MLB Dissertation

From plain sailing into turbulent waters
Legal & economic effects of
EU Competition Law on Liner Shipping
Ajithaa Edirimane

II
Copyright 2008 Ajithaa Edirimane
The author retains sole copyright to all her contributions.
Credit is given and the source duly acknowledged of the original data and graphs used in
this thesis.

III
Dedicated to
My Dearest Parents
Whose love and blessings guide me throughout my life

IV
Preface
This book contains my thesis, the result of my research undertaken in July 2008 for the
Master in Law & Business (MLB) program jointly conducted by the Bucerius Law School
in Hamburg and WHU Otto Beisheim School of Management in Vallender, Germany.
The advice, guidance and support I received from the people I had the good fortune to be
acquainted with while in Hamburg, went a long way to make my thesis a reality. I am
thankful to my supervisors Dr. Tim Reher (for his lectures on EU Competition Law, which
awakened my interest on the subject), Mr. Thomas Mansfeld, Chief Corporate Counsel,
Hapag Lloyd AG (for giving me an opportunity to experience the working environment
within a liner shipping company), Dr. Markus Schoener of the law firm CMS Hasche Sigle
(in particular, for his guidance and advice on this thesis), Mr. Joerg Habicht, Director
Regulatory Affairs of Hapag Lloyd AG (for explaining operational matters in liner shipping
based on his experience which gave me another perspective than one usually finds in books
and literature), German National Library of Economics for the wealth of information, the
sources who have been quoted and whose original data is referred to in my thesis, to all my
professors at both Bucerius Law School and WHU, the administrative staff at the Law
School and friends, for their help in numerous ways during my academic year.
There have been significant changes in the maritime transport sector since the submission
of this thesis in July 2008, apart from the application of EU Competition Law as from 18
October 2008. The only consolation in this respect for liner shipping seems to be the
Consortia Block Exemption which too is, however, subject to review. In the early part of
2008 when I embarked on my research, there was only a slight indication of an adverse
economic situation looming in the horizon, which was then hardly felt by the maritime
transport sector. But now, global liner shipping is faced with the full impact of a downward
dip of a shipping cycle and some of the effects of competition in this aggravated economic
environment, as mentioned in this thesis, may come to pass. I have added an ‘Afterword’
referring to the new developments affecting liner shipping, which are too important to be
left, unmentioned.
Ajithaa Edirimane
5 December 2008

V
TABLE OF CONTENTS
Preface
Abbreviations
Chapter 1
Introduction
1.1 Outline, structure and reference material 1
Chapter 2
Historical background of liner shipping and antitrust legislation
2.1 Evolution of shipping lines from regional players to global giants 6
2.2 Historical background of shipping conferences and shipping consortia 8
2.3 Conferences and self regulation of liner shipping 11
2.4 Other arrangements – mergers, consortia and alliances 13
Chapter 3
EU Competition Law and Block Exemptions
3.1 The prohibition of restrictions on competition 16
3.2 Anti competitive practices and Article 81(1) EC 18
3.3 Exceptions under Article 81(3) EC 19
3.4 EC Regulation 1/2003 and self assessment of Art 81(3) conditions 21
3.5 Abuse of dominant position and Art 82 EC 25
Chapter 4
EU Competition Law and maritime transport sector
4.1 Application of Competition Law to maritime transport 27
4.2 Conference Block Exemption 30
4.3 Consortia Block Exemption 33
4.4 Infringements of Block Exemptions 38
4.5 Reform of the maritime Competition Law 40
Chapter 5
Probable legal and possible economic effects –
Post Conference Block Exemption
5.1 Economic effects 43
5.1.1 Inelastic demand and supply 43
5.1.2 Shipping market cycles 44
5.1.3 Theory of the empty core 45
5.1.4 Efforts to stabilize the industry 47

VI
5.2 Legal effects 51
5.2.1 Relevant Market 52
5.2.2 Market Share 55
5.2.3 Effect on trade between Member States 56
5.2.4 Exchange of information and concerted practices 56
5.2.5 Effects of United Nations Code on Liner Conferences 59
Conclusions 61
Afterword 63
Bibliography i - iii
Annexures
I Total Container Trade & World Container Fleet iv
II Growth in size of container ships v
III Notes on Ranking: Mergers & Acquisitions v
IV Evolution of global liner market shares vi
V Forms of co-operation in the maritime transport sector vii
VI Rise in containership construction vii

VII
ABBREVIATIONS
BER Block Exemption Regulation
CENSA Committee of European National Shipowners’ Association
EC European Commission
EEC European Economic Commission
ELAA European Liner Affairs’ Association
ESC European Shippers’ Council
EU European Union
FETTCSA Far East Trade Tariff Charges and Surcharges Agreement
GDP Gross Domestic Product
Guidelines Guidelines on the application of Article 81 EC
IPBCC India Pakistan Bangladesh Ceylon Conference
NVOCC Non Vessel Operating Common Carrier
OECD Organization of Economic Cooperation and Development
OSRA Ocean Shipping Reforms Act
TAA Trans-Atlantic Agreement
TACA Transatlantic Conference Agreement
TEU Twenty-foot Equivalent Unit
UN Conference Code United Nations Code of Conduct for Liner Conferences
UNCTAD United Nations Conference on Trade and Development

Chapter 1
Introduction
1.1 Outline, structure and reference material
This is a time of significant change in the maritime sector. The shipping industry in the
European Union (EU) has so far operated without any hindrance from EU Competition Law
protected by the “block exemption” granted under EC Regulation 4056/86 which exempted
liner shipping from the application of Articles 85 & 86 of the Treaty of Rome (now
contained in Articles 81 & 82 of the EC Treaty1
). Article 3 of Regulation 4056/86
exempted the application of EU Competition Law from liner conferences2
, tramp shipping3
,
pool arrangements4
and from cabotage5
. A similar block exemption was granted to liner
consortia6
under EC Regulation 823/2000. This unusual Conference block exemption
permitted liner shipping in the European Union to enter into arrangements on price fixing
and control supply which, in other industries was deemed anti-competitive.
The aim of EU Competition Law is to implement a system whereby “competition in the
internal market is not distorted”7
. The tools for achieving the said objective are Article 81
(prohibiting anti-competitive practices), Article 82 (preventing abuse of dominant position)
1
EU Competition law provisions
2
In maritime transport, a group of shipping companies that jointly determine freight charges, sailing
frequencies, and shipping capacity within a given geographic area.
3
Charters of bulk carriers, specialized carriers, etc.,
4
“Shipping pool” is a collection of similar vessels, under different ownerships, operating under a single
administration. The pool managers market the vessel as a single, cohesive fleet unit, collect their earnings and
distribute them under a pre-arranged “weight” system.
5
Coastwise trade restrictions to vessels flying the national flag
6
Liner shipping companies
7
Article 3(1)(g) EC Treaty

2
and the EC Merger Regulations8
. These are considered to be the “three pillars of EC
Competition Law”.
The enforcement of Competition Law on anti competitive practices and the abuse of
dominant position expose the offender to heavy fines as much as 10% of its worldwide
turnover, apart from causing adverse publicity and other punishments. The only defense
available for an accused is Article 81(3) by establishing that the restrictive practice
contributes to the (1) improvement of production and distribution of goods, (2) promotes
technical and economic progress, (3) allowing consumers a fair share of the resulting
benefits; and that the (4) the restrictions engaged in are necessary to achieve such benefits.
However, the view on granting block exemptions to liner shipping held by the EC took a
different turn as reflected in its Review of the block exemption in June 2004 wherein it was
stated that “the conditions for an exemption would appear to be no longer fulfilled. There is
no conclusive economic evidence that the assumptions on which the block exemption was
justified at the time of its adoption in 1986 are, in the present market circumstances and on
the basis of the four cumulative conditions of Article 81(3) of the Treaty, still justified.”
Thus, on 18 October 2006 the EC lifted the block exemption by means of EU Regulation
1419/2006 allowing the full application of Article 81 and 82 to the maritime transport
sector. However, in the case of liner shipping, a transition period of 2 years was granted
with the repeal of the block exemption taking effect on 18 October 2008. There was no such
amnesty for tramp shipping, pool arrangements and cabotage, with EU Competition Law
becoming applicable from the date of implementation of the EU Regulation 1419/2006. As
from 18 October 2008, the entire maritime sector (excluding liner consortia) have become
subject to Article 81 and 82 of the EC Treaty. The block exemption granted for liner
8
EC Council Regulation No. 139/2004 of 20 January 2004

3
consortia under EU Regulation 823/2000 expires in April 2010. The Commission has
released a draft regulation with significant changes which will come into effect for a further
period of five years as from 2010 and it is presently under review9
.
On 1st
July 2008, EC released the final “Guidelines on the application of Article 81 of the
EC Treaty to maritime transport services” giving explanations on the application of the
provisions of Article 81. It is however silent on Article 82. Stakeholders, (i.e. ship owners,
operators, shippers etc.,) expressed various views in the aftermath of the Draft Guidelines
issued in September 2007 on the impending regulations and their views broadly fell into
two categories. Ship owners and operators argued for a revision of the Guidelines on the
basis of the negative impact on the industry and shippers approving the steps to regulate the
maritime industry. The ship owners and operators sought detailed guidance on the
application of Article 81 and broader definitions to certain terms, especially terms such as
“relevant market” and “agreement”. They maintained that without proper clarifications their
operations can be severely restricted. It was also pointed out that the type of information
which can be exchanged has not been clarified leaving them in a difficult position as the
sharing of market information for forecasts and capacity planning is critical for maritime
operations.
In the case of Article 82, an important determinant for its application is the “market share”
held by an undertaking. The factors to determine “market share” are purely economical and
it is necessary to ascertain whether the economic factors that the EC would focus on, are
justifiable.
9
EC Press Release IP/08/1566 of 22/10/2008

