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US Industrial Outlook

Transportation services

Transportation services – Industry Overview

Thomas M. McNamara

AIRLINES

In 1990 and 1991, the U.S. airline industry suffered large financial losses. The industry’s poor financial performance was the result of several factors, the most important being the recession, higher fuel prices, the adverse effect of the Persian Gulf conflict on international air travel and rising debt service costs.

These factors had a devastating effect on the financial condition of several airlines. As of September 1991, four large air carriers – America West, Continental, Midway, and Pan American – had filed for bankruptcy protection while reorganizing. Eastern Air Lines ceased operating on January 19, 1991. Other air carriers are restructuring their operations, and there are indications that additional industry consolidations could occur in 1992.

During 1990 and 1991, the Persian Gulf conflict required the first activation of the Civil Reserve Air Fleet (CRAF) program since it was established in 1952. Under the program, the Department of Defense may requisition previously contracted passenger and cargo aircraft from commercial air carriers to augment the military’s own airlift capacity. The airline industry responded rapidly to aid the military build up in the Persian Gulf. By July 15, 1991, commercial aircraft had flown over 5,315 missions, and delivered 690,150 troops and 228,400 tons of material in support of military requirements.

Currently, 213 certificated U.S. air carriers provide various air transportation services in the United States. Scheduled passenger service is provided by 178 air carriers, 9 provide scheduled all-cargo service, and 26 provide charter services. Of the 178 carriers that provide scheduled passenger service, only 22 operate large jet aircraft (aircraft with 60 seats or more) and generate annual revenues in excess of $100 million. The remaining 156 carriers, which operate small aircraft (less than 60 seats) or generate annual revenues of less than $100 million, are designated regional carriers. Table 1 contains information on industry trends for 1989 and 1990.

[TABULAR DATA OMITTED]

Financial Information

Current detailed financial information is available for the 22 large scheduled passenger airlines. These carriers account for 95 percent of total airline revenues for scheduled passenger operations,

The airline industry incurred an operating loss of $3.95 billion, and a net loss of $4.96 billion for the year ending June 30, 1991. Of the 22 large air carriers, only seven-southwest, Alaska, Horizon, Aloha, Markair, Midwest Express, and Tower Air – made money on an operating basis. In the previous year ending June 30, 1990, the industry generated a $60 million operating profit, but suffered a net loss of $516 million, the latter reflecting, among other things, the high interest paid on debt.

These losses were the result of rising operating costs, declining traffic, and falling real yields (revenues generated by one passenger traveling one mile). Domestically and internationally (systemwide), operating expenses rose 10.2 percent for the 12 months ending June 30, 1991. Operating revenues increased a modest 3.8 percent during the same period. Traffic growth was essentially flat: domestic revenue passenger miles (RPMs, one paying passenger traveling one mile, a measure of traffic) dropped slightly, 0.8 percent, while international traffic increased only 2.2 percent. Passenger enplanements (boardings) actually declined for both domestic and international operations.

Because of the decline in traffic, even with a slight increase in capacity (up 0.6 percent domestically, and 3.2 percent internationally), the industry’s average load factor (percent of seats occupied) declined 0.8 percentage points to 62 percent for the year ending June 30, 1991. Faced with a stagnant travel market, air carriers were cutting service – both frequency of flights and points served – and total industry employment had declined almost 6 percent to 464,000 by mid-1991.

In response to falling traffic, the industry initiated wide-spread discount pricing in 1990 and 1991. Average yield in domestic markets rose only 1.8 percent, to 13.3 cents per passenger mile, in the 12 months to mid-1991. After adjusting for inflation, domestic yield actually declined 3.5 percent. In contrast, operating costs per available seat mile in domestic service rose 6.7 percent. Yields in international markets outpaced inflation, rising 7 percent in nominal terms, although unit costs rose 16.7 percent. International operations generate 24 percent of industry revenues.

Airline traffic was down 5.2 percent for the first half of 1991 compared with 1990 levels. Estimates for the third quarter 1991 indicate that systemwide traffic continued to decline compared with the same period in 1990. With traffic still falling, costs rising, and discount fares proliferating, the industry was expected to post a substantial loss in the third quarter of 1991, although considerably smaller than the losses suffered in either of the first two quarters of the year. It appeared likely that the fourth quarter of 1991 would be substantially better financially than the disastrous fourth quarter of 1990. Many analysts, however, do not expect the industry to earn a profit until sometime in 1992.

Although financial losses in 1990 and the first half of 1991 were exceptional, many scheduled passenger carriers have had poor earnings for the last decade. As a group, scheduled passenger carriers suffered losses in the 1981-1983 period, in large part due to the recession and high fuel prices. During the 1984-1989 period, the industry earned positive net income in four of the six years and reported a minimal loss in another. However, the industry’s financial losses were so severe in 1990 that any gains in the 1980’s were wiped out, and scheduled passenger carriers lost about $2 billion during the 1981-1990 decade.

A major reason for the losses in 1990 and into 1991 was the widening gap between revenues and unit costs (operating costs per available seat mile). During the second half of 1990, airline yield increased 4.8 percent over 1989 levels, while unit costs increased 10.7 percent. In the disastrous fourth quarter of 1990, domestic and international yields increased 5.7 percent and 8.3 percent, respectively, over 1989 levels, while unit costs jumped 13.2 percent and 25 percent.

Sharply higher unit costs and sluggish traffic growth posed a dilemma for airline managers: although air carriers needed to increase fares to cover higher fuel costs, higher fares would only discourage discretionary travel in an already flat travel market.

The principal reason for the rise in unit costs was the jump in fuel prices following Iraq’s invasion of Kuwait. Prior to the invasion, jet fuel prices were 58 cents per gallon. By October 1990, however, fuel prices had nearly doubled to $1.14 per gallon. In the fourth quarter of 1990, jet fuel prices averaged $1.09 per gallon, compared with 66 cents per gallon in the fourth quarter of 1989. Fuel costs accounted for 22 percent of total airline operating expenses in the fourth quarter of 1990, compared with only 15 percent in the quarter preceding Iraq’s invasion of Kuwait. Based on consumption levels at the time, each 10 cent increase in the price of a gallon of jet fuel raised industry operating costs by $1.6 billion annually.

Debt Burden

Many of the nation’s largest scheduled passenger carriers became highly leveraged (large debt financing compared to equity) in the late 1980’s when they took on large amounts of debt to fund investment in new aircraft, to finance mergers and acquisitions, or to undertake financial restructurings. For example, Trans World Airlines’ debt burden increased dramatically when it was taken over by private individuals in 1988; and Northwest Airlines added an estimated $3.5 billion to its debt structure when it was taken private in 1989. Several airlines that are now experiencing serious financial problems have been highly leveraged for years.

On December 31, 1990, the long-term debt burden for the major scheduled passenger carriers, including the value of capitalized leases, totaled $20.8 billion (which includes estimates for the privately held air carriers). Stockholders’ equity for these air carriers totaled $7.1 billion, which resulted in a debt-to-equity ratio of 2.9 (debt 2.9 times greater than equity). In 1985, by contrast, the largest air carriers had a debt-to-equity ratio of 1.3.

The effect of greater financial leverage has been to increase the industry’s debt service costs. In 1990, interest expense on long-term debt and capitalized leases totaled $1.9 billion, up from $1.4 billion in 1985.

Regional Airlines

The regional segment of the airline industry comprises airlines that, for the most part, operate aircraft with less than 60 seats in scheduled passenger service over short distances between smaller communities and larger hub airports. The regional segment is an integral component of the nation’s transportation system, providing an essential link between smaller communities and the nationwide service networks operated by larger airlines.

During 1990, there were 148 regional airlines. They generated total operating revenues of $2.9 billion. The regional airlines’ revenue passenger miles and enplanements increased 19.6 percent and 14.8 percent, respectively, between 1989 and 1990, outpacing the larger airlines’ traffic growth. During 1990, regional air carriers served 811 airports and, at the majority of these airports, they provided the only scheduled service. At the end of 1990 the regional airlines’ fleet totaled 1,723 passenger aircraft and 645 cargo aircraft.

Due to the proliferation of joint marketing and code-sharing agreements between the regional airlines and larger carriers, the regional industry’s structure changed significantly in the mid- 1980s. In 1990, the 30 largest regional airlines, accounting for 87 percent of the industry’s enplanements, had code-sharing agreements with other airlines. Many of the largest regional airlines, moreover, are wholly or partially owned by their larger airline partners.

Air Cargo

The air cargo industry comprises airlines that specialize in providing air express or general air freight service, or both, as well as airlines, including passenger airlines, that provide contract, charter, or scheduled cargo services not only to the shipping public but also to other cargo airlines. The need of air cargo operators to become more efficient and competitive has spurred the establishment of highly automated sorting hubs supported by a network of aircraft and ground vehicles that are coordinated on a national level.

On an industry-wide basis, cargo (freight, express, and mail) growth slowed in 1990, compared with the growth rates experienced during the 1980’s. During 1990, cargo revenue ton-miles (RTMS) increased 2.2 percent, compared with a 7.4 percent average annual growth rate during the 1980’s. Domestic RTMS increased 3.8 percent, while international revenue ton-miles declined 2.4 percent. Part of the lower growth rate is attributable to the effect of the recession and the use of long-range cargo aircraft in the CRAF military program.

In 1990, Federal Express was the largest cargo operator with operating revenues of $7.6 billion and a 26 percent market share. Federal Express rate of growth in RTMs was minimal in 1990, adjusted for the acquisition of Flying Tiger airline in 1989. Other cargo specialists such as ABX Air, DHL Airways, Emery Worldwide, and United Parcel Service experienced growth rates in excess of 10 percent. The market share of these four carriers improved from 11.2 percent in 1989 to 12.9 percent in 1990. Revenue ton-miles for the 11 largest passenger airlines that also provided belly cargo capacity increased 5.8 percent over 1989 levels. The air cargo market share for these passenger carriers increased from 44 percent in 1989 to 46 percent in 1990.

New Aircraft Deliveries

While many air carriers are experiencing financial difficulties, the industry must invest in new, quieter, more fuel-efficient equipment.

In recent years, deliveries of new aircraft generally have been used to increase capacity, not to replace existing equipment. But in the 1990’s, new equipment will be needed not only to meet the expected growth in traffic, but also to replace aging Stage 2 aircraft, which by law must be phased out of domestic operations by the end of the decade. The Airport Noise and Capacity Act of 1990 requires that all aircraft meet stringent Stage 3 noise standards by the year 2000. Air carriers can comply with this requirement by eliminating Stage 2 aircraft from their fleets, reengining their Stage 2 equipment, using hushkits to eliminate noise, or increasing the proportion of quieter Stage 3 aircraft to specific levels. At the end of 1990, Stage 2 equipment accounted for 2,277 aircraft, or 54 percent of the total jet fleet.

The Federal Aviation Administration (FAA) estimates that the U.S. commercial air carrier fleet will increase to 5,508 jet aircraft by 2001. (The jet fleet expanded from 3,868 aircraft in 1988 to 4,252 aircraft in 1990.) After expected retirements, this represents a net addition of approximately 114 aircraft per year, or an annual growth rate of 2.4 percent.

The Boeing Corporation estimates that aircraft deliveries to U.S. airlines from 1991 through 2005 will be valued at $234 billion, or approximately $15.6 billion per year. Financing these aircraft is expected to be accomplished through internally generated funds, new long-term debt, equity infusions, and innovative leasing arrangements. But considering the airline industry’s cyclical nature and its poor financial performance, financing large numbers of new aircraft will be a significant challenge.

