Transportation services - Industry Overview

Michael Hartmann

Most sectors of these four transportation industries--airlines, trucking, railroads and water transport--should respond to improved economic conditions with modest gains in 1993. In the airline industry, more carriers could merge or face bankruptcy, depending on the economy and on whether destructive fare wars persist; long-term prospects, however, particularly in international services, are for moderate to strong growth. Trucking company rates will remain under intense competitive pressure; major carriers will continue a trend toward seeking profits from expedited deliveries in short-haul markets. Rail freight traffic is expected to increase about 3 percent in 1993, and Amtrak passenger-miles to rise 7 percent. U.S.-flag ships in international commerce face stiff competition from foreign vessels, but U.S. domestic and inland shipping could benefit from recoveries in the steel, construction, automotive and other basic industries.

Before reading this chapter, please see "How to Get the Most Out of This Book" on page 1. It will clarify questions you may have concerning data collection procedures, factors affecting trade data, forecasting methodology, the use of constant dollars, the difference between industry and product data, sources and references, and the Standard Industrial Classification (SIC) system. For other topics related to this chapter, see chapter 20 (Aerospace), 21 (Shipbuilding and Repair), and 35 (Motor Vehicles and Parts).

AIRLINES

Through the first half of fiscal year 1992, 37 U.S. airlines representing 98.9 percent of the industry reported $1.8 billion in operating losses. This followed record financial losses by the industry of nearly $4 billion for the full fiscal year (FY) 1991. Despite these large losses, traffic rebounded somewhat in the international market, up 20.4 percent for the first six months of FY1992. However, the broad economic recovery that was expected to help turn the entire industry around failed to materialize. Instead, deep fare reductions introduced in the early part of 1992 made an already bad financial situation even worse.

American Airlines attempted to rationalize and simplify its fare structure into three major categories, increasing some fares and decreasing others. Other carriers followed suit, but with even deeper discounts. The resulting reductions in operating revenues for the major U.S. air carriers were traumatic, causing all of the domestic carriers, even the relatively healthy ones, some distress.

Thus, revenue losses continued in the first half of 1992, in spite of the fact that traffic, as measured in revenue passenger miles, increased 4.6 percent, and high fuel prices abated. Average jet fuel prices during the first nine months of FY92 were at 62 cents per gallon, compared with 81 cents paid in FY91. Expenses peaked far beyond revenues in the middle of FY90 (Figure 1), and, although expenses fell in early 1991, revenues declined even further.

The poor economic condition of the industry as a whole was manifest in the deferral of some new aircraft purchases and the outright cancellation of other orders. New aircraft orders declined about 66 percent for the first half of FY92, while deliveries were up about 20 percent. Employment declined from 545,809 persons in 1990 to 533,565 in 1991, according to the Air Transport Association of America (Table 1).

Table 1: Airline Trends
(in billions of dollars except as noted)
                                                         Percent
                                      1990      1991     Change
Total operating revenue               76.0      75.0     -1.3
Scheduled passenger revenue           58.4      57.0     -2.4
Cargo revenue                          7.0       7.1      1.4
Charter passenger revenue              2.8       3.6     28.6
Other revenue                          7.8       7.3     -6.4
Scheduled revenue passenger miles    463.9     447.8     -3.5
Charter revenue passenger miles       14.2      16.3     14.8
Cargo revenue ton miles               17.3      16.5     -4.6
Number of aircraft (actual)        4,252.0   4,242.0     -0.2
Employment (000)(*)                  546.0     534.0     -2.2
(*) Employment is only for large certificated air carriers.
SOURCES: U.S. Department of Transportation, Federal Aviation Administration; Air
 Transport
Association.

Modest but steady growth in domestic air traffic at an annual rate of 4.1 percent is forecast through the year 2003. Greater gains are expected in international aviation, especially in the Pacific Rim area. The Federal Aviation Administration (FAA) estimated an increase of 14.7 for all of calendar year 1992, although most of this gain is seen as a recovery from the low demand recorded in the first quarter of 1991. During the next decade, until 2003, the FAA forecasts that international traffic growth will be 6.3 percent annually.

Financial Information

The airline industry as a whole incurred an operating loss of almost $1.38 billion, and a net loss of $1.48 billion for the first half of FY92 ending March 31, 1992.

Traffic growth for the major air carriers rebounded modestly during the first half of FY92: domestic revenue passenger miles (RPM's--one paying passenger traveling one mile, a measure of traffic) rose 4.8 percent, and ASM's (available seat-miles, a measure of available capacity) rose 2.6 percent, resulting in an increase in the average load factor (percent of seats occupied) of 1.2 points. Among all the airlines, however, the national carriers lost 8.4 percent in RPM's, and ASM's were down 8.8 percent, resulting in a slight gain in load factor of 0.3 points.

In response to unstable demand, the industry continued its widespread discount pricing of 1990 and 1991 into early 1992. Despite increased passenger traffic, the watering down effect of discount pricing on revenues held the average yield in the first half of FY92 to only 1.7 percent, or 13.6 cents per passenger mile.