4
The focus of this thesis is on the liner shipping sector10
in view of the importance it holds in
the global supply chain and the considerable impact it has on time sensitive cargo11
. Today,
approximately 90% of non bulk cargo worldwide moves by containers stacked on transport
ships.12
With opposing views expressed by the two major stakeholders in the liner shipping
industry, carriers and shippers, there is a need to ascertain the legal and economic
consequences considering that the ultimate goal in competition law is to promote consumer
welfare.
The legal and economic effects are explored by analyzing the current EU legal regime on
competition law and historical reasons for granting a special status to the maritime transport
sector. The objective is to ascertain to what extent the effects of competition law, or the
application of Article 81 and 82, will bring about the desired results of promoting consumer
welfare in an industry which historically has been sharing information to serve international
markets. The thesis is structured to initially consider Liner Conferences within which
carriers operated for well over century, what lead to the formation of Conferences and then
analyzes the post-Conference competitive environment under EU Competition Law.
The research material used for this thesis has been legal and economic bibliography relating
to the maritime industry, judgments from the courts of the European Union, articles from
reputed Journals, discussion papers of the European Commission and an analysis of the
10
‘Liner shipping involves the transport of cargo, chiefly by container, on a regular basis to ports of a
particular geographic route, generally known as a trade. Other general characteristics of liner shipping are that
timetables and sailing dates are advertised in advance and services are available to any transport user.’ –
Para.10 of the Guidelines on the application of Article 81 EC to maritime transport services.
11
Helmick, Jon S, “Intermodal ports and liner shipping: A 21st
century status report” Logistics Spectrum. Jan-
Mar 2001. FindArticles.com 10 June 2008
http://findarticles.com/p/articles/mi_qa3766/is_200101/ai_n8934777 ‘Liner service is the backbone of
international trade in manufactured goods. Liners, sailing on regular schedules along established ocean trade
lanes, move vast quantities of consumer, industrial and military commodities ranging from video cameras to
night-vision scopes, perfume to paint, jeans to milling machines…’
12
Wikipedia on Containerization, http://en.wikipedia.org/wiki/Containerization

5
submissions made to the latter by carriers, operators and shippers. In particular, the books
authored by Daniel Marx (1958) and B. M. Deakin (1973) were referred for an insight to
the early shipping industry. The reasons for abolishing conferences were gathered mainly
from the publication of Luis Ortiz Blanco (2007) titled Shipping Conferences under EC
Anti Trust Law.

6
Chapter 2
Historical background of liner shipping and antitrust legislation
2.1 Evolution of shipping lines from regional players to global giants
Over the ages, ships have significantly affected the destinies of countries and people around
the globe. In the 19th
century the oceans were dominated by British sea going vessels. Ships
were then used for transport of raw material from the Asian subcontinent and Far East for
British manufacturers. Along with the introduction of steam ships in 1850, which were
faster and predictable than sailing vessels, ocean transportation was cut even shorter with
the opening up of the Suez Canal in 1869. This meant that the liners could now carry double
the cargo during the same period of time.
Another revolution in sea transport took place in 1956 when Malcolm Maclean, an
entrepreneur from North Carolina, USA embarked on the idea of transporting goods in huge
35 foot containers, which could be stacked together leading to the most economical use of
space on board a ship13
. The first container shipping link across the Atlantic was thus
operated by Sea Land linking the east coast of USA with Bordeaux France and Hamburg,
Germany in April 196614
. Container shipping eventually replaced a major portion of the
“break bulk” method of transporting cargo on ships. It reduced the time of loading and
unloading and increased the amount of cargo that could be transported.15
The availability
13
Mercogliano, Dr. Salvatore – The Container Revolution
https://www.sname.org/newletter/SeaHistoryContnrShps.pdf
14
Port of Rotterdam: Brief History of Container Transport http://container50.org.uk/RotterdamHistory.pdf
15
George Raine, San Francisco Chronicle 5 Feb. 2006, A Sea Change in Shipping - 50 years ago container
ships altered the world.: ‘In 1959, according to Matson research, the industry was loading and unloading
0.627 tons per man hour. By 1976, with container shipping well established, the figure was 4,234 tons per
man hour. A ship’s time in port shrank from three weeks to 18 hours. In 1950, an average commercial vessel

7
of space on vessels increased when Ports started installing their own shore side cranes.
Similarly the sizes of vessels too increased from the original converted tankers which
carried a few hundred containers to the purpose built container ships such as the latter day
post-Panamax16
container ships capable of carrying 10,000 TEU17
s.
Thus, containerization and inter-modalism18
increased the speed and the volume of cargo
that can be carried across oceans and continents leading to considerable reduction in costs
of transport prompting investors and entrepreneurs from USA and Europe to invest in the
Far East, Latin America, Africa and the Indian sub-continent where the cost of production is
low. World trade has been increasing faster than world GDP since the latter part of the 20th
century and it is expected to increase even more in years to come.19
Liner shipping is a
pivotal force in this growth of world trade as evidenced by the volume of containers
transported world wide.20
The reduction in transport costs21
was attributable not only to the
revolutionary change in the mode of cargo transport from break bulk to containerized cargo,
but also due to shipping companies expanding to become ‘economies of scale’22
. The cost
could carry 10,000 tons at a speed of 16 knots. With container shipping, the average commercial vessel carried
40,000 tons at a speed of 23 knots’.
16
Ships classified as "Panamax" are of the maximum dimensions that will fit through the locks of the Panama
Canal. This size is determined by the dimensions of the lock chambers, and the depth of the water in the canal.
Panamax is a significant factor in the design of cargo ships, with many ships being built to exactly the
maximum allowable size.
17
Twenty-feet equivalent unit (TEU) – standard 20-foot container measuring 20 × 8.0 × 8.5 feet
18
Movement of containers through sequential transportation (i.e. sea, air and land)
19
UNCTAD Handbook of Statistics http://www.unctad.org/Templates/Page.asp?intItemID=1890&lang=1
20
See: Annexure I for total container trade transported and estimated up to 2010 and World Container Fleet
21
Deutsche Bank Research, April 25, 2006 Container Shipping http://www.dbresearch.de/
‘The cost per TEU of transport from Europe to the Far East is about 13% less when using a ship with a
capacity of 8,000 TEU instead of one with a 6,800 TEU’
22
Chandler, Alfred, The Enduring Logic of Industrial Success Harvard Business Review March – April 1990
130-140 : Economies of scale refers to the reduction in unit cost as output increases. Seen in industries where
there is a high fixed cost.

8
advantages that a firm enjoys due to expansion has been achieved in the container shipping
sector by building larger post-Panamax container vessels23
and through mergers and
acquisitions among shipping lines, whereby regional players in the shipping industry has
become global giants24
. The market share of the ten biggest carriers increased from 50% of
the world capacity in January 2000 to 60% in January 2007 corresponding to a growth in
the cumulated capacity from 2.5 million TEU in January 2000 to 6.3 million TEU in
January 200725
.
2.2 Historical background of shipping conferences and shipping Consortia
In the latter part of the 19th
century, the opportunities that were seen for making money in
an era of escalating sea transport lead to an oversupply of capacity.26
The introduction of
the steam ship in 1850 reduced the number of days in transporting cargo and enabled ships
to complete more voyages per year27
. Even though the capacity increased, during this time
the demand for goods took a downturn as ‘The Panic of 1873’ or the Long Depression in
the USA caused the closure of 18,000 US businesses between 1873 and 187528
. The excess
capacity with the introduction of steam ships coincided with the sudden loss of transport
business. The sailing vessels, providing an inferior service where speed is concerned, had to
23
Examples are ‘Emma Maersk’ of Maersk Line – capacity 15,200 TEUs; ‘Colombo Express’ of Hapag Lloyd
– capacity 8,749TEU’s; Also See: Annexure II
24
See: Annexure III – Main Mergers & acquisitions in the liner shipping sector from 2000 – 2006;
25
See: Annexure IV and as quoted by P. Cariou in Int, Journal of Ocean Systems Management, Vol. 1, No. 1,
2008 p.3
26
Sjostrom, William: Ocean Shipping Cartels : A Survey, Review of Network Economics, Vol 3, Issue 2-2004,
11I :
27
Deakin and Seward Shipping Conferences p.15
28
Persons, Warren M.; Tuttle, Pierson M.; Frickey, Edwin (1920). "Business and Financial Conditions
Following the Civil War in the United States". Review of Economic Statistics 2 (Supplement 2): 5-21.

9
bring down its freight to compete with this superior class of ocean going vessels29
. The
slump in demand coupled with the reduced freight rates levied by sailing vessels, lead to
cutthroat competition among shipping lines30
. Some lines failed but their ships remained31
.
The benefits shippers received by way of low freight soon disappeared as the excessive
competition lead to price wars driving away some of the regular carriers from business32
.
As a result, the number of ships providing services concentrated in the ownership of a
few33
.
It was at such a time in 1875, that the first liner Conference34
called the ‘Calcutta Steam
Traffic Conference’ was established on the route from UK to India, to stabilize prices and
protect the interests of ship owners35
. It consisted of five carriers: the P&O (Peninsular and
Oriental Steam Navigation Co.), the British India Steam Navigation Co. the City, Clan, and
Anchor Lines36
. The Conference later extended its ports from UK to the rest of Europe. In later
years, Calcutta Conference, which is considered to be the 1st
modern liner Conference, changed
its name to ‘India Pakistan Bangladesh Ceylon Conference’ (IPBCC).
Excess capacity and its impact on freight needs to be considered in the light of the capital
cost incurred by ship owners in providing service. The nature of capital expenditure in
29
Deakin & Seward Shipping Conference p.21: ‘Sailing ships were prepared to carry cargo at rates well
below those which were profitable for steamships and this accentuated the decline in freight rates’
30
Marx – International Shipping Cartels p.46
31
Ibid p. 46
32
Ibid
33
Ortiz Blanco – Shipping Conference under EC Anti Trust Law p. 4
34
Definition of Liner Conference from EC Regulation 4056/86: Liner Conference means a group of two or
more vessel operating carriers which provides international liner services for the carriage of cargo on a
particular route or routes within specified geographical limits and which has an agreement or arrangement,
whatever its nature, within the framework of which they operate under uniform or common freight rates and
any agreed conditions with respect to the provision of liner services.
35
Deaking & Seward : Shipping Conferences p.22
36
Aldcroft, D.H. (1968) The Development of British Industry and Foreign Competition 1875-1914: Studies in
Industrial Enterprise. University of Toronto Press: Toronto, p.343