Government Actions

Recently enacted legislation, proposed new rules, and government policy initiatives will have important immediate and long-term implications for the airline industry. The most important initiatives are legislation to phase out Stage 2 aircraft, airworthiness directives, proposed rules to govern airline-owned computer reservation systems, and legislation that allows airports to levy fees on passengers to help finance the expansion of airport capacity.

It is estimated that the Airport Noise and Capacity Act of 1990 will cost the industry hundreds of millions of dollars over the next decade. This law prohibits the operation of Stage 2 aircraft to or from an airport in the contiguous United States and the District of Columbia after December 31, 1999, with a provision for waivers to allow operation of a limited number of Stage 2 aircraft beyond that date if certain conditions are met. Interim compliance dates were mandated to ensure progress toward the 1999 goal. The law also requires that a national program be developed to review noise and access restrictions taken by airports on the operations of Stage 2 and Stage 3 aircraft. The Secretary of Transportation was directed to initiate several rulemaking proceedings to foster this program. In September 1991, the FAA issued its final rules in this proceeding.

Responding to public concerns raised in a 1988 accident in which aircraft age was a factor, the FAA established the Airworthiness Assurance Task Force. Based on recommendations made by the Task Force, the FAA issued new airworthiness directives that require the repair or replacement of certain aircraft components on aging aircraft and establishing a 4-year schedule for compliance. Since March 1990, compliance directives have been issued for the majority of U.S. manufactured aircraft.

All structural and corrosion related directives are expected to be completed and issued by January 1992. It is estimated that structural directives will affect more than 1,500 aircraft, while corrosion-related directives will affect more than 2,900 aircraft. The cost to the industry of complying with these directives has not been estimated.

Virtually all airline bookings presently are made through one of four airline-owned computer reservation systems (CRSs). In 1984 the Civil Aeronautics Board established rules that prohibited bias in data entry and display, mandated non-discriminatory terms for airline participation, and limited subscriptions to 5 years. These rules play an important role in preserving and enhancing airline competition.

The existing rules expired on November 30, 1991. The Department of Transportation has proposed to readopt the current basic rules, stipulating that informition provided by CRS vendors be organized in an objective and unbiased manner, and that participation in CRSs be open to all carriers on a non-discriminatory basis. A number of new provisions designed to enhance competition are also being proposed, such as requiring that travel agents be permitted to use equipment and computer software obtained from third-party suppliers.

The Aviation Safety and Capacity Expansion Act of 1990 also authorized the FAA to grant authority to airports to levy up to a $3 fee on each enplaned passenger with the proceeds going to improve airport facilities. The revenue may be used to finance projects that would preserve or enhance capacity, safety, or security of airports, reduce noise, and increase competition. These charges, which give airport authorities a source of revenue independent of the airlines, should help airports expand capacity or improve facilities without having to seek tenant airlines’ approval. Since passenger facility charges will help airports to expand capacity for all air carriers, potential entrants will be able to gain access to airport gates and facilities, thereby promoting competition.

INTERNATIONAL COMPETITIVENESS

Although traffic growth has been sluggish in domestic markets, international traffic for U.S. airlines has grown rapidly in recent years. International traffic, as measured by RPMs and enplanements, has increased by 80 percent and 68.5 percent, respectively, over the past four years. In 1990, traffic increased 14.3 percent, and passenger enplanements increased by 12 percent – the fourth consecutive year of double-digit traffic growth.

Three major factors have influenced recent international traffic levels. First, the bombing of Pan American Flight 103 in December 1988 reduced U.S. flag carrier traffic between the United States and European destinations during the first half of 1989. Second, the Eastern Air Line strike, which began in March 1989, distorted U.S. capacity and traffic between the United States and many South American destinations. Third, because of concerns over terrorism following Iraq’s invasion of Kuwait, traffic to Europe was particularly hard hit, with some U.S. air carriers experiencing declines of up to 75 percent in some markets.

Traffic to the Pacific has grown rapidly. Over the last 9 years, RPMs and passenger enplanements have more than tripled, growing at an average annual rate of 15.2 and 15.5 percent, respectively. Travel to Pacific destinations, moreover, shows no signs of slowing. Since 1986, RPMs and enplanements have both increased by better than 22 percent annually. In 1990, traffic to the Pacific grew 23.2 percent while enplanements rose by 22 percent.

Over the last 5 years, international yields have increased by 14.4 percent, from 9.34 cents per RPM in 1985 to 10.68 cents in 1990. International yields were subject to the same pressures as domestic yields in 1990 and 1991, reflecting fare increases to cover rapidly rising fuel costs. However, unfavorable economic conditions in the United States and other countries have depressed airline traffic, making it difficult for carriers to sustain fare increases. For example, international air carriers generally implemented fuel surcharges on international air fares totalling 13 percent in late 1990 and early 1991. Portions of these surcharges were withdrawn after the Persian Gulf conflict, reflecting the decline in fuel costs that occurred at that time. In addition, to restore traffic growth, carriers expanded the number of available discount fares in several major international markets. Taken together, these developments make the near-term outlook for international airline yields highly uncertain.

Government action has been required to achieve a number of improvements in the international operations of U.S. airlines. The Department of Transportation approved transfers of Eastern Air Lines’ Latin American route network to American Airlines, Pan American’s London/Heathrow Airport authority to United, and most of TWA’s Heathrow routes to American, as well as transfers of a number of individual transpacific and transatlantic routes. In the case of the London/Heathrow routes, which have transformed American and United into major trans-atlantic competitors, lengthy government-to-government negotiations were required to make the previously restricted Heathrow access transferable.

The Administration has also adopted a program whereby U.S. communities unable to obtain international air service from U.S. carriers can obtain such services from foreign airlines, even where they are not specifically authorized by applicable international aviation agreements. The new policy recognizes the importance of international air service to the economic well-being of our communities and ensures that those benefits are maximized.

The ability of financially weak carriers to raise capital through the equity markets is severely limited. As a result, many carriers have had to forgo financing or have had to obtain relatively expensive short-term debt or lease financing.

In January 1991, the Secretary of Transportation relaxed restrictions on foreign investments to enhance access to debt capital from foreign sources and to increase the amount of non-voting equity capital that can be held by foreign entities to 49 percent of an airline’s total capital, provided that actual corporate control remains in the hands of U.S. citizens. Although the 25 percent limit on foreign-held voting equity, which was established by statute, remains in effect, in June 1991 the Secretary announced the Administration’s support for legislation allowing foreign ownership of up to 49 percent of this stock as well. Allowing airlines more access to foreign capital should reduce their cost of capital and enhance their ability to compete and grow.

Outlook for 1992

The outlook for the airline industry depends upon the state of the U.S. economy and whether fuel prices remain stable. Following the 1990-1991 recession, the economy appears poised for moderate growth. As the rate of inflation has moderated, moreover, both short-term and long-term interest rates have declined sharply. Fuel prices, which doubled in 1990, have now dropped back to 69 cents per gallon, close to the pre-Persian Gulf conflict level.

Despite the poor financial performance of almost all carriers in 1990 and the first half of 1991, several of the nation’s largest scheduled passenger carriers remain in good financial condition; they should return to profitability in an improved environment. But the near-term financial prognosis remains highly uncertain for those air carriers that are either in poor financial shape, or are being restructured under the supervision of the bankruptcy courts.

Internationally, there is a likelihood of further route transfers. To expand price and service options for air travelers, the U.S. Government also has undertaken major liberalization initiatives with our most important aviation partners – Canada, the United Kingdom, Mexico, and Germany – that will place international air services on a more competitive footing.

Long-Term Prospects

Long-term financial prospects for the U.S. airline industry depend upon a number of factors, including future economic growth, adequate fuel supplies, and the expansion of airport capacity. Government actions also will influence the fortunes of individual air carriers. New legislation, such as the Aviation Safety and Capacity Act, took a major step toward expanding capacity and reducing entry barriers at congested airports. The long-term financial and competitive viability of highly leveraged air carriers depends on whether they can adjust to changes in the operating environment, including competition from financially stronger carriers.

The FAA has forecast that domestic airline traffic will increase at an annual rate of 4.1 percent during 1991-2002, and international traffic at an annual rate of 6.4 percent. Domestic enplanements are forecast to increase by 3.8 percent annually and international enplanements 5.9 percent annually over the same period, somewhat lower than the expected growth in traffic. To support traffic growth and to replace aging aircraft, the industry, according to Boeing Corp., will be required to spend an estimated $234 billion on new equipment over the next 15 years.

Further industry consolidation is possible in 1992. Northwest Airlines is taking a major equity position in Hawaiian Air Lines and has expressed a desire to acquire Continental Airlines, as have other parties. Northwest is also pursuing a joint marketing arrangement with America West Airlines. USAir and Air Canada also have announced that they are considering various ways to coordinate operations and services.

The globalization of the commercial air carrier industry is proceeding at a rapid rate, as marketing agreements between U.S. and foreign-flag carriers proliferate. Expanding opportunities for U.S. and foreign air carriers to serve domestic and foreign markets will promote competition and ensure that the traveling public has access to high levels of service.

Additional References

FAA Aviation Forecasts, Fiscal Years 1991-2002, February 1991, Federal Aviation Administration, U.S. Department of Transportation, Washington, DC 20591. Telephone: (202) 267-3355. Secretary’s Task Force on Competition in the U.S. Domestic Airline industry, U.S. Department of Transportation, Office of the Secretary, 400 7th St. SW, Washington, DC. Telephone: (202) 366-5412. Air Transport 1991, The Annual Report of the U.S. Scheduled Airline Industry, Air Transport Assn. of America, 1709 New York Ave. NW, Washington, DC 20006. Telephone: (202) 626-4175. Boeing Commercial Airplane Group, P.O. Box 3707, MS 64-47, Seattle, WA 98124-2207. Telephone: (206) 237-1710. Regional Airline Assn., 1101 Connecticut Ave. NW, Washington, DC 20036. Telephone: (202) 857-1170.

TRUCKING

The trucking industry comprises four broad service markets: truckload (TL), less-than-truckload (LTL), small package, and package express. Trucking firms compete in these markets with each other, to some extent with barges, and with airlines and railroads. Truckload (TL) freight, the largest motor carrier market in terms of tonnage, is typically hauled directly from sender to receiver, without going through sorting terminals. The freight itself ranges from raw materials to finished goods. LTL traffic, defined by the Interstate Commerce Commission (ICC) as shipments weighing less than 10,000 pounds, typically involves five separate activities: local pick-up, sorting at a terminal facility, line haul, sorting at a destination terminal, and local delivery.

Small package includes the 2-to-3 day delivery market long defined by and dominated by United Parcel Service (UPS). Package express service, essentially next day delivery, is dominated by air freight carriers such as Federal Express. However, both small package and package express markets are now fiercely contested by firms traditionally viewed as trucking companies. Roadway Services’ small package service, and Consolidated Freightways’ purchase of Emery’s air freight business, are examples. Similarly, UPS has expanded from its traditional small package business into the role of giant in the overnight air business, second only to Federal Express. Operationally, the LTL market resembles the small package and package express markets, with use of regional or national networks, sophisticated sorting terminals, and local pick-up and delivery service. Many LTL carriers historically handled packages as a component of their LTL business, but much of this traffic is now captured by the specialized package carriers, such as UPS and Federal Express.

In terms of revenue, trucking easily retained its lead share of the U.S. freight market in 1991. This predominance reflects the higher revenues per ton and per ton-mile generated by trucking, compared to lesser per ton revenues of rival rail and barge carriers. Correspondingly, trucking’s ton and ton-mile shares of the U.S. freight market are smaller than its revenue share (Table 2).

