FMC approves THE Alliance's 'safety net'

Original Post Source

Dive Brief:

  • The Federal Maritime Commission (FMC) has voted unanimously to approve THE Alliance’s right to establish a contingency fund to be used in case of a member insolvency or severe financial distress situation, American Shipper reported Thursday.
  • Inspired by Hanjin Shipping’s bankruptcy, THE Alliance’s contingency fund will enable all members — Hapag-LLoyd, K Line, MOL, NYK, and Yang Ming — to act on behalf of other members in rescuing stranded cargo. It also helps establish a clear plan of action should insolvency strike one of the four member lines.
  • Though regulators discussed legislative solutions in the wake of Hanjin, both the industry and lawmakers prefer an independent solution, such as this contingency fund, to avoid another disastrous bankruptcy.

Dive Insight:

Having witnessed such a damaging storm to the industry, it appears the FMC supports a team rescue effort.

“As I have noted previously, last year’s collapse of Hanjin Shipping was a wake-up call for the entire ocean transportation and logistics chain,” Federal Maritime Commissioner William P. Doyle said at the FTR Transportation Conference 2017 in Indianapolis, IN. “It is so important that another Hanjin debacle does not happen again. Companies may fail, but the responsibility lies with everyone, at least to the extent that we do not have the damage that occurred post-Hanjin.”

Immediately following Hanjin’s bankruptcy, a German supply chain manager bemoaned the 1,000 containers of cargo he was likely to lose as a result of port debt seizures and standstill vessels. The realization that merchandise was likely to remain stranded for weeks shook the whole industry, as did the unwelcome news of the extremely low reimbursement rate due to unsecured creditors.

“Looking back, things could have been done differently,” said Doyle. “Looking forward, things must be done differently. And, things are being done differently with the establishment of this contingency trust fund by THE Alliance. Hopefully the contingency fund will never have to be tapped.”

Presuming Hanjin had been part of an alliance or even signed a Memorandum of Understanding, ships within its federation would have been legally able to rescue cargo if a hardship plan such as that approved by the FMC was in place. Further, deliveries would have continued, with other lines acting as guarantors toward Hanjin’s debt. Of course, such a decline would not have occurred with sister ships able to draw on the existing rescue fund.

“I firmly believe that if a carrier joins an alliance, it is the responsibility of the alliance members to ensure the cargo gets to where it needs to go,” said Doyle. After all, Hanjin was carrying other members’ cargo at the time of its fall, which compounded the industry problem.

However, to this day THE Alliance is the only such group with a contingency plan. Rival carriers argue this is because the group is the only one with a carrier at high risk, although alliance members claim it is more of a widely applicable safety net. Beyond insolvency, the fund can be triggered by a “material adverse change” that affects other carriers’ cargo, and used to ensure port calls or reimburse parties for legal claims.

“I applaud the innovative actions taken by carriers of THE Alliance. It is a responsible commercial reaction to the events of last year and it serves to assure the shipping public that its cargo will be delivered in a reliable and timely manner,” said Doyle. 

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