Transportation services - 1991 U.S. Industrial Outlook

William C. Johnson

Transportation Services

Prospects for these industries depend heavily on the course of the economy. Stiffer competition and higher fuel prices promise a period of turbulence for the air transport industry. The trucking industry remains the largest segment of the total U.S. freight transport market. Growing competition within the industry and with other transport modes is keeping pressure on rates, and hence on revenue growth. Rail traffic volume is expected to be relatively flat, but Amtrak passenger miles should grow 3 percent. Slower economic growth and a weaker dollar will restrain the growth of U.S. liner import cargoes.

AIRLINES

The U.S. commercial airline industry (SIC 451 and 452) consists of approximately 230 carriers providing scheduled, charter, and on-demand transportation services for passengers and cargo. Of these firms, 72 primary carriers operate fleets of aircraft with more than 60 seats, a maximum payload of more than 18,000 lb., or conduct international operations and provide the vast majority of all U.S. service (Table 1). [Tabular Data Omitted]

Air travel increased significantly in the first half of 1990. Major carriers increased revenue passenger miles 7.9 percent in the first half, compared with the same petition in 1989. Load factors declined, however, as available seat miles increased 8.5 percent. Total passenger enplanements for the industry declined 0.2 percent. However, the average trip was longer, with substantial increases in international travel.

After having risen more than 20 cents per gallon above summer 1989 prices, fuel costs declined during the first seven months of 1990 to approximately the level of a year earlier. Prices peaked in January 1990, reaching 78 cents a gallon. High fuel prices in early 1990 hurt airline earnings, as they had in the latter part of 1989.

Quoted air fares increased 11.4 percent between July 1989 and July 1990, but much of this increase was dissipated by substantial fare discounting. Operating revenues for majors and nationals increased $2.7 billion during the first half of 1990 over the same six months of 1989, but operating expenses increased almost $4 billion for the period. As a result, operating profits decreased from $1.3 billion to only $24 million and produced a net loss of $ 147 million. The second quarter, however, showed improvement over the first quarter with net profits of $458 million as opposed to net losses of more than $600 million the previous year. The second half of 1990 brought substantial uncertainty, with jet fuel prices doubling during the Gulf crisis. The airlines have found it necessary to raise fares to meet these costs, thus discounting air travel. At the same time, however, the carriers have found it difficult to maintain the fare increases, especially for discretionary travel during a generally slowing economy. The industry could see net losses well above $1 billion for the year.

Regulations that controlled virtually every economic facet of U.S. commercial aviation were eliminated in 1977-78, and the reverberations continue to be felt both here and abroad. In the first years following deregulation, the industry expanded rapidly, not only in capacity and frequency of flights, but also in the number of firms offering service. Today, overall system capacity remains high, but the number of primary and secondary carriers has declined. Passenger service to many smaller communities is being curtailed and fares have gone up. Many airlines have ceased operations altogether; many others have merged. Marketing alliances are being formed among domestic carriers and with foreign airlines, and new routes and services are constantly being created. While merger activity abated during 1989-90, outside pressure has developed from entities interested in acquiring control of several of the now asset-rich major carriers.

As a further consequence of deregulation, the basic concepts that define aviation relations between the United States and many other countries are shifting, perhaps moving ever more closely to "open skies" free market competition. Discussions between the United States and Canada are to begin in 1991 to open the two countries' air transport markets and provide increased cross-border flights. This would bring benefits to the tourism industry as well as to business and pleasure travelers. Similar discussions have begun between the United States and the European Community, whose 12 member nations are moving toward integrating their economies in 1992.

The "Unserved Cities Program" that permits the airline of a bilateral aviation partner to provide service from its home country to a U.S. city that does not have international service between the two points has brought international service to previously unserved routes without the need to renegotiate bilateral aviation agreements.

The air transport industry had an operating profit (revenues on flight operations less direct operating expenses) on domestic and international flights of $1.9 billion in 1989, a decline of $1.6 billion from 1988. Operating expenses rose $8.7 billion to $69.7 billion, a 14.3 percent increase, while operating revenues increased $7.1 billion to $71.6 billion. Contributing on the passenger side to the industry's increased revenue was a 2.2 percent increase in revenue passenger miles (RPMs, a measure equivalent to carrying one paying passenger one mile) to a total of 447.4 billion. Freight ton miles (a measure of cargo carriage equal to one ton carried one mile) increased 11.6 percent to a total of 16.3 billion, as total freight revenues increased 17.2 percent to almost $16 billion, improving yield per ton mile.

The four largest passenger carriers, American, United, Delta, and Northwest, along with Federal Express - the largest cargo carrier - generated operating profits of $2.59 billion, more than the industry total. American contributed $731 million, down 8.7 percent from last year; United $457 million (down 27 percent); Delta $676 million (up 29 percent); Northwest $290 million (up 48 percent); and Federal Express $434 million, a decrease of $134 million (24 percent). The latter figures represent the combined operating profit of Federal Express and Flying Tigers, which Federal Express acquired last year. The industry's operating profits were partially offset by losses of other carriers. Eastern absorbed an $865 million (up 204 percent), and U.S. Air, which had an operating profit of $427 million in 1988 (the combined operating profits of U.S. Air, $283 million, and Piedmont, $144 million) lost $228 million in 1989.

According to FAA data, the industry's net profits (operating profits less taxes and debt service) totaled $440 million in 1989, down $1.25 billion from $1.7 billion in 1988. Although Delta's operating profit was some $54 million lower than that of industry leader American, it enjoyed the industry's largest net profit last year - $473 million. American reported a net profit of $423 million, United $358 million, Delta $473 million, and Federal Express $125 million. These five carriers plus Continental and newcomers Southwest and America West were the major carriers that generated both operating and net profits in 1989. TWA produced a small operating profit of $24 million but a net loss of $299 million. Continental, which had a net loss of $316 million in 1988, moved to the profitable side in 1989 with a $3 million net profit. Southwest increased its operating profit 14 percent, from $86 million in 1988 to $98 million in 1989, and improved its net profit almost 25 percent, from $57 million to $71 million. America West saw its operating profit grow from $18 million to $48 million, and net profit more than double from $9 million to $20 million. The top two net earners, Delta and American, accounted for half of the net profits generated by the seven profitable majors. Eastern, with net losses of $852 million, accounted for half the net losses of the four majors. The other majors with net losses were Pan Am ($415 million), TWA ($299 million), and U.S. Air (138 million).

Passenger Service

U.S. major passenger carriers posted a combined operating profit for the first half of 1990, but just barely. The 11 major passenger carriers had a combined first-half operating profit of just under $70 million. For the first-half of 1989 combined operating profit was $1.2 billion. The 11 majors posted a first-half 1990 net loss of just over $66 million, compared with a net profit of $416 million for the first six months of last year. The operating profit of the majors declined because their higher operating revenues were outstripped by increased operating expenses. Thus, although operating revenues increased 8 percent, from $28.7 billion to $31 billion, operating expenses jumped 12 percent, from $27.5 billion to $30.9 billion.

The four carriers with large net losses in 1989 continued to have substantial net losses in the first half of 1990: Eastern ($172 million), Pan Am ($240 million), TWA ($40 million) and U.S. Air ($113 million) U.S. Air, which had a $116 million net profit in the first half of 1989 (but a loss for the full year) had the greatest decline, $229 million, for a net loss of $113 million. The seven major carriers with net profits continued to show positive numbers, but only Continental had an increase in net profits for the first six months of 1990 ($118 million) over the first half of 1989 ($16 million). Net profits of the remaining six carriers declined $535 million in the first half of 1990, from $916 million in the first half of 1989 to $381 million.

Revenue passenger miles flown on international and domestic routes by all scheduled carriers increased 2.2 percent during 1989, to a total of 433 billion. Through the first eight months of 1990. RPM's for the 11 majors totalled 300.4 billion, an increase of 21.4 billion, or 7.7 percent, over the corresponding eight-month period in 1989.

As a result of the expansion of the airline industry's capacity to transport passengers in the years followed deregulation, most carriers struggled to fill their aircraft. They often restored to massive discounting to attract new customers, regardless of the consequences. For many, the outcome was bankruptcy and failure.

The major passenger carriers have increased their passenger enplanements to the point where load factors (a ratio of RPMs to seat miles available for occupancy, or ASMs, that reflects how many of the available seats were actually producing revenue), reached 62.9 percent in calendar 1988 and 63.5 percent in 1989. In the first eight months of 1989, the load factor was 64.7 percent. By the end of August 1990, the majors had a total of 469.2 billion seat miles available on the market during the 8-month period, an increase of 8.7 percent over the previous span. Load factors declined to 64.0 percent. This, along with increasing costs put pressure on airlines profits. Load factors are normally lower in the fall, except during the year-end holidays.

Cargo Service

Revenues from cargo service are relatively small compared with revenues generated by passenger service, but they are increasing rapidly. The industry generated total cargo operating revenues of $8.9 billion in 1989, an increase of $1.4 billion, or 18.5 percent. Freight revenue ton miles increased 6.7 percent to 10.3 billion. One air freight carrier, Federal Express, earned $5.8 billion - almost two-thirds of the industry total - carrying 40.4 percent of the freight ton miles (FTMs). The 11 major passenger carriers moved 5.8 billion FTMs, or 56 percent of the total, and in 1990 increased their market by 1.1 percent. The gain was at the expense of Federal Express, whose market share declined 1.3 percent.

New programs being implemented by some of the combination carriers to strengthen their presence in the market appear to be having an effect. Among the passenger airlines, the top four cargo carriers in 1989 were American, Pan Am, United, and Northwest. All four increased their FTMs, with a combined growth of 416 million revenue freight ton miles to 4 billion FTMs, an 11.5 percent increase over 1988.

INTERNATIONAL COMPETITIVENESS

The decline in the value of the dollar has made the United States a bargain for foreign tourists. The airline industry is profiting from this situation. Interest remains strong among both U.S. passenger and cargo carriers to expand service abroad, so much so that some carriers have begun to argue for a relaxation of the bilateral agreements between national governments that establish - and frequently artificially restrain - the terms under which airlines are allowed to serve international routes.

A strong increase in international RPMs (up 9.3 percent in 1989) contributed almost all the gain in the year's overall RPM increase. Domestic RPMs rose only 0.2 percent. International enplanements increased 5.5 percent in 1989, to 37.4 million. Through the first eight months of 1990, the scheduled airline industry's international traffic rose 16.9 percent to 79.6 billion RPMs from 68.1 billion RPMs, while capacity increased 11 percent to 111.7 billion ASMs from 100.9 billion ASMs for the corresponding eight months in 1989. The international load factors was 71.2, up from 67.5 during the first eight months of 1989. The number of passenger enplaned in international service increased 13.4 percent, from 24.8 million to 28.2 million.