Table 2: Trucking Share of Freight Industry in 1989

(billions)

Total Freight Trucking

Measure Trucking Industry Percent

Revenues $257 $330 78

Tons 2.5 6.2 40

Ton-miles 716 2,813 25

NOTE: Figures are revised estimates.

SOURCE: Transportation in America 1991, Eno Foundation.

A number of factors contribute to the difficulty of obtaining precise data on the trucking industry: its enormous size, the ambiguity of terms such as “local” trucking, disparate data sources and collection methodologies, and the fact that much of trucking is exempt or deregulated and, therefore, subject to few or no reporting requirements. One subsector where figures are more readily available is ICC authorized trucking, composed of interstate, for-hire carriage. This subsector generated about $75 billion in revenue in 1990, or more than one quarter of the industry total (Table 3).

Table 3: 1990 ICC(1) Carrier Revenues

Industry sector Carriers 1990 Revenues

All ICC carriers 45,791 $74.7 billion(2)

Top 100-total 100 34.7 billion(3)

UPS carriers 2 10.9 billion

LTL, general freight 35 13.7 billion

TL, general freight 23 3.8 billion

Other top 100(4) 40 6.3 billion

(1) Interstate Commerce Commission.

(2)Estimate.

(3)Actual.

(4)Primarily household goods, motor vehicle, and chemical tank.

SOURCES: Interstate Commerce Commission, Section of Systems Development; Commerc

ial

Carrier Journal, July 1991.

Besides pressure from other modes, the trucking industry itself is intensely competitive, characterized by continuing expansion of existing firms and entry of new firms. In 1980 there were fewer than 20,000 carriers with ICC operating authority and only about 1 percent of these held 48-state authority, and about 30 percent held contract operating authority. By July 1991, the total number of ICC regulated motor carriers had reached nearly 47,000, including 970 Class I carriers with annual revenues exceeding $6 million, and 1,439 Class II carriers with revenues exceeding $1.2 million. More than 14,000 of these carriers held 48-state authority, and more than 30,000 could offer shippers contract service.

Further evidence of the intensely competitive nature of today’s trucking industry is the large and growing number of ICC licensed brokers. Brokers match shippers with carriers, constantly booking freight reservations and adding to the competition throughout the industry. Prior to 1980, fewer than 100 brokers were licensed by the ICC to arrange for interstate movement of freight by motor carriers. By July 1991, there were more than 7,100 licensed brokers.

Estimates of total employment in the trucking industry vary widely, ranging from 3.5 million to 8 million people. An ICC data base of 192 Class I carriers shows 1989 revenues of $26 billion, and 460,000 employees. With the nation’s entire trucking sector estimated at close to $260 billion in 1989, a range of 4-4.5 million persons is a reasonable estimate of total industry employment.

The trucking industry’s technology evolution has become a revolution, especially in the area of managing freight transport information. Bar code technology, satellite vehicle tracking. shipment tracking, long distance dispatching, computerized route selection, and similar advances are not new. But the application of these technologies and their integration within single companies is spreading rapidly. Not only have such applications become feasible and affordable, but for major trucking companies – as well as their air cargo, package express, and other competitors – they may already be competitively indispensable. The pressure to cut costs and provide state-of-the an service has prompted scores of trucking companies to adopt some or all of these technologies in just the last few years. Hundreds more will face decisions to acquire them in the year ahead

The ability of carriers to monitor shipment status has in, proved dramatically, especially with the deployment of bar coded data entry systems. By the mid-1980’s, for example, Federal Express office employees were recording shipment origin-destination data via desk-top computer terminals as customer orders were taken; delivery status could subsequently be tracked by accessing the computer data base. Today, FedEx”s drivers and retail outlet employees, using hand-held computers, can scan customer air bills and transmit the shipment information almost instantly to a central computer. Federal Express, now with over one million packages delivered daily, has been an industry leader in freight transport information integration since its founding two decades ago. Other package express companies and, more recently, trucking’s LTL and TL sectors, are deploying similar technologies.

Satellite tracking of vehicles is also a rapidly growing technology application. Trucks equipped with terminals can transmit their positions and exchange data with dispatch centers on two-way satellite links. One source estimated that by mid-1991 some 100 trucking firms were using satellite services to track their motor carrier fleets.

Several regulatory and legislative issues could affect motor carriers in 1992. These include motor carrier safety, larger trucks, state deregulation, and negotiated rates.

Safety

The motor carrier safety debate has many facets and shows little signs of subsiding. Questions persist whether the motor carrier industry is safer today than before deregulation, and what can or should be done to make vehicles safer, drivers more skilled, and improve existing safety records. The answers are not without controversy, and at least one event in 1992 – the deadline for passing commercial driver license (CDL) tests – may serve to widely publicize the safety issue.

In 1986, Congress passed the Commercial Motor Vehicle Safety Act, which called for uniform standards for testing and licensing drivers, and for renewed efforts to remove unsafe drivers from the highways. The Federal Highway Administration’s commercial driver license (CDL) program was established to meet these goals. Under the program, beginning April 1, 1992, in order to operate a vehicle or vehicle combination exceeding 26,000 pounds, drivers must have passed a new two-part commercial driver license test: a knowledge test, and a skills test for a vehicle similar to the one that an individual will be licensed to drive. Because of the April deadline, a temporary shortage of qualified drivers could result. Even barring a shortage, companies could face higher outlays for driver training or for wage premiums to attract certified drivers.

Larger Trucks

The issue of heavier, longer combination vehicles (LCV’s) on the 45,000-mile Interstate Highway System remains extremely important to the industry. The basic weight limit, subject to many exceptions, on the Interstate system currently is 80,000 pounds gross vehicle weight (gvw), a limit made uniform among states by the Surface Transportation Assistance Act of 1982. This law also allowed single 48-foot trailers and vehicle combinations of twin 28-foot trailers. Every state permits some exception to the vehicle limits on a trip-by-trip basis, and about 20 states allow fairly regular use of larger, heavier vehicle combinations. The intensity of the railroad-motor carrier debate on this issue suggests the magnitude of cost savings truckers might achieve if allowed to operate larger vehicles throughout the interstate system. Costs on a per-trailer or per ton-mile basis would drop considerably. Increased user charges would diminish the gains, but competition with rail carriers would intensify.

State Regulation

Another important industry issue is elimination of entry, rate, and other economic regulation at the state level. A 1990 U.S. Department of Transportation report, addressing how state regulations affect the package express industry, noted that some 42 states still exert “strict” or “moderate” economic regulation of motor carriers; further, that an estimated $3 to $7 billion could be saved by eliminating these regulations. In 1991, several efforts were made to pass Federal legislation – some in conjunction with the highway reauthorization bill – that would preempt state economic regulation of trucking. The stated rationale for the proposed legislation included the costs imposed by intrastate regulation on interstate commerce.

Companion issues often tied to intrastate economic regulation fall under the heading of “state uniformity.” Today’s interstate truckers face costly, inconsistent bookkeeping and reporting requirements at the state level, such as overlapping state rules regarding vehicle registration and fuel tax payments. Uniformity legislation that would greatly reduce duplicative filing of applications, fees and taxes made considerable progress in 1991, and carriers may soon realize cost savings in this area.

Negotiated Rates

The negotiated rates issue, while largely resolved with respect to future motor freight movements, may continue to receive media and even congressional attention in 1992. During the late 1980’s, creditor groups for bankrupt motor carriers sought allegedly delinquent payments from shippers for previously hauled freight. They demanded payment at the rate level specified in filed tariffs, despite the fact that shippers and carriers had negotiated – but carriers had failed to file – much lower rates. Potential payments at issue have been estimated at $200 million. Shipper groups worked with Congress in 1991 to find a less onerous repayment formula. Whether or not an arrangement is struck to reduce potential shipper liability for transport service already rendered, it is presumed all future motor carrier commerce will travel either under correctly filed tariffs or under contracts.

ICC authorized motor carriage is largely deregulated. Nonetheless, carriers are still required to comply with financial reporting, tariff filing, and other residual economic regulations. The ICC, however, has demonstrated its willingness to further remove the Government from the industry’s basic business activities. Whether additional regulatory changes will be enacted in 1992 is not certain, but ICC support for such changes seems likely.

Financial Highlights

Performance of 100 of the largest ICC authorized carriers was relatively strong in 1990, compared with weak results the previous year. Operating revenue grew 7.6 percent, net income 6.8 percent, and revenue tons hauled 3 percent. In absolute terms, however, 1990 performance was less impressive, as net income was still below the 1988 level for about the same amount of revenue tons hauled (Table 4).

Table 4: Results For 100 Largest ICC, Regulated

Carriers(2)

Percent Change

Measure 1988 1989 1990 1989-90

Revenue (billion) $18.7 $20.3 $21.8 7.6

Net income (million) $464 $414 $442 6.8

Tons (million) 170 167 172 3.0

(1) Interstate Commerce Commission.

(2) Figures exclude UPS, contract carriers (which do not report quarterly figure

s), and some large

carriers that failed to submit timely reports.

SOURCES: Interstate Commerce Commission, Large Class I motor Carriers of Propert

y Selected

Earnings Data, 1988-1990.

Still, 1990 performance could have been worse. Diesel fuel prices following the Iraqi invasion of Kuwait soared from about $1.10 to $1.60 per gallon, according to the ICC full-service pump price index, and GNP for fourth quarter 1990 was down 1.6 percent. Despite these negatives, carriers apparently were able to pass on most fuel price increases to shippers, so that the recession had surprisingly little effect on motor carriers by yearend.

In contrast with the better than expected ending in 1990, the start of 1991 was very weak. First quarter GNP declined further, down 2.8 percent on an annual basis. Few industries escaped the slowdown, and trucking was no exception. Operating and net income levels for the ICC’s 100 large carrier group, for example, plunged from 1990 levels, down 50 percent and 90 percent, respectively. The 3-year slowdown in heavy truck purchases, still in evidence at least through July 1991, confirmed either a tight cash flow in many companies, or a reluctance to commit to significant capital outlays in the face of an uncertain economy (Table 5).

Table 5: Heavy Truck Sales

(units)

Through July Full Year

1990 1991 1988 1989 1990

Class 8 73,541 56,335 148,361 145,068 121,324

Class 7 51,340 46,271 103,042 93,446 85,345

Class 6 22,188 13,728 53,599 39,128 38,209

NOTES: Class 8 vehicles are 33,000 lbs. gross vehicle weight; Class 7 are 26,001

-33,000 gvw;

Class 6 are 19,501-26,000 gvw. Class 8 full year sales represent close to 1 perc

ent of total U.S.

car and truck sales. All figures are “domestic retail, “which are sales to U.S.

end users and

include

imports.

SOURCE: Motor vehicle Manufactures Association.

Trucking industry performance in second quarter 1991 was also weak. Although presumably helped by a slowly improving economy, numerous motor carriers still posted year-to-year net earnings decreases for the quarter. For the ICC’s 100 large carrier group, tons hauled during the quarter were up 2 percent, revenues were up 3.4 percent, but net income down 7.9 percent. Yellow Freight, for example, showed 3 percent growth in tonnage, 5 percent growth in revenues, but a 32 percent drop in earnings. Tonnage for Consolidated Freightway’s Motor Freight subsidiary dropped 9 percent, revenue dropped 3 percent, and operating income 37 percent.