10
shipping is described in detail by Marx in International Shipping Cartels37
. He categorizes
the principle cost factors in shipping as: Prime or out of pocket expenses; Operating
Expenses; Overhead Expenses; Joint costs; and Opportunity costs. These costs depend on
the route, size, speed and type of vessel, management and ports of call. Overhead expenses
do not vary whether the liner is in port or in high seas, which indicates the uncontrollable
nature of certain costs in maintaining a sea going vessel. The scheduled liner, after it
advertises the service, cannot withdraw from the schedule. It is an opportunity cost, which
is avoidable for tramp vessels as they can shift their routes according to demand. Once it
has been determined to place a vessel on berth, roughly 70 to 75 per cent of the cost of the
voyage is fixed’38
.
In the light of these findings, the formation of the first shipping Conference in 1875 referred
to as the ‘Calcutta Conference’, in an era of overcapacity, cutthroat competition and price
wars, can be attributed to the shipping companies desire to protect their interests and to
keep the business of shipping afloat. From this first Conference other Conferences soon
mushroomed in shipping lanes all around the globe. There were roughly 150 Conferences39
in
operation worldwide as of 2001, ranging in membership from two to forty lines40
. Conferences
were looked upon as a necessary element of shipping41
in the early part of the 20th
century,
but gradually the need for Conferences came to be questioned in the face of dissatisfaction
over freight rates42
.
37
Marx, International Shipping Cartels p.11- The principle cost factors effecting ocean freight rate
38
Ibid p.21
39
In 1990, there were over 400 Conferences operating worldwide according to Croner’s World Dictionary of
Liner Conferences
40
OECD Statistics, 2002, p.19
41
Preamble of the UN Convention on a Code of Conduct for Liner Conferences www.unctad.org/ttl/legal
42
Marx International Shipping Cartels p.69

11
2.3 Conferences and self regulation of liner shipping
The Calcutta Conference, in an attempt to prevent price wars, stipulated equal rates for each
of the British ports and prevented preferential rates from being given to shippers.43
Such
rigidity in pricing was however, not to the liking of many shippers and they tried to switch
to independent carriers44
. In order to pacify shippers, whose patronage the shipping
companies needed, a deferred rebate system was introduced in 187745
. The discontent over
rebates and preferential rates resulted in both the British and US governments appointing
Commissions to investigate the practices of Conferences in 1909 and 1912 respectively46
.
Both reports arrived at the same conclusions, finding that in all of the trade routes where
Conferences existed ‘a remarkable uniformity of rates seems to exist and not a trace of a
rate war can be found’47
. Competition among Conference members were regulated by rate
agreements, control of schedules, pooling and through performance bonds48
.
The proponents of the system saw in Conferences, a method to regulate and stabilize
shipping, whilst the opponents considered it cartelist and anti-competitive. In certain
instances, Conferences have acted in a monopolist manner and have used such methods as
‘tying in agreements with shippers’, ‘fighting ships’ and inter-conference agreements.49
43
ibid p.46
44
Ibid
45
A shipper would be entitled to a rebate on freight, if he gives the conference all its cargo. But the shipper
could not easily get out of the rebate system without incurring a loss, as the rebate of the former period was
granted only during the successive period of the contract. This kept the shippers continuously tied to the
Conference.
46
British Investigation - Report of the Royal Commission on Shipping Rings 1909. The Commissions
recommendations are in Vol.1, Cd. 4668 :
US Investigation – Investigation of Shipping Combinations (Washington, 1913 and 1914) Vol. No. 4 titled
Report on Steamship Agreements and Affiliations in American Foreign and Domestic Trade. This Committee
is also referred to as the Alexander Committee based on the name of proposer of the resolution in the House of
Representatives, Mr. Joshua W Alexander. The findings of the Alexander Committee formed the basis for the
US Shipping Act of 1916.
47
Marx, International Shipping Cartels p. 52
48
ibid p. 53: Deakin Shipping Conferences p 3 ; Ortiz Blanco Shipping Conferences under EC Anti trust law
p. 19
49
Marx, International Shipping Cartels p. 53, Ortiz Blanco Shipping Conferences under EC Anti trust law
p.19

12
The best known case of ‘fighting ships’ between a Conference and an independent line is
the Mogul case.50
It is considered as a landmark case in English common law in respect of
monopolies51
and describes the method adopted by Conference members to vanquish
opponents. In 1884 Mogul Steamship Co. (Mogul) and the Conference named as
‘Agreement for the China and Japan trade’ operating between Europe and Far East, entered
into an arrangement whereby Mogul was permitted to operate two tea ships from Hangkow
to London provided Conference rules were observed. But later when Mogul tried to join the
Conference to operate on an equal footing, permission was not granted which resulted in
Mogul operating at reduced freight rates on the same route. The Conference members
retaliated by reducing their rates further and shared the loss sustained in this operation.
Mogul filed action against the Conference members for inducing and bribing shippers and
preventing them from granting it cargo but lost in the initial action and in the appeals to the
Court of Appeal and House of Lords. The courts held that the mere fact of trying to frustrate
competition did not mean that the ship owners were interfering with the freedom of trade.
Conferences were not held to be illegal as long as the means used to eliminate competition
was not illegitimate per se52
.
The intra Conference rivalry could go to extreme heights when dissatisfied with the
allocation of market shares53
. Marx reveals the political power wielded by these
organizations as follows54
: ‘A shipping conference is a meeting in which the competitors
50
Mogul Steamship Co. vs McGregor, Gour and Co and others (1885) 15 QBD 476. This was finally decided
by the House of Lords in 1892.
51
Jennings (1980) p.31
52
Ortiz Blanco, Shipping Conferences under EC Anti Trust Law p. 20, 21
53
Marx, International Shipping Cartels, p.147
‘One of the most spectacular occurrences of this type in recent years was the dispute which erupted with
volcanic fury in 1949 between the British and Dutch members of conferences regulating trade between
Northern European ports and India, Pakistan and Ceylon. During the hostilities, …in which the Dutch raided
the British ports for traffic, …the actual cost of ocean transportation fell by 90 per cent to 10 per cent of the
Conference freights applicable before the dispute’
54
Marx, International Shipping Cartels p. 148

13
face one another with the object of achieving that minimum cooperation which will suffice
to prevent such chaotic competition as might render impracticable the liner system of
working ships. Each member of the conference is seeking the minimum surrender of his
competitive freedom which is compatible with this object; his attitude in debate is
determined by the sources of strength which lie behind his diplomacy’.
Some of the economic factors which had a bearing on the operations of Conferences in the
19th
century at the time they were formed seemed to have been a common feature as
highlighted in the TAA case.55
. Conferences and certain monopolistic practices were thus
recognized and accepted, till in later years as a consequence of Commissions of
investigations and public policy, the view that Conferences should be regulated, became
established56
.
2.4 Other arrangements - mergers, consortia and alliances
Conferences held a dominant role in sea borne trade for a century since the establishment of
the 1st
Conference in 1875. But during the latter part of the 20th
century, around 1980’s the
dominance of Conferences saw a general decline due to a number of factors57
. Tramp
shipping grew in strength, competing with liner shipping for bulk cargo. Non conference
lines managed to secure a significant market share of conference lines.58
The container
revolution and multi modal transport system enabling door to door transportation of cargo
55
Transatlantic Agreement (TAA Decision) 1999/243/EC O.J. (1999) 95/1 (1999) 4CMLR 1415; Para. 18, 19
and 20 :”The markets in containerized maritime liner transport services are generally subject to economic
conditions which vary according to the direction of the traffic. Thus, on the transatlantic route, there is a
significant imbalance between the demand for eastbound services and that for westbound services. In 1992,
the rates of utilization of vessels - the ratio between the volume of demand and total capacity available - were
estimated at 72.4% for eastbound traffic and at 62.6% for westbound traffic. Finally, during 1993, westbound
traffic grew strongly while eastbound traffic decreased considerably. From 1988 to 1991, the rates in the
westbound sector fell by more than 23%, while they rose by 10% to 13% in the eastbound sector. In the
economic context, ship owners suffered significant financial losses.’
56
Kalindaga & Karandawala (UN 1990) Relations between Liner Conferences and Shippers p. 8
57
p. 27
58
Ibid p.26

14
caused the emergence of new types of cargo operators called “Non Vessel Operating Cargo
Carriers” (NVOCC). For liner shipping they were shippers, whilst for shippers they acted as
cargo carriers. NVOCCs thus became another type of competitors for liner shipping, being
able to quote their own freight rate based on a combination of transport modes59
(i.e. sea
and land transport).
Another significant factor which caused an adverse impact on freight rates was
‘overtonnaging’. During 1990 – 2005, the average size of a container liner increased and so
did the fleet of vessels60
. By increasing size and expanding, carriers aimed to reduce the
cost of operation. Deutsche Bank Research on Container Shipping released in April 2006
states thus: “Ever faster and ever larger ships ply the world’s oceans. In terms of number of
ships, the container fleet increased by over 180% between 1990 and 2005. The size of the
fleet in terms of total container capacity (in TEU), however, expanded by 400%. During the
same period, the average size of container ships increased from 1,250 to over 2,200 TEU.
There are already plans for ships carrying over 13,000 TEU. According to calculations by
Ocean Shipping Consultants, the cost per TEU of transport from Europe to the Far East is
about 13% less when using a ship with a capacity of 8,800 TEU instead of one with only
6,800 TEU.”
Conferences were the first organizational method devised by carriers to withstand
destructive competition. In later years, to overcome the loss of revenue brought about by
falling freight rates due to increasing capacity and faster modern vessels, other
combinations came into being and amalgamations of shipping companies took place. It is
not possible for all shipping companies to go through expensive structural changes to reap
59
Ibid p. 30
60
See: Annexure I and II

15
the benefits of economies of scale and thus methods of cooperation in terms of business
strategies began to form, which helped to stabilize the market, reduce costs, differentiate
service and/or develop the market61
. One of these forms of cooperation is referred to as
“Liner Consortium or Consortia” which came into existence during the 1980’s. It was partly
to realize the benefits of economies of scale through joint cooperation and partly to
counteract the increasing competition posed by global operators. Thus, liner consortia
tended to expand with more vessels joining with other lines to form an international
presence in different routes to have access to a wider market. The European Commission
Regulation 823/2000 defines a Liner Consortium as ‘an agreement between two or more
vessel-operating carriers which provide liner shipping services exclusively for the carriage
of cargo, chiefly by container, relating to one or more trades, and the object of which is to
bring about cooperation in the joint operation of a maritime transport service, and which
improves the service that would be offered individually by each of its members in the
absence of the consortium, in order to rationalize their operations by means of technical,
operational and (or) commercial arrangements, with the exception of price fixing’62
Members of a liner consortia cooperate in the physical operation of a fleet. i.e. members
carrying one another’s containers in their respective ships under a slot charter arrangement,
ship scheduling, sharing voyage costs such as bunker charges, port charges, etc., within the
consortium arrangement. Members of a consortium get the benefit of working together to
achieve economies of scale63
, but at the same time, they operate independently on other
matters such as freight rate and quality of service.
61
See: Annexure V for the different forms of cooperation: Source: D.K. Ryoo The Handbook of Maritime
Economics and Business
62
Refer: http://ec.europa.eu/comm/competition/antitrust/legislation/maritime/
63
Different types of consortia arrangements : (1) Highly Integrated Consortia (i.e. Grand Alliance) with a
Tonnage Center, that assigns vessels to be deployed in given services. The Tonnage Center works out the
schedules. The individual ships are still operated and costs paid by the individual line. Any difference between