Measured on a fiscal-year basis ending September 30, 1990, available seat miles, revenue passenger miles, load factors, and enplanements rose for air travel to all regions of the world. Growth on Pacific routes was phenomenal, with ASMs, RPMs, and enplanements all growing more than 20 percent and the load factor increasing to 71.9. On Atlantic routes the enplanements grew 7.2 percent to 16.1 million, and RPMs increased 8.9 percent to 53.5 billion. The load factor jumped 4 points to 69.7, since ASMs only increased 2.7 percent. On routes to Latin America, enplanements grew 9.5 percent to 12.9 million. Passengers travelled 15.9 billion RPMs on the 25.6 billion ASM, both increases of approximately 8 percent. The load factor rose 0.2 to 62.1.

Revenues earned by U.S. carriers for transporting foreign nationals are reported as U.S. receipts (i.e., exports) for determining the U.S. balance of payments, while revenues paid to foreign airlines by U.S. passengers are treated as U.S. payments (imports). Within this parameter, the U.S. Travel and Tourism Administration and the Bureau of Economic Analysis, both agencies of the Commerce Department, have formulated a survey method for estimating these transactions. Based upon this methodology, U.S. receipts for 1984-88 increased from $4 billion to $8.8 billion. Payments grew from $5.6 billion to $7.6 billion. For 1989 receipts rose another $1.3 billion to $10.1 billion, while payments rose only $600 million to $8.2 billion. Negative balances in the period 1984-86 have turned positive, increasing to a surplus of $1.9 billion in 1989.

Outlook for 1991

Several major factors make it difficult to project the flight path of the industry through 1991 or where it will be by the end of the year. These include the situation in the Middle East, with its effect on aviation fuel; the extent of the general slowdown that is developing in the economy; and the ability of air carriers to raise fares to meet increasing costs.

As the second largest industrial user of petroleum products after trucking, the airline industry's fortunes rise and fall with oil prices. Because airlines are also particularly vulnerable to recession, the industry can be doubly hurt if rising energy prices also lead to a general economic slowdown.

An increase of one cent per gallon for aviation fuel costs U.S. airlines an extra $160 million on an annual basis. During the period prior to the Iraqi invasion, airlines had been paying less than 60 cents per gallon. By the fall of 1990, carriers were paying as much as $1.20 per gallon and were regularly paying in excess of $1.00. If prices were to remain at approximately $1.00, 40 cents above the pre-August 2 price, U.S. air carriers would pay an additional $6.4 billion per year for fuel. This is almost double the airlines' operating profit in 1988, and more than triple the operating profit in 1989. It is also 15 times 1989's net income, and equal to about 9 percent of the year's total operating revenues.

Such a cost increase would be difficult for airlines to absorb in the best of times, but if the economy slows it will be even more difficult. Increases in air fares have been difficult to put in place. Even when fare increases have been published, substantial discounting has occurred as carriers try to gain market share or seek to increase cash flow. Higher prices for tickets also discourage travel, especially leisure travel, when the economy is weak. This will increase pressure on carriers to discount tickets.

If the Middle East crisis is resolved - leading fuel prices to fall to the lower levels prevailing in the spring of 1990 - and the economy remains relatively firm, the airline industry could see a breakeven or better year if some of the fare increases put in place hold firm. If the increases do not hold, the industry could suffer net losses, although the stronger carriers would remain profitable.

Higher oil prices and a weakening economy may lead to a shakeout of the airline industry, sending weaker carriers into bankruptcy or into the arms of stronger carriers. Eastern is already under the protection of the bankruptcy court as it tries to work its way out of financial troubles. To raise operating funds, Eastern has already sold its Latin American routes and its shuttle service. Other carriers also are raising cash by selling off valuable assets. Pan Am has sold its Inter-German Service to Lufthansa and has announced its intention to sell its routes between five U.S. cities and London to United, a year after selling its Chicago to London routes. Midway sold 14 takeoff and landing slots at National and LaGuardia and its Philadelphia hub operation.

With the dollar remaining stable or declining slightly, the international travel market remains bright, with continued growth in travel to the U.S., especially from Europe and Japan. The international freight market should continue to grow as American goods remain attractively priced to foreign buyers.

Long-Term Prospects

The nation's general economic trend usually serves as a good yardstick for the airline industry, whose profits and losses closely track periods of growth and recession.

The U.S. commercial aviation industry has now entered a new phase of the deregulation process - globalization. This, combined with other free market movements around the world, could lead to creation of multinational megacarriers. The race is now on among the world's carriers to see which of them can put together the most effective global system. The strategies include marketing agreements, code sharing, and/ or equity stakes in other carriers.

Commercial carriers can be expected to continue to expand their present hub systems and to develop new secondary hubs at medium and small airports.

Despite somewhat slower growth and lower profits during the next year or two the airline industry is expected to resume its growth into the next century. Along the way, there will be some periods of relatively rapid expansion and profitability and other periods that are slower. - C. William Johnson, Office of Service Industries, (202) 377-5071, October 1990.

Additional References

Air Transport 1990, The Annual Report of the U.S. Scheduled Airline

Industry, Air Transport Association of America, 1709 New York

Avenue NW, Washington, DC 20006. Telephone: (202) 626-4175. FAA Aviation Forecast, Fiscal Years 1990-2001, March 1990, Federal

Aviation Administration, U.S. Department of Transportation, Washington,

DC 20591. Telephone: (202) 267-3355. Air Transport World, 1030 15th Street NW, Washington, DC 20005.

Telephone: (202) 659-8500. Aviation Daily, 1156 15th Street NW, Washington, DC 20005. Telephone:

(202) 822-4649. Aviation Week & Space Technology, 1777 North Kent Street, Arlington,

VA 22209. Telephone: (212) 512-2000.

TRUCKING

The trucking industry can be differentiated in numerous ways: for-hire carriage vs. private carriage, regulated vs. unregulated, interstate vs. intrastate, etc. There are also distinctions within these subsectors, such as ICC-regulated, or truckload (TL) and less-than-truckload (LTL). This chapter focuses on the entire industry as well as on selected subsectors.

For-hire trucking may be further distinguished by TL, LTL, small package, and package express markets. These markets denote four broad arenas in which trucking firms compete with each other, as well as with railroads, barges, and airlines. TL traffic constitutes the largest motor carrier market. A TL shipment is typically hauled directly from sender to receiver, without going through sorting terminals. The freight ranges from finished goods to raw materials. Depending upon the commodity, railroads, barges, and combinations of truck-rail, truck-barge, and rail-barge also compete for TL freight.

Small package includes the 2-to 3-day delivery market long defined by and dominated by United Parcel Service (UPS). The next-day delivery market, sometimes referred to as "package express," is dominated by air freight carriers such as Federal Express. However, truck service is a crucial element of the package express business, and both small package and package express markets are now fiercely contested by firms traditionally viewed as trucking companies. An example is UPS's rapidly growing overnight air division.

The Interstate Commerce Commission (ICC) defines the LTL market as shipments under 10,000 lb. The average shipment weighs about 900 lb. and typically involves five separate activities: local pick-up; sorting at a terminal facility; line haul; sorting at a destination terminal; and local delivery. Operationally, the LTL market resembles the package markets: with use of regional or national networks, sophisticated sorting terminals, and local pick-up and delivery service. A key difference is that package carriers pick up and deliver using drivers with hand trucks or metal dollies, instead of using trucks that are backed up to loading docks. Many LTL carries historically handled packages merely as a variant of their smaller LTL business, but much of this traffic is now captured by the specialized package carriers.

In terms of revenue, the trucking industry easily remained the largest segment of the total U.S. freight transport market in 1990. Reflecting trucking's higher revenues per ton and per ton-mile than either barge or rail movements, the trucking industry's ton and ton-miles make up a smaller share of U.S. domestic freight market (Table 2). [Tabular Data Omitted]

Besides pressure from other modes, the trucking industry itself is intensely competitive, with existing firms expanding and new ones entering the industry. Entry and resulting competition among ICC-regulated carriers is particularly noticeable under the deregulatory impetus of the Motor Carrier Act of 1980. ICC operating authority for companies with annual revenues under $1 million grew from 14,610 in 1980 to 40,384 in 1989, an increase of 275 percent. This figure had increased by another 1,500 through July 1990.

Figures showing entry by new carriers considerably understate the industry's competitive intensity, however. For example, total ICC Class I and II carriers decreased 27% from 3,435 in 1980 to 2,513 in 1989. But ICC figures on contract carriage, 48-state operating authority, and the number of brokers paint a more complete picture, with implications for the ICC subsector and the industry as a whole. Contract authority not only allows carriers to tailor specific service standards to individual shippers, but the fact that contract rates need not be filed at the ICC allows - and often forces - carriers to engage in aggressive rate cutting to secure shipper business. Although contract authority was once a small percentage of total permits, in 1990 nearly 75 percent of the entire ICC-regulated subsector held both common and contract operating authority. Similarly, whereas 48-state operating authority was held by only a few carriers in 1980, some 10,000 grants were in effect near yearend 1990. Since 1980, virtually all the major ICC-regulated LTL carriers have obtained 48-state authority, permitting them to aggressively expand into each other's markets. Finally, the number of ICC-licensed brokers continues to increase dramatically. Brokers match shippers with carriers, constantly booking freight reservations and generating powerful competitive pressures throughout the industry. Prior to 1980, fewer than 100 brokers were licensed by the ICC to "arrange" interstate movements of freight by motor carriers. In 1990 there were more than 6,500 licensed brokers, with 9,500 permits outstanding.

Trucking industry output has paralleled overall growth in the U.S. economy. Reflecting substantial productivity increases, employment has increased at a somewhat slower pace. In 1989, total industry employment was estimated at 2.9 million, a 10 percent increase over 1980. In 1990, employment was approaching 3 million. The mix of employment categories within the industry, such as the number of drivers versus the number of cargo handlers, varies considerably among industry subsectors. Among TL carriers, which have no sorting terminals, drivers make up an estimated 65 percent of the workforce. Among LTL carriers, drivers and helpers account for about 40 percent of the workforce (Table 3). [Tabular Data Omitted]

Although "truck" freight can be hauled in nearly any sized vehicle, Class 8, 7, and 6 vehicles are considered the industry's workhorses. As in 1989, the 1990 heavy (8) and medium-duty (7,6) truck sales figures were headed lower from year-earlier levels. Sluggish traffic levels and concern about a possible recession apparently contributed to carriers' caution about new capital expenditures (Table 4). [Tabular Data Omitted]

Financial Highlights

Freight traffic levels for all modes generally move in concert with broader economic activity. Predictably, a recession in the early 1980s sharply reduced demand for truck service. Conversely, the past eight years of virtually uninterrupted economic growth increased ton and ton-mile levels and attendant demand for motor carrier service.