Airline traffic for the industry was up 4.7 percent for the first three quarters of FY92, compared with the same period in 1991. The major portion of this increase was due to the rebound in international traffic (up 20.4 percent), while domestic traffic remained flat with a 0.1 percent loss. With some costs rising and uncertainty as to the ultimate effect of deeply discounted fares offered early in 1992, the industry appeared headed for a substantial losses in the last quarter of FY92. In the domestic arena, the losses may be considerably larger than those suffered in the first three quarters of the year.

While financial losses in 1990 and the first half of 1991 were exceptional, many scheduled passenger carriers have suffered from poor earnings for the last decade. Losses experienced by the scheduled passenger carriers during the 1981-1983 period were due in large part to the recession at that time and high fuel prices. During the 1984-1989 period, the industry earned positive net income in four of the six years, and reported a minimal loss in another. However, the industry's record losses in 1990 were so severe ($3.9 billion) that they wiped out any earlier gains. Scheduled passenger carriers ended up losing about $2 billion during the 1981-1990 decade.

A major reason for losses in 1990 and into 1991 was the widening gap between revenues and unit costs (operating costs per available seat mile). During 1991, system passenger yield increased 1.9 percent over 1990 levels, and yields are expected to increase 2.6 percent in 1992. At the same time, operating expenses fell by 1.6 percent in 1991 compared with 1990 due to declines in jet fuel costs. Through the first three quarters of FY92, lower fuel prices (down 23.5 percent from the same period in FY91) resulted in estimated savings to the industry of more than $2.4 billion.

Debt Burden

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

The effect of greater financial leverage has been to increase the industry's debt service costs. In 1991, interest expense on long-term debt and capitalized leases totaled $1.7 billion, $300 million higher than in 1985.

Regional Airlines

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

The regional airlines' revenue passenger miles and enplanements increased 7.6 percent and 3.4 percent, respectively, between 1990 and 1991.

Unlike the major carriers, the regional carriers have been experiencing continued growth and have increased their traffic over the year ending in mid-1992. Revenue passenger miles in 1991 increased 3.4 percent over 1990, and are estimated to increase 8.2 percent in 1992. Industry growth will continue to outpace that of the larger carriers because of increased demand. The introduction of new state-of-the-art aircraft offering amenities similar to those found on larger aircraft will contribute to greater public acceptance. Another factor is the increasing integration with major carriers. This is encouraging the majors to undertake further route rationalization programs, opening new opportunities for growth by the regionals through service substitution and expansion into markets currently served with large jet aircraft. Due to the proliferation of joint marketing and code-sharing agreements between the regional airlines and larger carriers, the regional industry's structure changed significantly in the mid-1980's. In terms of relative size and sophistication of airline operations and aircraft fleets, the regional industry has evolved from that of a step-child to one as an important participant in air transportation. Although the role of the regionals is and has been to provide feeder service to the large hubs, two factors underlie the success of the regionals: industry consolidation, and increasing integration with the major and national carriers.

Air Cargo

The air cargo industry is composed of airlines that specialize in providing air express or general air freight service, or both, as well as airlines, including passenger airlines, that provide contract, charter, or scheduled cargo services to the shipping public and to other cargo airlines. The need of air cargo operators to become more efficient and competitive has spurred the establishment of highly automated sorting hubs. These hubs are supported by a network of aircraft and ground vehicles that are coordinated on a national level.

On an industry-wide basis, cargo (freight, express, and mail) growth continued to slow in 1991 compared to the growth rates experienced during the 1980's. During 1991, cargo revenue ton-miles (RTMs) decreased 4.6 percent compared with a 7.4 percent average annual growth rate during the 1980's. Part of the decrease is attributable to the continued effect of the recession.

New Aircraft Deliveries

World air carriers placed an estimated 279 orders for large jet aircraft with U.S. and foreign manufacturers during 1991, down from 1,071 in 1990. Only 85 (30.5 percent) of these were for two-engine narrowbody aircraft. As of the end of 1991, U.S. and foreign manufacturers had a total backlog of 3,127 aircraft on order. Of these, 2,021 (64.6 percent were for two-engine narrowbody aircraft. A total of 215 aircraft were delivered to U.S. customers in 1991. This figure represents 25.7 percent of the worldwide total. Of these deliveries to US airlines, 83.3 percent (179 aircraft) were two-engine narrowbody aircraft.

Until 1990, aircraft deliveries to U.S. air carriers amounted to net additions to the U.S. fleet. However, after 1990, the airlines began to replace older Stage 2 aircraft with more efficient, less noisy Stage 3 aircraft. U.S. airlines retired 39 aircraft in 1990 and another 225 during 1991. Not all of these, however, were due to retirements of Stage 2 aircraft; some resulted from the shut-downs of Eastern, Midway and Pan American. Further impetus for retirements of Stage 2 aircraft will come through recently enacted noise abatement legislation.