16
Chapter 3
EU Competition Law & Block Exemptions
3.1 The prohibition of restrictions on competition
‘Competition in the commercial world means a striving for the custom and business of
people in the market place’64
. Benefits of competition are pointed out as lower prices, better
production, wider choice and greater efficiency than under conditions of a monopoly65
. The
unprecedented growth of economies in the twentieth century, especially that of the
industrialized nations, fuelled the need for a legal system to ensure fair play in the market
place and for the protection of consumers.
Modern Competition Law is based on the US Anti trust legislation in particular the
Sherman Act of 189066
which was the first piece of legislation to limit cartels and
monopolies in the USA. Whilst the Sherman Act was commended for protecting
competition in commerce, it drew criticism as well for stifling innovation and thereby being
harmful to society67
. The US Shipping Act of 1916 required Conference agreements to be
filed with the US Shipping Board and only under such agreements approved by the
Shipping Board, was the fixing of pricing and restriction of output permitted. The
amendments to the Shipping Act of 1961 resulted in common carriers and Conferences
space provided and space demanded is settled on realistic cost standards and not on actual costs. (2) Vessel
Sharing Agreements (VSA), which are less integrated and has a coordination of vessels sailing according to
accepted schedules. Each party operates its own vessel and there is no joint Tonnage Center. Parties swap
slots on each others’ ships in certain routes. Any difference between slots swapped may be settled on realistic
cost standards and not on actual costs.
64
Whish, Richard Competition Law, Fifth Edition, p. 2
65
ibid
66
Wikipedia: http://en.wikipedia.org/wiki/History_of_competition_law
67
Bork, Robert H. (1993) The Anti Trust Paradox (second edition). New York: Free Press. ISBN 0-02-
904456-1

17
filing rates and charges with the Federal Maritime Commission for public scrutiny. Under
the Ocean Shipping Reform Act of 1998 (OSRA), which is currently in force, the immunity
from anti trust activity for carriers has been increased by permitting carriers and shippers to
enter into private confidential contracts at off tariff rates, giving such contracts anti trust
immunity.
The influence of the US anti trust laws in the formation of EU Competition Law is
significant. When the EC Treaty was being negotiated there had been considerable pressure
by the Americans and by some segments of the European Community for the inclusion of
competition law in the Treaty68
. The objective was to prevent businesses from partitioning
the internal market, as well as to encourage competition across borders69
, as the focus was
to have a single market within the European Union. In the words of Jacques Delors,
President of the European Commission (1985-1995), “The Single Act means, in a few
words, the commitment of implementing simultaneously the great market without frontiers,
….’ 70
’ The emphasis paid to competition law can be seen as a step towards integration of
the EU71
and dismantling the barriers to trade72
. In terms of Article 2 of the EC Treaty, the
aim of the Community is to establish a Common Market and ‘to promote throughout the
Community a harmonious development of economic activity’. In this regard, the main
reference to facilitating competition within the EU is contained in Article 3(1)(g) of the EC
Treaty, which refers to the implementation of a system whereby ‘competition in the internal
market is not distorted’.
68
Chalmers/Hadjiemmanuil/Monti/Tomkins, European Union Law, p. 928
69
Ibid p. 931
70
Refer: European Commission website on the Single Market:
http://ec.europa.eu/internal_market/index_en.htm
71
Wessling Rein, The Modernisation of EC Anti trust Law (Oxford, Hart 2000) 48-9
72
Mario Monti – European Competition for the 21st
Century (Fordham Corporate Law Institute, 2001) 257-8
‘After having painstakingly dismantled the barriers to trade represented by the national laws and regulations,
we must be watchful for them not to be replaced by market segmentations introduced by firms’

18
3.2 Anti competitive practices and Article 81(1) EC
EC Competition Law rests on three pillars: Article 81 EC (ex Art. 85), Article 82 EC (ex.
Art. 86) and the EC Merger Regulation 139/2004 (ECMR). The focus of this thesis is on
Article 81 and 82 EC73
, due to the importance of the said provisions in regulating anti
competitive practices in the maritime sector.
Article 81 (1) of the EC (ex Article 85)74
prohibits the following restrictive agreements as
incompatible within the Common Market:
“All agreements between undertakings, decisions by associations of undertakings and
concerted practices which may affect trade between Member States and which have as their
object or effect the prevention, restriction or distortion of competition within the common
market, and in particular those which:
(a) directly or indirectly fix purchase or selling prices or other trading conditions;
(b) limit or control production, markets, technical development, or investment;
(c) share markets or sources of supply;
(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby
placing them at a competitive disadvantage;
(e) make the conclusion of contracts subject to acceptance by the other parties of
supplementary obligations which, by their nature or according to commercial usage, have
no connection with the subject of such contracts.”
It is important to note therefore, that the prohibition in Article 81(1) applies only to such
agreements and concerted practices which prevents, restricts or distorts competition within
73
Implemented under Council Regulation No 17 of 6 February 1962,
74
See: http://ec.europa.eu/comm/competition/legislation/treaties/ec/art81_en.html

19
the common market. In analyzing whether the agreement or concerted practice affects trade
between Member States, the following needs to be considered75
:
(1) Does the economic activity involve at least two Member States?
(2) Does it have an “appreciable effect” on the competitive structure inside the Community.
(This is based on the position held in the market by the parties to the agreement, the nature
of the products, among others)
3.3 Exceptions under Article 81(3) EC
Under European Union competition law, an exception can be granted to an anti competitive
practice76
, even though there is an infringement of Article 81(1), if the conditions stipulated
under Article 81(3) are fulfilled. Any agreement, decision or concerted practice between
undertakings77
or associations of undertakings will not be prohibited, in spite of preventing
or restricting competition, if it:
(1) improves the production or distribution of goods or promotes technical or economic
progress, (“efficiency gains”);
(2) allows consumers a fair share of the resulting benefit, (“fair share for consumers”);
(3) does not impose on the undertakings concerned restrictions which are not indispensable
to the attainment of the said objectives (“indispensability of the restrictions”) and
(4) does not afford the undertakings the possibility of eliminating competition in respect of
a substantial part of the products in question (“No elimination of competition”).
‘Efficiency gains’ arise when the agreement (notwithstanding its restrictions on
competition) contributes to improvement in the production or distribution of goods or
promotes technical or economic progress. The effects of efficiency gains are matched
75
EC Guideline on the effect on trade (Official Journal C 101 of 27.4.2004)
76
There is no such comparable exception under the Anti trust laws in the US.
77
Refers to an economic entity (i.e. company, association of individual)

20
against the disadvantages arising from restrictions on competition caused by the
agreement.78
In this cost benefit analysis, the gains should thus outweigh the negative
effects of restrictions on competition79
. As regards the second condition, ‘fair share for
consumers’, it has been held that the benefits to consumers should match the benefits
obtained by the undertakings.80
The analysis should be based on the provable or foreseeable
effects of the agreement.81
As explained in the EC Guidelines, the application of Article 81(3) only becomes relevant
when an agreement between undertakings restricts competition within the meaning of
Article 81(1). If a restriction of competition has been proved, Article 81(3) can be brought
in as a defense. In terms of Article 2 of Regulation 1/2003 and as decided in several cases82
,
the burden of proof is on the undertaking which seeks the exceptions under Article 81(3).
These four conditions have a cumulative effect and therefore, even if one condition is not
fulfilled, the exemption sought under Article 81(3) will not be granted.83
If an agreement or
concerted practice is restricting competition under Article 81(1) and is not exempted under
Article 81(3), then such an agreement or concerted practice will be automatically void
under Article 81(2). Such infringements of Article 81(1) are deemed “hard core.” In this
regard, cartels are considered as falling within the “hard core” category.
In the past the Commission considered individual cases under Article 81(3) for exemptions
and issued comfort letters that Article 81(1) does not apply. The Commission was also
78
Ibid p. 293 and Consten und Grundig
79
EC Guidelines on Horizontal cooperation agreements (OJ C3 of 6.1.2001) describes the analysis adopted by
the Commission in this regard and lists categories of agreements which are deemed to bring benefits to
consumers as they fulfill the conditions stipulated in Article 81(3).
80
SPO (1995) CFI para.295
81
Consten & Grundig (1966) ECJ, 348
82
Consten and Grundig (1966) ECJ 347; VBVB and VBBB v Commission (1984) ECJ para.52, Matra
Hachette (1994) CFI, para 104, FEFC (2002) CFI, para 339
83
EC Guidelines on the application of Article 81(3), OJ No. C 101 of 27.4.2004

21
empowered to grant ‘block exemptions’ in determining the scope of the application of
Article 81(1) of the EC Treaty. Block exemptions thus co-existed with individual
exemptions granted under Article 81(3), which had been used only in limited number of
cases.84
In granting Block Exemptions of Article 81(1) for a category of agreements or
concerted practices, the Commission considers whether such category as a whole, fulfills all
four conditions of Article 81(3).
3.4 EC Regulation 1/2003 and self assessment of Article 81(3) conditions
EC Regulation 1/2003 of 200685
now permits national Courts to enforce EU Competition
Law as embodied in Article 81 and 82 to regulate anti competitive practices within their
respective member states. Up to April 200886
, there have been 20 such cases decided by
national Courts enforcing Article 81 and 82 EC. The Regulation has simplified the
procedure and has waived the earlier requirement for undertakings to seek a ruling from the
EC regarding ‘anti competitive effects’ of a proposed act. However, this means that the
undertakings themselves are now required to self assess whether an agreement or concerted
practice which violates Article 81(1), yet fulfills the criteria under Article 81(3) establishing
a pro-competitive benefit.
Considering the burden thus thrust upon undertakings to be their own ‘monitors’, an
analysis of what constitutes self assessment and the questions that the Commission requires
undertakings to consider in assessing whether an agreement or a concerted practice has a
84
Blanco, Luis Ortiz Shipping Conferences under EC Trust Law p. 289 : ‘Community courts have analyzed
Article 81(3) only approximately 30 times. It has sent numerous comfort letters giving informal approval to
many agreements that have been notified. The Commission has adopted more than 150 formal exception
decisions and about 20 Block exception Regulations, some of which have been repealed and replaced by
others.
85
Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on
competition laid down in Articles 81 and 82 of the Treaty amended Regulation (EEC) No 4056/86 to bring
maritime transport under the common competition enforcement rules applicable to all sectors with effect from
1 May 2004, with the exception of cabotage and international tramp vessel services.
86
http://ec.europa.eu/comm/competition/elojade/antitrust/nationalcourts/