The freight sector's relatively secure link to a historically growing U.S. economy generally ensures growth in demand for motor carriers' basic unit of output: a ton-mile, or one ton of freight hauled one mile. Revenues, operating margins, and net profits, however, do not always mirror this growth. Performance in 1990 was illustrative. Continuing new entry, changing market strategies among existing carriers, competition from railroads, and even growing competition from foreign freight carriers continued to pressure the industry's financial performance.

To the extent that the ICC's top 100 LTL and TL carrier results indicate industry-wide performance, 1990 real revenues per ton declined. In the first quarter of 1990, the top 100's year-to-year tonnage increased 4.2 percent to 44 million tons, but operating revenues grew only 6.3 percent. Adjusted for inflation, the nominal increase represented nearly a 2 percent real revenue per ton decrease.

Individual rate data, as opposed to figures derived from aggregate revenues, are monitored less closely in the motor carrier industry. Nonetheless, assertions of rate softening, evident in late 1989, were again widespread throughout the first quarter of 1990; constant-dollar declines in industry aggregate figures confirmed the claims. By mid-1990, however, year-earlier comparisons were less discouraging, and some rate firming was being reported.

Rates on some ICC-regulated traffic are initially set collectively by rate bureaus that enjoy limited antitrust immunity. However, even these rates are subject to severe downward market pressure, evidenced by individual carriers that often file discounts from approved general rate increases. Trade literature suggested discounting was again pervasive in 1990, especially during the first quarter.

In terms of revenue share, the ICC's top 100 carriers were performing in 1990 much as in 1989. Based on preliminary, annualized six-month figures, the top 100 accounted for approximately $34 billion of an estimated $73 billion ICC-regulated sector. Actual figures for 1989 are shown in Table 5.

Within these various subsectors, familiar names dominated. Three carriers led the LTL market: Yellow, Consolidated Freightways (CF), and Roadway. Each company had combined revenues in excess of $2 billion in 1989, although CF's and Roadway's subsidiaries contributed substantially to their totals.

As in prior years, revenues among ICC top 100 non-LTL general freight carriers varied widely, with 18 firms showing projected 1990 revenues above $200 million each. According to 1989 full-year figures, North American Van Lines led household goods carriers with $792 million in gross revenues; J.B. Hunt led TL general freight carriers with $510 million; chemical hauler Mattlack had $214 million; and auto hauler Anchor Motor Freight generated $257 million.

Growing expenses have compounded the problem of soft rates. In the ICC regulated LTL sector, labor, including executive and management salaries and employee fringe benefits, remain the largest expense category, or about 61 percent. Like many other expense categories, LTL labor costs are also increasing faster than rates (Table 6). [Tabular Data Omitted]

Because TL carriers are largely non-union and operate without terminals, labor takes up a smaller percentage of total operating costs, or about 40 percent.

Annual compensation varies considerably among employee types. Drivers in the heavily unionized LTL sector receive about $35,000 per year. A Bureau of Labor Statistics hourly figure of $11.65 (July 1990) suggests $23,000 in annual compensation for trucking and trucking warehouse employees. But this figure represents an industry-wide composite that includes numerous non-union drivers and other personnel.

The Teamster's National Master Freight Agreement (MFA), up to renwal in 1991, represents an estimated 200,000 members of the trucking industry. This is down from approximately 300,000 in 1980. Similarly, the number of carrier signatories to the MFA has declined, from about 600 in 1990 to 34. (The International Brotherhood of Teamsters (IBT) represents an estimated 1.6 million individuals, including those in non-trucking sectors of the economy.) At UPS, in contrast, the number of workers represent by the Teamsters has increased from approximately 80,000 to more than 140,000 since 1980. The UPS agreement, however, is separate and tailored to the company's need for seasonal and part-time workers. The three-year UPS agreement was renewed in 1990, granting 50-cent hourly increases a year to the existing average driver pay of $16.24 per hour. The UPS agreement also retained considerable work-hour flexibility in the company's rapidly growing air freight division.

INTERNATIONAL COMPETITIVENESS

Growth in foreign trade potentially increases the number of shipments required to move goods. As part of the expanding trade-related transport, there are 1,700 so-called maquiladoras, or border town plants, in northern Mexico that assemble largely U.S.-made components into products returned to this country and sold here and abroad. Substituting transportation of parts and unfinished goods for labor expense helps keep production costs low. Demand for U.S. truck service (and other modes) increases as a result. The trucking industry also benefits when U.S. carriers gain access to foreign markets. A prime example is the recent opening of Canadian markets to U.S. truckers.

The European Community's (EC) single market plan for 1992 also represents a modest new opportunity for U.S. truckers. (Some 280 directives from the EC's 1985 treaty meeting should be codified by yearend 1992 and are scheduled to take effect January 1, 1993.) To the extent that the EC agreement lowers production costs and increases European consumers' disposable incomes, European export and import trade should grow. Freight carriers in the U.S. would participate in the resulting traffic movements. In addition to transport to and from Europe, the EC agreement should produce more freight transport within Europe. EC and non-EC transport carriers are positioning themselves by merging, forming marketing alliances, and - to a more limited extent - expanding operations. U.S. air cargo, package express, and small-package carriers have led the way in seizing new opportunities in Europe. But traditional trucking firms like Consolidated Freightways, Yellow, and Roadway are also establishing a presence there. Opening American transport markets to foreign operators introduces additional, albeit limited, competition. Canadian and Mexican motor carriers are examples, competing in both the LTL and TL sectors, for example. Additional capacity can also come from foreign ocean carriers that own double-stack containers. Although foreign (and domestic) ocean carriers routing double-stack freight from West Coast ports to central and eastern U.S. cities behave largely transport customers (i.e. shippers), they often solicit backhaul freight to fill available container space. In this fashion, they compete with truckload carriers much as railroads do.

Foreign firms may also acquire U.S. carriers, or merge and enter marketing agreements with them. No new capacity is introduced under these circumstances, but sophisticated foreign firms can bring global transport expertise and financial resources that compete with U.S. carriers outside the foreign firm's corporate alliance. (U.S. carriers allying with such firms would presumably benefit from these arrangements.) The growing number of international carriers - U.S. and foreign - with multiple mode freight-carrying capacity is evidence of these evolving global carriers. U.S. firms such as APC, CSX, and Roadway, and foreign firms such as TNT of Australia, British Airways, and Maersk of Denmark are examples.

Mexico deregulated its domestic trucking in 1989, adopting policies designed to yield many of the far-reaching benefits achieved initially by the U.S. in 1980 and Canada in 1988. Internationally, although much progress remains to be achieved, activity on the Mexico-U.S. bilateral front has increased dramatically during the last two years. For transport into the interior, Mexico still requires U.S. truckers to use Mexican drivers and tractors when reaching the border; thus U.S. operating authority into Mexico's interior is essentially non-existent. As a consequence of these restrictions, the 1982 moratorium on full Mexican carrier operating authority in the U.S. remains in effect, even though the U.S. offers certificates of registration (CR) for virtually unlimited authority in the U.S. commercial zone along the border. More than 2,600 Mexican carriers hold certificates of registration, but only 11 hold full ICC operating authority.

Nonetheless, recent progress is impressive. Serious dialogue on transportation issues has been established and efforts to reduce border delays have been undertaken. In October 1990, Mexican government officials expressed their intent to allow any ICC-authorized U.S. motor carrier to fully serve a 26-kilometer border zone within Mexico. The $50 billion in annual trade between the U.S. and Mexico represents a level of economic activity that carriers in both countries have a stake in capturing. Consequently, even without further political progress, firms have incentives to continue forming marketing and other corporate agreements with their cross-border counterparts. Given the encouraging progress at inter-governmental levels, however, eventually, such marketing agreements may largely be replaced by single-firm through operations. Moreover, these transport developments could occur even before a full bilateral trade agreement is signed.

Outlook for 1991

Despite slow traffic growth and a soft rate environment, improved service holds the promise of revenue growth. Markets offering next-day and second-day delivery are quickly maturing, as competition in the $10-overnight package express service indicates. However, same-day delivery markets for express, small package, and even larger freight have room for growth. The total size of these markets is unclear and operational constraints are numerous; nonetheless, same-day is a premium service that should permit selected companies to sustain high margins for several years.

Companies with improved shipment tracking capabilities are also well positioned. These systems, which track individual shipments and vehicles, can entail considerable expense, and they will soon be a must for serious competitors. Nonetheless, they provide entre to the high-service, higher margin end of the market. It is estimated that over the past decade the intensely competitive environment resulting from transportation deregulation has produced up to $65 billion annually in reduced logistics outlays: $30 billion in savings from reduced inventory storage, and about $35 billion less in freight payments. Motor carriers account for more than $25 billion of these reduced freight payments, and more reliable motor carrier service has permitted growth in "just-in-time" manufacturing processes and led to much of the inventory savings. Whatever the marketing advantage carriers gain by applying advanced technology systems, use of the system produces efficiencies and improves U.S. global competitiveness.

Other opportunities for revenue growth will be scarce, at least in domestic markets. The ATA's Regular Common Carrier Conference, a trade organization representing some traditional LTL carriers, has urged the ICC to consider establishing minimum rates to cushion reportedly fierce price competition. However, "reregulation" of rates is unlikely in an economy increasingly driven by global market pressures. Instead, shippers are likely to enjoy a buyer's market in which soft rates are common.

Nor is the four-year old "filed tariff" debate likely to generate higher revenue for existing carriers. Even if shippers are forced to pay disputed past rate bills according to filed tariffs - not on the basis of lower, unfilled rates supposedly negotiated in good faith - most payments would accrue to the creditors of failed firms. To avoid future disputes, rate negotiations presumably will be strictly recorded in filed ICC tariffs or between parties in the form of written contracts. Thus, neither past resolutions nor future accommodations would provide existing carriers a substantial revenue windfall.

Overall, little increase in the total real revenue pie - either from more traffic or higher rates - is expected. Instead, most revenue opportunities will arise from shifts in market share among existing competitors as the industry shakeout continues. Further intrastate deregulation might also affect revenues. Despite a decade of interstate motor carrier deregulation, surprisingly few states have fully removed their own economic regulatory barriers - restrictions on entry, routes, commodities, rates, and so forth. The U.S. Department of Transportation has identified 15 states with moderate, some 27 states with strict, and only 8 states with virtually no economic regulation of motor carriers. Federal pre-emption of state motor carrier regulation, a policy encouraged by some package express companies, would dismantle state barriers and create revenue opportunities for truckers and package express firms that are not fully participating in those markets. The probability of such legislation is growing; it could be included in the 1991 highway reauthorization bill.