At the end of 1991 there were 4,252 active aircraft in the U.S. airline fleet. Of these, 1,994 (46.9 percent) were Stage 2 aircraft. FAA forecasts that only 67 Stage 2 aircraft will remain in the fleet by the year 2003. The assumption is made that 624 Stage 2 aircraft will have been retrofitted to meet Stage 3 noise standards by that date. Based on the backlog of aircraft orders and the projections of air carrier traffic and other factors, the U.S. commercial air carrier fleet is going to increase to a total of 5,965 aircraft by 2003. This implies the net addition of 143 aircraft annually (2.9 percent average annual increase) to the U.S. fleet. Actually, because of the demise of Eastern, Midway, and Pan American, the fleet is expected to lose 10 aircraft in 1992.

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

Government Actions

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

The Aviation Safety and Capacity Expansion Act of 1990 authorized the FAA to grant authority to airports to levy up to a $3 passenger facility charge (PFC) on each enplaned passenger. The proceeds go to improve airport facilities' By the end of the third quarter of FY92, 15 airports had received FAA approval to collect PFC's.

INTERNATIONAL COMPETITIVENESS

Perhaps the most striking development of 1992 was the proposed $750 million deal between USAir and British Airways (BA). If approved by both governments, the transaction will give BA a 25 percent voting share in USAir and a possible 44 percent share of total equity. Current U.S. law limits the amount of ownership by a foreign interest in a U.S. carrier. Some U.S. airlines have urged the Government to use this deal as a lever to establish a "quid pro quo" for more liberal concessions in bilateral agreements with the British Government, as well as a means to explore new competitive opportunities in the emerging unified European marketplace.

After several years of negotiations, the United States and the European Community signed an agreement in July 1992 limiting both direct and indirect subsidies on civil air transports of more than 100 seats. The agreement limits funds advanced by governments to no more than 33 percent of total development costs. Indirect support is limited to 4 percent of a company's annual sales. The agreement also calls for strict repayment of government loans and disclosure of terms and conditions. It prohibits government inducements, such as landing rights, and aid programs, and government supported financing of airline sales campaigns.

New U.S.-Russian overflight agreements that open previously restricted airspace to international commercial flights will mean savings in fuel for U.S. as well as foreign carriers, and reductions in airport congestion and delays. It will shorten flight times as much as 70-75 minutes between Detroit and Seoul. For Japanese air carriers, one immediate effect is that they have been able to abandon Anchorage, Alaska as a stopover on flights to the West. The Russian Government is considering charging for overflights as a means of gaining foreign exchange.

Although traffic growth has been sluggish in domestic markets, international traffic for U.S. airlines grew rapidly in recent years, then levelled off in 1991. International traffic between 1986 and 1990, as measured by RPM'S and enplanements, increased by 80 percent and 68.5 percent, respectively. These increases were accompanied by increases in airline capacity for international passengers that more than doubled between 1983 and 1991. For the first half of fiscal year 1992, international passenger enplanements increased 7.6 percent compared with the same period in 1991, and revenue passenger miles increased 20.4 percent.

The big three--American, United and Delta, which account for more than half of all industry traffic--have significantly expanded their international markets. United Airlines is now the dominant U.S. carrier in the Pacific, American dominates in Latin America, and Delta is rapidly assuming preeminence in the North Atlantic. With the introduction of new long-haul aircraft, such as the B747-400 and MD-11, and the rapid expansion in the fleet of two-engine over-water aircraft, new markets are being opened and new international marketing strategies are evolving.

Revenue passenger miles on Atlantic routes are expected to increase 15.2 percent in 1992, after a fall of 12.3 percent in 1991 due that year to the Persian Gulf crisis and the threat of terrorism. Latin American business, which benefitted from the decline in transatlantic travel, was up 14.7 percent in 1991, and will increase 5.9 percent in 1992. Transpacific route revenue passenger miles slowed somewhat in 1991, but are expected to increase 12.2 percent in 1992.

Outlook for 1993

The outlook for the airline industry depends upon the health of the U.S. economy and whether fuel prices remain stable. Fuel prices, which doubled in 1990, dropped back in early 1992 to prices close to the pre-gulf conflict level.

Despite the poor financial performance of almost all carriers for 1990 through the first half of 1992, several of the nation's largest scheduled passenger carriers remain in good financial condition. They should return to profitability in an improved environment. But three major carriers-Eastern, Pan American and Midway--folded in 1991, and three others--Continental, TWA, and America West--are under the protection of bankruptcy courts. The near-term financial prognosis remains highly uncertain for those air carriers that are either in poor financial shape, or are being restructured under the supervision of the bankruptcy courts. Further consolidation of the industry depends in large measure on the length and severity of a generally weak global economy.

Faced with new markets, new players, new equipment, and potential large increases in international traffic, the challenge facing the U.S. industry today is how it can accommodate the international demand and still meet the need for a safe, efficient, and profitable air transportation network.

Long-Term Prospects

The FAA 10-year forecasts show that domestic airline revenue passenger miles will increase at an annual rate of 4.1 percent between 1992 and 2003, and international revenue passenger miles at an annual rate of 5.7 percent. Domestic enplanements are forecast to increase by 3.7 percent annually, and international enplanements 6.5 percent annually over the same period.