22
pro-competitive benefit, need to be explored. This is mostly an economic exercise requiring
the input and consideration of factual data and economic scenarios. The first and third
conditions are considered first and thereafter the second and fourth, as analyzed under the
said EC Guidelines.
First condition of Article 81(3)87
- The restrictive agreement must contribute to improving
the production or distribution of goods or promoting economic progress:
The following questions assists in analyzing whether there are “efficiency gains” -
· What are the objective benefits created by the agreement?
· What are the claimed efficiencies? (i.e. nature, magnitude, how and when are the
efficiencies achieved)
· What is the link between the agreement and the efficiencies?
· What is the value of these efficiencies?
In ascertaining the benefits, it is necessary to calculate the monetary benefit or estimate
the value.
Third condition of Article 81(3)88
- The agreement must not impose restrictions which are
not indispensable to the attainment of the efficiencies:
The two fold test that is applied under this condition -
a. The restrictive agreement should be reasonably necessary to achieve the efficiencies.
b. The individual restrictions of competition should be reasonably necessary to achieve
the efficiencies.
The following questions assist in analyzing the “indispensability of restrictions” -
87
EC Guidelines on the application of Art. 81(3), paragraph 3.2
88
EC Guidelines on the application of Article 81(3), paragraph 3.3

23
· Are more efficiencies produced with the agreement or restriction than without such
agreement / restriction?
· What are the market conditions and business realities of the parties that make such
restrictions necessary for the attainment of the efficiencies?
· Are there realistic and attainable alternatives which are less restrictive but can lead to
achieving the same efficiencies?
· Can the parties achieve the same efficiencies on their own without such joint
arrangement and restrictions?
· Is the degree of restriction necessary to achieve the claimed efficiencies? What is the
period of time needed for a return of investment on the project?
· Is it impossible to achieve benefits under the agreement without such restrictions?
The more restrictive the agreement, more strict will be the test under the third condition. In
this assessment, the structure of the market, risks related to the agreement, etc., should also
be considered.
Second condition of Article 81(3)89
- Consumers must receive a fair share of the efficiencies
generated by the restrictive agreement:
The consumers of the relevant market should be better off as a result of the restrictive
agreement for this condition to be fulfilled. There should be a ‘pass on’ effect of the
benefits under the agreement. The greater the restriction, the greater must be the ‘pass on’
effect of benefits to consumers. If actual benefits cannot be quantified, the undertakings are
required to substantiate their claims by estimates. It is however pointed out in the
Guidelines that entities enjoying market power will be less inclined to pass-on the benefits
resulting from their operations. The following questions assist in analyzing the pass on
effect of a “fair share for consumers” -
89

24
· Is there a more efficient allocation of resources resulting in the consumers in the
relevant market getting the benefits of the service, which would not have been the case
without such a restrictive agreement?
· If there is a time lag to achieve such efficiencies, is there a future gain to the
consumers? This would need the consideration of inflationary effects, by discounting
the value of future gains.
· If cost benefits are achieved, is there a ‘pass-on’ to consumers of such cost benefits by
means of reduced prices?
Fourth condition of Article 81(3)90
- The agreement should not afford the parties to
eliminate competition in respect of a substantial part of the products:
This condition makes the aspect of competition between parties operating in the same
market, far more important than the potential pro-competitive efficiency gains from
restrictive agreements.91
It ensures that there is no abuse of dominant position. The
following questions assist in analyzing whether there is “no elimination of competition” –
· What was the degree of competition that existed in the relevant market prior to the
existence of the agreement?
· What is the current market concentration and number of competitors?
· Has there been a substantial reduction of competition as a result of the agreement? The
greater is the reduction of competition, the greater the risk of elimination of
competition. Price increases that are imposed after the execution of an anti competitive
agreement may indicate the market power of the parties to the agreement.
· What is the potential competition in the relevant market?
90
91
EC Guidelines on the application of Article 81(3) paragraph 105

25
The barriers of entry to the market for a new entrant, regulatory framework, market
structure, sunk costs, the extent of past entry, economic outlook, are all considered in
assessing potential future competition.
· Do the other competitors face higher costs of service and capacity constraints?
If the answer to the question is ‘yes’ the competitive response is deemed limited.
· What are the competitive constraints that the parties to the agreement impose on each
other, such as differentiation of services, among others?
The EC Guidelines on the application of Article 81(3) makes it clear that in a self
assessment, all of the above questions and other matters having a bearing to the four
conditions should be fully analyzed. If the self assessment reveals any doubts about non-
fulfillment of even one condition, then the undertakings concerned would have no available
defense for contravening Article 81(1).
3.5 Abuse of dominant position and Article 82 EC
Article 82 EC92
applies when a single undertaking or a group of undertakings in a dominant
position has abused the said dominant position for anti competitive gains within the
common market.
The important feature in this provision is that it does not ban dominance as unacceptable.
Only the abuse of dominance is considered unlawful. Article 82 also specifically refers to
certain practices which are considered abusive outright. Even though there is a well
92
Article 82 EC : ‘Any abuse by one or more undertakings of a dominant position within the common market
or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may
affect trade between Member States: Such abuse may, in particular consist in:
(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
(b) limiting productions, markets or technical development to the prejudice of consumers;
(c) applying dissimilar conditions to equivalent transactions with other trading partners, thereby placing
them at a competitive advantage;
(d) making the conclusion of contracts subject to acceptance by the other parties of supplementary
obligations which, by their nature or according to commercial usage, have no connection with the
subject of such contracts

26
developed case law for the application of Article 81, in respect of Article 82, the decided
cases are limited. There is continuing debate whether the application of Article 82 to the
operation of industrial giants would hamper their growth and innovation, which would be a
loss to society93
. Monti lists four conditions94
which should be evident to establish an
infringement under this Article:
(1) the undertaking is dominant in the given market;
(2) it has abused its dominant position;
(3) the abuse has effect on trade between Member states;
(4) there is an absence of any objective justification for such abuse.
All four conditions should be present to proceed against an undertaking for abuse of
dominant position under Article 82 of the EC Treaty.
93
V. Korah, An Introductory Guide to EC Competition Law and Practice 7th
Edition, Oxfor, Hart, 2000
94
Chalmers/Hadjiemmanuil/Monti/Tomkins, European Union Law, p. 1025

27
Chapter 4
EU Competition Law and maritime transport sector
4.1 Application of Competition Law to maritime transport
The maritime sector of continental Europe in the 19th
century was not regulated by
governmental authorities. The continental authorities were disinterested or were not aware
of the negative effects of shipping conferences. The first defensive action by ship owners
leading to the involvement of European countries took place as a result of the 1958 US
court ruling in Isbrandtsen.95
The ruling activated European Ship owners to form the
Committee of European Ship owners (CES) which became a positive voice to influence
European legislators. In the meantime the Federal Maritime Commission (FMC) of the US
through powers vested under the Bonner Act, adopted a strict approach by scrutinizing
Conference agreements. European countries considered this to be undue interference96
and
passed a resolution in March 1963 leading to the formal recognition of the Conference
system in Europe. It gave the necessary impetus for ship owners and shippers to form into
associations, the former under CENSA (the Committee of European National Ship owners
Association) and the latter under European Shippers’ Council (ESC). 97
This was the first
step in bi-lateral self regulation of the maritime sector in continental Europe. Thus, the US
actions to regulate Conferences resulted in such Conferences being formally recognized in
Europe in the 1960’s.
The Code of Practice for Conferences (CENSA Code) was drafted with the participation of
ESC and adopted in Genoa in October 1971. It was submitted to the CSG Governments for
95
FMB v Isbrandtsen Co. 356 US 481 (1958)
96
Blanco, Luis Ortiz, Shipping Conferences under EC Anti trust law, p.48
97
Ibid p.49

28
acceptance in the same year98
. The Code covered a range of issues such as the principles
relating to loyalty arrangements, information to be published by Conferences, rate
increases, surcharges, etc. During this time, there were hardly any court actions against
Liner Conferences for anti competitive practices.99
. The main criticism that was leveled
against the CENSA Code was that it excluded the participation of Developing Countries.100
Nevertheless, the emerging national shipping lines in Developing Countries increased the
pressure to find solutions to the problems caused by Conferences101
, such as high ocean
freights impacting on their exports102
. After several deliberations at UNCTAD, a consensus
was reached to have a universally acceptable Liner Code that addresses the issues of the
Developing Countries.103
This lead to the adoption in 1974 of the United Nations
Convention on a Code of Conduct for Liner Conferences (UN Conference Code), which
largely reflected the basic policies enshrined in the CENSA Code, but also addressed the
interests of Developing Countries in fleet developments104
.
The UN Conference Code took almost a decade to come into force since adoption as there
was opposition for some of its provisions, especially to the provision relating to the
"40/40/20 rule"105
in Article 2, considered to be a protectionist measure. The Member states
of the EC finally ratified the Code subject to a common reservation set out in Council
98
ibid
99
The only recorded judgment was against the Far Eastern Freight Conference in 1971 for a deferred payment
rebate which was considered an abuse of dominant position. This judgment was later overruled by the Berlin
Appeal Court in 1972. See UNCTAD Secretariat Reports (1972) 6 para. 24
100
ibid
101
Kalindaga Y.C. and Karandawala P. Relations between Liner Conferences and Shippers: Past, Present and
Future (Bremen 1990) 16 -17
102
Blanco, Luiz Ortiz, Shipping Conferences under EC Anti Trust Law, p. 60
‘The poorest countries saw Conferences as vestiges of a colonial past ..and one of the ways of dominating
world maritime trade devised by rich countries’
103
Kalindaga Y.C. and Karandawala P. Relations between Liner Conferences and Shippers: Past, Present and
Future (Bremen 1990) 42 -43
104
Ibid
105
Shipments carried between two state parties are to be shared - 40% for ship owners established in the
country of origin, 40% for ship owners established in the country of destination, and 20% for ship owners
from other countries, which are also party to the Code.