Perhaps the greatest opportunity for cutting costs rests with legislation for raising size and weight limits on the 45,000-mile Interstate Highway System. Although numerous exceptions exist, the basic weight limit on the interstate is currently 80,000 lbs. gross vehicle weight (gvw), a limit made uniform by the Surface Transportation Assistance Act of 1982. This law also allowed 48-ft. single trailers and vehicle combinations of twin 28-ft. trailers. With heavy trucks typically weighing 33,000 lb. empty, the 80,000 lb. gvw limit means freight capacity of over 40,000 lb. (20 tons). Some states already allow twin 48-ft. trailers, triple 28-ft. trailers, and other longer vehicle combinations. Consistent with Bridge Formula B, which establishes axle load limits, Twin 48's (with 9 axles) have a gvw of 134,000 lb.; triple 28's permit a gvw of 118,000 lb.

Potential cost savings from higher weight and longer combination vehicle (lcv) limits is a hotly debated subject. The operating costs per vehicle or per vehicle combination would certainly rise, but decline on a per ton-mile basis. To the extent costs would drop, the motor carrier industry's vast truckload subsector would gain the most. Railroads fear that such savings could help truckers sharply cut rail's market share, hurting total revenues and net operating income. One source claims that nationwide twin 48-ft. trailers could drop truckers' per-trailer costs from about 95 cents per mile to less than 60 cents. Truckers argue that the savings are less dramatic and, in any event, merely represent potential efficiencies that are now being lost.

Higher diesel fuel taxes and vehicle registration fees would cut into gains from an increase in allowable truck weights and sizes. However, even if user fees were set at full cost recovery levels to cover highway construction and maintenance costs, truckers' operating savings could still exceed the fees. In any event, highway reauthorization legislation, initially passed every two years and more recently every four to five years, is scheduled to be taken up in 1991 and may contain some mix of higher weight limits and higher user fees.

Other potential cost savings would evolve if intrastate regulatory barriers were removed. Just as truckers realized fleet operating efficiencies when removal of interstate regulations in 1980 reduced empty mileage and route circuity costs, similar, albeit lesser, gains would result from eliminating state-sanctioned regulatory inefficiencies.

Finally, the industry has made substantial outlays for terminals, computerized data management, and package and vehicle tracking systems in the last several years. Carriers that invested in these programs should experience lower operating expenses in 1991, as well as revenue growth generated by higher quality service.

Competition and slowing economic conditions will constrain labor expense. However, the Teamster's three-year Master Freight Agreement scheduled for renegotiation in April should increase wages in the LTL sector. Similarly, the Department of Transportation's commercial driver license (CDL) program and other driver or vehicle safety programs could add to operating costs. Although outlays for training and safety compliance outlays may pay operating dividends in the long run, in the short term cash flow tends to be outward.

Extreme volatility in crude oil prices and seasonal factors in refining schedules make precise forecasts on fuel prices impractical. Through August, an ICC weekly index of selected, full-service diesel pump prices averaged $1.17 per gallon in 1990. Prices had pushed to $1.44 in response to cold weather in early January, declined steadily to a low of $1.06 in July, and shot up again to more than $1.40 in late August following the Iraqi invasion of Kuwait. These prices include the $0.14-per-gallon Federal excise tax plus the respective state diesel fuel taxes, which range from $0.075 to $0.228 per gallon. Prior to the Mideast crisis, fuel expense, including excise taxes, accounted for about 5 percent of LTL carrier costs and 20 percent of TL carrier costs. With no change in Federal or state diesel fuel taxes, crude oil prices at $30 dollar per barrel will probably yield diesel fuel prices in the $1.40-$1.50 range (full service, pump). Depending upon events in the Middle East, however, various outcomes - including crude oil prices that are low by recent historical standards - are still plausible in 1991.

Insurance expenses, which make up 2 to 5 percent of total operating expenses, could also trend upward. To the extent premiums or, alternatively, the mere availability of coverage reflects underwriters' perception of credit risk, a stalling economy would serve to raise premiums. At the state regulatory level, requiring insurance companies to cover all risk pool candidates also tends to raise overall premiums. Similarly, resistance to rate increases can induce insurance companies to withdraw from markets altogether, ultimately raising higher rates where coverage is still available.

Long-Term Prospects

No dramatic change is in the offing for the trucking industry. Instead, trends already under way will intensify. Competition pervades the industry's various subsectors, not only from other truckers but from railroads in the vast truckload subsector and from small-package and package-express carriers in the smaller LTL market. This competition will produce an industry increasingly characterized by computer and telecommunication links, larger trucks, more sophisticated global carriers and shippers, and blurred modal distinctions. - Thomas M. McNamara, Office of Economics, Interstate Commerce Commission, (202) 275-7684.

Additional References

Commercial Carrier Journal, "The Top 100," July 1990, Chilton Co.,

Chilton Way, Radnor, PA 19089. Telephone: (215) 964-4000. Europe Now, U.S. Department of Commerce, International Trade Administration,

1990, 14th and Constitution Ave., NW, Washington, DC,

20230. Telephone: (202) 377-5823. Facts & Figures '90, Motor Vehicle Manufacturers Association, 7430

Second Ave., Detroit, MI 48211. Telephone: (313) 872 4311. Impact of State Regulation On The Package Express Industry, 1990, U.S.

Department of Transportation, 400 7th Street, SW Room 9217,

Washington, DC 20590. Telephone: (202) 366-4420. Large Class I Motor Carriers of Property Selected Earnings Data, Quarter

and Twelve Months Ending 12/31/89; Quarter Ending 3/31/90; Quarter

and Six Months Ending 6/30/90, Bureau of Accounts, Room 3148

Interstate Commerce Commission, 12th and Constitution Ave., NW,

Washington, DC 20423. Telephone: (202) 275-7094. Freight Transport Deregulation, Robert V. Delaney Cass Logistics, Inc.,

1015 Locust Street, St. Louis, MO 63101. Telephone: (314) 621-4121. Staff Report No. 12, January 1990. Interstate Commerce Commission,

12th and Constitution Ave., NW, Washington, DC 20423. Telephone:

(202) 275-7684. Traffic World, "Europe 1992," June 11, 1990, 445 Marshall Street,

Phillipsburg, NJ 08865. Telephone: (201) 859-1300. Traffic World, "U.S. & Mexico: Bridging The Border," July 23, 1990, 445

Marshall Street, Phillipsburg, NJ 08865. Telephone: (201) 859-1300. Transport Statistics In The United States, Motor Carriers Part 2, For Year

Ended 12/31/88, Bureau of Accounts, Interstate Commerce Commission,

12th and Constitution Ave., NW, Washington, DC 20423. Telephone:

(202) 275-6752. Transportation In America, A Statistical Analysis of Transportation in the

United States, Eighth Edition, 1990, Frank A. Smith, Eno Foundation,

P.O. Box 2055, Westport, CT 06880. Telephone: (203) 227-4852. Transportation Report, C.J., Nicholas, July 1989, U.S. Department of

Agriculture, Office of Transportation Washington, DC 20250. Telephone:

(202) 653-6218. Value Line Investment Survey, "Trucking And Transport Leasing Industry,"

June 29, 1990, Value Line Publishing, 711 Third Ave., New York,

NY 10017. Telephone: (212) 687-3965.

Government Contacts

Leister, Douglas V., Office of the Secretary at U.S. Department of

Transportation, regarding small package and package express markets

and European Commission regulations. U.S. Department of Transportation,

400 7th St., SW, Room 9216, Washington, DC 20590. Telephone: (202)

366-4813. MacRae, Nancy K., Office of the Secretary at U.S. Department of

Transportation, ragarding U.S.-Canadian and U.S.-Mexican international

transport issues. U.S. Department of Transportation, 400 7th St.,

SW, Room 10300-B, Washington, DC 20590. Telephone: (202) 366-9512. Pieper, Max, Federal Highway Administration at U.S. Department of

Transportation, regarding truck size and weight limits. U.S. Department

of Transportation, 400 7th St., SW, Room 3104, Washington, DC

20590. Telephone: (202) 366-4029. Rastatter, Edward H., Office of the Secretary at U.S. Department of

Transportation, regarding interstate trucking regulations and the package

express industry. U.S. Department of Transportation, 400 7th St.,

SW, Room 9217, Washington, DC 20590. Telephone: (202) 366-4420. Redisch, Michael A., Office of Economics at the Interstate Commerce

Commission, regarding motor carrier deregulation and trucking industry

competition. Interstate Commerce Commission, 12th and Constitution

Ave., NW, Room 3219, Washington, DC. Telephone: (202)

275-7684.

RAILROADS

In 1990, there were 13 major independent freight railroads or affiliated railroad systems, defined by the Interstate Commerce Commission (ICC) as Class I carriers on the basis of having operating revenues of $93.5 million or more in 1989. These carriers accounted for more than 90 percent of the carloads handled by the railroad industry. The freight railroad industry also encompassed more than 500 smaller carriers (independent of Class I railroads), including local, regional, and switching and terminal railroads. Intercity rail passenger service is provided by Amtrak, a quasi-government corporation that handles approximately 22 million passenger trips per year across 43 states.

FREIGHT SERVICE

For the fourth year in a row, the railroad industry had record revenue ton-miles in 1990. (A revenue ton-mile is 1 ton of freight moved 1 mile). Revenue ton-miles rose an estimated 2 percent in 1990, largely on the strength of gains in coal shipments. Coal traffic increased between 4 and 5 percent as utilities replenished their inventories after an unreasonably cold December 1989, and then encountered milder than normal weather during much of 1990. Among other prominent rail-shipped commodities, chemical shipments rose between 1 and 2 percent, and intermodal traffic (trailer-on-flatcar and container-on-flatcar) grew an estimated 3 percent. Overall, however, results were mixed, with the volume of traffic down for the majority of commodities. Motor vehicles and parts were down 8 to 9 percent as a result of weaker auto sales; lumber and wood products were down between 5 and 6 percent as a result of the slowdown in residential construction; stone, clay, and glass fell between 3 and 4 percent in response to a decline in overall construction; and paper and paper products declined 2 to 3 percent. Traffic in grain was estimated to be relatively flat.

Average annual employment for the Class I railroads (including Amtrak) fell an estimated 5 percent, from 252,000 in 1989 to 239,000 in 1990. The sharp decline in workforce levels is continuing as several railroads adopt early retirement programs to reduce labor costs.

For the 12th months ended July 31, 1990, the industry earned 7.1 percent on net investment (excluding special charges). Since 1980, the year the Staggers Rail act partially deregulated rail rates and services, the railroads have been able to put more than $100 billion into track and equipment. As a result, after decades of losing traffic to the highways, the railroads' share of total U.S. freight ton-miles has generally stabilized at slightly more than 35 percent. The industry's safety record also has improved dramatically, with the number of accidents dropping 70 percent from the late 1970s, and the rate of accidents per train-mile down more than 60 percent.

The improvements in railroad profitability and shipper service have not been achieved through sharp rate increases. In fact, the overall index of rail freight rates compiled by the Bureau of Labor Statistics (BLS) shows that in the nine years after the Staggers Act was passed, rates declined by 1 percent, in real terms, compared with an increase of 2.9 percent per year in the prior five years. Figures gathered from the railroads (which cover contract movements more fully than the BLS index) show that average rail freight rates for grain went down more than 27 percent from 1981 through 1988, even before adjusting for inflation.

