April 1st - the traditional recognition of April Fool’s Day in the United States – is a day filled with practical jokes, momentary scares and unreciprocated laughter. This April Fool’s ironically marked the long-awaited commencement of services under the THE Alliance and the OCEAN Alliance, with the Maersk/MSC/HMM Strategic Cooperation Agreement coming into place on March 30th, separate and apart from the 2M Alliance, already underway for some time.

Driven by an unprecedented surplus in market capacity and depressed freight rates, the ocean shipping industry has undergone several rounds of consolidation over the preceding year, including company mergers/acquisitions, corporate restructuring, alliance-shifting and even a notable bankruptcy. The consolidation of four mega alliances down to three mega alliances represents a Darwinist reaction to industry conditions; and, their commencement marks the finale of a year that has touched nearly every stakeholder in the supply chain.

Substantively, the OCEAN Alliance, comprised of CMA-CGM, Cosco China Shipping, OOCL and Evergreen, and THE Alliance, made up of Hapag Lloyd, MOL, NYK and K Line, will together be responsible for 58.3 percent of the capacity on the Asia-Europe route, and a staggering 70.1 percent of the capacity on the Asia-North America route. In a somewhat unprecedented construct, Maersk and MSC have entered into a second agreement with Korean survivor, Hyundai Merchant Marine, separate and distinct from the 2M Alliance between MSC and Maresk. This agreement will authorize the three carriers to engage in slot chartering, slot exchanges, and related cooperative activities on a worldwide geographic scale. The 2M Agreement has been operative since 2015, in the wake of the failed P3 Agreement, and essentially makes up the remaining capacity on the Asia-Europe and Asia-North America routes with nominal single digit capacity controlled by independents.

These larger alliances present bigger and more complicated hurdles to overcome. The complexity of the supply chain, and unprecedented scale of these new alliances will inevitably affect the core aspects of our business: commercial, operational, legal and insurance. For example, vessels are already steaming to the US from Asia that had to be coordinated and stow planned amongst new carrier partners, many of which will be calling at new terminals. Industry expert and former Hyundai Merchant Marine (America) CEO and President David Arsenault, has advised, “while alliances are not a new concept, this represents the first time in history that every mega alliance is being realigned simultaneously on April 1st, which represents the Big Bang event of 2017. There will undoubtedly be growing pains as the new alliance partners learn to work together, the terminals get into rhythm based upon the new operational environment along with the railroads, truckers, intermodal equipment providers and labor becoming accustomed to the new normal.” It will be a race against time for these new alliances to hit their stride, with July kicking off the industry’s busiest peak season in anticipation of the seasonal Holidays in December.

While the mega alliances and industry consolidation represent significant changes in the maritime industry, it remains to be seen what further actions are required to restore the financial health of the carriers. As noted by Mr. Arsenault, “the industry has hit a critical juncture in balancing service and costs. In their quest to restore profitability, carriers are aggressively removing costs which often results in service degradation. It remains to be seen if the market is willing to pay a premium for service or if shippers are choosing carriers based solely on freight rates. When the dust settles, carriers must find a way to differentiate themselves and offer a unique and attractive service at a reasonable rate level in order to set the industry back on the right course.”

And, as some have recognized, the maritime business is not the first in the transportation sector to experience such market troubles. Mr. Arsenault aptly considered that, “the airline industry has undergone similar woes over the past decade. Through a similar and systematic fury of consolidation, alliance-shifting and new partnerships, airlines were finally able to become profitable and achieve an adequate ROI. The airline industry has striking similarities to the maritime industry and historically is a leading indicator of trends that eventually impact the maritime sector.”

To complicate matters, the Federal Maritime Commission, which signed off on these mega alliances (and has to date never blocked an alliance), could face increasing pressure from shippers as freight rates begin to recover from historical low levels in 2016. It will be challenging to determine the impact that industry consolidation will have on freight rate recovery vs. potential mal-practices. Some would say that pressure has already mounted, concomitant with the US Department of Justice’s most recent service of subpoenas on top executives of twenty of the world’s largest carriers. The DOJ has consistently and publically offered its disapproval of the alliances and carrier anti-trust immunity in general. Regardless of how this duel between two executive branch counterparts will shake out, one thing is for sure, the alliances are on the hot seat both commercially and legally.

Perhaps the date chosen was a Freudian slip; a subconscious premonition of the rough seas ahead. Nevertheless, this April 1st may very well have begun a painful period for supply chains that is no joking matter in the maritime industry.