Financial prospects for the U.S. airline industry over the next five years depend, however, on a number of factors, including future general economic growth, adequate fuel supplies, and the expansion of airport capacity. Also, Government actions will influence the fortunes of individual air carriers. New Federal legislation, for example, expands capacity and reduces entry barriers at congested airports. The long-term financial and competitive viability of highly leveraged air carriers depends on whether they can adjust to changes in the operating environment, including competition from financially stronger carriers.--Michael Hartmann, Office of Policy, Plans and Management Analysis, FAA, (202) 267-3325, September 1992.

Additional References

Federal Aviation Administration (FAA) Aviation Forecasts, Fiscal Years 1992-2003, February 1992, Federal Aviation Administration, U.S. Department of Transportation, Washington, DC 20591. Telephone: (202) 267-3355. Air Carrier Industry Scheduled Service Traffic Statistics Quarterly, Research and Special Programs Administration, U.S. Department of Transportation, Washington, DC 20590. Telephone: (202) 366-9059. Quarterly Industry Overview, September 1992, Federal Aviation Administration, U.S. Department of Transportation, Washington, DC 20591. Telephone: (202) 267-3355. Boeing Commercial Airplane Group, P.O. Box 7307, MS 64-47, Seattle, WA 98124-2207. Telephone: (206) 237-1710. Air Transport 1991, The Annual Report of the U.S. Scheduled Airline Industry, Air Transport Association of America, 1709 New York Ave. NW, Washington, DC 20006. Telephone: (202) 626-4175.

RAILROADS

The railroad freight industry generated nearly $32 billion in operating revenues in 1992, up about 3 percent from 1991. The 13 major freight railroads accounted for almost $29 billion of that total. Amtrak, the quasi-government rail passenger corporation serving 45 states, had revenues of $1.3 billion in 1992.

FREIGHT SERVICE

In 1992, for the sixth consecutive year, the railroad industry recorded a new high for freight traffic, increasing by more than 2 percent as measured by revenue ton-miles (a measure than incorporates both weight and distance). Carloads of motor vehicles and parts rebounded by an estimated 10 percent from 1991. Intermodal traffic (trailer-on-flatcar and container-on-flatcar) grew an estimated 8 percent. Chemical shipments increased 3 percent. Shipments of lumber and wood products increased 3 percent as residential construction began to recover. Stone, clay, and glass shipments were relatively flat, reflecting a continued weakness in non-residential construction. Grain traffic increased 2 percent. Coal declined an estimated 2 percent, due to slightly milder weather and inventory reductions by electric utilities.

For the 12 months ending June 30, 1992, the freight railroad industry earned an average 6.9 percent return on its net investment base (excluding special charges). Since 1980, the year the Staggers Rail Act partially deregulated rail rates and services, the railroads have invested more than $140 billion in track and equipment. Freight rates declined by 2.1 percent per year in real terms between 1990 and 1992, and have declined 1.5 percent per year since the passage of the Staggers Act, compared with an increase of 2.9 percent per year in the 5 years prior to the Staggers Act. The industry's safety record also has improved dramatically: the number of accidents is down more than 70 percent, and the frequency of accidents per train-mile is down more than 60 percent since the late 1970's.

Intermodal and Technology Issues

Railroad productivity continues to increase at a faster rate than that of almost any other industry. Rail intermodal traffic, which doubled from 3.1 million trailers and containers in 1980 to 6.2 million in 1991, is a good example. Traffic has grown as a result of productivity improvements stemming from the Interstate Commerce Commission's (ICC) 1981 exemption of intermodal traffic from rate regulation, and from the introduction in 1984 of specialized railcars with depressed platforms that carry containers stacked two high (double stack containers). Containers from the Far East move through West Coast ports to inland destinations under expedited schedules on such double-stack trains, carrying export and domestic traffic on the backhaul. More than 100 double-stack trains depart the West Coast weekly. Double-stack cars now account for 30 to 35 percent of total intermodal capacity.

U.S. and Canadian railroads are developing advanced train control systems (ATCS), which utilize microelectronics and telecommunications to control train operations. This technology is designed to monitor the handling of freight cars, the performance of locomotives, and the management of track crews. Some railroads are now testing ATCS in an environment that allows a train crew to receive instructions and to report on the work completed, in real time. When fully implemented, "smart trains" with "positive train separation" are expected to provide safer, more efficient transportation and improved productivity and customer service.

Cooperation with Mexico

Cooperative efforts between the United States and Mexico are increasing the efficiency and safety of rail transportation between the two countries. In anticipation of the proposed North American Free Trade Agreement, and in response to burgeoning trade between the two countries, U.S. railroads and the Mexican railway system--Ferrocarriles Nacionales de Maxico (FNM)--have introduced innovative management and operating practices and have worked together to streamline border crossing procedures.