Unresolved Issues

Wages and other labor-related expenses make up the largest element of railroad operating costs. Thus, labor issues remain a major focus for the railroads, including wage and benefit settlements, crew size, and work rules. The last four-year nationwide contract between most of the major railroads and the rail unions expired June 30, 1988. When the negotiations reached an impasse, a Presidential Emergency Board (PEB) was convened in May 1990 to investigate unresolved 1984 health benefit issues, followed by a PEB on the expired 1988 contract. Under the Railway Labor Act (RLA), the old contract provisions will remain in place until either a new contract is ratified or the lengthy dispute-resolution procedures of the RLA have been exhausted. This round of negotiations could be critical for the industry; some of the large carriers are participating in the national bargaining on most broad issues, such as health benefits, but are negotiating separate contracts with the unions on a limited number of issues, such as the minimum number of employees for each train crew.

Since 1908, railroad worker's compensation benefits have been governed by the Federal Employers Liability Act (FELA). Unlike no-fault worker's compensation, the state-based system for other industries, FELA requires employees to prove railroad negligence for on-the-job injury in order to collect damages. The amount of damages is determined either through negotiation or litigation. The Department of Transportation's Moving America: New Directions. New Opportunities; A Statement of National Transportation Policy Strategies for Action (February 1990) cites FELA as an outmoded requirement that keeps railroads from competing on an equal basis with other modes of transportation and calls for its repeal.

The railroads are moving ahead with innovations in equipment, computerized freight tracking and train scheduling, and marketing. New types of service, particularly for intermodal traffic, also are being offered. Rail intermodal traffic has nearly doubled between 1980 and 1989, from 3.1 million trailers and containers to 5.9 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 a depressed well, or platform, that carry two containers stacked on top of each other. Growing volumes of containerized imports from the Far East have been moving through West Coast ports to inland destinations on such double-stack trains under expedited schedules, carrying exports and domestic traffic on the backhaul. More than 100 double-stack trains depart the West Coast weekly with double-stack traffic. Double-stack cars now account for about 25 percent of total intermodal capacity - and the share of container traffic in intermodal loadings has nearly doubled from 25 percent in 1980 to nearly 50 percent in 1990.

A U.S. Department of Transportation study, Double-Stack Container Systems: Implications for U.S. Railroads and Ports, jointly sponsored by the Federal Railroad Administration and the Maritime Administration, was released in June 1990. The report concluded that although about 83 percent of intercity truck traffic moves in hauls of less than 500 miles, double-stack services can be fully competitive with trucks in dense traffic corridors of 725 miles or more. In the major long-haul markets of Seattle-Chicago and Los Angeles-Chicago, double stacks have already diverted significant volumes of truck traffic, and additional opportunities exist in these and other corridors, some secondary corridors, and for refrigerated commodities.

Mergers and Acquisitions

The corporate and physical structure of the U.S. freight railroad industry continues to evolve. Although the pace of mergers between major railroads has slowed considerably, restructuring continues through purchases or transfers of smaller portions of rail systems. Among the more recent developments, in October 1989 the ICC approved the purchase of the Chicago and North Western Transportation Company (CNW) by a consortium of investors headed by Blackstone Capital Partners. As part of the transaction, the Union Pacific (UP) acquired $100 million in preferred stock in the new company, and under the proposed trackage rights agreement over CNW between Fremont, NE/ Council Bluffs, IA and Chicago, the Union Pacific obtained a commitment from the CNW to spend $115 million to upgrade the line during 1989 and 1990. The UP's February 1990 application for approval of the trackage rights agreement is pending at the ICC.

Rio Grande Industries, Inc., (RGI) received ICC approval in September 1989 to acquire the St. Louis-Chicago line from the bankrupt Chicago, Missouri & Western Railway. In another RGI proceeding, the ICC in July 1990 approved the company's application to acquire the Soo Line's Chicago to Kansas City Line. A portion of this line included Soo Line trackage rights over a CNW line segment. RGI and CNW were unable to agree on trackage rights compensation for the CNW segment and in August 1990 the RGI-Soo Line agreement was terminated. At the same time, RGI announced that it had reached agreement with Burlington Northern (BN) to gain access into Chicago through trackage rights over BN's from Kansas City. In late September 1990, the RGI-BN trackage rights agreement was exempted from ICC regulatory review, but the ICC is reviewing petitions to revoke the exemption.

In October 1990, the ICC approved the Canadian Pacific (CP) acquisition of the Delaware and Hudson Railway Company (D&H) and related trackage rights over other rail carriers. The CP had operated over the D&H on an emergency basis since the beginning of August 1990, replacing the bankruptcy trustee who had operated the line since the end of February 1990. Subsequent to the D&H's bankruptcy and cessation of operations in June 1988, operations were performed by the New York, Susquehanna and Western Railway.

The Staggers Act did not completely deregulate the freight railroads, but it did take significant steps to remove ICC authority over railroad activities in which competition was already working to constrain rail rates and improve service.

In one of the most important provisions of the Staggers Act, railroads and shippers were permitted for the first time to enter into confidential, legally binding contracts covering rail rates and services. These contracts must be filed with the ICC, but the specific rates and conditions are not disclosed. In 1989, more than 16,000 contracts were signed. All told, more than 105,000 contracts between railroads and shippers were entered into from the time the Stagger Act was signed to mid-1990.

The Staggers Act allows railroads to raise individual rates to cover increases in costs each quarter - as measured by an ICC-approved index of railroad costs - without additional review by the ICC. Beyond that zone of flexibility, the ICC retains authority to regulate rates for traffic for which there is no effective competition. For an individual rate subject to ICC review, the Commission established in its September 1985 guidelines on coal rates that the maximum a shipper can be required to pay will be the stand-alone costs of providing the required transportation service. The ICC defines stand-alone costs as all capital and operating costs (including a return on capital) that would be incurred by a hypothetical least cost, most effective carrier, if it were serving only the shipments at issue in the case or a group of shippers using essentially the same facilities. The ICC may adjust its maximum rate findings if a railroad has inefficient rates in other parts of its system that should be making up some of the revenue shortfall, could collect needed revenues according to a more gradual phasing-in of rate increases, or has achieved revenue adequacy.

Rate Standards

In April 1987, the ICC proposed simplified formula-based rate standards as a surrogate for stand-alone costs, which were based on a rulemaking proceeding that considered what guideline to use in regulating non-coal rates and particularly rates for small shippers. The ICC maintained that if shipments come from numerous origins or involve small volumes, the stand-alone cost methodology is too costly and complicated to be used. In several non-coal cases, the ICC has applied the proposed standards and has found that maximum reasonable rates under the proposal would be below the level of the rates being charge. The railroads protested that the proposals were not economically sound and would produce unjustified and debilitating rate reductions. The question is still being debated.

Most rail rates are not determined by the outcome of a particular rate case at the ICC. Of the 864 rate complaints filed by shippers at the time the Staggers Act was passed, only a few have not yet been resolved. The remainder have been dismissed, withdrawn, or settled through negotiations between the railroads and shippers. Recently, an average of only 16 new rate complaints/protests have been filed per year, down sharply from an annual average of nearly 300 before the Staggers Act went into effect.

In 1986, the ICC responded to some shippers' concerns that its standards for determining the adequacy of railroad revenues might not accurately reflect broader market perceptions, and modified its procedures and methodology to bring them closer to those of other industries. The new rules make it more likely for a railroad to be found revenue-adequate. In August 1990, the Commission found the Florida East Coast Railroad and Norfolk Southern Corporation were revenue adequate in 1988, with returns on net investment (ROI) of 14.6 and 13.1 percent, respectively. This was well above the commission-determined 11.7 percent current cost of capital in 1988.

Under the Staggers Act, a revenue adequate carrier cannot apply surcharges to certain light density lines, nor can it take increases using the zone of rate flexibility for rates linked to the rail cost adjustment factor (RCAF). (The RCAF is the measure of the inflation-based rate increases railroads can charge without ICC review.) The effect of these conditions should be minimal. With respect to coal rate guidelines, where a finding of revenue adequacy could limit maximum rate levels, the ICC has stated that it will not view a single year's revenue adequacy finding as a constraint on coal rates.

Another recent rulemaking involved an index of costs railroads incur and on which the ICC relies to establish the RCAF. In March 1989, the ICC discounted the RCAF by a factor that reflects rail productivity gains. Shippers had long argued that Congress did not intend railroads to receive the full extent of such gains through the RCAF automatically. In July 1990, the ICC allowed the Class I railroads to cancel their participation in rail carrier cost recovery master tariffs, thereby de-linking the rates from the RCAF. The railroads had petitioned for this change just prior to July 1, 1990, when rates tracking the RCAF would have had to be reduced by 1 percent because productivity gains had offset cost increases. This followed ICC-ordered decreases of 0.4 and 0.2 percent in the first and second quarters of 1990. Individual railroads will still be able to raise rates to cover increases in costs, but such increases are now subject to challenge at the ICC under certain circumstances. (For additional background on the Staggers Rail Act, see the 1990 Industrial Outlook, chapter 42.)

Outlook for 1991

Rail traffic volume is forecast to be relatively flat compared with 1990. Coal traffic, the top commodity carried by the railroads, is expected to grow by 1 to 2 percent in 1991, 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 is expected to increase by 1 percent. Traffic in lumber and wood products, metallic ores, primary metal products, motor vehicles and parts, and stone, clay and glass should decline as a consequence of slow economic growth. Railroad employment is forecast to decline by approximately 3 percent to 232,000, in part because early-retirement programs are continuing.

Long-Term Prospects

Traffic growth over the next five years will be modest. Rail tonnage is expected to rise an average of 1.0 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 rail-shipped tonnage over the next five 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 in large volumes on the Ohio and Mississippi River systems. Trucking is also an important option for many shippers. Railroads' share of U.S. intercity freight ton-miles was 37 percent in 1989, down sharply from 56 percent in 1950, although their share has held fairly steady at about 35 to 40 percent since the early 1970s. Most of the loss reflects a shift to trucks for short-distance shipments.

The competitive challenge will continue, especially if motor carriers continue to improve efficiency and truck size and weight increase. But railroads should have an opportunity to hold or improve their traffic base in competition with other modes because of improved overall efficiency brought about by mergers, better equipment utilization, and technological innovations. Railroads' increasing attention to the quality of service, aggressive marketing, and effective use of railroad-shipper contracts also will give the industry a chance to retain or improve its market share. Railroads have the capacity to accommodate more traffic because major carriers have invested heavily in renewing track and structures over the last several years, and the industry's plant is in excellent condition.

