At a congressional hearing in June 2008, Jean Godwin, executive vice president and general counsel of the American Association of Port Authorities (AAPA), laid out the core difference between her members and their customers. "Unlike carriers and shippers, ports cannot move their assets, which are the product of the investment of billions of dollars of public funds," Godwin testified. This inflexibility means that ports "can be whipsawed by the other players" in the industry, she said.
Godwin's remarks were prophetic. In the years to come, shipping lines would endure a financial meltdown, a severe global recession, and billions of dollars in losses from uneven demand, overcapacity, and rate wars stemming from both conditions. Since 2011, two major liner alliances, the G6 and the P3, have sprung up to rationalize sailing capacity—and possibly dictate freight rates—on the world's major sea lanes. Meanwhile, a megacontainership capable of carrying up to 18,500 twenty-foot equivalent units (TEUs) has hit the water, promising enormous economies of scale as well as fewer ship calls at ports. An estimated 42 percent of current ship orders are for vessels exceeding 12,000 TEUs, according to Drewry Maritime Consultants, a U.K.-consultancy.
On the port front, British Columbia's Port of Prince Rupert, a relatively minor player in 2008, has grown to challenge U.S. West Coast ports in the trans-Pacific intermodal trade. Mexico's LÃ¡zaro CÃ¡rdenas has made inroads of its own south of the border. The Panama Canal expansion project, a glimmer in the eye in 2008, is two-thirds of its way to completion.
Liners, shippers, and beneficial cargo owners have adjusted their business models to cope with all these changes. U.S. ports, static creatures that they are, don't have that luxury. So it was viewed with more than passing interest in mid-January when the rival ports of Seattle and Tacoma asked the Federal Maritime Commission (FMC) for authority to gather and share information about each other's operations, facilities, and rates, subject to appropriate legal oversight. A merger or any other "change in governance" would not be part of any talks, the ports said.
The ports told the agency that the discussions would be designed to "identify potential options for responding to unprecedented industry pressures." The ports' joint strengths—namely a deep harbor and channel that requires no dredging, strong rail and road connections, and the West Coast's second-largest cluster of warehouses and distribution centers—must be leveraged "in the face of continued soft demand and increased competition," they said. The ultimate goal is to increase volumes through the jointly shared Puget Sound, the nation's third-largest container gateway, according to the ports.
In a February report, Drewry called the Seattle-Tacoma request a "ground-breaking move which could be copied by other ports" hoping to counter the threats from bigger ships and liner alliances. As alliances expand their reach, they will force ports and terminal operators to handle more single-customer volumes, Drewry said. This could give those alliances significant pricing power, the firm reckons. However, ports capable of accommodating megaships may hold a bargaining chip because there will be a limited number of locations where such a vessel can call, Drewry says. How the tug-o-war plays out may determine who gets the upper hand, the firm says.
WAVE OF THE FUTURE
Ship alliances, born from the financial and operating mess of the past few years, could be the industry's story of the future. The P3 alliance, composed of Denmark's Maersk Line, France's CMA CGM, and the Swiss line Mediterranean Shipping Co., the world's three largest liner companies, wants authority from U.S., European Union, and Chinese regulators to share vessel capacity on major routes. Based on current operating structures, the alliance would control 41 percent of trans-Atlantic capacity and 24 percent of trans-Pacific.
On Feb. 20, the G6 alliance, formed in 2011 and composed of APL, Hapag-Lloyd, Hyundai Merchant Marine, Mitsui O.S.K. Lines, Nippon Yusen Kaisha (NYK), and Orient Overseas Container Line, said it would expand its joint services to the trans-Pacific and trans-Atlantic trade lanes during the second quarter.
The key question facing ports is how vessel rotations will be influenced by the combination of alliances and larger ships, according to Curtis Spencer, president and CEO of IMS Worldwide Inc., a Texas-based consultancy. That uncertainty is "the much bigger story for 2014 and 2015" than the hoopla surrounding the Panama Canal expansion and its potential impact on trade patterns, Spencer said.