Not all first-half 1991 news was negative. The improvement in third quarter GNP, while weak, raised prospects for stronger motor carrier performance. And, consistent with signs of a prospective economic recovery was the first half rise in 1991 it prices of selected publicly traded motor carrier equities. Also encouraging was the fact that stock price increases had presumably taken account of the 50-cent hourly wage increase settlement that signatories to the 3-year Teamsters Union Master Freight Agreement approved. The increase took effect in April 1991, raising the base hourly wage from $15.70 to $16.20; it is scheduled. to reach $17. 10 by April 1993.

INTERNATIONAL COMPETITIVENESS

For U.S. trucking, international developments primarily center on Canada and Mexico. Mutual access to U.S.-Canada markets is already well developed. Nonetheless, the fact that Canada’s trucking industry is somewhat more restricted – both Canadian as well as foreign firms – suggests further gain still may be achieved by U.S. carriers. U.S.-Canadian two-way trade (exports and imports) was $175 billion in 1990. Each country is by far the other’s largest bilateral trade partner. The freight services market associated with that cross-border trade flow is estimated at $7 billion. Although relatively few trade restrictions remained prior to the 1988 Free Trade Agreement (FTA), the scheduled 10-year gradual removal of those residual tariffs, quotas and other trade restrictions should lead to even larger two-way trade, and consequent growth in the freight services market.

Unlike the United States, where licensing of motor carriers occurs primarily at the Federal level (ICC), licensing in Canada occurs at the provincial level. Two 1987 laws produced important changes in Canadian provincial regulations: The National Transportation Act, and the Motor Vehicle Transportation Act (MVTA). The MVTA urged the provinces to emulate a national standard of relaxed entry, route, and rate regulation. Legislation became effective January 1, 1988, and most provinces have now liberalized their economic regulation of motor carriers. A Canadian equivalent of our 48-state authority, however, is still not available. Meanwhile, Canadian access to the U.S trucking market was expanded in part by changes following the Motor Carrier Act of 1980, and then through subsequent arrangements agreed to by the two countries.

In 1991, approximately 2,100 Canadian carriers held U.S. ICC operating authority, with nearly 650 of those holding 48-state authority. In 1990, U.S. carriers held more than 4,300 provincial grants of authority in Canada, up from about 3,000 in 1989. The number of outstanding grants held by U.S. carriers varies sharply by province, with carriers holding 1,362 grants from Ontario, but only 20 from Newfoundland.

The U.S.-Mexican situation is considerably different from that of U.S.-Canada. Two-way trade with Mexico was $65 billion in 1990. While significant, this annual trade is smaller than the U.S.-Canadian total, and there has been less progress regarding mutual access to truck markets. But recent developments promise greater prospects for significant improvement. Because of Mexico’s insistence that Mexican drivers and Mexican trucks be used for traffic in Mexico, the United States imposed a retaliatory moratorium in 1982 on grants of authority to Mexican carriers. The total number of grants to Mexican trucking companies is only four, and no Mexican carrier holds 48-state authority. The United States does issue certificates of registration (CRs) for Mexican trucking within a border commercial zone that ranges up to 25 miles north of the 2,000 mile border (up to 75 miles near San Diego and Brownsville, Texas). About 2,600 CRs have been issued to Mexican carriers.

Progress in U.S.-Mexican transport matters has been expedited under the administration of President Salinas. Mexico welcomes the presence of U.S and other foreign companies in Mexico. The number of so-called twin plants or “maquiladoras” (generally sister plants of U.S. companies) in Mexico exceeded 2,000 in 1991, and the Mexican Government looks for another 500 foreign plants to be established by yearend 1992. Trucking is a major topic being discussed by the United States, Canada, and Mexico in the ongoing North American Free Trade Agreement (NAFTA) talks. U.S. and Mexican officials, meanwhile, have been cooperating closely on the matter of safe, adequately insured Mexican carriers operating in the U.S commercial zone. Even without a future bilateral or trilateral agreement, either on transport specifically or free trade generally, further cooperation is expected to continue, and could lead to a lifting of the present U.S. moratorium.

Outlook for 1992

Trucking industry performance sometimes varies sharply from the overall economy – for example, the industry’s relatively strong performance during the fourth quarter 1990 recession. More generally, however, trucking industry performance parallels the overall economy, and forecasts for 2.5-3 percent GNP growth suggest 1992 should be a year of modest advances for motor carriers.

Still, pervasive competition will renew downward pressure on motor rates and earnings. Developments in other modal operations, such as work rule concessions in the railroad industry, will add to these downward pressures. Compliance with the federal commercial driver license (CDL) program and outlays for rapidly changing information technology will place upward pressure on costs, potentially contributing to further profit erosion. Conversely, efficiency gains from technology applications and favorable developments in legislation affecting longer combination vehicles (LCV’s) could lower costs and help increase market share and profits.

Long-Term Outlook

The continuation of several existing trends should strongly influence the trucking industry in the future. First, global production will require increasingly more careful coordination between production and distribution functions. Transport companies will need to time deliveries with increasing precision to meet requirements of assembly plants using components shipped “just in time” from many areas of the world. If U.S. freight companies fail to provide the requisite sophistication, foreign global freight companies or the manufactures themselves will assume the role. Second, this integration will occur largely through more widespread application by the industry of computerized information technology. Third, the notion of a one-time U.S. motor carrier industry shakeout will prove erroneous. Instead, the rise, fall, and repositioning of freight carriers will be perennial; only firms that meet the increasingly exacting standards of global distribution will remain serious competitors. Finally, increased pressure will force better maintenance and management of the U.S. highway infrastructure. Costs of road damage and congestion will be more carefully priced to the users in order to maintain the highway system and keep it operating efficiently. Application of smart vehicle, satellite tracking, and other technologies will facilitate this pricing function.

[TABULAR DATA OMITTED]

Additional References

Freight Trucking, Promising Approaches For Predicting Carriers’ Safety Risks, April 4, 1991, General Accounting Office, Report No. GAO/ PEMD-91-13, Washington, DC 20548. Telephone: (202) 275-6241. Impact of State Regulation On The Package Express Industry, 1990, U.S. Department of Transportation, 400 7th St. SW, Rm 9217, Washington, DC 20590. Telephone: (202) 366-4420. Large Class I Motor Carriers of Properly Selected Earnings Data, Quarter and Twelve Months Ending 12/31/90; Quarter Ending 3/31/91; Quarter and Six Months Ending 6/30/91, Bureau of Accounts, Rm 3148 Interstate Commerce Commission, 12th and Constitution Ave. NW, Washington, DC 20423. Telephone: (202) 275-7094. Staff Report No. 12, January 1990. Interstate Commerce Commission, 12th and Constitution Ave. NW, Washington, DC 20423. Telephone: (202) 275-7684. Transport Statistics In The United States, Motor Carriers Part 2, For Year Ended 12/31/89, Bureau of Accounts, Interstate Commerce Commission, 12th and Constitution Ave NW, Washington, DC 20423. Telephone: (202) 275-6752. Transportation Report, C.J. Nicholas, July 1989, U.S. Department of Agriculture, Office of Transportation, 14th and Independence Ave. SW, Washington, DC 20250. Telephone: (202) 447-2794. Telephone: (202)653-6218. Our Nation’s Highways, Selected Facts And Figures, U.S. Department of Transportation: Federal Highway Administration, Office of Highway Information Management, Washington, DC 20590. Telephone: (202) 366-0180. Transportation in America, Ninth Edition, 1991, Frank A. Smith, Eno Foundation, P.O. Box, 2055, Westport, CT. 06880. Telephone: (203) 227-2582. Transportation Quarterly, “Economic Regulation vs. Safety Regulation of the Trucking Industry – Which More Effectively Promotes Safety?” Karen Borlaug Phillips and Janie A. McCutchen, Vol. 45, No. 3, July 1991 (323-340), Eno Transportation Foundation, Inc., P.O. Box 2055, Westport, CT. 06880. Telephone: (203) 227-2582. Commercial Carrier Journal, “The Top 100,” July 1991, Chilton Co., Chilton Way, Radnor, PA 19089. Telephone: (215) 964-4000. Facts & Figures ’91, Motor Vehicle Manufacturers Association, 7430 Second Ave., Detroit, MI 48211. Telephone: (313) 872-4311.

RAILROADS

In 1991, the 13 major freight railroad systems had operating revenues of nearly $28 billion. More than 500 smaller carriers had operating revenues of nearly $3 billion. Amtrak, a quasi-government corporation serving 45 states, carried more than 22 million intercity passengers in 1991.

FREIGHT SERVICE

The railroad industry’s traffic in 1991 declined after a string of 4 record breaking years. Overall traffic measured by both weight and distance declined 2 percent, with the majority of individual commodities declining as well. Carloads of coal traffic decreased 2 to 3 percent, as utilities reduced above-normal inventories. Chemical shipments were flat, as was intermodal traffic (trailer-on-flatcar and container-on-flatcar); paper and paper products declined 2 percent. Carloads of motor vehicles and parts were down 10 to 12 percent as a result of weaker auto sales; lumber and wood products were down 10 percent because of the sharp decline in residential construction; and stone, clay, and glass shipments fell between 6 and 8 percent in response to a decline in overall construction. Grain traffic fell an estimated 3 to 5 percent, in large part because the Soviet Union was not a major customer until late in the third quarter.

The railroad industry performed admirably during the Persian Gulf conflict, moving considerable amounts of military equipment and supplies on short notice. This demonstrated the system’s ability to handle significant levels of additional freight efficiently, on short notice, and within its existing capacity.

Class I railroads (systems with operating revenues of over $94 million in 1990), including Amtrak, employed 231,000 in 1991, or 4 percent fewer workers compared with 1990 (241,000).

For the 12 months ending June 30,1991, the industry earned a 5.9 percent return on its net investment base (excluding special charges). Since 1980, the year the Staggers Rail Act partially deregulated rail rates and services, the rate of return has generally been in the 4 to 6 percent range, compared with the 1 to 2 percent range in the 1970’s. Since 1980, the railroads have been able to put more than $125 billion into track and equipment. The industry’s safety record also has improved dramatically, with the number of accidents down more than 70 percent and the rate of accidents per train-mile down more than 60 percent since the late 1970’s.

Despite the improvements in profitability, freight rates declined by 1.2 percent per year in real terms during the 1980’s, compared with an increase of 2.9 percent per year in the 5 years prior to the Staggers Act of 1980.

Marketing and Technology Issues

The railroads have experienced substantial improvements in productivity due to innovations in equipment, marketing, and computerized freight tracking and train scheduling. Rail intermodal service has grown dramatically, doubling between 1980 and 1990, from 3.1 million trailers and containers to 6.2 million. Two major events account for the increase: the ICC’s 1981 exemption of intermodal traffic from rate regulation, and the introduction in 1984 of railcars with five depressed platforms. each capable of carrying containers stacked two high. Growing volumes of containerized imports from the Far East have been moving through West Coast ports to inland destinations under expedited schedules on such double-stack trains, carrying export and domestic traffic on the backhaul. More than 100 doeble-stack trains depart the West Coast weekly. Double-stack cars now account for about 25 percent of total intermodal capacity – and the share of container traffic (as opposed to trailers) in intermodal loadings has nearly doubled, from 25 percent in 1980 to nearly 50 percent in 1991.

U.S. and Canadian railroads have been developing advanced train control systems (ATCS) that utilize microelectronics and telecommunications to control train operations. Different versions of ATCS are currently being tested or used in limited applications. Initial adaptations of this technology will include monitoring the handling of freight cars and performance of locomotives, and managing track maintenance crews. With full implementation, “smart trains” are expected to be safer and more efficient, improve productivity and customer service, eliminate paperwork, and diagnose their own mechanical disorders.