29
Regulation (EEC) No 954/79 of 15 May 1979, which came to be known as the Brussels
Package, the first important maritime transport measure adopted under Article 84(2) of the
EEC Treaty (now Article 80(2))106
. The Brussels Package or Regulation No. 954/79
accepted the legitimacy of Conferences notwithstanding the need to regulate them.
According to the reservations set out in Regulation No. 954/79, Article 2 of the UN
Conference Code on cargo sharing, Article 3 on Conference decision making procedures
and paragraph 3 of Article 14 on the minimum period of time required for freight increases,
would not be applicable for Conference trades between EU member states and OECD
countries, that are parties to the Code. The dispute resolution system as contained in the UN
Conference Code, (i.e. mandatory conciliation) also would not apply to the said countries as
they opted for arbitration of the disputes at the European level. Subject to such
qualifications, the rest of the provisions became applicable to the EU member states and
OECD countries. The lengthy debates over the UN Conference Code and the Brussels
Package containing the conditions for ratification paved the way for the EC to have a role in
community maritime affairs, which was non-existent earlier107
. It also formed the
foundation for future maritime policies of the EC.
Whilst expressing concern over the protectionist elements108
of the UN Conference Code,
the EC however had no reservations about confirming the legitimacy of Conferences, as can
be seen from the last recital of the Preamble in Regulation 954/79 (Brussels Package):
‘Whereas the stabilizing role of conferences in ensuring reliable services to shippers is
recognized, but it is nevertheless necessary to avoid possible breaches by conferences of the
106
Blanco, Luis Ortiz Shipping Conferences under EC Anti Trust Law p 114
107
Blanco, Luis Ortiz Shipping Conferences under EC Anti Trust Law, p 105
108
Ibid p. 102; Bohme (1978) 67; Farthing (1988) 23 -24 describes the ‘Brussels Package as an attempt to
extract the Liner Code’s protectionist teeth’

30
rules of competition laid down in the Treaty; whereas the Commission will accordingly
forward to the Council a proposal for a regulation concerning the application of those rules
to sea transport’
The assessment that Liner Conferences have a stabilizing role but should be regulated, lead
to the passing of EEC Council Regulation 4056/86 on 22nd
December 1986109
, otherwise
know as the Conference Block Exemption. In both the occasions that the EC had taken the
initiative to protect Conferences, it had been as a reactionary step for an external event and
not as a result of finding a solution based on an internal appraisal. (i.e. CSG Resolution in
1963 to protect Conferences in response to the strict supervision under US Bonner Act and
Regulation No 954/79 of 15 May 1979 or Brussels Package in response to the UN
Conference Code)
4.2 Conference Block Exemption
The Council Regulation (EEC) No.4056/86 (1) of 22.12.1986 or the Conference Block
Exemption is considered to be ‘the most generous, atypical and exceptional Block
Exemption in Community competition law110
. It was granted under the hypothesis that the
four conditions as set out in Article 81(3) were met by liner Conferences. There has been
much debate in recent years, whether this was really the case or whether political factors
that prevailed had a far greater influence in the EC decision111
.
109
Implemented under Article 5 of Regulation No 1017/68 which provides for the exemption of agreements,
decisions and concerted practices which contribute towards improving the quality of transport services, or
promoting greater continuity and stability in the satisfaction of transport needs.
110
Compagnie Maritime Belge (CEWAL) II 2000, ECJ para 115
111
Blanco Shipping Conferences under EC Anti Trust Law p. 291

31
In a subjective analysis of the Block Exemption to ascertain whether the four conditions of
Article 81(3) are met112
; firstly, Conferences should yield ‘efficiency gains’; secondly, there
should be a distribution of a fair share of the benefits achieved by means of Conferences
transferred to the consumers; thirdly, the restriction to competition imposed by Conferences
should be indispensable to achieve the said efficiency gains; and fourthly, Conferences
should not eliminate competition. The position held by the Commission in this regard can
be gathered from the decision given in Bayer Gist-Brocades113
‘The question of a
contribution to economic progress within the meaning of Article 81(3) can only arise in
those exceptional circumstances where the free play of competition is unable to produce the
best result economically speaking.
The recitals in the Preamble of the Conference Block Exemption, refers to:
(a) ‘Distinctive characteristics’ and a ‘specific role’ played by Liner Conferences114
;
(b) The need for regulations supplementing the UN Conference Code or making it
more precise115
(c) Liner Conferences having a stabilizing effect assuring shippers of reliable
services and giving fair consideration to users, which cannot be obtained without
the cooperation that shipping companies promote within Conferences in relation
to rates and where appropriate, capacity or allocation of cargo;
(d) Conferences continuing to be subject to effective competition from both, non-
conference, tramp and other modes of transport.116
(e) the Commission having neither the power nor the mechanism to regulate
Conference practices117
;
112
EC Guidelines on the application of Article 81(3), OJ C 101 of 27.4.2004
113
EC decision (1975) para III.
114
Regulation No.4056/86 : Recital 5 of the Preamble
115
Ibid: Recital 3 of the Preamble
116
Ibid Recital 7 of the Preamble

32
It is apparent from the Preamble of the Conference Block Exemption, that the Commission
acted on the premise that Conferences were meeting the four conditions stipulated under
Article 81(3) and therefore, should be exempted from Article 81 and 82 (ex Article 85 and
86) EC. Though specific reference is made to ‘distinctive characteristics of liner
Conferences’, what those characteristics are, have not been spelled out.
The Preamble refers to the need to reconcile EU Competition Law with the UN Conference
Code118
. The recitals in the preamble of the Conference Block Exemption and those of the
Brussels Package are similar in substance, but the recitals of the Block Exemption have
gone much further to give special recognition to liner Conferences. This step can be seen as
a desire to strengthen the liner shipping sector in the EU, at a time when the European
Community was faced with a recession in the maritime industry119
and a measure to
counteract the protectionist policies of the UN Conference Code.120
. The other reason for
adopting a ‘non interference role’ was due to the Commission’s uncertainty as to whether it
had the requisite powers to regulate the maritime and air transport sectors, due to Ex Article
84 specifically referring only to rail, road and inland transport sectors as matters coming
within its scope. The uncertainty was resolved to a great extent by the ECJ judgment in the
French Seamen case121
in which the Court held that the general and fundamental rules of
the EEC Treaty are applicable to maritime transport. Yet, no effective work was undertaken
in this area till the enactment of the Single European Act of 1986, which came into effect in
1987. The provision which gave the most protection to liner Conferences was Article 3 of
Regulation 4056/86, which exempted the application of Article 81 (1) (ex Article 85(1) )
117
Ibid: Recital 2 of the Preamble
118
Blanco, Luiz Ortiz Shipping Conference under EC Anti Trust Law p. 154
119
ibid p.116
120
ibid
121
French Merchant Seamen (1974) ECJ Close (1980) 1990-91

33
and gave legitimacy to loyalty agreements, deferred payments rebate schemes and other
restrictive practices.122
The Commission whilst giving Conferences a generous exemption from EU Competition
Law, however, took measures to control and prevent violations of the basic principle of the
law. The conditions imposed by Article 4 of the Conference Block Exemption stipulated
that the agreement, decision or concerted practice should not cause detriment to ports,
transport users or carriers within the Common Market, by applying rates and conditions
which differ according to the country of origin or destination or port of loading or discharge
unless those conditions can be economically justified. Article 4 thus embodied the basic
principle contained in Article 3(1)(g) EC Treaty that ‘competition in the internal market
should not be distorted’, corresponding with the goal of the Single European Act of 1986,
which is to remove remaining barriers between countries, increase harmonization and
competitiveness of member states.
4.3 Consortia Block exemption
A Block exemption for Liner Consortia123
was first adopted by EC Regulation 870/95 in
1995124
and renewed by EC Regulation 823/2000 in 2000. Under EC Regulation 611/2005
in 2005 it was renewed for a further period of five years ending in 2010 amending certain
provisions of Regulation 823/2000.
122
Article 3 of Reg. 4056/86: “Agreements, decisions and concerted practices of all or part of the members of
one or more liner conferences are hereby exempted from the prohibition in Article 85(1) of the Treaty, subject
to the condition imposed by Article 4 of this Regulation, when they have as their objective the fixing of rates
and conditions of carriage, and as the case may be, on or more of the following objectives:
(a) the coordination of shipping timetables, sailing dates or dates of calls;
(b) the determination of the frequency of sailings or calls;
(c) the coordination or allocation of sailings or calls among members of the conference;
(d) the regulation of the carrying capacity offered by each member;
(e) the allocation of cargo or revenue among members”
123
EU Press Release of 25th
April 2005: “A consortium is a grouping of shipping lines which co-operate to
provide joint maritime cargo transport services. Such agreements usually allow shipping lines to rationalize
their activities and achieve economies of scale, thus improving the productivity and quality of liner shipping
services.”.
124
Under the enabling Council Regulation 479/92 of 25.2.1992

34
As in the case of the Conference Block Exemption, the criteria relevant for block exemption
in this instance too, is the fulfillment of the four conditions stipulated under Article 81(3).
This is clearly stated in the Preamble of the Consortia Block Exemption125
. The first
Consortia Block exemption was granted almost a decade after the Block Exemption for
liner Conferences. With the passing of time, the Commission had been able to assess the
impact of the application of competition law on the maritime industry126
. The Commission
observed that certain categories of agreements, decisions and concerted practices between
shipping companies relating to the “joint operation” of liner transport services, leads to
economic efficiency, not withstanding the anti competitive effect of such agreements127
.
The exemption granted exclusively for Conferences could not have been availed of by a
diverse category of carriers, unless a special exemption within the parameters of Article
81(3) did exist for them.
The Consortia Block Exemption is however, limited to international liner shipping services
exclusively engaged in the carriage of cargo, chiefly by container.128
Consortia of carriers
which do not operate container vessels will therefore not be protected by the Consortia
Block Exemption.129
The policy of this exemption appears to be the protection of liner
shipping which have committed substantial capital investments.
To justify the granting of a block exemption of Article 81(1), the joint operational activities
of Consortia as defined in the Regulation, should lead to the realization of the following
125
Recital 1 of Regulation 870/95, 823/2000 and 611/2005
126
See Recitals of EC Regulation 823/2000 (hereinafter referred to as Consortia Block Exemption)
127
Ibid - Recital 1 and 4
128
Ibid - Article 2 – Definition of a Consortium
129
Pozdnakova, Alla Liner Shipping and EU Competition Law p 206