The ports that succeed in this new environment will have strong supporting infrastructure for road and rail access, Spencer said. The supposed holy grail of channel and harbor depth will be a secondary consideration in port selection, he said.
In Seattle and Tacoma, the first big order of business is likely to be streamlining the abundance of terminals at both sites. There are nine combined terminals, more than enough to handle the combined 4 million TEUs of annual throughput, Drewry said. The current structure dates back to the days when each carrier operated its own terminal through affiliate relationships. While this made sense when carriers were smaller and operated more independently, it has become a liability when addressing the outsized needs of large alliances with their cargo on massive vessels, the firm said.
The process of consolidating terminal capacity would require approval by the FMC. Or the winnowing could be accomplished through mergers. Either way, it would take time. A more immediate step would be for the ports to coordinate ship berthing windows or integrate rail intermodal services, Drewry said. However, both steps would require prior consent of the terminal operators and the railroads, the firm noted.
IS IT REALLY NECESSARY?
Aaron Ellis, an AAPA spokesman, said the group has no formal position on the Seattle-Tacoma request. However, Ellis said AAPA encourages information-sharing among ports that compete with each other but also have common interests.
It is possible the trend toward deeper collaboration will be limited to ports like Seattle and Tacoma. The facilities are only 30 miles apart, making it an easy logistical task to coordinate efforts. Unlike other U.S. ports, Seattle and Tacoma face a unique geographic challenge from Prince Rupert, which is the closest North American West Coast port to Asia, and touts the shortest land-sea route to the Midwest through connections with Canadian National Railway. Prince Rupert has been pursuing the U.S. and Canadian intermodal traffic that represents about 70 percent of Seattle and Tacoma's combined volumes. If Drewry's numbers are accurate, it's succeeding; since 2004, Prince Rupert's TEU annual compound growth rate has stood at 6 percent. During that time, Seattle and Tacoma's annual growth rate has been flat to slightly down. The ports' proposal is as much a response to the competition from Prince Rupert as the challenges posed by bigger ships and liner alliances, Drewry says.
Some ports may not see the need for deeper cooperation than what is currently allowed under the industry's limited antitrust immunity. The adjacent ports of Los Angeles and Long Beach, the nation's two busiest, compete against each other for business while already cooperating on infrastructure, environmental, security, and regional planning issues, according to Art Wong, a spokesman for the Port of Long Beach. For example, the ports are collaborating on a project that would create a freight-only lane for trucks on an 18-mile portion of the I-710 freeway between the two facilities.
Wong said leaders of both cities have weighed a merger's pros and cons almost as long as the ports have been around. However, they could never decide which entity would control a majority of seats on a governing board, he said. In 1925, Los Angeles voted for a plan to consolidate the ports, only to have Long Beach veto the plan. "The idea of merging the ports ... isn't gaining much traction," Wong said. "[It] never has."
James I. Newsome III, president and CEO of the South Carolina State Ports Authority, said regionally co-located ports "need to seriously evaluate the impact of the mega-alliances and whether it makes sense to forge closer commercial cooperation as a response." Newsome said that U.S. ports must generate adequate returns on their investments to prepare for the megacontainerships. Ship alliances, by contrast, are designed to reduce costs across the supply chain, putting their mandate at odds with that of the ports, Newsome said.
Newsome has forecast greater cooperation in future years between the Port of Charleston and the Port of Savannah, 107 miles to the south in neighboring Georgia. Curtis J. Foltz, executive director of the Georgia Ports Authority, has said publicly he sees no need to work with South Carolina beyond developing their joint interest in a planned container terminal eight miles from the entrance to the Savannah River in Jasper County, S.C. The project would effectively create a third regional port and allow dredging to a 50-foot depth, deeper than either Charleston, at 45 feet, or Savannah, at 42 feet. The deeper water would accommodate the large vessels expected to dominate global sea trade.