Ocean shipping's brave new world

The Ocean Shipping Reform Act of 1998 doesn't take effect until next May, but the maritime industry already is seeing repercussions.

By Staff -- Logistics Management, 11/1/1998

The Future Is Now. That advertising slogan for high-tech consumer products could just as well apply to the ocean shipping industry today. The tradition-bound maritime community already is undergoing radical change because of a new law that won't even take effect for another five months.

When the Ocean Shipping Reform Act of 1998 was signed by President Clinton in October, it marked the end of a long journey. Deregulation of ocean shipping rates and contracting had been on the congressional agenda for nearly a decade, but earlier versions of the legislation failed to make it out of Congress. What made the difference this time was a Republican majority in both houses and a well-orchestrated, aggressive campaign by the legislation's supporters.

The Federal Maritime Commission (FMC), which is charged with implementing the bill, must issue final regulations by March 1, 1999. The law goes into effect May 1. It contains provisions that will "stand the industry on its head," as one opponent said. Among the many significant changes in the Ocean Shipping Reform Act compared to current law are:

* Most service contract terms, including rates and service commitments, may be confidential. (Certain terms, such as contract duration, still must be filed with the FMC.);

* "Me-too" contracts, which required carriers to offer "similarly situated" shippers the same favorable rates as their competitors, have been dropped;

* In addition to individual shippers and shippers' associations, groups of "unaffiliated shippers" now may enter into service contracts;

* Any group of ocean carriers, not just a conference, may enter into service contracts;

* Carriers need not file tariffs with the FMC. Instead, they must make tariff information electronically available in a format approved by the FMC;

* Carriers may jointly negotiate rates and services with other transportation providers, such as railroads and trucking companies; and

* Ocean consolidators (NVOCCs) now must be licensed and post a bond or other form of security. The law refers to NVOCCs and ocean freight forwarders as "ocean transportation intermediaries" and treats them as a single class of provider.

Some things haven't changed: Ocean carrier conferences retain their antitrust immunity, and they must continue to file their agreements with the FMC. That agency also retains authority to monitor carriers' activities and investigate possible anti-competitive actions.

Large shippers in particular support the new law and have led the fight for passage under the auspices of the National Industrial Transportation League (NITL). Other stakeholders, including NVOCCs, shippers associations, freight forwarders, and some foreign-flag carriers, oppose the legislation. NVOCCs, for example, are unhappy that the law prohibits them from signing service contracts with their own customers. Although they do not have that right under current law, they fear that ocean carriers' newfound flexibility will give vessel operators undue competitive advantage.

Among the most vocal of the act's opponents is the American Institute of Shippers Associations, whose members are small and medium-sized shippers that leverage their combined cargo volumes to obtain favorable rates from ocean carriers. Executive Director Glenn Cella says his group's members fear that smaller shippers will end up subsidizing their wealthier competitors by paying higher rates. Cella also believes the law encourages anti-competitive behavior, charging that some members of Congress agree but won't expend the effort to rectify the problem. "Instead, they say, 'Let's wait and see what happens,'" he says.

Cella also questions the 1998 act's failure to require any review of the law's impact on the maritime industry, a requirement that was written into the Shipping Act of 1984. Kathy Luhn, NITL's vice president of government affairs, counters that because market forces, not government control, will determine rates and service levels, there is no need for formal review. "The basic laws of economics and marketing are going to ... take care of problems and abuses that might arise," she says. Shippers are not left to solve legal issues on their own, Luhn adds. They still will be able to file complaints with the FMC if they believe carriers have discriminated against them, and they now may address any contract problems in court, she notes.

Profound Impact

Whether they're for or against the shipping reform act, all parties agree on one thing: The new law will have a big impact on every link in the maritime chain.

For shippers, the ability to negotiate confidential contracts with ocean carriers will have the greatest effect on business. That new freedom will change the way shippers buy ocean transportation, predicts William A. McCurdy Jr., commerce counsel for chemical industry giant DuPont. "Contracts will be much more concerned with the scope of work and services, and they will be customized," he believes. Rather than negotiate price with sales managers, he suggests, shippers may want to discuss contract terms with the carriers' operating management.

Contract formats currently used by carrier conferences will have to be dropped. At least in the beginning, McCurdy expects, large shippers will draft their own contracts, but small shippers will work from a standard document originated by the carrier. "This will reflect what's happening in trucking. A guy who has only five loads a year is unlikely to have his own contract, but if you run five million a year, you'll write your own," he says.

And for the carriers? "I think it's going to be really traumatic," says maritime industry consultant Ted Prince. "Most of the carriers ... don't understand that what [contract] confidentiality means is a massive industry shakeout," he says.

Consultant John Reeve of A.T. Kearney agrees with that assessment. "I think that the act will promote continued consolidation. ... We've seen railroads and airlines going bankrupt under deregulation, but once things have stabilized, the industry will be stronger," he says. "Some [carriers] will go to the wall, but I think the good ones will survive."

NVOCCs are quickly finding ways to skirt the restrictions the legislation places on them. Because they function as both shipper and carrier, they can take advantage of the new provision that allows unaffiliated shippers to form agreements. NVOCCs also can form shippers associations, which may enter into service contracts with carriers and sign confidential contracts with their own members. At least two large NVOCCs already have taken that step and more are certain to follow.

Most observers believe that the law sounds a death knell for ocean shipping conferences, groups of carriers serving a particular trade lane that set rates and operational practices under antitrust immunity. "Conferences have lost their raison d'etre," says Reeve. "I think conferences as they exist now in North America will be gone in 12 months. They'll evolve toward much looser arrangements like 'talking agreements.'" (Talking agreements, which are subject to antitrust law, allow conference and independent carriers to coordinate their operational policies, capacity, and surcharges--but not rates.)

There already are signs that conferences are under market pressure, even though implementation of the act is still five months away. Before the bill had even been signed, APL announced its resignation from the Trans-Pacific Westbound Rate Agreement, a conference that covers exports from the United States to most of Asia. The resignation is effective Jan. 1, 1999.

In announcing that decision, Solon D. Webb, senior vice president, trans-Pacific services, said that the shipping reform act played a major role in APL's decision. "The timing of our action will enable us to be fully prepared for the new, deregulated business environment," he said.

Shippers Beware

The total impact of the Ocean Shipping Reform Act of 1998 won't be known for years to come, but shippers are likely to reap the benefits before carriers do, predicts Ted Prince. When railroads and trucking were deregulated 20 years ago, both shippers and carriers were neophytes at contracting for transportation services. Today, shippers can bring two decades of experience to the table, while ocean carriers still will be getting their bearings, he says.

Nonetheless, the uncharted waters of ocean shipping deregulation are filled with dangers, and even experienced shippers should beware of potential surprises, Prince warns. If shippers want to take full advantage of the reform act's benefits, he says, "they should be aggressive, be confident, be prepared--and be careful."

Editor's Note: The National Industrial Transportation League will hold a series of day-long seminars on the Ocean Shipping Reform Act of 1998 and how the law will affect business activities. Seminars will be held in January and February 1999. The cost is $495 per person for NITL members and $695 for non-members. For more information, contact Patricia McKenney of NITL at (703) 524-5011.