Both new operating practices and new investments are increasing the presence of U.S. railroads in this international commerce. U.S. railroads are now operating pre-blocked trains through to their Mexican destination without changing locomotives. Double stack trains are being utilized extensively to transport U.S. automobile parts, as well as goods imported from Pacific Rim countries through U.S. ports into Mexico. For the first time, unit grain trains are running into Mexico using joint rates negotiated between U.S. carriers and the FNM.

Several new cooperative ventures are increasing the interrelationship of U.S. and Mexican railroads. The FNM has purchased Union Pacific Railroad's Transportation Control System, which provides computerized monitoring and management of yard operations, inventory, billing, scheduling, and planning functions. The Atchison, Topeka and Santa Fe Railway, the FNM, and Concarril, a Mexican rail car builder, have entered into an agreement to provide rail cars to Santa Fe. And the Southern Pacific has invested in a Mexican company, Ferropuertos, that is building distribution centers to handle imported grain, mineral exports, and intermodal traffic moving both to and from the United States.

Additionally, Burlington Northern and the Mexican corporation, Grupo Protexa, have formed a joint transportation venture to integrate rail and barge services between interior points in Mexico and the U.S. Trains will move southbound to Galveston, Texas, where they will be transported on oceangoing barges provided by Protexa to Mexican Gulf ports and onto the FNM rail system. All these cooperative efforts will increase the competitiveness of both countries' rail industries, opening new markets for both trade and the railroads.

Industry Structure and Regulatory Environment

The 13 Class I freight railroad systems (defined in 1991 as systems with operating revenues of more than $96 million) and Amtrak employed 222,000 persons in 1992. In addition, there are 30 regional railroads with 11,578 employees; 276 independently owned local railroads (not part of Class I systems) with 6,279 employees; and 188 switching and terminal railroads with 7,248 employees. Although the pace of mergers among major railroads has slowed since the early 1980's, sales of line segments by Class I railroads to smaller operators continue. As traffic volumes decline on branch lines, Class I railroads have sold their lines to smaller, lower cost operators. These short lines have improved service to local shippers, while continuing to feed traffic to the major railroads. Over 75 percent of the short line railroads operating today were formed since 1981.

The Staggers Act did not completely deregulate the freight railroads, but it did reduce ICC authority in areas where competition served to limit rail rates. Now, roughly three-quarters of freight traffic is not subject to maximum rate regulation, either because competition has kept rates at levels below the threshold for ICC authority, or because the ICC exempted the traffic altogether. The ICC has explicitly exempted traffic moving in boxcars and trailers-on-flatcars. In addition, the Commission has exempted many agricultural and manufactured commodities (including most lumber and wood products) regardless of car type, after determining that competition was sufficient to protect shippers. In July 1992, the Commission proposed to deregulate the movement of transportation equipment.

Recently, an average of only 11 new rate complaints and protests have been filed per year--only 6 in the most recent year (FY91)--down sharply from an annual average of nearly 300 rate complaints or protests before the Staggers Act went into effect. (For additional background on the Staggers Rail Act, see the 1990 Industrial Outlook, chapter 42.) Now, at least 60 percent of all rail traffic moves under contract.

Railroad-shipper contracts, legalized by the Act, have had a significant impact on the industry. The terms of these agreements, although filed at the ICC, are confidential; only a very general summary is released to the public. However, in 1986, Congress required additional disclosure, including shipper names, in summaries of grain contracts. After the new rules were adopted, the number of rail grain transportation contracts filed at the ICC decreased significantly. A 1992 study released by the Federal Railroad Administration, Effects of Disclosure Requirements on Railroad Grain Transportation Contracts, found that even though the number of grain contracts decreased, the amount of grain moving under contract increased. However, as a result of the disclosure requirement, railroads modified and formalized their grain transportation marketing programs to minimize shipper complaints of discrimination. The study revealed that disclosure encouraged railroads to contract with large grain receivers rather than shippers, caused some carriers to move away from grain transportation contracts entirely, and resulted in equalized rates to shippers. The study also concluded that these requirements stimulated railroad innovations, such as Burlington Northern's (BN) Certificates of Transportation (COT) program, where BN sells guaranteed future transportation capacity for grain shipments at prices set through a public bidding process. (In May 1992, the ICC dismissed a complaint challenging the lawfulness of this program.)

Labor Issues

Wages and other labor-related expenses are the largest component of railroad operating costs, accounting for over 40 percent of these expenses. In 1991, railroad labor and management collective bargaining disputes over wages, work rules and health care with most freight railroads were resolved (see discussion in U.S. Industrial Outlook 1992, page 40-12). However, three other disputes--between Amtrak and its unions, the International Association of Machinists (IAM) and the freight railroads, and the Brotherhood of Maintenance of Way Employees and Conrail--were not part of the 1991 settlements.

By June 1992 the freight railroads' dispute with the IAM and disputes between Amtrak and two of its unions had not been resolved, leading to a shut down on June 24 of the nation's railroad system. Congress intervened within two days, legislating an arbitration process to resolve the remaining disputes. Arbitrators rendered binding awards in the disputes on August 2, 1992. All national railroad labor contracts will be in force until January 1, 1995.