Rail Passenger Service

The National Railroad Passenger Corporation, better known as Amtrak, operates about 220 intercity passenger trains per day over 24,000 miles of rail line, serving more than 500 communities in 43 states. Each year, Amtrak carries close to 40 million passengers - more than 22 million on its intercity trains and about 17 million metropolitan commuters (the latter under contract with various transportation authorities).

Amtrak had another record year in fiscal 1990 with revenues of about $1.3 billion, up 5 percent from the year before. Expenses rose about 4 percent to $1.8 billion. The system matched the previous year's record-high revenue-to-expense ratio of 72 percent. Passenger-miles traveled on Amtrak increased from 5.9 billion to 6.1 billion between fiscal 1989 and fiscal 1990.

Amtrak received a federal subsidy of $605 million for fiscal 1990, plus an additional $24.4 million for the Northeast Corridor Improvement Project between Washington and New York. In constant dollars, Amtrak's fiscal 1990 subsidy represented a reduction of more than 50 percent from its fiscal 1981 Federal appropriation. The substantial drop was achieved without route reductions, but rather through a combination of fare and ridership increases and close control of expenses.

By taking over responsibility for the train and engine crews from the freight railroads over whose lines its trains operate, Amtrak has achieved major improvements in productivity. This shift, which began in fiscal 1986, save Amtrak more than $50 million per year and gives it better control over its operations. Consolidation and upgrading of car and locomotive repair shops also have resulted in considerable savings.

Amtrak began many new services in fiscal 1990. It extended the "Crescent" in Alabama from Birmingham through Montgomery to Mobile (the "Gulf Breeze"); added one more "San Joaquin" train between Oakland and Bakersfield, with connecting bus service to Los Angeles; extended the "Atlantic City Express" between Atlantic City and New York, Philadelphia, and Washington to Richmond, Va; operated three daily Atlantic City-Philadelphia round trips to the Midway Airlines Terminal at Philadelphia International Airport; and launched a new train, the "Carolinian," between Rocky Mount and Charlotte, NC, where it combines with the "Palmetto" to continue the New York. Amtrak also increased to two the number of daily roundtrip nonstop "Express Metroliners" between New York and Washington. In each instance, passenger revenues from these extensions are projected to meet or exceed the cost of the new service. A rail replacement program jointly funded by Amtrak, California, the Santa Fe Railway, and Los Angeles, Orange, and San Diego Counties is under way to enhance service and reduce congestion and automobile pollution along the San Diego-Los Angeles Corridor.

Rebuilding the rail line along the west side of Manhattan continues. The "West Side Connection" scheduled to be completed in the spring of 1991 will enable Amtrak trains from upstate New York to bypass Grand Central Terminal and operate directly into Pennsylvania Station. Thus passengers will not have to change trains and stations in New York City. Major work progressed in fiscal 1990 at New York's Penn Station, Philadelphia's 30th Street Station, and Chicago's Union Station.

In January 1990, Amtrak took delivery of the last of its $100 million order of new, short-distance Horizon Fleet cars, made by the Bombardier Corporation of Canada and assembled in Barre, VT. The 104 coaches and food service cars began revenue service in Chicago (78 cars) and Oakland-Bakersfield (26 cars). The new cars will increase Amtrak's capacity about 9 percent, which will help alleviate ate the overcrowding of trains and reduce the number of customers who are turned away when seats are sold out. Amtrak also proposed to purchase an additional 75 to 179 Superliner type cars in late 1990.

Outlook for 1991

The total passenger-miles traveled on Amtrak is expected to grow an estimated 3 percent, and revenue per passenger-mile is expected to increase by 2 percent in constant dollars. Part of the passenger-related revenue increase will come from state-supported service in California, North Carolina, and Alabama. Atlantic City traffic is a key market for expansion in the next few years, as Amtrak continues to work with the casinos there to build ridership. Amtrak forecasts that non-passenger-related revenue, including contract commuter service, real estate operations, and mail and baggage, will reach $416 million, up a strong 9 percent from $380 million in fiscal 1990.

Long-Term Prospects

Through 1995, Amtrak passenger-miles are expected to continue to grow by 2 to 3 percent per year. Amtrak's basic goal is to continue to improve rail passenger service while reducing its dependence on Federal support. Amtrak management believes that with adequate capital funding it can continue to improve its revenues and efficiency and cover more of its costs. Amtrak intends to replace its 35- to 40-year-old long-distance Heritage equipment with single-level Viewliner cars to operate on Eastern and other low-clearance routes. This will increase capacity and lower maintenance costs. Under Amtrak's plan, the cars would be purchased costs. Under Amtrak's plan, the cars would be purchased between fiscal 1991 and fiscal 1994. Adding equipment also would enable Amtrak to add new service in markets where the resulting revenues would exceed the costs of providing the service.

Amtrak is seeking legislation exempting it from the Federal Employers' Liability Act and replacing the formula for determining contributions to the Railroad Unemployment Insurance Act with a cost share based on the actual share of unemployment payments to workers. The objective is to relieve the railroad of costs it deems excessive.

High-Speed Passenger Service

Interest in high-speed passenger rail service has increased in the last several years. This form of passenger travel is seen as a way of reducing highway congestion and relieving airport and airway congestion by reducing short-haul air traffic. High-speed rail passenger systems (defined as operations above 120 mph) are typically electrified. Currently, the only high-speed service in the U.S. is the Amtrak Metroliner in the Northeast Corridor, which runs at a maximum speed of 125 mph. Germany and Japan have been testing magnetic levitation (maglev) systems with speeds up to 300 mph that rely on magnetic forces to provide a non-contact means of propulsion, braking, suspension, and lateral guidance. Recently, the French TGV, a steel wheel-on-steel rail system, achieved a record 320 mph in a test run. The train operates at 187 mph in regular service.

Several state and local governments and private sector groups have undertaken market feasibility studies on the potential for high-speed service, in some cases with grants from the Federal Railroad Administration (FRA). Corridors include Miami-Tampa-Orlando; New York-Boston; New York-Montreal; Houston-Dallas-Fort Worth-Austin-San Antonio, TX; Philadelphia-Harrisburg-Pittsburgh; Las Vegas-Anaheim; Los Angeles-Fresno-Bay Area-Sacramento; Minneapolis/St. Paul-Madison-Milwaukee-Chicago; Seattle-Moses Lake, WA; and Cincinnati-Columbus-Cleveland. Florida is moving toward awarding a franchise to private developers to construct and operate a 13.5-mile maglev segment between Orlando Airport and a nearby resort area, as well as a franchise for a high-speed rail line serving Miami-Orlando-Tampa. Texas' newly created High Speed Rail Authority has received letters of intent from two groups interested in building and operating a high-speed network in that state. One would use the technology of French TGV and the other the technology of the German intercity express. Las Vegas conducted a feasibility study of a very high-speed rail or maglev line connecting it with Los Angeles, and California and Nevada recently created the California-Nevada Super Speed Ground Transportation Commission to solicit and review applications for private construction and operation of such a line. The Commission received one franchise proposal to privately finance, build, and operate a 300-mph magnetic levitation train system over a 265-mile double tracked route from Las Vegas to Anaheim.

In a congressionally mandated study completed in June 1990, the Department of Transportation concluded that in a limited number of high-density intercity transportation markets, maglev systems in the U.S. have the potential for attracting travelers for distances of 100 to 600 miles. In addition to reducing congestion, such systems could provide substantial fuel savings and reduce air pollution.

The FRA is continuing research on high speed rail and magnetically levitated systems to ensure that these systems are safe. The FRA and the U.S. Army Corps of Engineers are co-chairing the National Maglev Initiative, an interagency committee formed to evaluate the future role of maglev in the U.S., assess the current status of maglev, and create a partnership with industry to stimulate research and development. The fiscal 1991 budget contains a request for nearly $10 million for maglev research. - Joel P. Palley, Federal Railroad Administration, U.S. Department of Transportation, (202) 366-0348, October 1990.

Additional References

"Abandonment of Rail Lines and the Smaller Railroads Alternative," John

F. Due, Logistics and Transportation Review, Vol. 23 No. 1 (March

1987), pp. 109-134. Accident/Incident Bulletin (annual), U.S. Department of Transportation,

Federal Railroad Administration, Office of Safety, 400 7th Street SW,

Washington, DC 20590. Telephone: (202) 366-2760. Annual Outlook for U.S. Coal, U.S. Department of Energy, Energy

Information Administration, 1000 Independence Ave., SW, Washington,

DC 20585. Telephone: (202) 586-8800. 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. The Coal Book (annual), Association of American Railroads, 50 F Street,

NW, Washington, DC 20001. Telephone (202) 639-2550. Deferred

Maintenance and Delayed Capital Improvements on Class II and Class

III Railroads, February 1989, U.S. Department of Transportation,

Federal Railroad Administration, 400 Seventh St. SW, Washington, DC

20590. Telephone: (202) 366-0177. Employment and Earnings (monthly), Bureau of Labor Statistics, U.S.

Department of Labor, Washington, DC 20212. Telephone: (202) 523-1172. Final Report, September 1990, Commission on Railroad Retirement

Reform. Contact: U.S. Railroad Retirement Board, Chicago, IL.

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. Maglev Vehicles and Superconductor Technology: Integration of High

Speed Ground Transportation into the Air Travel System, L.R.

Johnson, D.M. Rote, J.R. Hull, H.T. Coffey, J.G. Daley, and R.F.

Giese. Center for Transportation Research, Argonne National Laboratory,

Argonne, IL 60439. Report No. ANL/CNSV-67. Available from the

National Technical Information Service. Telephone: (703) 487-4650. Modern Railroads (monthly) and Modern Railroads: Short Lines and

Regionals (semimonthly), Suite 900, Washington, DC 20005. Telephone

(202) 628-2773. Monthly Traffic Monitor, Data Resources, Inc., 29 Hartwell Avenue,

Lexington, MA 02173. Telephone: (617) 863-5100. Moving America: New Directions, New Opportunities; A Statement of

National Transportation Policy Strategies for Action, February 1990,

U.S. Department of Transportation, 400 Seventh St. SW, Washington,

DC 20590. Telephone: (202) 366-5571. National Transportation Strategic Planning Study, March 1990, U.S.

