03 October 17

The relationship between port choice and terminal involvement of alliance members in container shipping

In which ways the changing organizational routines of shipping (i.e., alliance formation and vertical integration in container terminal operations) are affecting the selection of ports of call in intercontinental liner service networks?

The latest port study by PortEconomics members Theo Notteboom, Francesco Parola, Giovanni Satta and Thanos Pallis analyses the relationship between port choice and terminal involvement of alliance members in container shipping.

The study examines the relationship between port choice of alliance members and the direct involvement of shipping lines in container terminals in North-West European ports.

It does so examining the evolution of calling patterns on the North Europe-Far East trade from 2006 to 2017.

In addition it explores the changes in both alliance formation during that period and in the container terminal involvement of carriers in North West European ports are addressed.

By examining the relationship between port calling patterns of alliances and the terminal interests of alliance members, the paper addresses questions related port choice/selection by carriers, providing value to port managers and shipping professionals in view of port strategy and planning decisions, as well as shipping strategy formulation.

You can reach the study (free access is valid, until November 11, 2017): Notteboom T.E., Parola, F., Satta, G. and Pallis A.A. (2017). The relationship between port choice and terminal involvement of alliance members in container shipping. Journal of Transport Geography, 64C, pp. 158-173.

Background and rationale of the study

The demand for container handling in seaports has seen strong growth in recent decades. Worldwide container port throughput increased from 88 million TEU in 1990 to approximately 535 million TEU in 2008. After a volume dip in 2009, caused by the economic and financial crisis, growth resumed at a lower growth rate to reach an estimated 691 million TEU in 2016 . The development of containerization went hand in hand with the creation of global container hubs. The 20 largest container ports handled 312 million TEU in 2015 or almost 45% of the world total (data port rankings compiled by Rotterdam Port Authority). The emerging worldwide container shipping networks reshaped global supply chain practices, supporting the globalization in production and consumption. Containerization has been a key driver of modern economic globalization and the adoption of new supply chain practices.

The growing demand for maritime container transport has been met via vessel upsizing.
While larger vessels allow shipping lines to benefit from economies of scale at sea, terminal operators and port authorities are pushed into making significant investments in equipment and nautical accessibility in view of reducing or eliminating potential diseconomies of scale of such large units in port. The high requirements in terms of the adaptive capacity of ports and terminals has triggered a debate on the (fair) distribution of costs and benefits between shipping lines and port operators when deploying ever-larger vessels. At the same, the number of weekly liner services on the North Europe-Far East trades, the most important East-West route in volume terms, evolved from 35 in 2006, 26 in 2012, 21 in 2015 to only 17 in the second quarter of 2017. At the same time the average ship size increased from 6,164 TEU in 2006 to over 14,000 in 2017 (data compiled by authors based on online carrier schedules).

The combination of fewer services and larger ships has led to increased competition among container ports to act as a port of call within one or more of these limited number of intercontinental liner services (also called loops or strings). The stakes are high: a weekly call in one of the services between North-Europe and the Far East now typically generates an annual container volume per port of call of about 300,000 TEU (Figure 1). A liner service using only ships of 20,000 TEU, i.e. currently the largest container vessels, could bring this figure to an average of some 450,000 TEU per year per port of call.

Meanwhile, market consolidation and alliance formation in container shipping have resulted in a market characterized by a small number of large shipping groups offering joint services on key trade routes. Not only do ports vie for fewer services serviced by larger vessels, they also have to deal with a few carrier groups with a strong bargaining power to play off one port against the other.

Given that the stakes are high, container ports are actively taking several measures to strengthen their competitive position as ports of call in the global container shipping networks. Such measures include investments in infrastructure (e.g. nautical accessibility, quay walls, etc.); “info-structure” (e.g. Port Community Systems); the implementation of commercial strategies in port pricing and land management; and actions aimed at improving the port-hinterland connectivity. Since the late 1990s, several port authorities have developed strategies allowing shipping lines to develop dedicated or semi-dedicated terminals aiming to secure ship calls and the associated maritime container volumes (Notteboom, 2002; Parola and Musso, 2007).

Container shipping lines have become major players in the container terminal market by entering key ports, using shareholdings, joint ventures with local or global terminal operators, sister companies or subsidiaries focused on terminal operations. The formation of strategic alliances has resulted in a more complex relationship between the terminal involvement of these alliance members and actual port calls.

It is thus worth studying how the changing organizational routines of container shipping (i.e., alliance formation and vertical integration to include direct involvement of shipping lines in container terminals) are affecting the selection of ports of call in intercontinental liner service networks. The role of inter-carrier dynamics, and in particular the involvement of carriers in alliances and in container terminals, is an under-researched theme in the extant literature on port choice/selection by carriers.

This study tests empirically to what extent terminal involvement by one or more alliance members influences the decision of the members belonging to the same alliance to include the port as a port of call in one, or more, liner services of that alliance.

The empirical part examines the actual relationship between port choice of alliance members and the direct involvement of shipping lines in container terminals in North-West European ports, using data on the evolution of calling patterns on the Europe-Far East trade from 2006 to 2017 in the light of changes in alliance formation during that period and the changes in the container terminal involvement of carriers in North West European ports.

The results draw attention to the role of inter-carrier dynamics and the terminal interests of carriers in explaining the calling pattern behaviour of these shipping lines. In this sense, the paper also has value to port and shipping professionals in view of port strategy and planning decisions, as well as shipping strategy formulation.

 

Source: Porteconomics

 

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