A New Era For Vessel Sharing Agreements – FMC Allows P3 and G6 Alliances To Go into Effect

by Cozen O'Connor

On March 20, 2014, the Federal Maritime Commission (FMC) announced that by a vote of 4-1, it had decided to let the P3 Network Vessel Sharing Agreement, among CMA CGM S.A., A.P. Moller-Maersk A/S trading under the name of Maersk Line and MSC Mediterranean Shipping Company SA, become effective on March 24, 2014. On April 2, 2014, the FMC announced a similar decision with respect to the G6 Vessel Sharing Agreement among APL Co PTE Ltd., Hapag-Lloyd AG, Hyundai Merchant Marine Co., Ltd., Mitsui O.S.K. Lines, Ltd, Nippon Yusen Kaisha, and Orient Overseas Container Line, Ltd., which became effective on April 4.

Although these two agreements in many respects resemble the type of vessel sharing agreements that have been filed with the FMC for the past 30 years, they are larger in scale and more integrated operationally. A unique provision of P3 is the establishment of a separate legal entity to act as its tonnage center. Although other alliances have had tonnage centers in the past, these were typically committees of the members rather than a separate entity with its own employees. Despite their similarity to past vessel sharing arrangements, when placed in historical context these two agreements may represent the next step in the evolution of carrier cooperation, for both carriers and regulators.

Prior to 1984, vessel sharing agreements in the U.S. trades were relatively rare for both practical and legal reasons. Practically, prior to the emergence of containerization as the dominant form of liner transportation, cargo was moving in breakbulk form and this presented challenges in terms of reserving an appropriate amount of space for the cargo, keeping the cargo of different carriers segregated, and dealing with liability issues. All of these practical issues are simpler in a containerized environment than a breakbulk environment. As a legal matter, prior to 1984, parties wishing to enter into a space charter agreement in the U.S. trades had to persuade the FMC to find the agreement was in the public interest, a process that could and often did take years. 

In the early days of containerization, many breakbulk carriers sought to share the capital and business risks of adopting the new container technology by forming joint services. A joint service is essentially a joint venture that multiple carriers contribute assets or funds, and which holds out and markets a service under a single name. Most of these services were managed by a committee of the owners, a structure that proved cumbersome and unworkable in the long term. As a result, most of the joint services (which were common in the 1970s and early 1980s) were either disbanded or sold to a single owner.  

The Shipping Act of 1984 simplified the process of carrier agreements becoming effective by providing that agreements filed with the FMC would become effective 45 days after filing unless the FMC went to court and obtained an injunction against an agreement on the grounds that the agreement was likely, through a reduction in competition, to result in an unreasonable reduction in transportation service or an unreasonable increase in transportation cost. During the same period, containerization had emerged as the dominant form of transport, eliminating practical problems. As a result, lines began to enter into space charter agreements in the mid-1980s.

Perhaps the first true vessel sharing agreement was called, appropriately enough, The Vessel Sharing Agreement (which led to use of the term “VSA” to describe such arrangements) among Sea-Land Service, Inc., Nedlloyd Lijnen, B.V., and P&O Containers, Ltd. This agreement was intended to maximize the utilization of the then very large and fuel efficient containerships (the so-called Econships) that Sea-Land had acquired from the estate of the bankrupt U.S. Lines. The P3 and G6 agreements have a similar purpose — maximizing utilization of large, efficient vessels as a means to reduce carrier costs. In other words, some of the basic reasons lines enter into VSAs have remained unchanged over the years.

The use of space charter and vessel sharing agreements increased through the late 1980s and early 1990s, although the vast majority of these agreements were (like the original VSA) often focused on a single trade lane. During this period, relatively few lines were considered “global” carriers and those that were often offered service through a combination of stand-alone strings that did not involve partners, trade-specific vessel sharing agreements, and space charter arrangements. As world trade increased and the phenomenon of globalization emerged, carriers sought to meet the transportation needs of their increasingly global customer base. Hence, carriers moved to geographically broader cooperations that the FMC labeled “global alliances,” most notably The Grand Alliance, The New World Alliance, and the CKYH alliance.  These agreements, although not truly global, were often broader in geographic scope and involved a more integrated, long-term cooperation than many of their predecessors. However, the objective was still the same:  to provide a service superior to that which could be offered alone while reducing operational costs and capital risks.

In many respects, the P3 and G6 agreements represent the next logical step in the evolution of carrier agreements:  geographically broader, more operationally integrated, long-term vessel sharing arrangements that come closer to being truly global. As in the past, these arrangements help carriers hedge against the risk of the investment required to build the large, fuel-efficient ships necessary to provide service at a competitive cost. They also allow improved utilization, a key to achieving cost savings. The difference between these agreements and past VSAs is primarily one of degree rather than kind — the cost advantage offered by new tonnage is necessary to remain competitive, but the size and cost of new ships has reached the point where it may no longer be feasible for carriers to operate outside an alliance that helps reduce the risk of such an investment to the point that it is acceptable. Indeed, some are questioning whether it is possible for a line to remain competitive on a global scale following a 1990s model of offering a patchwork of stand-alone and cooperative services rather than being a member of a global alliance.  

Although most comments filed with the FMC regarding these agreements favored effectiveness, in response to concerns expressed by certain shippers and others in comments filed with the FMC (and expressed in the press), the FMC has allowed the agreements to go into effect (but with enhanced monitoring by the agency). Thus, just as the lines have built on their past experience in developing these new relationships, so too the FMC has built on its past experience with VSAs to conclude correctly that these agreements do not differ substantively from their predecessors and should be allowed to proceed. As a result, both the industry and the U.S. regulatory agency responsible for overseeing it appear to have taken a step forward to evolve with new economic realities in the areas of carrier cooperation and government regulation, respectively.



DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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