Department of Transportation, 400 Seventh St. SW, Washington, DC

20590. Telephone: (202) 366-5571. Railroad Coal Rates in the Competitive Marketplace, February 1989,

Economics and Finance Department, Association of American Railroads,

50 F Street, NW, Washington, DC 20001. Telephone: (202)

639-2302. Railroad Grain Rates in the Competitive Marketplace, June 1989, Economics

and Finance Department, Association of American Railroads,

50 F Street, NW, Washington, DC 20001. Telephone: (202) 639-2302. Producer Price Index-Railroads, Bureau of Labor Statistics, U.S. Department

of Labor, Washington, DC 20212. Telephone: (202) 523-1221. 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. Rail Rates Experience Multi-Year Decline, April 1990, Interstate Commerce

Commission, Office of Transportation Analysis, 12th & Constitution,

Washington, DC 20423. Telephone: (202) 275-7684. 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. Railway Age (monthly), 345 Hudson St., New York, NY 10014. Telephone:

(212) 620-7200. Seventeenth Actuarial Valuation, August 1988, U.S. Railroad Retirement

Board, Chicago, IL. Telephone: (312) 751-4500. Short-Term Energy Outlook: Quarterly Projections, U.S. Department of

Energy, Energy Information Administration, Forrestal Building, Washington,

DC 20585. Telephone: (202) 586-8800. A Survey of Shipper Satisfaction with Service and Rates of Shortline and

Regional Railroads: Joint Staff Study, August 1989, U.S. Department

of Transportation, Federal Railroad Administration, 400 Seventh St.

SW, Washington, DC 20590, Telephone: (202) 366-0348; Interstate

Commerce Commission, Office of Transportation Analysis, 12th and

Constitution, Washington, DC 20423. Telephone: (202) 275-7684. 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 Foundation, P.O. 2055, Westport, CT

06880. Telephone: (203) 277-4852. Transportation Review (annual), Data Resources, Inc., 29 Hartwell Avenue,

Lexington, MA 02173. Telephone: (617) 863-5100. The U.S. Freight Railroads: Recent Trends and Future Prospects, Richard

E. Briggs, Association of American Railroads, May 1989. Telephone:

(202) 639-2302. Yearbook of Railroad Facts (annual), Economics and Finance Department,

Association of American Railroads, 50 F Street, NW, Washington,

DC 20001. Telephone: (202) 639-2302.

WATER TRANSPORTATION

The U.S. water transportation industry (SIC 44) consists of deep sea foreign and domestic transportation (including passenger ships), Great Lakes-St. Lawrence Seaway carriage, inland waterway movements, and local waterborne cargo.

The gross national product (GNP) attributable to the water transportation industry is estimated at $7.5 billion based on 1987 data. Employment decreased by 3 percent to an average of 176,000 workers in 1989, from annual average of 181,600 in 1988. Preliminary estimates indicate that an average of 165,400 workers were employed in the industry during the first four months of 1990.

Deep sea foreign and domestic water transportation includes three cargo categories: general cargo, dry bulk, and liquid bulk. General cargo operations, predominantly movements of finished goods, usually are performed by regularly scheduled vessels operating as common carriers in liner service. Dry bulk cargoes, such as grain, coal, ore, and fertilizer, move in specialized vessels under contract or proprietary carriage. Liquid bulk cargoes, primarily crude oil and refined petroleum products handled by tanker and tank barge fleets, normally are transported on a proprietary basis. International cargo movements are generally expressed in long tons (2,240 pounds) and domestic cargoes in short tons (2,000 pounds).

DEEP SEA FOREIGN TRANSPORTATION

The U.S.-flag deep sea foreign trade shipping industry (SIC 441) carries merchandise between U.S. and foreign ports in direct competition with the ships of the world fleets. Preliminary data indicate that in 1989 the U.S.-flag deep sea foreign trade fleet carried 35.7 million long tons of cargo (Table 7), valued at $69.7 billion (Table 8). This represents an increase of 16 percent in tonnage and an increase of 21 percent in value compared with 1988. U.S.-flag carriage in 1989 accounted for 4.3 percent of all U.S. oceanborne foreign trade by tonnage and 16.1 percent by value. In 1989, the U.S.-flag foreign trade fleet continued to carry a greater proportion of high-value liner cargo tons (18.8 percent) by weight than of low-value, non-liner cargoes (1.7 percent) or tanker cargoes (3.4 percent).

Deep sea foreign transportation is a source of both receipts and payments for balance-of-payments accounting purposes. In 1989, the balance-of-payments deficit for international ocean transportation declined to $1 billion, from $1.5 billion in 1988. (In ocean freight movements, the importer generally pays freight charges.) U.S. receipts and payments for international ocean transportation are shown in Table 9. [Tabular Data Omitted]

The U.S.-flag foreign trade liner fleet is composed of general cargo ships and intermodal ships. General cargo ships include breadbulk vessels, partial containerships, and other ships designed to carry non-containerized cargo. Intermodal ships primarily consist of containerships, roll-on/ roll-off vessels, and container/barge vessels. Vessel size is measured in deadweight tons (DWT), the amount of water (in long tons) that a ship displaces, including cargo, stores, and fuel. As of April 1, 1990, the U.S.-flag liner fleet operating exclusively in foreign trade (including foreign-to-foreign trade) consisted of 105 vessels totaling 3.1 million DWT. These ships included 79 intermodal vessels with a capacity of 2.6 million DWT (Table 10). [Tabular Data Omitted]

The intense competition that has existed in the international liner trades in recent years continues. The U.S. foreign trade routes have been among the most lucrative in the world. For this reason, considerable excess capacity exists on these routes which, in turn, depresses freight rates.

Although carriers in the transatlantic trade have made major efforts to reduce capacity in recent years, and despite a greater volume of trade, freight rates for containerized trade generally remain below the depressed levels of 1988. In the transpacific trade, growth in the volume of U.S. imports has been unexpectedly strong. The increase in U.S. exports to the Far East has also contributed to improving conditions in this trade. In addition, a 1989 agreement to reduce container capacity by 10 percent among the major carriers in the transpacific trade has brought some improvement in rates on the eastbound leg. This agreement will be in effect until March 1991.

As U.S. exports continue to increase, the imbalance appears to have stabilized. Imports were 53.5 percent of the total containerized trade in 1988, 53.3 percent in 1989, and are expected to have been 53 percent in 1990.

Net earnings for the U.S.-flag foreign trade liner fleet were $36 million in 1989, a decrease of 66 percent from 1988 (Table 11). According to industry estimates, net earnings during 1989 were lower than expected because of increased competition.

Although worldwide demand for bulk shipping services has been increasing, freight rates remain below break-even levels for U.S.-flag foreign trade liquid and dry bulk carriers. The capacity of the active U.S.-flag dry bulk fleet engaged in the foreign trade has decreased from 734,000 DWT in April 1989 to 631,000 DWT as of April 1, 1990. The U.S. foreign trade tanker fleet (including foreign-to-foreign trade) decreased to 35 vessels totaling 3.4 million DWT in April 1990, from 47 vessels (4.1 million DWT) in April 1989. As of April 1990, 18 of the 35 U.S.-flag tankers were operating in the foreign-to-foreign trade.

Outlook for 1991

The U.S. economy is expected to continue to grow slowly in 1991. This slowdown, along with a weaker dollar and lower consumer spending, is expected to restrain the growth of U.S. liner import cargoes. Liner export cargoes are expected to continue to increase slightly as the economies of U.S. trading partners continue to expand and the dollar weakens. The U.S. container trade imbalance is expected to decrease slightly in 1991 U.S. container trade has been reduced. Since 1988 this shipments.

New, larger containerships are being introduced into the trade by foreign-flag operators as they attempt to improve economies of scale. As a result, freight rates may weaken during the year as the new ships enter service on the major U.S. foreign trade routes.

U.S.-flag liner operators could benefit from an April 1990 Department of Defense rule that will require close monitoring of DOD cargo movements to assure carriage on U.S.-flag vessels. This rulemaking could bring additional revenues to the U.S.-flag fleet.

Conditions in the international bulk trades are expected to continue to improve. The outlook for freight rates in the dry bulk market is more positive than in recent years. The would market is expected to stabilize in 1991.

The outlook for the tanker market is uncertain for 1991 because of changes in the sources of supply of crude petroleum in 1990. In the past few years tanker rates have been more positive because owners have rationalized tonnage and scrapped many of their surplus vessels. Worldwide demand for tanker tonnage will be significantly influenced by the crude oil trade and economic activity. In particular, demand for imported petroleum will rise as domestic production continues to decline.

The Oil Pollution Act of 1990 requires tankers calling at U.S. ports to pay a 5 cents-a-barrel fee to be used for cleaning oil spills and compensation for damage. In addition, tanker operators will face unlimited liability for spills. Several operators have announced that they will limit service or stop calling at U.S. ports.

World seaborne trade in the three major dry bulk commodities, coal and coke, iron ore, and grain is expected to increase during 1991. Shipments of coal and coke are projected to increase by 4.6 percent, while iron ore shipments are projected to grow by 2.8 percent. U.S. export of coal and coke are expected to increase by 5 percent during the 1990-91 period and iron ore imports are expected to increase by 6 percent in 1990-91. World seaborne trade in grain is expected to increase by 3 percent in 1991. U.S. exports of grain are projected to increase 3.4 percent in 1990-91.

Prospects for the U.S.-flag foreign trade dry bulk and tanker fleet will continue to depend on the volume of preference cargoes - that is, those which are required to be carried in U.S. flag vessels - and on freight rates earned in these trades. The volume of preference cargoes in the dry bulk trade could increase in 1991. The Food and Agriculture Resources Act of 1990, if signed by the President, will increase the share of food aid cargo carried by U.S.-flag bulk carriers beginning in 1991. A portion of the demand for U.S.-flag tankers in the preference trade will be in the movement of crude oil for the Strategic Petroleum Reserve.

Long-Term Prospects

Total U.S. containerized trade is expected to grow at an annual rate of about 3.7 percent between 1991 and 1995. However, capacity is expected to increase more rapidly than containerized trade because of continuing world orders for larger new containerships. As of May 1990, 176 fully cellular containerships were on order. The world orderbook for new containerships is equivalent to 18 percent of the capacity of the existing fleet. The average size of a fully cellular containership on order is 26,000 DWT, compared with 21,000 DWT in the existing fleet. Excess capacity will exist on the most profitable routes and put pressures on rates as operators try to capture and maintain market share.

For the 1991-1995 period, U.S. liner import cargoes are expected to grow about 3.8 percent annually. Exports are expected to grow about 3.7 percent annually between 1991 and 1995.

As supply and demand in the world bulk carrier trades approach equilibrium, conditions will continue to improve. U.S.-flag bulk vessels are not generally active in the international market, except on subsidized routes, because of their high operating costs.

DOMESTIC SHIPPING

Section 27 of the Merchant Marine Act of 1920, known as the Jones Act, requires all waterborne commerce between points in the United States, including its territories and possessions, to be carried on vessels built and documented in the United States and owned by U.S. citizens. Domestic shipping operations consist of the domestic oceanborne trades (coastal, intercoastal, and noncontiguous trade with Alaska, Hawaii, Puerto Rico, the Virgin Islands, and Guam), including the service boat industry; Great Lakes movements; and the inland waterways trades.