35
benefits130
, which can be seen as fulfilling the conditions relating to ‘efficiency gains’ and
‘fair share to consumers’ under Article 81(3):
(1) Generally improving the productivity and quality of available liner shipping services
through economies of scale, operation of vessel and utilization of port facilities;
helping to promote technical and economic progress by facilitating and encouraging
greater utilization of containers and more efficient use of vessel capacity; and
(2) Resulting in users of shipping services obtaining benefits such as improvements in the
frequency of port calls, improvement in scheduling and personalized service through
the use of modern vessels and equipment,
However, since the four conditions of Article 81(3) are cumulative, the exemption can be
availed of by Consortia only if the other two conditions; ‘restrictive agreement being
indispensable to realize efficiency gains’ and a ‘competitive environment’, continues to
exist. Unlike in Conferences, an anti competitive feature that never existed in Consortia is,
‘price fixing’.131
Whilst emphasizing on the benefits that Consortia bring to liner shipping, the Commission
in the Regulation also stresses on the need to maintain a competitive environment. In this
regard, Recital 7 of the Preamble and Article 4 are particularly noteworthy, as it tends to
caution against any artificial capacity adjustments that may have an adverse effect on
pricing and thus destroy the benefits of the ‘joint cooperation.’ Recital 7 states thus: For the
purpose of establishing and running a joint service, an essential feature inherent in
consortia is the ability to make capacity adjustments. The non utilization of a certain
percentage of vessel capacity within a consortium is not an essential feature of consortia’.
130
Recital 4 of Regulation 823/2000
131
Article 1(1) of Council Regulation 479/9 as amended by Council Regulation 1/2003 of 16.12.2002. Recital
9 of Regulation 823/2000 indicates that Consortium members who wish to fix rates jointly and do not satisfy
the criteria of Regulation 4056/86 must apply for individual exemption.

36
Therefore, whilst capacity adjustments are permitted, intentional capacity freezes are not
allowed.
Consortia Block Exemption Regulation applies only to agreements concluded by members
of Consortia. It does not apply to restrictive agreements concluded between consortia and
shipping companies, nor does it apply to restrictive agreements between different consortia
and the members of such consortia132
. The Block Exemption applies to Consortia which
provide international liner transport services from or to one or more Community ports133
.
Regulation 463/2004 amended the Consortia Block Exemption further by stipulating market
shares for Consortia of shipping companies ‘within which it operates’ on the general
hypothesis that a smaller market share enables sufficient competition. Accordingly, a
Consortia with a market share below 30% (if the consortium operates within a Conference)
or 35 % (if the consortium operates outside a Conference) is automatically exempt if it
fulfils the other conditions of the Consortia Block Exemption134
.
Article 3 of the current Consortium Block Exemption gives the following exhaustive list of
exempted agreements applicable for Consortiums which should be read together with
Article 1 and 2 of the Regulation135
:
1. Joint operation of the liner shipping transport service, which comprise solely: the
coordination and/or joint fixing of sailing time tables and the determination of ports of
132
Para. 21 of Regulation 823/2000
133
Ibid Article 1
134
The proposed new Consortia Block Exemption which is due to take effect as from 25.4.2010 for another 5
years, has reduced further the above mentioned market shares. These are yet to become part of EU
Competition law. This new development is mentioned in the Afterword of this book.
135
Article 1 gives the scope whilst Article 2 defines among others, the term “consortium”; See also DG
Competition’s Report on Commission Regulation No. 870/95, Brussels, 28.1.1999;
http://ec.europa.eu/comm/competition/antitrust/legislation/maritime/

37
call, the exchange, sale or cross-chartering of space or slots on vessels, the pooling of
vessels and/or port installations, the use of one or more joint operation offices, the
provision of containers, chassis and other equipment, and/or the rental, leasing or
purchase contracts for such equipment; the use of a computerized data exchange
system and/or joint documentation system;
2. Temporary capacity adjustments.
3. Joint operation or use of port terminals and related services (such as lighterage or
stevedoring services).
4. Participation in one or more of the following pools: cargo, revenue or net revenue.
5. Joint exercise of voting rights held by the consortium in the Conference within which
the members operate136
.
6. A joint marketing structure and/or the issue of a joint bill of lading;
7. Any other activity ancillary to the above: subject to the obligation of the members to
use on the trade vessels allocated to the consortium and to refrain from chartering
space on vessels belonging to third parties and an obligation on the members not to
assign or charter space to other vessel operating carriers on the trade or trades in
question except with the prior consent of the members of the consortium.
The existence of an effective price competition between the members of the Consortia is
imperative to be exempted from the application of Article 81(1) under the Consortia Block
Exemption.137
136
This is no longer applicable in the EU with the lifting of the Conference Block Exemption as from
18.10.2008
137
Article 5 of Regulation 823/2000

38
4.4 Infringements of Block Exemptions
Restrictive practices and abuse of dominant position by shipping Conferences were thus
tolerated in view of the protection granted under Block Exemptions and an examination of
concentrations was taken only after the TACA decision in 1998.
In the TACA case138
of 1994, 15 shipping companies which were initially party to a Liner
Conference in the transatlantic liner service between northern Europe and USA formed as
Trans-Atlantic Agreement (TAA), entered into a new Liner Conference called the Trans-
Atlantic Conference Agreement (TACA) which had basically adopted the same procedures
as that of TAA and was found to have infringed the provisions of Article 85(1) (now Article
81(1) ) by executing service contracts with restrictive provisions. TACA was accused of a
further second series of infringement from 1994 – 1996 constituting abuse of collective
dominant position and infringement of Article 86 (now Article 82), by inducing potential
competitors to join the Conference. The Court of First Instance confirmed the findings of
the Commission but did not consider the exchange of information between the companies
as abusive as the said information had already been published in the US by filing
agreements with the FMC. The Court waived fines totaling Euro 273 Million imposed by
the Commission for abuse of collective dominant position of shipping companies forming a
Conference, partly on technical grounds (infringement of the defense) and partly due to the
immunity granted by the Block Exemption on liner Conferences. The Commission’s
decision as well as the court ruling was focused towards Article 81(3) and its compliance by
block exempted agreements of Liner Conferences139
.
138
Refer Joined cases : T-191/98 and T-212/98 to T-214/98 www.curia.eu.int
139
Pozdnakova, Alla Liner Shipping and EU Competition Law p.121

39
In 2003, the Commission granted approval for a ‘revised TACA’ Liner Conference
Agreement, which was a substantially changed version from the previous TACA agreement
and was pro-competitive in substance. Under the revised version, individual members were
given the freedom to enter into service contracts. Since then the revised TACA has set the
basic standards for operation of Conferences140
.
The CEWAL case141
involved an abuse of dominant position by a liner Conference
adopting the tactic called ‘fighting ships’ to eliminate a competitor. In the FETTCSA
judgment, the non execution of an anti competitive agreement did not prevent the
application of Article 81(1), which held that levies and surcharges by Liner Conferences,
under the term ‘technical agreements’, as anti competitive practices.142
In this case, a non
conference agreement was entered into between a coalition of 14 members of the Far
Eastern Shipping Conference (FESC) and independent lines operating in the North Europe,
South East and East Asia trade for the purpose of establishing an industrial standard for the
calculation of charges and surcharges other than freight rates.143
It came in to force in 1991
and lasted for three years. The additional charges constituted a substantial part and in some
instances up to 60% of the freight rates in the east bound trade. The Commission found it to
be a horizontal price fixing arrangement and held that it did not come within the category of
technical agreements entitling exemption under Article 2 of Regulation 4056/86. The
Commission’s decision on FETTCSA was however, annulled by the CFI on procedural
grounds.
140
Ibid p. 144
141
Judgment of Joined Cases C-395/96 P and C-396/96 P (2000)
142
CFI - Case T-213/00 (2003)
143
Such as: Bunker Adjustment Factor based on the increase in ship’s fuel, Currency Adjustment Factor to
compensate for exchange rate fluctuations in freight rates charged and the currency in which the costs are
incurred by carriers, Terminal Handling Charges, Less than Container Load Service Charges, Detention
Charges for cargo kept beyond the free time in the port, Demurrage paid by shippers for detaining containers
beyond the prescribed period and other charges such as War Surcharges, Change of destination charges, etc.,

40
4.5 Reform of the maritime competition law
The event which triggered the European Commission to review the entire Liner Conference
Block Exemption is the OECD Secretariat Report of 2001-2002 which was critical of
Conferences and stated that if ‘they are not eliminated, they should at least be subject to
economic regulation, by an independent regulator’. This possibility was considered less
desirable than the withdrawal of anti trust immunity.144
The Commission commenced the
review process in 2003145
on the general consensus that an amendment or repeal of the
Conference Block exemption would increase competiveness and would be in line with the
objectives of the Lisbon Strategy146
. The decision to repeal the Conference Block
Exemption was arrived at after inviting comments from the public by the White Paper of
October 2004147
and conducting an independent study148
.
The European Liners Affairs Association (ELAA), representing about 80% of liner shipping
in the world, expressed reservations and proposed that it should be replaced by an
information exchange system149
. The European Shippers’ Association (ESC) representing
over 100,000 exporting companies and generating over 90% of the EU maritime traffic,
maintained that such an information exchange system is not necessary as the carriers
cooperate extensively under the Consortia Block Exemption regime150
. The Commission
whilst observing that a ‘majority of cargo transported between the EU and US is transported
by shipping lines in consortia and alliances using individual service contracts instead of
144
OECD (2002) para. 147.
145
EC Press Release IP/05/1586 – 14th
December 2005
146
The Lisbon Strategy or the Lisbon Agenda, is an action and development plan for the European Union. Its
aim is to make the EU ‘the most dynamic and competitive knowledge-based economy in the world capable of
sustainable economic growth with more and better jobs and greater social cohesion and respect for the
environment by 2010’. It is a decision entered into by the European Council in Lisbon in March 2000.
147
EC Notice 1P/04/1213
148
Conducted for the EC by Fearnley Consultants AS, Global Insight and Holman Fenwick & Willan
149
See ELAA proposals at http://ec.europa.eu/competition/antitrust/legislation/maritime/
150
EU Press Release – MEMO/05/480 -FAQ – Proposal to Repeal Block Exemption for Liner Conferences