In April 1991, the Federal Railroad Administration released a report, Rail vs. Truck Fuel Efficiency, that compared fuel efficiency of rail service with competing truckload service in the same corridors, taking into account circuity and routing. For Class I railroads, mixed freight trains were 200 to 420 percent more fuel efficient than 48 foot van trailers, double-stack trains were 150 to 240 percent more fuel efficient than trucks carrying container trailers, and trailer-on-flatcar trains were 40 to 110 percent more fuel efficient than 48 foot van trailers. These results suggest that rail transport may play an important role in furthering our national energy policy.

Cooperation with Mexico

Cooperative efforts between the United States and Mexico are improving rail transportation between the two countries and encouraging the development of trade. The U.S. and Mexican Customs offices and railroads have worked together to streamline border crossing procedures, thus expediting the flow of commerce and reducing border congestion. Innovative management and operating practices are improving rail-to-rail interchanges and encouraging the development of new transportation services. For example, U.S. railroads are now operating some “run-through” train service, whereby U.S. carriers use their own equipment from their U.S. origins to their Mexican destinations, without interchanging locomotives at the border; Mexican crews are used to operate the trains within Mexico. There also is an agreement to operate, for the first time, a unit grain train into Mexico, using negotiated joint rates between the Mexican railway system – Ferrocarriles Nacionales de Mexico (FNM) – and a U.S. carrier. Additionally, double stack train service is being developed successfully by several U.S. carriers and shipping lines to transport goods, including U.S. automobile parts and goods from Pacific Rim countries imported through U.S. ports.

In the future, there will be more exchanges of technology similar to the purchase by FNM of Union Pacific Railroad’s Transportation Control System, which provides computerized monitoring and management of yard operations, inventory, billing, scheduling, and planning functions. All these cooperative efforts increase the competitiveness of both countries’ rail industries, opening new markets for both trade and the railroads.

Industry Structure and Regulatory Environment

Today, in addition to the 13 Class I freight railroad systems, there are 32 regional railroads with 12,235 employees; 293 independently owned local railroads (not part of Class I systems) with 6,766 employees; and 178 switching and terminal railroads with 7,738 employees. Although the pace of mergers among major railroads has slowed considerably, sales of line segments by Class I railroads to smaller operators continue. As traffic volumes decline on many branch lines, Class I railroads have in some instances been replaced by these smaller operators, who generally have lower costs. These short lines have been able to improve service to local shippers; they continue to feed traffic to the major railroads. Over 75 percent of the short line railroads operating today were formed since 1981.

The Staggers Act did not completely deregulate the freight railroads, but it did take significant steps to remove ICC authority over railroad activities where competition already was working to constrain rail rates and improve service. Now, roughly three-quarters of freight traffic is deregulated, either because rates fall below a statutory threshold, or because the ICC has used its discretionary authority to issue an exemption. The ICC has exempted traffic moving in boxcars and trailers-on-flatcars, as well as certain agricultural and manufactured commodities (regardless of car type), including most lumber and wood products. These exemptions were implemented after proceedings demonstrated that competition was sufficient to prevent shipper abuse.

Shippers whose traffic has not been exempted and whose rates are above the statutory threshold still have the right to protest rates for regulated traffic. In instances where a shipper files a complaint that a railroad is charging an unreasonable rate, the ICC requires the shipper and railroad to submit evidence on competition. If the ICC finds that competition is insufficient, the ICC requires the parties to submit cost data for the Commission to determine if the rate is unreasonable. If the rate is then found unreasonable, the ICC requires the railroad to refund the difference between the rate and the allowed maximum, and pay interest charges.

Recently, an average of only 15 new rate complaints and protests have been filed per year, down sharply from an annual average of nearly 300 before the Staggers Act went into effect. (For additional background on the Staggers Rail Act, see the 1990 Industrial Outlook, chapter 42.)

Under another important provisions of the Staggers Act, railroads and shippers were permitted to enter into contracts covering rail rates and services. These contracts must be filed with the ICC, but the specific rates and conditions are not disclosed. At least 60 percent of all rail traffic, and at least 80 percent of all coal traffic, currently moves under contract. The number of contracts filed has averaged 15,000 to 16,000 per year since 1986, with increasingly more traffic covered per contract.

Labor Issues

After three years of collective bargaining on health insurance benefits, wages, and work rules, the railroad industry and 11 major unions were unable to reach an agreement in early 1991 on the terms of a new contract. Despite National Mediation Board efforts to mediate the dispute, and appointment of a Presidential Emergency Board (PEB) that issued a report making recommendations on resolving the differences, the unions went out on strike on April 17, 1991. The next day, Congress passed legislation that ended the strike and authorized a Special Board to resolve disputed issues and ambiguities in the PEB report that could not be settled through collective bargaining. On July 18, the Special Board issued its report which upheld all of the recommendations of the PEB. Ten days later, the recommendations became law.

Among the most contentious issues, the PEB report included recommendations that rail workers, for the first time, be required to contribute to the costs of their health insurance plans. The PEB also recommended an increase in the basis of a day’s pay for employees working on-board trains from 108 miles in effect in 1990 to 130 miles by January 1, 1995. The PEB also recommended a lump sum signing bonus of $2,000 to each employee; two 3 percent wage increases effective in 1991 and 1993 and a 4 percent wage increase effective in 1994; three 3 percent lump-sum payments to be paid in 1992, 1993, and 1994, and a 2 percent lump-sum payment to be paid in 1995; and cost-of-living adjustments every six months beginning July 1, 1995. The Board also recommended that train crew reductions be negotiated locally, rather than on a national basis, with binding arbitration if agreement cannot be reached.

Wages and other labor-related expenses are the largest component (nearly 45 percent) of railroad operating costs. Retirement expenses and benefits, mandated by the Railroad Retirement Act, are administered by the Railroad Retirement Board (RRB). Payroll taxes in 1991 were 7.65 percent for both employees and employers on earnings up to $53,400 for Tier I, the equivalent of Social Security, and were 16.10 percent for employers and 4.90 percent for employees on earnings up to $39,600 for Tier II, the private pension equivalent of the Railroad Retirement pension benefit. These high rates are necessary because a decline in railroad employment over the years has left the system with three retirement beneficiaries for each current employee.

Safety Issues

The Federal Railroad Administration (FRA) regulates rail safety in the United States. In 1991, FRA issued rules requiring railroads to report instances of grade crossing signal system failures, and proposed safety standards to protect workers on railroad bridges. FRA also published new certification requirements for locomotive engineers, and proposed a rule requiring electronic event recorders on all passenger trains and on freight trains that travel faster than 30 mph and carry 50 or more cars. Although these regulations may require more railroad investment in equipment or personnel, it is anticipated that rail safety and operating efficiency will be enhanced.

In the area of hazardous materials safety, FRA is currently monitoring a contract study on tank car safety and, with the Research and Special Programs Administration (another agency of the U.S. Department of Transportation, DOT), is developing regulations to further improve the safety of tank cars.

Outlook for 1992

Rail traffic volume is forecast to rebound from the losses of 1991 with revenue ton-miles (a ton of freight moved one mile) increasing 2 percent. Coal traffic, the top commodity carried by the railroads, is expected to grow by 2 to 3 percent in 1992, in line with industry and government forecasts of increased coal production. Intermodal traffic is expected to grow by 2 to 3 percent in tandem with the increasing importance of container and double-stack service. Traffic in chemicals, lumber and wood products, paper, metallic ores, primary metal products, motor vehicles and parts, and stone, clay and glass and other industrial commodities, are expected to increase as a consequence of renewed economic growth. Growth in grain traffic will depend on an improved harvest, and on whether larger volumes of grain shipments are made to the Soviet Union. Railroad employment is forecast to decline by approximately 4 percent to 222,000, a early-retirement programs continue, and crew size reduction are negotiated and implemented.

Long-Term Prospects

Traffic growth over the next 5 years will be modest. Rail tonnage is expected to rise an average of 1 to 1.5 percent per year. Railroad traffic volume, however, is heavily dependent on the strength of industrial production and shipments, particularly in the key industries served by rail, such as steel, chemicals, automobiles, paper, construction, and agriculture. The primary source of rail traffic is still bulk commodities, including coal for generating electricity and producing steel. Coal is likely to continue to account for approximately 40 percent of the weight of rail shipments over the next 5 years.

Railroads’ prospects for attracting bulk commodities and other goods will be affected by their ability to meet competition from other modes of transport. Barges are major competitors for bulk commodities, including coal and grain, which move 5 large volumes on the Ohio and Mississippi River systems. Trucking is also an important option for many shippers. Railroads’ share of intercity freight ton-miles has held fairly steady between 35 to 40 percent since the early 1970’s.

PASSENGER SERVICE

The National Railroad Passenger Corporation (Amtrak) started its 20th year of operation in May 1991. Amtrak operates about 230 intercity passenger trains per day over 24,000 miles of rail line, serving more than 500 communities in 45 states. In fiscal year 1991 (October 1990 to September 1991), Amtrak carried 40 million passengers-more than 22 million on its intercity trains and about 18 million metropolitan commuters.

During the same period, despite the economic slowdown in the national economy and losses for Amtrak’s competitors, Amtrak made a strong showing in passenger volume, and continued its progress toward the goal of covering its operating cost. Amtrak’s passenger-miles increased from 6.1 billion in fiscal year (FY) 1990 to 6.2 billion in FY 1991. Amtrak covered 80 percent of its operating expenses in FY 1991. Revenues were about $1.4 billion, up 4 percent from the previous year. Expenses increased about 1 percent to $1.75 billion during the same period.

Amtrak received a Federal subsidy of $475 million for FY 1991, plus an additional $179 million for the Northeast Corridor Improvement Project between Washington and Boston. In constant dollars, Amtrak’s 1991 subsidy represented a reduction of more than 60 percent from its 1981 Federal appropriation. The substantial decrease was achieved through a combination of steady fare and ridership increases, and close control of expenses.

In December 1991, Amtrak received its first delivery of 52 new diesel locomotives, with additional deliveries scheduled to occur over a 2-year period. Amtrak has contracted for the purchase of 140 new bilevel Superliner sleepers, diners, lounge cars and coaches expected to cost some $340 million. The first delivery of Superliners is expected in early summer 1993, with the remaining deliveries over a 2 1/2-year period.

In California, a 4-phased track improvement program along the San Diego-Los Angeles Corridor was completed in 1991, improving transit times and reducing congestion and automobile pollution. The project was jointly funded by Amtrak, the state, the Santa Fe Railway (which owns the right-of-way), and Los Angeles, Orange, and San Diego Counties. In 1990, California voters approved bond issues which may ultimately provide more than $500 million for improved intercity rail passenger service.

In April 1991, the Empire Connection opened, consolidating Amtrak’s New York City services in Penn Station. As a result, passengers no longer have to change between Pennsylvania (Penn) Station and Grand Central Terminal (12 blocks distant) to make connections between Northeast Corridor trains and Empire Corridor trains (the latter between New York City and Buffalo via Albany). Amtrak and the State of New York spent $89 million to rebuild an abandoned freight line along Manhattan’s West Side and extend the line into Penn Station. Amtrak expects $6 million in added revenue and a savings of $2 million a year from the consolidation of station operations. An additional $11 million was appropriated by Congress in 1991 to pay for a second track along a portion of the route. Construction has begun, and service on the track is expected to begin in the spring of 1992. The second track will provide more scheduling flexibility and help avert potential delays. Station improvement work progressed in 1991 at Penn Station in New York City, and major renovation and rehabilitation projects were completed at Union Station in Chicago, 30th Street Station in Philadelphia, and Union Terminal in Cincinnati. Also, as a result of Amtrak reroutings, a net total of fifteen stations were opened.

