flexible approach. Although shipping companies did not exhibit clear violations during the pandemic, there are ways to make them concede benefits. The various monopolistic behaviors within shipping alliances have long provided a ready justification for this. The expiration of CBER does not mean the prohibition of shipping companies forming shipping alliances; rather, it means that shipping companies within the alliances will no longer have an overall exemption, and each company will have to individually face the EU’s antitrust laws, specifically the “Horizontal Guidelines” and the “Specialisation Block Exemption Regulation,” effectively lowering the threshold for penalties.
Under the overall exemption, penalizing shipping companies presents two challenges. First, antitrust laws are difficult to apply, and even if they are applicable, penalizing one company would necessitate penalizing all shipping companies within the alliance. For example, Maersk and Mediterranean Shipping Company (MSC) are part of the 2M alliance, and the behaviors of companies within the alliance are the same. Penalizing MSC would mean penalizing Maersk as well, which broadens the scope and increases resistance. By canceling the overall exemption, it becomes possible to penalize a single shipping company without involving others, reducing resistance. This may also encourage a shipping company to report “certain behaviors” of other shipping companies within the alliance in order to avoid penalties.
The EU’s approach is more nuanced than the United States, which introduced the heavily shipper-biased “Ocean Shipping Reform Act.” However, as the region with the most prominent shipping companies, the EU needs to handle this matter with care and cannot treat all shipping companies impartially, unlike the United States. The subsequent penalties may be more targeted.
Asia-Europe routes will be greatly affected
The termination of the CBER regulation will have a significant impact, especially on the Asia-Europe shipping routes. In the extreme scenario where shipping alliances disband, and each company operates the Asia-Europe route independently, it will reduce the options for shippers. For example, under current alliance agreements, a shipping company like Evergreen offers multiple routes from Chinese ports to European base ports. If shared agreements are prohibited, they may offer significantly fewer options. Shippers will face longer waiting times if they miss a ship’s departure.
This situation also poses challenges for shipping companies due to vessel and cargo matching issues. In case a shipping company’s capacity is exceeded by the cargo volume, containers may have to be left behind. Without shared agreements, surplus cargo might need to be stored at ports, adding pressure on port facilities and causing operational peaks and valleys. Small and medium-sized shipping companies might find it even more challenging to operate on the Asia-Europe route due to differences in investment costs and cargo-handling capabilities. This could be part of the EU’s strategy to protect the market share of large European shipping companies.
For freight forwarders, the situation is more complex, as shippers may abandon contracts with individual shipping companies to have more flexibility in choosing from different companies. They may enter contracts with multiple companies to ensure their service capabilities. Overall, the industry may go through an adjustment period, with various stakeholders adapting to the new landscape. It’s expected that the EU Commission won’t necessarily disband shipping alliances but may instead penalize a few shipping companies. Shipping alliances may reconfigure, and larger companies might acquire smaller ones, further increasing industry concentration.