The Box - Marc Levinson [124]
As the artificially high rate structure collapsed, ship lines faced profit squeeze. Restructuring was the only way out. In July 1969, barely three years after container shipping had become an international business, West Germany’s two biggest shipping companies agreed to merge as Hapag-Lloyd, a huge new player in the North Atlantic. Three months later, Malcom McLean responded in kind. McLean had always preferred consolidation to competition; had the U.S. government not blocked him, he would have acquired Sea-Land’s sole East Coast competitor, Seatrain Lines, in 1959, and its main competitor to Puerto Rico, Bull Line, in 1962. Now, on Sea-Land’s behalf, he committed $1.2 billion of R.J. Reynolds’s money to an audacious deal with United States Lines. U.S. Lines was in the midst of building 16 containerships, all able to carry more than 1,000 containers and to steam faster than 20 knots. It would soon have the greatest containership capacity of any line. Sea-Land proposed to lease that entire fleet, all 16 vessels, for 20 years. U.S. Lines would surrender its status as a subsidized carrier, which would allow Sea-Land to deploy the ships wherever it wanted, without government approval. A major competitor would be out of the game, and Sea-Land would become by far the largest ship line on both the Atlantic and the Pacific.26
Competitors cried foul—but they reacted promptly. In early 1970, Grace Line was merged into Prudential Lines. Matson surrendered its international ambitions, selling its ships in 1970 and giving up its efforts to turn Honolulu into a hub for commerce across the Pacific. Moore-McCormack Lines sold its four newest freighters and exited the North Atlantic. Two British carriers, Ben Line and Ellerman Line, joined forces on the UK-Far East route, and three Scandinavian companies combined their ships to create a single international carrier called Scanservice.
Those shifts were far from enough to stabilize the industry. In the Australia trade, Overseas Containers Ltd. lost $36 million between 1969 and 1971. Hapag-Lloyd suffered losses in 1969, 1970, and again in 1971. On the North Atlantic, where one-third of containership capacity was unutilized, American Export Isbrandtsen Line lost so much money in 1970 and 1971 that its parent company’s shares were suspended from trading on the New York Stock Exchange and its president was forced out. U.S. Lines, operating in both the Atlantic and the Pacific, lost $14 million in 1970 and as much again the following year. Even Sea-Land had a difficult passage after the U.S. government blocked its efforts to combine with U.S. Lines, its profit falling from $39 million in 1969 to $21 million in 1970 and barely $12 million in 1971. R.J. Reynolds, like the other conglomerates that had invested in ship lines, was learning that container shipping was not the gold mine it had imagined.27
In desperation, the leading carriers on important routes tried an old-fashioned solution: reducing competition. Five competitors in the Europe-Far East trade, two British, two Japanese, and the German Hapag-Lloyd, combined their Pacific interests in an alliance called TRIO. Among them, the companies agreed to build nineteen large ships, with each company allocated a number of container slots on each ship. A second Europe-Pacific consortium soon followed, with the Swedish carriers and the Dutch company Nedlloyd merging their Asian operations into a company called ScanDutch. Those two alliances drastically cut the number of competitors between Europe and Japan, helping stabilize rates. An even more powerful cartel, the North Atlantic Pool Agreement, was born in June 1971. The pool agreement, strongly backed by six European governments, combined the efforts of what had been fifteen separate ship lines from six countries. It spelled out exactly what percentage of the total cargo each company would carry. All of the members agreed to charge identical rates, and revenues from North America-Europe service were to be shared. The cartel managed