Safety Issues

In 1992, the Federal Railroad Administration (FRA), which regulates rail safety in the United States, issued final rules in three significant areas. The first regulation requires railroads to report instances of grade crossing signal system failures; the second specifies safety standards to protect workers on railroad bridges; and the third establishes new certification requirements for locomotive engineers. Although these regulations may require more railroad investment in equipment and personnel, it is anticipated that rail safety and operating efficiency will be enhanced.

FRA is continuing research on hazardous materials tank car safety, as well as various projects on human factors, such as stress and fatigue and alcohol and drug use; equipment and component failure prevention; locomotive crashworthiness; signals, train control, and grade crossings; and rail integrity.

Outlook for 1993

In 1993, rail traffic volume is forecast to continue the modest recovery of 1992, with revenue ton-miles increasing 3 percent. Coal traffic, the top commodity carried by the railroads, is expected to grow by 2 to 3 percent in 1993, in line with industry and government forecasts of increased coal production. Intermodal traffic is expected to continue to be the fastest growing area, increasing by 3 to 5 percent in tandem with the increasing importance of container and double-stack service. Traffic in chemicals, lumber and wood products, paper, metallic ores, primary metal products, motor vehicles and parts, and stone, clay and glass and other industrial commodities, are expected to increase as a consequence of stronger industrial production. Growth in grain traffic will depend largely on export demand, for example, on whether larger volumes of grain shipments are made to the former Soviet Union. Railroad employment is forecast to decline by approximately 3 percent to 214,000, as early-retirement programs continue, and as additional crew size reductions are negotiated and implemented.

Long-Term Prospects

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

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

PASSENGER SERVICE

The National Railroad Passenger Corporation (Amtrak) started its 21st year of operation in May 1992. Amtrak operates about 250 intercity passenger trains per day over a 25,000 mile route system, serving more than 500 communities in 45 states and the District of Columbia. In FY92 (October 1991 to September 1992), Amtrak carried 40 million passengers--more than 22 million on its intercity trains and about 18 million metropolitan commuters. The number of miles travelled by Amtrak passengers totalled 6 billion in FY92.

Amtrak is continuing its progress toward the goal of covering all its operating cost. Amtrak covered 79 percent of its operating expenses in FY92. Revenue was approximately $1.3 billion, down from $1.4 billion the previous year, while expenses of $1.6 billion were down from $1.75 billion during the same period.

Amtrak received a Federal subsidy of $506 million for FY92, plus an additional $205 million for the Northeast Corridor Improvement Project between Washington and Boston. In constant dollars, Amtrak's 1992 subsidy represented a reduction of more than 60 percent from its 1981 Federal appropriation. The substantial decrease was achieved through a combination of steady fare and ridership increases, and close control of expenses.

Amtrak has contracted for the purchase of 140 new bilevel Superliner sleepers, diners, lounge cars and coaches expected to cost some $340 million. The first delivery of Superliners is expected in early summer 1993, with the remaining deliveries spread over a 2.5 year period.

Station improvement work progressed in 1992 at Penn Station in New York City, and major renovation and rehabilitation projects were completed at Union Station in Chicago, 30th Street Station in Philadelphia, and Union Terminal in Cincinnati.

In December 1992, Amtrak will begin testing the Swedish-built X-2000 tilting train between New York City and Boston and between Harrisburg and Philadelphia. Revenue testing will be conducted in 1993 between New York City and Washington, DC.

Outlook for 1993

Passenger-miles traveled on Amtrak are expected to grow an estimated 7 percent in 1993, and revenue per passenger-mile is expected to increase by 1 to 3 percent in constant dollars. Part of the passenger-related revenue increase will come from state-supported service in California and North Carolina. Commuter services where Amtrak is the contract operator are expected to grow more rapidly. Currently, Amtrak operates certain routes in southern California, the Peninsula Corridor service in the San Francisco area, and the new Virginia Railway Express service in northern Virginia, all under contract to state or local authorities. Amtrak forecasts that non-passenger related revenue, including contract commuter service, real estate operations, and mail and baggage, will reach $428 million, up 6 percent from $402 million in FY92. Amtrak plans to order 50 single-level Viewliner cars for use on long-distance eastern routes, 39 additional Superliner cars, and 23 Horizon cars to replace aging Turboliner equipment operating in the Empire Corridor in New York state.

Long-Term Prospects

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

For the 5-year period, 1992-97, Amtrak passenger-miles are expected to continue to grow by 2 to 3 percent per year. Amtrak's goal is to continue to improve rail passenger service while reducing its dependence on Federal support. It intends to replace its Heritage fleet with single level Viewliner equipment, and add more Superliners where necessary. Amtrak management believes that with adequate capital funding it can cover its operating costs by the year 2000.