Summary information on the volume of cargoes carried and revenues earned is contained in Table 12. During 1988, the U.S. domestic water transportation industry carried more than 1 billion short tons of cargo and earned $6.7 billion in revenues. Preliminary figures for 1989 indicate cargo approached 1 billion tons. [Tabular Data Omitted]

Deep Sea Domestic Transportation

In 1988, the deep sea domestic industry (SIC 442) carried 330 million short tons of domestic waterborne cargo. Movements of crude petroleum and petroleum products accounted for 83 percent of the 1988 tonnage. Preliminary estimates for 1989 indicate a decrease of 9 percent, to 300 million short tons (Table 12). This small decrease is due to a decline in the volume of waterborne crude oil traffic that followed a decline in Alaska North Slope (ANS) crude oil production from 1,974,000 barrels per day (b/d) in 1988 to 1,832,000 b/d in 1989. Increased consumption of ANS crude oil on the West Coast and the opening of a new crude oil pipeline from the West Coast to Midwest refineries also contributed to the decline. [Tabular Data Omitted]

As of April 1, 1990, 163 vessels, totalling 9.3 million DWT, were operating in domestic ocean trade (Table 4). There were 93 domestic ocean vessels (3.8 million DWT) employed in the coastal trade, and another 70 vessels (5.5 million DWT) were operating offshore in the noncontiguous trades. [Tabular Data Omitted]

Tankers make up the largest segment of the domestic fleet. There were 130 U.S.-flag tankers and oceangoing integrated tank barges, totaling 8.5 million DWT, active in the domestic trade on April 1, 1990. Domestic tankers and oceangoing integrated tank barges carried approximately 253 million short tons of crude oil, petroleum products, and chemicals during 1988. This represents a decrease of almost 12 percent from 1987.

The deep sea domestic liner fleet consisted of 24 active vessels, totalling 494,000 DWT. One vessel was operating in coastal service, with the balance engaged offshore in the noncontiguous trades. In addition, two passenger vessels totaling 14,000 DWT were operating in the Hawaiian cruise trade.

There were seven oceangoing dry bulk ships and integrated tug/barge units, totalling 222,000 DWT, and a large number of conventional tug/barge combinations operating in the domestic trade as of April 1, 1990.

Liner cargoes and dry bulk commodities moving in the coastal trade totaled 45 million short tons during 1988. The major commodities included coal and coke (12 million short tons) and nonmetallic minerals (13 million short tons). These cargoes were carried by the deep sea domestic liner fleet, dry cargo barges, dry bulk ships, and integrated tug/barge units.

The service boat industry, which transports workers and supplies to offshore drilling rigs, recovered significantly since 1989. The industry has continued to dispose of uneconomic surplus tonnage. The U.S.-flag fleet consists of approximately 900 vessels, compared with a high of about 1,200 vessels in 1985. The primary marketplace for U.S.-flag service vessels continues to be the Gulf of Mexico, where fleet utilization is approaching full capacity. However, with the severe downturn in the U.S. offshore drilling industry in the early 1980s, many U.S.-flag service boat operators sought employment outside U.S. waters in the growing international market. Many of these vessels remain outside the Gulf.

Great Lakes Movements

The Great Lakes industry (SIC 443) lost some ground in its recovery during 1989, the result primarily of poor weather late in the navigation season and an early closing of the Sault Saint Marie locks because of icing. U.S. Great Lakes shipments totaled 110.5 million short tons during 1988. Preliminary estimates indicate a decrease to 100 million short tons in 1989 (Table 12).

The U.S. steel industry accounts for most of the Great Lakes cargo. The steel and related industries, which are heavily concentrated in the region, rely on the Great Lakes fleet for shipments of iron ore and coal. As of March 1, 1990, the Great Lakes fleet consisted of 78 vessels with a total capacity of 2.1 million DWT. The fleet included 69 bulk carriers, 3 tankers, and 6 ferries. In May 1990, 64 of these vessels were operating, representing 97 percent of available capacity.

The principal commodities carried by the U.S.-flag Great Lakes fleet are iron ore, coal, and stone. Shipments of iron ore for the steel industry totaled 57.1 million short tons during 1989, a decrease of 7 percent from 1988. Coal shipments for power generation increased 6 percent, to 19.4 million short tons in 1989. Limestone and gypsum shipments decreased from 26.4 million short tons in 1988 to 25.1 million short tons in 1989.

Inland Waterways Transportation

The inland waterways industry (SIC 444) consists chiefly of barge movements over the nation's 25,777 miles of navigable waterways. In 1989, inland waterway shipments accounted for 60 percent of all domestic waterborne commerce. According to the U.S. Army Corps of Engineers, at the end of 1988 the inland waterways fleet consisted of approximately 23,200 dry cargo barges with a carrying capacity of more than 32 million short tons; nearly 3,300 liquid tank barges capable of carrying approximately 7.0 million short tons; and more than 3,240 towboats, tugs, and other workboats.

Cargo shipments increased during 1989 from the 1988 level, and freight rates were raised slightly. Demand for capacity was bolstered by a strong national economy in basic industrial sectors such as steel and chemicals. Although there is a small overcapacity of barges, new construction is being reported by almost all smaller shipyards.

In 1988, 588 million short tons of cargo moved on the inland waterways, an increase of 20 million tons from 1987. Table 13 shows tonnage for the four major commodity groups moving through Lock and Dam 25 and 26 on the Mississippi River and Lock and Dam 52 on the Ohio River. Traffic on the lower Mississippi settled down in 1989 after low water in 1988 caused a temporary decline and subsequent surge in traffic.

Outlook for 1991

In the domestic liner trade, service between Hawaii and the mainland may be expanded. The Hawaiian cruise trade will continue to be a strong segment of the domestic travel industry.

The two key trades for the U.S.-flag domestic tanker fleet will continue to be the movement of Alaska North Slope (ANS) crude oil to the lower 48 states, Alaska, and Hawaii, and the movement of refined petroleum products between the Gulf and East Coasts. Tanker shipments of Alaskan crude oil to the Gulf Coast will continue to decrease because of declining output from the Alaska North Slope oil fields, increased pipeline capacity between the West Coast and Gulf Coasts, and increased demand for crude oil by West Coast refiners. In the product trade, U.S.-flag domestic tanker operators face stiff competition from pipelines and from imported refined products.

The outlook for the Great Lakes fleet is tied to recovery in the U.S. steel industry. Iron and steel output is expected to grow a small amount in 1991 after a decline in 1990. Iron ore for the steel industry traditionally has accounted for more than half of all cargoes carried by the Lakers. Also, a significant share of the limestone (which is used to manufacture iron pellets for the steel industry) and the coal carried by the fleet is destined for steel makers. Improved demand for these commodities should result in the continuing high capacity utilization of the U.S.-flag Great Lakes fleet.

The inland waterway industry has generally overcome its problems of equipment overcapacity, weather variations, and lock maintenance, and is well on the road to recovery. The trend toward fewer companies in the industry is expected to continue, with more mergers and consolidations. Tonnage carried is projected to increase modestly by 1 percent annually in the near term.

The outlook is also good in the offshore drilling industry. Increases in offshore drilling activity are likely as long as the price of imported petroleum increases. The surplus of service vessels has decreased to the point where almost all of the available capacity is being utilized.

Long-Term Prospects

The long-term outlook for the domestic liner industry is tied closely to the national economy. Added capacity in the Hawaiian liner trade is likely to put downward pressure on freight rates. Matson Navigation Company, which operates six vessels in the mainland-Hawaiian trade, has ordered a new containership scheduled to be delivered in 1992, and also purchased a roll-on/roll-off vessel from the Puerto Rico Maritime Shipping Authority. American President Lines is appealing a denial of permission to enter the trade and Sea-Land Service may expand its capacity on the route. Capacity in the domestic Alaska liner trade is expected to remain stable and no additional vessels are expected to enter the trade.

Employment of the domestic tanker fleet will continue to depend on the ANS crude oil and domestic refined product trades. The volume of waterborne trade will continue to decline as ANS production slows and alternative modes of transport are used.

Long-term prospects for Great Lakes shipping depend on the level of shipments of iron ore, coal, and limestone carried by U.S.-flag Lakers and the continuing prosperity of the steel industry in the Great Lakes region. The industries are expected to continue at high production levels unless termination of Voluntary Restraint Agreements (VRAs) in 1992, coupled with an increase in the value of the dollar, leads to increased steel imports. (The agreements limit foreign steel producers to about 20 percent of the U.S. market.) In addition, the stringent air quality standards for coke ovens in the pending Clean Air Act could force several coke batteries to close. However, the same legislation could provide impetus for the movement of Western coal by vessel from Superior, Wisconsin, to lower Lakes ports, which would require two new 1,000-foot vessels. The construction industries appear to have a continuing need for limestone, sand, gravel, and cement. Continued high utilization of the existing fleet could also lead to retrofitting of some of the remaining straight-deck bulk carriers by lengthening or installation of self-unloading equipment. (For additional information, see also chapters 1 (Metals and Industrial Minerals Mining), and 2 (Coal Mining), 7 (Construction Materials), 13 (Industrial and Agricultural Chemicals).

Average annual traffic on the inland waterways is projected to grow 1 to 3 percent between 1990 and 2000. The commodities with the highest expected annual growth rates are industrial and agricultural chemicals, farm products, and coal. New barge construction programs may be needed to satisfy expected demand, but operators must manage their programs to prevent overbuilding. - Tom Bryan, Office of Policy and Plans, Maritime Administration, U.S. Department of Transportation, (202) 366-5484, September 1990. [Tabular Data Omitted]

PHOTO : The ability of railroads to attract bulk commodities, their mainstay, depends on their ability to meet competition from other modes of transportation, especially trucks.

PHOTO : Traffic of coal, the top commodity carried by the railroads, is expected to grow 1 to 2 percent in 1991.

Additional References

Transportation in America, Transportation Policy Associates, 8th ed.,

May 1990, ENO Foundation, P.O. Box 2055, Westport, CT 06880.

Telephone: (203) 227-4852. Lloyd's Shipping Economist, Lloyd's of London, One Finger Steel,

London, EC2A, 4LQ England. Telephone: 071-250-1500. World Sea Trade Service, Summer 1990 Review, DRI/McGraw-Hill and

Temple & Barker & Sloane Inc., 24 Hartwell Avenue, Lexington, MA

02173. Telephone: (617) 863-5100. Shipping Statistics and Economics, Drewry Shipping Consultants Ltd., 11

Herson Quay, London E149Y. Telephone: 071-538-0191. Containerisation International, National Magazine House, 72 Broadwick

Street, London, W1V 2BP, England. Telephone: 071-439-5000. The Waterways Journal, 319 N. Fourth St., St. Louis Mo. 63102

Telphone: (314) 241-7345. Fairplay International Shipping Weekly, P.O. Box 96, Coulsdon, Surrey

CR3 2TE, England. Telephone: 081-660-2811.

COPYRIGHT 1991 U.S. Department of Commerce
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