In June 1991, Amtrak rerouted the Seattle-Chicago Pioneer through Wyoming. Wyoming has been without rail passenger servicc since 1983, when the California Zephyr was rerouted through Colorado. The change will reduce the operating time of the Pioneer, enabling a later departure from Seattle. It also should improve on-time performance by operating over a faster route, and making better connections with other trains to Denver.

Outlook for 1992

Passenger-miles traveled on Amtrak are expected to grow an estimated 2 percent in 1992, and revenue per passenger-mile is expected to increase by 1 to 3 percent in constant dollars. Part of the passenger related revenue increase will come from state-supported service in California and Alabama. Amtrak forecasts that non-passenger related revenue, including contract commuter service, real estate operations, and mail and baggage, will reach $398 million, up 1 percent from $393 million in FY 91. Amtrak plans to place an initial order for single-level Viewliner cars in 1992 for use on long-distance eastern routes.

Long-Term Prospects

Increased concerns over traffic congestion and air pollution should provide favorable conditions for Amtrak to increase its ridership over the next several years. Roughly two-thirds of the urban interstate highways are congested, and congestion-caused delays at many airports are common. Amtrak has the potential to provide additional commuter services and intercity services.

For the 5 year period, 1991-96, Amtrak passenger-miles are expected to continue to grow by 2 to 3 percent per year. Amtrak’s goal is to continue to improve rail passenger service while reducing its dependence on Federal support. It intends to replace its Heritage fleet with single level Viewliner equipment, and add more Superliners where necessary. Amtrak management believes that with adequate capital funding it can cover its operating costs by the year 2000.

Currently, the Amtrak Metroliner in the Northeast Corridor runs at a maximum speed of 125 mph and serves the Washington-New York City market in under three hours. FY 1991 appropriations included funding to begin electrification of the Boston-New York segment of the Northeast Corridor. When these and other improvements are complete, trip times between Boston and New York will fall from 4 or more hours to about 3 hours. To produce such improved trip times, in addition to electrification of a New Haven to Boston segment, the following are being considered: infrastructure improvements, such as track separation, to reduce conflicts with commuter operations; improvements in track and signals; faster accelerating electric locomotives; purchase of cars that can tilt on curves while maintaining speed; and bridge repairs. With trip time reduction, some air trips might be diverted to rail, possibly decreasing the need for a second Boston airport, since 20 to 30 percent of all the domestic flights departing Boston’s Logan Airport are destined for New York. Congress’ FY 1991 appropriation for Amtrak includes $25 million to begin electrification as well as $100 million for other speed-related improvements. DOT’s Volpe National Transportation Systems Center conducted a study identifying the benefits of various improvements needed to decrease travel time between Boston and New York City for both commuter and intercity travel.

High-Speed Passenger Service

Public interest in high-speed rail passenger service has increased in the last several years. High-speed rail passenger systems (defined as operating at top speeds of 125 mph or greater) are viewed as a way to provide some relief to congested airports and highways, especially in markets under 600 miles.

Germany and Japan have tested magnetic levitation (maglev) systems that rely on magnetic forces to provide a non-contact means of propulsion, braking, suspension, and lateral guidance; these systems have the potential for speeds up to 300 mph. Among steel-wheel-on-steel rail systems, the French TGV is the fastest, operating at a top speed of 187 mph.

Several state and local governments and private sector groups have undertaken market feasibility studies of the potential for high-speed service. The Federal Railroad Administration has provided grants for several of these feasibility studies. In fiscal 1991, the FRA entered negotiations with the State of Washington for a congressionally-mandated feasibility study of high speed rail or maglev in high density corridors. Federal funds will be matched by the state for a total of $1 million.

In May 1991, the Texas High Speed Rail Authority awarded a franchise to Texas TGV (Morrison-Knudsen) for a $5.7 billion, privately financed 590-mile system, employing French technology and serving Dallas/Fort Worth-Houston-San Antonio-Austin. Completion of the Dallas/Fort Worth-Houston segment is scheduled for 1998 and the San Antonio-Austin-Dallas link would be open in 1999. In addition to a pledge to raise $1.8 billion in equity over the life of the project, principally for rolling stock, Texas TGV intends to finance the infrastructure through $5 billion in tax-exempt revenue bonds.

In June 1991, Florida certified Maglev Transit, Inc. (MTI), an American company with considerable Japanese and German financial involvement, to construct and operate the first commercial maglev line in the world, a 13.5 mile segment, using the German Transrapid technology, between Orlando Airport and the International Drive complex near Disney World. The project will cost about $600 million, with funds raised privately. Construction is to begin in the fall of 1992, and operations are scheduled for 1995. An estimated 6.5 to 8.5 million people are expected to ride the train annually.

Florida has reopened the process to select a franchisee for a 310 mile high-speed steel-wheel rail system serving Miami-Orlando-Tampa, after the only private applicant Florida High Speed Rail Corporation) withdrew its application. The 80 mile Orlando-Tampa corridor is being considered by the state for Phase I of the program.

In February 1990, Maglev Inc., a Pittsburgh based public/ private/labor partnership proposed that Pittsburgh become a manufacturing center for maglev components. Their study recommended building a regional maglev system that would eventually link such major cities as Washington, DC and Cleveland. beginning with a 19.5 mile demonstration line from downtown Pittsburgh to the Greater Pittsburgh International Airport. Carnegie Mellon University is conducting a 1 year feasibility study for this proposed maglev demonstration corridor, supported by $660,000 from DOT’s Urban Mass Transportation Administration.

As a result of financing uncertainty, a privately financed maglev line operating at 300 mph over a 265 mile double-tracked route from Las Vegas, Nevada, to Anaheim, California has been delayed, with completion now tentatively scheduled for 2002 or 2003.

An interagency partnership has been formed to work with state governments and the private sector to evaluate the future role of maglev in the United States. The partnership, led by FRA and the U.S. Army Corps of Engineers, with support from the Department of Energy, the Environmental Protection Agency, and several other federal agencies, is called the National Maglev Initiative (NMI). The NMI will issue a report in the spring of 1993 summarizing its findings and making recommendations to Administration and Congressional decision makers on further maglev development and deployment.

The FRA is continuing research on high speed rail and magnetically levitated systems to ensure that systems presently planned are safe. The research will provide the basis for future safety regulations.

Additional References

Accident/Incident Bulletin (annual), U.S. Department of Transportation (DOT), Federal Railroad Administration, Office of Safety, 400 7th Street SW, Washington, DC 20590. Telephone: (202) 366-2760. Annual Report, Interstate Commerce Commission, Office of Public Affairs, 12th and Constitution Avenue, NW, Washington, DC 20423. Telephone: (202) 275-7252. Annual Report, National Railroad Passenger Corporation (Amtrak), 400 North Capitol Street, Washington, DC 20001. Telephone: (202) 906-3000. Assessment of the Potential for Magnetic Levitation Transportation Systems in the United States; A Report to Congress, June 1990, U.S. Department of Transportation, Federal Railroad Administration, 400 Seventh St. SW, Washington, DC 20590. Telephone: (202) 366-9660. Employment and Earnings (monthly), Bureau of Labor Statistics, U.S. Department of Labor, Washington, DC 20212. Telephone: (202) 523-1172. Producer Price Index-Railroads, Bureau of Labor Statistics, U.S. Department of Labor, Washington, DC 20212. Telephone: (202) 523-1221. Rail Rates Continue Multi-Year Decline, May 1991, Interstate Commerce Commission, Office of Transportation Analysis, 12th & Constitution, Washington, DC 20423. Telephone: (202) 275-7684. Rail vs. Truck Fuel Efficiency: The Relative Fuel Efficiency of Truck Competitive Rail and Freight Operations Compared in a Range of Corridors, April 1991, U.S. Department of Transportation, Federal Railroad Administration. Available from the National Information Service (NTIS) (PB 91-233619) Telephone: (703) 487-4650. Short-Term Energy Outlook: Quarterly Projections, U.S. Department of Energy, Energy Information Administration, Forrestal Building, Washington, DC 20585. Telephone: (202) 586-8800. Railroad Regulation: Economic and Financial Impacts of the Staggers Rail Act of 1980, May 1990 (GAO/RCED-90-80), U.S. General Accounting Office, P.O. Box 6015, Gaithersburg MD 20877. Telephone: (202) 275-6241. Final Report, September 1990, Commission on Railroad Retirement Reform. Contact: U.S. Railroad Retirement Board, 844 Rush St., Chicago, IL 60611. Telephone: (312) 751-4500. Freight Commodity Statistics (annual), Association of American Railroads, 50 F Street, NW, Washington, DC 20001. Telephone: (202) 639-2302. The Grain Book (annual), Association of American Railroads, 50 F Street, NW, Washington, DC 20001. Telephone: (202) 639-2550. Modern Railroads (monthly), and Modern Railroads: Short Lines and Regionals (semimonthly), 8401 Corporate Dr., Suite 520, Landover, MD 20785. Telephone: (301) 459-9283. Monthly Traffic Monitor, Data Resources, Inc., 29 Hartwell Avenue, Lexington, MA 02173. Telephone: (617) 863-5100. Profiles of Local and Regional Railroads (annual), Economics and Finance Department, Association of American Railroads, 50 F Street, NW, Washington, DC 20001. Telephone: (202) 639-2302. Railway Age (monthly), 345 Hudson St., New York, NY 10014. Telephone: (212)620-7200. Traffic World (weekly), 1325 G Street, NW, Washington, DC 20005. Telephone: (202) 626-4500. Transportation in America: A Statistical Analysis of Transportation in the United States (annual), Eno Transportation Foundation, Inc., Publications Department 419, P.O. 753, Waldorf, MD 20604. Telephone: (301) 645-5643. Transportation Review (annual), Data Resources, Inc., 29 Hartwell Avenue, Lexington, NU 02173. Telephone: (617) 863-5100. Yearbook of Railroad Facts (annual), Economics and Finance Department, Association of American Railroads, 50 F Street, NW, Washington, DC 20001. Telephone: (202) 639-2302.

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WATER TRANSPORTATION

The U.S. water transportation industry (SIC 44) consists of firms that provide waterborne transportation services for freight or passengers, marine cargo handling, towing/tugboat services, and other related services, such as the operation of marinas (Table 6).

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Because waterborne freight-moving and freight-handling services account for the majority of the water transportation industry’s revenues ($15.4 billion, or 75 percent in 1987), workers and payroll, this discussion of the industry is centered on U.S. firms that offer waterborne freight-related services. The presentation is structured to highlight the deep sea foreign trade sector, which is the segment of the U.S. waterborne freight transportation industry most directly affected by international competition.

Two measures are used to describe the capacity of the ships operated by water transportation carriers: gross registered tonnage and deadweight tonnage. With certain exceptions, gross registered tonnage (GRT) is broadly defined as the capacity (in hundreds of cubic feet) of enclosed space available (within the hull and above the deck) for cargo, stores, fuel, passengers and crew. Deadweight tonnage (DWT), which is reported in long tons (2,240 pounds per long ton), is a measure of the total weight a ship can carry, including cargo, crew, fuel, and stores.

As of May 1, 1991, there were 630 vessels (24 million DWT) of at least 1,000 GRT in the U.S. flag oceangoing merchant fleet (Table 7). The fleet declined by 4 ships (160,000 DWT) from April 1, 1990.