Currently, the Amtrak Metroliner in the Northeast Corridor (Washington-New York-Boston) runs at a maximum speed of 125 mph and serves the Washington-New York City market in less than 3 hours. Appropriations for fiscal years 1991 and 1992 included funding to begin electrification of the New York-Boston segment. When these and other improvements are complete, trip times between New York and Boston will fall from 4 hours or more to about 3 hours. To produce such improved trip times, the following are being considered: infrastructure improvements such as track separation, to reduce conflicts with commuter operations; improvements in track and signals; faster accelerating electric locomotives; purchase of cars that can tilt on curves while maintaining speed; and bridge repairs.

With trip time reduction, some air trips could be diverted to rail, possibly decreasing the need for a second Boston airport, because 20 to 30 percent of all the domestic flights departing Boston's Logan Airport are destined for New York. Congress' FY92 appropriation for Amtrak includes $110 million to continue electrification as well as $95 million for other speed-related improvements.

Advances in High-Speed Passenger Service

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

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

Several state and local governments and private sector groups have undertaken market feasibility studies of the potential for high-speed rail service. FRA has provided grants for several of these feasibility studies that ordinarily must be matched by state funds. FRA awarded such a grant to Washington State. All five states identified by the FY92 Department of Transportation (DOT) Appropriation Act--Maryland, New York (in cooperation with Massachusetts), Wisconsin, Pennsylvania, and Nevada--have submitted applications for new funding. Appropriations in FY92 have also provided for an Illinois DOT study of the Chicago-St. Louis rail corridor, without a state match.

In May 1991, the Texas High Speed Rail Authority awarded a franchise to Texas TGV (Morrison-Knudsen) for an estimated $7.0 billion, privately financed, 590-mile system that will employ French technology to serve Dallas/ Fort Worth-Houston-San Antonio-Austin. Completion of the Dallas/Fort Worth-Houston segment is scheduled for 1998; the San Antonio-Austin-Dallas link is scheduled to open in 1999. The process to prepare an environmental impact statement began in April 1992, an independent ridership study commenced in the summer of 1992, and a baseline implementation plan is due in November 1992.

In June 1991, Florida certified Maglev Transit, Inc. (MTI), an American company with considerable Japanese and German financial involvement, to construct and operate the first commercial maglev line in the world, a 13.5-mile segment between Orlando Airport and the International Drive complex near Disney World. The project, with funds raised privately, will cost about $622 million. Section 1107(b) 196 of the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) authorizes the appropriation of $97.5 million from the Highway Trust Fund for land and right-of-way acquisition and guideway construction for this project. Construction is to begin in late 1993, and operations using the German Transrapid technology are scheduled for 1996. An estimated 6.5 to 8.5 million people are expected to ride the train annually.

Florida plans to reopen the process to select a franchisee for a 320 mile high-speed steel-wheel rail system serving Miami-Orlando-Tampa by reissuing a new request for proposals sometime in 1993, after the only private applicant (Florida High Speed Rail Corporation) withdrew its application. The 80 mile Orlando-Tampa corridor is being considered by the state for Phase I of the program.

Among other projects being studied are New York State high speed and maglev corridors (including New York City-Albany-Buffalo) and a 19.5-mile demonstration maglev line from downtown Pittsburgh to the Greater Pittsburgh International Airport. The California Department of Transportation is developing a statewide plan for an integrated rail network. A privately financed maglev line operating from Las Vegas, Nevada, to Anaheim, California has been delayed as a result of financing uncertainty.

An interagency partnership has been formed to work with state governments and the private sector to evaluate the future role of maglev in the United States. The partnership, led by FRA and the U.S. Army Corps of Engineers, with support from the Department of Energy, the Environmental Protection Agency, and several other federal agencies, is called the National Maglev Initiative (NMI). The NMI will issue a report in Spring of 1993 summarizing its findings regarding the extent and nature of further maglev technology development that is appropriate for the United States, and the role of the U.S. Government in that development.

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

One of the features of the ISTEA is a new Federal program under Section 1010 to stimulate the development of high speed rail corridors. Section 1010 provides $5 million per year for FYs1992 through 1997, for a total of $30 million, for the elimination of hazards at railroad/ highway crossings in up to five high speed rail corridors selected by the Secretary of Transportation. These corridors must have rail service which currently achieves or can achieve 90 mph minimum speeds. They should also have the potential to reach 125 to 150 mph service.

Section 1036 of ISTEA calls for the development of a maglev prototype and test track with authorizations for $725 million in spending over 6 years, a high speed ground transportation technology demonstration program with authorizations for $50 million over 5 years, and a high speed ground transportation research and development program authorized at $25 million.--Joel P. Palley, Federal Railroad Administration, U.S. Department of Transportation, (202) 366-0348, August 1992.

