Challenges and opportunities in applying EU competition law to the maritime industry

Andrii Kaftanov
Arzinger Law Firm, Kyiv
andrii.kaftanov@hotmail.com

Over 80 per cent of the world's goods are transported by the maritime sector, a significant part of the global economy. Many businesses are competing for market share in the fiercely competitive shipping industry. However, the industry has noticed a rise in the number of alliances formed by container shipping firms in recent years. These alliances create questions regarding competition law even though they may have advantages like scale economies and increased service quality.

EU competition law is a key tool in promoting fair competition and protecting consumers. The EU competition law framework is based on several key regulations and guidelines, including the Treaty on the Functioning of the European Union (TFEU), the EU Merger Regulation and the Guidelines on the application of Article 101 of the TFEU to horizontal cooperation agreements. These regulations provide the European Commission and national competition authorities with the legal basis for investigating and enforcing competition law violations.

The European Commission has released guidance on how to apply competition law to maritime transport services. These rules spell out the conditions in which alliances between shipping businesses are acceptable as well as the elements that competition regulators should consider. The rules state, for instance, that collaboration between shipping businesses is more likely to be acceptable if it’s seen as benefiting consumers significantly, such as by improving service quality or lowering costs. The guidelines also stress that corporations shouldn't use cooperation as a strategy to avoid competition and that cooperation should only extend as far as is necessary to obtain these benefits.

By fostering market competition, competition law can also balance the advantages and hazards of coalitions. Allowing other rivals to join the alliance or form their alliances can accomplish this. In addition, competition authorities can lower market entrance barriers, such as port fees or infrastructure upgrades, which can boost competition and lessen the market dominance of participating enterprises.

Finally, by guaranteeing that customers have access to a variety of options at competitive costs, competition law can advance consumer welfare. To make sure that customers are not damaged by the partnership, competition regulators might mandate that businesses maintain specific service standards and pricing.

Nevertheless, given the peculiar nature of the maritime sector, applying EU competition law to it can be difficult. Many of the world's shipping companies have their corporate headquarters outside of the EU. Furthermore, it can be challenging to identify which entities are subject to EU competition law because shipping companies frequently operate through intricate networks of subsidiaries and joint ventures. These elements may make it difficult for competition authorities to successfully execute the law.¹

The forming of alliances among container shipping companies is one area of concern in the application of EU competition legislation to the maritime industry. These partnerships can be formed in a variety of ways, such as through slot exchange, vessel sharing and cooperative service agreements.

One of the most significant benefits of alliances is improved efficiency. Alliances allow shipping companies to pool resources, such as vessels and equipment, and coordinate schedules to optimise operations. This can result in improved vessel utilisation rates, reduced transit times and increased service frequency. Additionally, alliances can increase capacity by allowing companies to share vessels, which can reduce the need for investment in new vessels.

For shipping businesses, alliances might result in cost savings. Companies can lower operational costs, such as fuel, maintenance and crew costs, by pooling vessels. Aside from that, alliances can increase their negotiating power with suppliers like port operators and fuel suppliers, which could lead to lower prices.

Improved service quality is another benefit of alliances. Alliances can result in more frequent and reliable services, which can improve the overall customer experience. Additionally, alliances can allow shipping companies to offer a wider range of services and destinations.

Even though alliances can have advantages like cost savings and higher service quality, they also raise questions about the law of competition. For example, alliances may reduce competition by allowing companies to coordinate pricing and capacity, effectively creating a cartel. In addition, alliances may make it difficult for new entrants to compete in the market, as they face a significant disadvantage compared to established alliance members.

Alliances may lessen market competition, which is a drawback. Participating businesses can lower the number of services offered and restrict the range of services available to clients by pooling boats and coordinating timetables. Because of the decreased competition, prices may increase and service quality may decline.

Additionally, alliances may raise the possibility of collusion and anticompetitive conduct. Participating businesses can limit competition and hurt customers by coordinating prices and capacity. In marketplaces with a small number of dominating firms, the possibility of collusion can be extremely high.

