Wednesday, February 22, 2006

On Shoes and Ships and Sealing Wax...

What do the following have in common: Pan Am, Trans World Airways, Eastern Airlines, U.S. Lines, Pacific Far East Line, American President Lines, SeaLand?

They were all U.S. flag carriers at one time. Pan Am, Trans World Airways, and Eastern Airlines were airlines. U.S. Lines, Pacific Far East Line, American President Lines, and SeaLand were U.S. flag steamship lines.

American President Lines (APL) and SeaLand still exist as part of foreign flag carriers. APL is owned by Neptune Orient Line (NOL) in Singapore; SeaLand is part of Maersk-SeaLand, owned by the Danish company, A.P. Moller.

The same game can be played with railways: Southern Pacific, ATSF (Atchison, Topeka, & Santa Fe), Burlington Northern, Chesapeake & Ohio.

I can't keep track of the trucking companies that have come and gone.

The transportation industry has some unique constraints. Capital costs are high, as are labor costs. Profit margins are extremely small. A price increase of a penny a gallon (or ton in the case of ships) in fuel has a big impact in overall costs. So transportation operators try to cut costs wherever they can.

They can charge their customers more. That works if they are a monopoly or if few other operators care to serve that particular market. But, in the free market, once someone figures out there is money to be made, then others swarm. Prices decline (although costs don't) and consumers benefit.

They can try to cut back on their equipment maintenance or quality. But there is only so long an operator can defer maintenance on brakes or hulls or engine parts.

The operator can cut back on labor costs. And, in fact, this is often what they try to do. However, this has led to abuses of that labor pool: poor pay, long hours, unsafe working conditions. Labor fought back by forming unions.

One solution that has been tried is government support in the form of subsidies or protection from competition. The Union Pacific and the Southern Pacific were granted ownership of the lands along the track, which often proved more valuable than the railroad itself. Steamship companies had the Jones Act, which limits the transportation of goods between U.S. ports to U.S. flag ships, shipbuilding subsidies, and payroll subsidies. Airlines were granted monopolies on routes between U.S. cities and foreign countries. Truck lines also had route monopolies.

Maintaining oversight of all this involved an alphabet soup of Federal Agencies (FAA, ITC, FMC) and volumes of regulations, in fine print and flimsy paper.

During the Reagan Administration, much of this was swept away in the spirit of the Free Market. It was survival of the fittest.

The fittest were those with the lowest operating costs. Manufacturing and steel costs less outside the U.S.; so does labor. International Internet access means that the office doesn't need to be in the same geographic area as the terminus. In fact, it doesn't even need to be in the same country. The call center can be in the middle of the desert; data can be input from Manila.

The unions, watching as jobs moved out of their sphere of influence, fought any changes that might cause further erosion. Barcoding and scanning might be more efficient than having a clerk read the numbers and input them manually, but that means one less clerk might be needed.

Ships, airplanes, trucks, and locomotives became bigger and more powerful so that more cargo could be carried in one trip, using the same number of crew.

Meanwhile, customers demand better service and want to pay less for it.

Is there a solution?

More importantly, is there a free market solution?

My gut feeling is that this can't be done on the cheap and it won't be easy. Unions will have to give, stockholders will have to forfeit short-term profit, consumers will have to be willing to pay more, management will have to become more creative. These problems did not materialize overnight; they won't go away quickly.

On the other hand, in the early part of the 18th Century, a bunch of shipowners got together in the back room of a pub in London and discussed ways of mitigating the risk of sending sailing ships out to the far side of the globe and back again. The name of the pub was Lloyd's. Their solution has become part of history...