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Of the total, 455 (19.2 million DWT) were active. The remaining 175 (4.8 million DWT) ships were inactive. Of the 455 active vessels, 371 were privately owned ships, composed of 139 engaged in U.S. foreign trade and 152 operating in the domestic trades. The remaining 80 privately owned active ships were in service to the U.S. Military Sealift Command (MSC). In addition, 84 active merchant ships owned by the Federal Government included 74 ships that had been mobilized from the Ready Reserve Force to assist in transporting military cargo.

In general terms, there are three categories of commercial waterborne freight service: liner, nonliner, and tanker. Liner service refers to regularly scheduled common carriage, which is often used to ship finished goods.

Nonliner service refers to chartered or contracted service, and to freight services offered aboard ships that move from port to port in search of cargoes. The predominant use of nonliner service is for shipments of dry bulk cargoes, such as grain, coal, and dry chemicals, but it is also used to move shipments of finished goods.

Tanker service refers to movements of liquid bulk cargoes in tank ships or tank barges. Liquid bulk cargoes, which are mainly composed of shipments of crude oil and petroleum products, are often moved on ships owned or operated by oil companies.

The volume of commercial U.S. flag waterborne cargoes is substantial: the fleet delivers nearly 1.1 billion short tons of merchandise per year. (A short ton is 2,000 pounds.) In 1989, which is the latest year for which complete domestic trade data are available, the domestic water transportation sector carried approximately 1.02 billion short tons. In 1990, the deep sea foreign shipping sector of the U.S. industry carried nearly 39.8 million long tons (44.6 million short tons) in U.S. merchandise trade, up from 36.4 million long tons (40.8 million short tons) in 1989.

In addition to commercial cargoes, the U.S. water transportation industry serves the Department of Defense by carrying military cargoes. By mid-March 1991, for example, U.S. flag commercial ships had carried about 30 percent of the oceanborne military dry cargo tonnage moved in support of Operations Desert Shield and Desert Storm under the Special Middle East Sealift Agreement with the Department of Defense. Another 15 percent of those cargoes were carried by commercial U.S. flag ships operating under time charters to the MSC; 20 percent were carried by the government-owned Ready Reserve Force vessels.

Although the U.S. water transportation industry is important to the nation’s commerce and security, as a whole, the industry has suffered financial hardship for years in spite of the subsidies provided by the Federal Government. But there are signs that at least some companies are recovering.

In a June 1991 publication, the Internal Revenue Service estimated the entire water transportation industry’s profits (total receipts less total deductions before Federal income tax credits and charges) at $506 million in 1988. Total receipts were $17.5 billion that year. While this may appear to be a relatively small return (3 percent), it represents a vast improvement in industry performance compared to 1983, when the IRS estimated the industry lost $382 million on receipts totalling $15.3 billion.

DEEP SEA FOREIGN TRADE SHIPPING

Firms in the deep sea foreign trade sector of the U.S. water transportation industry (SIC 441) compete with each other and with foreign carriers for the world’s oceanborne trade cargoes

The nominal value of oceanborne U.S. foreign merchandist trade rose from $437 billion in 1989 to $445.2 billion in 1990, about a 2 percent increase. This represented nearly half of the total value of U.S. merchandise trade, which was $900.7 billion. The nominal value of oceanborne U.S. merchandise trade carried aboard U.S. flag ships, however, fell from $71.3 billion in 1989 to $68.1 billion in 1990 (Table 8).

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The waterborne share of total U.S. merchandise trade tonnage cannot be determined because only airborne and waterborne trade tonnages are consistently collected and published by the Bureau of the Census. However, total oceanborne U.S. merchandise trade tonnage was 822.6 million long tons in 1990, compared to 836.3 million long tons in 1989, and 786 million long tons in 1988 (Table 9).

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The total tonnage of U.S. foreign merchandise trade carried by U.S. flag ships grew from 36.4 million long tons in 1989 to 39.8 million long tons in 1990, with increases in U.S. flag shares of commercial tanker and nonliner traffic. U.S. flag tanker trade volume rose from 12.7 million long tons in 1989 to 16.2 million long tons in 1990. U.S. flag nonliner traffic rose from 6.2 million long tons to 7.7 million long tons.

Because it is involved in international trade, the foreign shipping sector of the U.S. water transportation industry is a source a(both receipts and expenditures in determining the U.S. balance of payments (Table 10). The U.S. deficit for all international ocean transportation transactions rose from $859 million in 1989 to approximately $1.4 billion in 1990, with much of the increase explained by a resurgence in payments to foreign flag tanker operators.

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Rising costs and price competition among international deep sea carriers have resulted in declining profits for the U.S. flag fleet employed in foreign trade liner service. Although U.S. laws permit carriers in the U.S.-international liner trades to establish freight-rate agreements, summary financial data for selected U.S. flag liner carriers indicate that operating expenses rose more than revenues between 1988 and 1990 (Table 11). The result for 1990 was a net loss of $25 million on revenues of nearly $5 billion.

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The summary financial data shown in Table 11 include some extraordinary expenses. But they also indicate that this segment of the industry has had difficulty covering expenses, even though some of these firms receive operating differential subsidies from the Federal Government to partially defray relatively higher U.S. flag operating costs.

Outlook for 1992

The performance of the U.S. deep sea foreign transportation industry depends on many factors, including the volumes of U.S. and world merchandise trade; price and service competition from foreign flag carriers; costs for labor, fuel, and other resources; insurance costs; and domestic and foreign governments’ tax and subsidy programs. Relatively small changes in any of the factors could have substantial effects on the U.S. flag fleet’s market share and financial performance, and on the industry’s outlook.

The International Trade Administration (ITA) estimates that global import volumes will increase by about 5 percent in 1992. For the U.S., ITA estimates about a 6 percent increase in the real value of merchandise imports during 1992, with a 5.3 percent increase in the real value of imported petroleum and petroleum products, and a 6.4 percent increase in the real value of other merchandise.

ITA also estimates about a 4 percent increase in the real value of total U.S. merchandise exports in 1992, with an increase of 3.6 percent in real agricultural exports, and a 4.1 percent increase in the real value of other merchandise exports.

In World Sea Trade Service: Summer 1991 Review, DRI/McGraw-Hill, Inc. (DRI) and Temple, Barker, & Sloane, Inc. (TBS) estimate U.S. outbound liner trade will increase by 6.9 percent in 1992 and U.S. inbound liner trade will grow by 9.4 percent. Outbound dry bulk (nonliner) volumes are forecast to increase by 2.1 percent; inbound dry bulk volumes will rise by 5.6 percent. DRI and TBS also estimate that U.S. inbound tanker volumes will rise by 3.3 percent; outbound tanker volumes will increase by 7.8 percent.

Several developments could positively affect oceanborne trade and the U.S. flag fleet in 1992. For example, a successful conclusion to the Uruguay Round of talks on the General Agreement on Tariffs and Trade (GATT), and the realization of the formation of the European Community as a single, open trading market could lead to increases in European liner trade with the U.S. and Canada, and in U.S.-to-Europe dry bulk trade.

As another example, Kuwait’s need for relief supplies and construction materials may continue to provide opportunities for both liner and nonliner service. Tanker trade also could rise as Kuwait and Iraq increase their output of petroleum and refined petroleum products, assuming other nations do not reduce their production levels to offset the increase.

U.S. flag carriers in the foreign trades could face improved prospects in 1992 if all of these forecasts prove to be accurate. But overcapacity and low freight rates continue to be reported as problems for the world’s fleets. A report in Lloyd’s Shipping Economist (LSE), for example, indicates that half of the total number (both inbound and outbound) of container slots in the North Atlantic liner trades is not used.

Long-Term Prospects

The long-term commercial viability of the deep sea foreign shipping sector of the U.S. water transportation industry depends on the effects of changing conditions in the world’s shipping markets. The long-term profitability of individual firms depends largely on their abilities to deliver the kinds of service their customers want, and to cover the costs of providing that service at market freight rates.

Overall, the outlook for the demand for shipping services appears favorable, with continuing trade growth forecast by several organizations. ITA estimates world import volumes will grow at rates above 5 percent per year through 1995, following the slower 3.8 percent increase in 1991.

DRI and TBS report that U.S. inbound liner trade volumes will grow about 5.2 percent per year between 1990 and 1995; outbound liner trade will grow approximately 7.1 percent annually during the same period. U.S. inbound dry bulk volumes are forecast to grow about 2.5 percent annually; outbound dry bulk volumes are estimated to increase approximately 2.3 percent per year.

DRI and TBS also estimate that U.S. inbound tanker volumes will increase approximately 3.0 percent per year between 1990 and 1995, down from the 9.7 percent annual increase reported for the 1985-to-1990 period. An LSE report indicates that many analysts expect a similar result for world oil trades: slower growth between 1991 and 1993 than in the previous five years.

On the supply side, several issues are of concern to U.S. carriers. For example, there have been many reports of excess shipping capacity, but the growth in shipping capacity forecast by DRI and TBS is lower than the ITA forecast of growth in world merchandise trade. DRI and TBS forecast the world’s oceangong merchant fleet capacity will increase by about 14 percent over five years (an average increase of about 2.7 percent per year), from nearly 677.4 million DWT in 1990 to approximately 73.6 million DWT in 1995.

Growth in world merchandise trade may not be sufficient to eliminate the shipping capacity problem since merchandise trade is carried by other transportation modes (truck, rail, air, and pipeline) as well as by water. However, to the extent that the waterborne share of the transportation services market is maintained as trade grows (or to the extent that demand for water transportation services grows faster than capacity) the surplus capacity could be reduced.

Another supply-side issue of concern to the carriers is their ability to control existing and potential costs. For example, tanker operators in the U.S. trades are concerned about the cost effects of complying with the Oil Pollution Act of 1990, which requires the eventual replacement of existing single-hull tankers and tank barges with double-hull vessels and imposes potentially unlimited liability on a carrier for an oil spill. As a result of these new regulations, some companies have indicated that they will no longer operate in U.S. foreign trade. Still others have indicated that the regulations will result in off-shore lightering (or unloading) from single-hull tankers to smaller, double-hull tankers that are qualified to enter U.S. waters.

Another issue of concern to all carriers is the burden of new or higher Federal, state, and local maritime taxes and user fees. Some carriers have claimed that these taxes and fees will result in diversion of U.S. merchandise trade through Canadian or Mexican ports.

DOMESTIC SHIPPING

The domestic sector of the water transportation industry moves cargo among points in the United States, including its noncontiguous states, territories, and possessions. With very few exceptions, Federal law requires that domestic waterborne cargoes be transported in U.S. flag ships, owned by U.S. citizens and built in U.S. shipyards.

Deep sea domestic transportation includes the coastwise, intercoastal, and noncontiguous trades, and the service boat industry. Coastwise trade refers to oceanborne movements of cargo along the contiguous 48 states’ coastlines, including trade between ports on the Atlantic and Gulf coasts. Intercoastal trade refers to oceanborne cargo movements between the contiguous states’ Pacific and Gulf coasts, and between the Pacific and Atlantic coasts. Noncontiguous trade refers to oceanborne trade with Alaska, Hawaii, and U.S. territories and possessions. The service boat industry transports workers and supplies, and provides other services for the offshore oil, gas, and mineral industries.

Great Lakes transportation, which is also called Lakewise trade, refers to waterborne movements of domestic cargoes on the Great Lakes. Inland waterways transportation refers to commercial freight movements on the nation’s rivers or intracoastal waterways systems.