The European Commission has shown a willingness to look into and disapprove of alliances that could violate EU competition law, as well as to allow coalitions with conditions that would resolve those violations. The shipping sector benefits customers and is kept competitive thanks to this enforcement effort.

Several shipping alliances have been investigated by the European Commission for potential breaches of EU competition law. For example, in 2014, the P3 Alliance (Maersk Line, Mediterranean Shipping Company (MSC) and CMA CGM), was rejected by the European Commission because it would harm competition. Similarly, in 2013, the G6 Alliance (APL, Hapag-Lloyd, Hyundai Merchant Marine, Mitsui O.S.K. Lines, Nippon Yusen Kaisha and Orient Overseas Container Line) was investigated by the European Commission for potential competition law breaches.

However, not all shipping alliances have been rejected or investigated. For example, the OCEAN Alliance in 2016 (CMA CGM, China Cosco Shipping, Evergreen Line and Orient Overseas Container Line) was approved by the European Commission, albeit with several conditions attached. These conditions included commitments by the companies to offer additional services on some routes to maintain competition.

Now the container shipping market is bracing itself for a potential price war following the announcement by the two largest shipping lines in the world, Maersk and MSC, that they are ending their vessel-sharing agreement, known as the 2M alliance. The 2015 agreement was aimed at ensuring cost-effective and competitive operations on major trade lanes, such as the trans-Pacific, Asia-Europe and trans-Atlantic. The end of the 2M alliance could lead to drop-in spot rates and other alliances in the industry could come under pressure.²

The dissolution of the association was blamed by Maersk and MSC on their changing, separate business models. With this change, Maersk will be able to concentrate on its Integrator strategy, which aims to make them an integrated logistics provider and streamline its clients' supply chains. For MSC, though, it might present fresh chances for development.

The 2M alliance's dissolution may cause market disruption and a price war in the container transportation industry. Other partnerships may be affected, and larger lines may find it difficult to load their ships without cargo obligations. However, there might be chances for new contracts and vessel-sharing agreements, and the decision might open the door for more competition in the sector.

Additionally, the EU has not held back from punishing shipping companies who violate EU competition law with sizeable fines. The European Commission, for instance, punished various shipping firms, including ECL (a subsidiary of NYK), a total of €395 million in 2018 for taking part in a cartel in the car carrier industry. Of that amount, €166 million was paid by ECL. Similarly, the European Commission punished CSAV, K-Line, NYK, WWL-EUKOR and MOL in 2014 and 2016 for taking part in cartels in the car carrier industry.

These penalties serve as an example of the harsh repercussions of breaking EU competition legislation in the maritime sector. Companies that engage in anticompetitive behaviour, such as collusion on pricing and customer allocation, can harm competition and ultimately harm consumers through higher prices and reduced choice. Competition authorities such as the European Commission play an important role in enforcing competition law and ensuring that the shipping industry remains competitive and benefits consumers.³

In conclusion, because of the distinctive features of the maritime sector, it can be difficult to apply EU competition rules to the sector. To encourage fair competition and safeguard consumers in the shipping sector, competition law is a crucial tool. Although they may be advantageous, alliances between container shipping companies also raise questions regarding the law of competition. Competition authorities can contribute to ensuring that the marine industry remains competitive and benefits consumers by assessing the competitive consequences of alliances and successfully enforcing competition legislation.

Notes

1. European Commission. (2013). Antitrust: Commission opens formal investigation into container liner shipping companies' consortia. Retrieved from https://ec.europa.eu/commission/presscorner/detail/en/IP_13_1051

2. www.spglobal.com/commodityinsights/en/market-insights/latest-news/shipping/012523-end-of-2m-alliance-to-shake-up-container-shipping-market-could-trigger-price-war

3. European Commission. (2016). Antitrust: Commission accepts commitments by container liner shipping companies on price transparency. Retrieved from https://ec.europa.eu/commission/presscorner/detail/en/IP_16_2684