41
conference tariff prices’151
, however, did not reject outright the information exchange
system and noted that it has positive features as well as negative features. The Commission
acting upon the premise that positive effects brought out by a restrictive agreement should
outweigh its negative effects, concluded that the conditions upon which the Conference
Block Exemption was granted, are not being fulfilled.152
By Council Regulation (EC) No
1419/2006 of 25 September 2006, (made effective on 18th
October 2006), the Block
Exemption Regulation (EEC) No 4056/86 was thus repealed. As from that date, EU
maritime transport services became subject to the generally applicable procedural
framework of Article 81 (ex Articles 85) and Article 82 (ex Article 86). In order to ensure a
proper transition, Conferences and the provisions153
of the Block Exemption Regulation
(EEC) No 4056/86 were allowed to continue for a two year transitional period ending on
18th
October 2008154
, from which date, all Conferences were to be prohibited in the EU with
the cessation of the exemption granted under Regulation 4056/86.
Draft Guidelines on the application of Article 81 to the maritime sector was issued in
September 2007 and after a review of comments from stakeholders, the final Guidelines
were issued on 1st
July 2008 (“Guidelines155
”). The Guidelines are intended to help
undertakings and associations of undertakings operating maritime services to and/or from a
port or ports in the EU to assess whether their agreements are compatible with Article 81 of
the EC Treaty and will apply for a period of five years156
(i.e. up to 30th
June 2013). This is
meant to complement the guidance issued under Guidelines on Horizontal Cooperation157
151
ibid
152
EU Press Release IP/05/1408 – Competition : Commission publishes study on impact of repealing
exemption for liner shipping Conferences.
https://europa.eu.int/comm/competition/antitrust/legislation/maritime/
153
Article 1(3)(b) and (c), Articles 3 to 7, Article 8(2) and Article 26 of Regulation 4056/86
154
Article 1 Council Regulation (EC) No 1419/2006
155
SEC(2008) 2151 final
156
Ibid, Para. 8
157
O.J. C 3 of 06.01.2001 p.2

42
and the Guidelines on the application of Article 81(3) of the EC Treaty158
. The Guidelines
explain under what circumstances, agreements or concerted practices between liner
shipping companies will fall foul of Article 81. Particular reference has been made to
‘Horizontal Agreements’ and ‘information exchanges’ between liner shipping companies
per se and between members of Trade Associations.
158
O.J. C 101 of 27.4.2004, p.97

43
Chapter 5
Probable Legal and possible economic effects – Post Conference Block
Exemption
The lifting of the Conference Block Exemption has come at a time when Conferences no
longer hold the importance it did in the maritime transport sector. We observed the gradual
decline of Conferences during the last decade. Hence, no significant effects can be expected
solely due to the lifting of the Block Exemption. But the effects on the maritime transport
sector, due to its full exposure to a competitive environment and restrictions on information
exchanges, can be significant. These may not be felt immediately, but over time. Probable
legal and possible economic effects are thus examined taking into consideration the inherent
strengths and weaknesses that are characteristic of this industry. It will be examined; firstly,
by identifying the economic factors having a bearing on the liner shipping sector and by
predicting the reactions that can be expected when operating in a competitive environment
and secondly, the legal effects resulting from the application of Article 81 and 82 to the
possible economic environment.
5.1 Economic Effects
5.1.1 Inelastic demand and supply
Liner shipping operate in a market where the demand is inelastic159
, a drop in freight rates
will not result in an increase in cargo, as the cargo generated by the shippers are not
determinant by the freight rates, but on the demand of the ultimate buyers in international
markets. On the one hand, the demand is seasonal and there are disparities in the outbound
159
Sjostrom, Liner Shipping : Modelling Competition & Collusion, Maritime Economics & Business p.314

44
and inbound sectors160
. On the other hand, the supply or shipping capacity too is inelastic,
as a drop in cargo, does not result in reduced rates as the voyage cost is fixed161
. The supply
and demand in the shipping world are seldom in balance.162
The imbalance between ship
capacity and cargo and its effects on market equilibrium is explained thus: ‘The surplus
need not have to be large. If there are 10 ship loads and 9 ships the ship owner will be a
price maker but if there are 10 ship loads and 11 ships the ship owner will be a price taker
and can be beaten down to the break even costs of the cheapest operator163
’ The liner
freight market has suffered from an enduring over-capacity164
and a correspondingly
depressed freight rate.
5.1.2 Shipping market cycles
For more than a century, the shipping industry has shown cyclical peaks and dips in
operational revenue, with each dip, caused by either an internal factor such as excess
capacity or an external factor, like an oil crisis, coinciding with disastrous performance165
.
Each peak has coincided similarly with good profits and ship owners placing orders for
more vessels. The cycles are said to average around seven years.166
But just as much as an
external factor such as a market crash or oil crisis is hard to predict, so is it difficult to
160
Fleming, Douglas Patterns of International Ocean Trade, Handbook of Maritime Economics & Business
p.81 – 88
161
See 2.2 in Chapter 2 of the thesis for operational and fixed costs
162
Alderton & Rowlinson The Economics of Shipping Freight Market (The Handbook of Maritime
Economics) p. 173 and states further: ‘ In the early 1970’s they were close, which was why these were
profitable years for shipowners. In 1973 demand exceeded supply and this was a very profitable year but in
October 1973 came the oil price rise following the Arab Israeli war and there has been surplus tonnage ever
since with the inevitable lowering of freight rates’
163
ibid
164
See Annexure VI for the increase in liner ship construction between 2003 - 2006
165
Stopford, Martin Shipping Market Cycles (The Handboom of Maritime Economics & Business) in p.214
gives the following example of a dip and a peak in shipping cycle :‘ By the summer of 1986 the financial
distress was so great that a Panamax bulk carrier which had recently been delivered for a price in excess of
$25 million could be purchased for $8 million. Bankers found that their customers could not even meet the
interest payments, and the collateral value of the ships had shrunk to a fraction of their market value when the
finance had been put in place. Some bankers withdrew from the industry, foreclosing on loans and taking
heavy write-offs. However, like all recessions, eventually supply and demand adjusted, and by 1989 rates
were back to the level of 1980.
166
Ibid -

45
determine when the next shipping cycle will occur. The importance of this factor was
stressed by the European Commission DG for Energy and Transport by pointing out the
impact of supply exceeding demand and cautioning government decision makers and
private investors to ‘keep in mind the shipping cycle’167
The cause for a shipping cycle is attributed to the change in the relative demand and supply
of ships, which triggers an increase or reduction of freight.168
This volatility helps ship
owners to earn tremendous profits if the capacity is available at the right time, but also
cautions them to play safe, as a peak is followed by a dip, in most cases caused by
overtonnaging with new vessels brought into the market169
. Conferences may have
protected ship owners from this type of unexpected dips in the shipping cycle by fixing
prices.170
. In recent years, the shipping industry has faced economic shocks during the oil
crisis of 1973 and 1979, Asia Crisis in 1977 and Gulf war in 1990/91171
.
5.1.3 Theory of the empty core
The other interesting economic factor that is considered to plague both shipping and airline
industries alike is related to the ‘theory of the empty core172
’, which leads to an unstable
equilibrium. According to this theory, the equilibrium attained in a perfect market where
both consumers and producers gain satisfaction in an efficient competitive environment,
167
Workshop held in Paris in conjunction with OECD in November 2004; See:
http://www.oecd.org/dataoecd/21/29/33955633.pdf
168
Stopford, Martin Shipping Market Cycles (The Handbook of Maritime Economics & Business) p. 217
169
Ibid
170
Report of the Section of Anti Trust Law of the American Bar Association on H.R.3138, the Free Market
Anti Trust Immunity Reform Act of 1999, February 23, 2000 : “At an oversight hearing before the US House
Judiciary Committee on anti trust immunity for the shipping industry in May 1999, Federal Maritime
Commissioner Delmond Won testified about the collusive agreements reached by carriers during the Asian
economic crisis in the previous year leading to uniformly high prices for shippers”
171
Stopford, Martin, Shipping Market Cycles (The Handboom of Maritime Economics & Business) p. 219
172
Telser, L “The usefulness of core theory in economics”, Journal of Economic Perspectives, 8, (1994) p.
151- 164;

46
cannot be realized in an industry where the core is empty. Telstar (1987) for the first time
brought to light the economic effects of an unstable equilibrium resulting from an empty
core. He described the symptoms of an empty core as ‘chaos173
’ and in such an industry he
states: "price cutting is extreme, most firms in the industry are losing money, and yet it is
plain that buyers want the product and are willing to pay higher prices than those currently
prevailing." Large avoidable costs and divisible demand are causes for an empty core.174
Raghavan explains175
that ‘once operating capacity has been created (sunk costs incurred),
its actual operation may require the incurrence of large avoidable costs, regardless of the
level of capacity utilization which results in a U-shaped cost curve’.
The demand is divisible in liner shipping176
. Deakin points out that ‘if a vessel is to be put
into a condition of earning any revenue at all, a very large proportion of its total costs are
fixed regardless of the volume of shipping services it can produce’177
. Divisibility of
demand that does not keep in line with excessive costs leads to destructive competition and
prices being pushed down causing a cascading effect among the other players in the market
who reduce their prices even further178
. Button in his analysis of the core theory179
points
out that industries which have more inelastic demand, variable supply/demand and a
smaller number of participants are more likely to have an empty core, in which case they
tend towards collusion in order to resolve the empty core, particularly during recessionary
periods.
173
See: Raghavan, Jayathi, ‘Application of core theory to the US Airline Industry’ Journal of Academy of
Business Economics (2005) : http://www.allbusiness.com/journal-of-academy-of-business-and-
economics/20050301/3475141-1.html
174
Pirrong, S. C. “An application of core theory to the analysis of ocean shipping markets”, Journal of Law
and Economics, (1992) 35, p.89 – 131 and 174
175
See: foot note 165
176
Fleming, Douglas Patterns of International Ocean Trade, p. 65- 85
177
Deakin Shipping Conferences p.91 and See: Chapter 2 of this thesis
178
See foot note 165 and 166
179
Button, Kenneth – Liberalizing European Aviation: Is there an Empty Core Problem? Journal of Air
Transport Economics, 30(3), 1996, p. 275-291

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