Deep Sea Domestic Transportation

The deep sea sector of the domestic water transportation industry (SIC 442) carried 307 million short tons of cargo in 1989, a decrease of 7 percent from the previous year (Table 12).

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Movements of crude oil and petroleum products, which represented 83 percent of deep sea domestic traffic in 1988, accounted for 81 percent of that tonnage in 1989. Nearly one-half of the decline in the deep sea domestic trade was due to a drop in Alaska North Slope (ANS) crude oil production. ANS crude oil production, which contributes approximately one-third of all deep sea domestic tonnage, fell from approximately 2 million barrels per day in 1988 to 1.8 million barrels per day in 1989. Of the 152 ships (8.6 million DNW) active in the domestic oceangoing trades on May 1, 1991, 79 (nearly 3.1 million DWT) were operating in the coastal trades (Table 7). The remaining 73 (5.5 million DWT) were operating in the noncontiguous trades.

Tank ships and integrated tug barges comprised 77 percent (117 of 152) of the total number of vessels operating in the deep sea domestic trades. Their combined capacity of 7.8 million DWT represented about 91 percent of the active deep sea domestic shipping capacity. During 1989, tank ships and oceangoing tank barges carried approximately 260 million short tons of crude oil, refined petroleum products, and chemicals, a decrease of almost 9 percent from 1988 levels.

As of March 1, 1991, the deep sea domestic liner fleet contained 25 active ships with a total capacity of 514,000 DWT. All but two of these ships were operating in the noncontiguous trades, mainly with Hawaii, Alaska, and Puerto Rico. Two ships, each capable of carrying 1,088 passengers, were operating exclusively in the Hawaiian cruise trade.

Other deep sea domestic fleet components included 8 dry bulk ships and integrated tug/barge units aggregating 239,000 DWT. There was also a large number of conventional tug and barge combinations operating in the deep sea domestic trades. Based on U.S. Army Corps of Engineers (COE) data, domestic deep sea dry bulk and liner tonnage totalled approximately 43 million short tons in 1989. At 13 million short tons, coal and coke shipments accounted for the largest share. Shipments of nonmetallic minerals accounted for the next largest share, at 9 million short tons.

The service boat industry suffered during the first half of 1991, after experiencing a two-year recovery. Demand for its approximately 900 service and utility vessels is linked primarily to the number of active rigs in the Gulf of Mexico. As reported by the Offshore Marine. Service Association and in Offshore Fleet Economics and The Wall Street Journal, the departure of as many as 15 percent of the active rigs for potentially more profitable overseas assignments led to a decline in employment opportunities; rates of hire fell below levels that had been anticipated earlier.

Great Lakes Transportation

The U.S. steel industry generates most domestic Great Lakes cargoes, which consist mainly of coal, ore, and limestone shipments. As of April 1, 1991, the U.S. flag Great Lakes fleet contained 63 ships (61 bulk carriers and 2 tankers) with a total capacity of 1.8 million DWT. At midyear, 52 of the ships were operating.

The Lake Carriers Association reported that 1990 iron ore shipments totalled 59.6 million short tons, a gain of 4 percent from 1989. Shipments of coal increased 2 percent to 19.9 million tons, but shipments of limestone and gypsum declined 7 percent to 23.4 million tons. An increase of 18 days in the length of the navigation season contributed to the tonnage gains.

Inland Waterways Transportation

The U.S. inland and intracoastal navigation system consists of more than 25,000 miles of waterways with depths of at least 6 feet. Of that total, approximately 11,000 miles are considered commercially significant waterways, with depths of at least 9 feet.

Most inland waterways commerce moves on the Mississippi River and its major tributaries, the Gulf Intracoastal Waterway, and the Columbia/Snake River System. Based on data contained in Transportation in America, a report by the Eno Foundation for Transportation, the U.S. inland river system transports 15 to 20 percent of all domestic waterborne cargo movements, which generally consist of high weight/low value bulk commodities and raw materials.

COE data indicate that the major inland waterways cargoes include petroleum and petroleum products (40 percent of total inland waterways tonnage), coal (20 percent), grains (10 percent), and chemicals (7 percent). Energy-related products account for over 60 percent of total inland waterways tonnage.

Based on COE data, inland waterways traffic increased from 588 million short tons in 1988 to 606 million short tons in 1989 (Table 12). Including local traffic, the total amounted to 686.2 million short tons in 1989, or about 62 percent of all U.S domestic waterborne tonnage. For 1990, total inland waterways traffic is estimated to have risen nearly 2 percent to 699 million short tons.

According to The American Waterways Operators (AWO), there are approximately 800 barge operators in the inland trades, less than half the number that existed 10 years ago. COE reports that inland barge operators have a combined fleet of about 3,300 towboats, 23,000 dry cargo barges, and 3,200 tank barges, including inactive vessels. The active inland fleet totals about 3,300 towboats (nearly all towboats are active), 17,500 dry cargo barges, and 2,600 tank barges.

The capacity of this equipment is significant. A typical 1,500-ton dry cargo barge can carry enough wheat to make at least 2 million loaves of bread. And a 1,500-ton tank barge, with a capacity of nearly 500,000 gallons, can carry enough gasoline for a car to be driven around the world nearly 700 times.

Although concerns about excess barge capacity remain, the surplus could decline due to slowly rising demand and the removal or scrapping of barges. Based on data from Barge Fleet Profile (BFP), approximately 1,200 barges were scrapped between 1983 and 1987.

Even though they now have a smaller fleet, inland waterway carriers handle more tonnage, average more trips annually, and experience less downtime than they did 10 years ago. Industry sources credit the increased efficiency to the reduction of delays at certain locks and dams, and to better communications systems.

Outlook for 1992

Opportunities for the domestic sector of the U.S. water transportation industry are directly related to the performance of the national economy. The forecasts assumed for this book is for an increase of about 3 percent in real GNP in 1992, with increases in real investment and consumer spending contributing more than two-thirds of that growth.

The domestic shipping industry also responds to world events. For example, the Journal of Commerce (JOC) reports that some carriers which operate in the deep sea domestic trades may divert or reactivate some of their capacity to carry construction materials to Kuwait.

In another JOC report, U.S. steel producers indicated that they hope to increase export sales again in 1991, as has happened every year since 1987. If this trend continues into 1992, and if an increase in U.S. steel exports results in increased steel production next year, then the Great Lakes carriers who transport domestic materials to U.S. steel mills could benefit.

Long-Term Prospects

Shipments of crude oil, petroleum products, chemicals, coal, grain, iron ore, and limestone comprise the bulk of domestic waterborne cargoes. Events that affect the domestic markets for any of these commodities or raw materials directly affect the domestic water transportation industry.

According to reports that have appeared in JOC, the outlook for Lakewise shipments of Western coal is favorable. JOC cites the tougher U.S. pollution standards to take effect in 1995 and greater interest from potential European buyers as sources of increased demand for low-sulphur coal. U.S. flag Great Lakes carriers may benefit from the expected increase in shipments.

COE estimates that the amount of tonnage carried on the inland waterways system will grow between 0.7 and 2.1 percent annually through the year 2000. No significant changes are expected in the types of cargoes handled.

The realization of anticipated public investments could help improve inland waterways carriers’ productivity and reduce their operating costs. For example, nine new navigational structures, including locks and dams, are scheduled to open between 1991 and 2000. The current estimated cost of these structures is $2.6 billion.

Many barges are approaching the end of their economic lives. BFP estimates that the typical tank barge is 15 to 20 years old; the typical dry barge is slightly newer. However, given current freight rates and operating costs, many barge operators have reported that their profit margins are neither high enough nor stable enough to justify purchases of new equipment, particularly in view of the remaining (but smaller) excess capacity. Consequently, fleet modernization may continue to be postponed except in those cases where it is necessary, such as the replacements required to begin as early as 1995 by the Oil Pollution Act.

Domestic carriers are concerned about a number of other issues related to their long-term costs and profitability, with the combined effects of current and proposed Federal regulations perhaps chief among them. For example, more demanding regulations have been proposed in Congress concerning hazardous materials, waste disposal, vapor recovery, crewing requirements, and vessel inspection, any of which could affect operators’ costs and profits. In addition, domestic carriers are concerned about possible unfavorable impacts of maritime taxes and user fees, the condition of the nation’s inland waterways infrastructure, and current and potential legislation and litigation over water rights.

Additional References

Census of Transportation, Bureau of the Census, U.S. Department of Commerce, Washington, DC 20233. Telephone: (301) 763-4100 for information about how to order Census documents). Source Book, Statistics of Income, Corporation Income Tax Returns: 1988, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224. Corps of Engineers, U.S. Department of the Army, 20 Massachusetts Avenue, NW, Casimir Pulaski Building, Washington, DC 20314. Telephone: (301) 436-2063. International Trade Administration, Office of Finance, Industry and Trade Information, U.S. Department of Commerce, Washington, DC 20230. Telephone: (202) 377-5145. Barge Fleet Profile for the Mississippi River System and Connected Waterways, Leeper, Cambridge & Campbell, Inc., 1051 Marie Ave. West, St. Paul, MN 55118. Telephone: (612) 454-0607. Containerisation International, National Magazine Company Ltd., 72 Broadwick Street, London, WIV 2BP, United Kingdom. Telephone: 071-439-5000. Fairplay, Fairplay Publications Ltd., 20 Ullswater Crescent, Ullswater Business Park, Coulsdon, Surrey CR5 2HR, United Kingdom. Telephone: 081-660-2811. Jane’s Containerisation Directory, Jane’s Information Group, Sentinel House, 163 Brighton Rd., Coulsdon, Surrey CR3 2NX, United Kingdom. Telephone: 081-763-1030. Journal of Commerce, 120 Wall Street, New York, NY 10005. Telephone: (212) 208-0370. Lloyd’s Shipping Economist, Lloyd’s of London Press Ltd., One Singer Steel, London, EC2A 4LQ, United Kingdom. Telephone: 071-250-1500. Offshore Fleet Economics, Offshore Data Services, Inc., P.O. Box 19909, Houston, TX 77224-9909. Telephone: (713) 781-2713. Shipping Statistics and Economics, Drewry Shipping Consultants Ltd., 11 Heron Quay, London E14 4JF, United Kingdom. Telephone: 071-538-0191. Transportation in America, Eno Foundation for Transportation, Inc., P.O. Box 2055, 270 Saugatuck Avenue, Westport, CT 06880-2055. Telephone: (203) 227-4852. The Waterways Journal, 319 North Fourth St., 666 Security Building, St. Louis, MO 63102. Telephone: (314) 241-7345. Work Boat, Journal Publications, 120 Tillson Avenue, Suite 201, P.O. Box 908, Rockland, ME 04841-0908. Telephone: (504) 626-0298. World Sea Trade Service, DRI/McGraw-Hill, Inc. and Temple, Barker & Sloane, Inc.; DRI/McGraw-Hill,Inc., 24 Hartwell Ave., Lexington, MA 02173; Temple, Barker & Sloane, Inc., 33 Hayden Ave., Lexington, MA 02173. Telephone: (617) 863-5100. The American Institute of Merchant Shipping, 1000 16th Street, NW, Washington, DC 20036. Telephone: (202) 775-4399. The American Waterways Operators, 1600 Wilson Boulevard, Arlington, VA 22209. Telephone: (703) 843-9300. Lake Carriers Association, 614 Superior Avenue West, 915 Rockefeller Building, Cleveland, OH 44113-1383. Telephone: (216) 621-1107. Offshore Marine Service Association, 1440 Canal Street, New Orleans, LA 70112. Telephone: (504) 566-4577.

COPYRIGHT 1992 U.S. Department of Commerce

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