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Additional References

Accident/Incident Bulletin (annual), U.S. Department of Transportation (DOT), Federal Railroad Administration, Office of Safety, 400 7th St. SW, Washington, DC 20590. Telephone: (202) 366-2760. Annual Report, Interstate Commerce Commission, Office of Public Affairs, 12th and Constitution Ave. NW, Washington, DC 20423. Telephone: (202) 927-5350. Annual Report, National Railroad Passenger Corporation (Amtrak), 400 North Capitol St., Washington, DC 20001. Telephone: (202) 906-3000. Assessment of the Potential for Magnetic Levitation Transportation Systems in the United States, A Report to Congress, June 1990, U.S. Department of Transportation, Federal Railroad Administration, 400 Seventh St. SW, Washington, DC 20590. Telephone: (202) 366-9660. Employment and Earnings (monthly), Bureau of Labor Statistics, U.S. Department of Labor, Washington, DC 20212. Telephone: (202) 606-6373. Producer Price Index-Railroads, Bureau of Labor Statistics, U.S. Department of Labor, Washington, DC 20212. Telephone: (202) 606-7705. Rail Rates Continue Multi-Year Decline, May 1992, Interstate Commerce Commission, Office of Transportation Analysis, 12th & Constitution, Washington, DC 20423. Telephone: (202) 927-7684. Rail vs. Truck Fuel Efficiency: The Relative Fuel Efficiency of Truck Competitive Rail and Freight Operations Compared in a Range of Corridors, April 1991, U.S. Department of Transportation, Federal Railroad Administration. Available from the National Technical Information Service (NTIS) (PB 91-233619). Telephone: (703) 487-4650. Short-Term Energy Outlook: Quarterly Projections, U.S. Department of Energy, Energy Information Administration, Forrestal Building, Washington, DC 20585. Telephone: (202) 586-8800. Railroad Regulation: Economic and Financial Impacts of the Staggers Rail Act of 1980, May 1990 (GAO/RCED-90-80), U.S. General Accounting Office, P.O. Box 6015, Gaithersburg MD 20877. Telephone: (202) 275-6241. Freight Commodity Statistics (annual), Association of American Railroads, 50 F St. NW, Washington, DC 20001. Telephone: (202) 639-2302. The Grain Book (annual), Association of American Railroads, 50 F St. NW, Washington, DC 20001. Telephone: (202) 639-2550. Modern Railroads (monthly), and Modern Railroads: Short Lines and Regionals (semimonthly), 8401 Corporate Dr., Suite 520, Landover, MD 20785. Telephone: (301) 459-9283. Monthly Traffic Monitor Data Resources, Inc., 29 Hartwell Ave., Lexington, MA 02173. Telephone: (617) 863-5100. Profiles of Local and Regional Railroads (annual), Economics and Finance Department, Association of American Railroads, 50 F St. NW, Washington, DC 20001. Telephone: (202) 639-2302. Railway Age (monthly), 345 Hudson St., New York, NY 10014. Telephone: (212) 620-7200. Traffic World (weekly), 1325 G St. NW, Washington, DC 20005. Telephone: (202) 626-4500. Transportation in America: A Statistical Analysis of Transportation in the United States (annual), Eno Transportation Foundation, Inc., Publications Department 419, P.O. 753, Waldorf, MD 20604. Telephone: (301) 645-5643. Transportation Review (annual), Data Resources, Inc., 29 Hartwell Ave., Lexington, MA 02173. Telephone: (617) 863-5100. Yearbook of Railroad Facts (annual), Economics and Finance Department, Association of American Railroads, 50 F St. NW, Washington, DC 20001. Telephone: (202) 639-2302.

TRUCKING

The U.S. trucking industry generated an estimated $281 billion in revenues in 1992, about 77 percent of the total U.S. freight market. Less than half the trucking total was for-hire carrier revenue, including interstate, intrastate, and local transport. The balance was imputed revenue from private carriage, i.e. estimated costs paid by manufacturers, builders, retailers, and others to haul their own goods.

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

Small package includes the 2-to-3 day delivery market long dominated by United Parcel Service (UPS). Air package express service, essentially next day delivery, is dominated by air freight carriers such as Federal Express. However, both small package and package express markets are now fiercely contested by firms traditionally viewed as trucking companies. Roadway Services' small package service, and Consolidated Freightways' purchase of Emery's air freight business, are examples. Similarly, UPS has expanded from its traditional small package business into the overnight air business, and is second only to Federal Express in that market.

Operationally, the LTL market resembles small package and air carrier package express markets, with establishment of regional or national networks, sophisticated sorting terminals, and local pick-up and delivery service. Many LTL carriers historically handled packages as a component of their LTL business, but much of this traffic now has been captured by the specialized package carriers.

Some long-haul trucking markets are undergoing dramatic change. Shorter product manufacturing cycles, trucking company efforts to retain drivers by limiting driver assignment time away from home, shipper desires for guaranteed delivery times, and railroad competition--notably from doublestacks (see Railroads this chapter)--are forcing truckers to focus on shorter regional markets, typically 250-500 miles in length. Targeting the shorter shipping routes reverses a 1980's trend in which some long-haul general freight carriers were achieving average lengths of haul of 1,100 miles and more.

In terms of revenue, trucking retains the lead share of the total U.S. freight market. This reflects the higher revenues per ton (weight) and per ton-mile (distance) generated by trucking, compared to rail and barge transport that carry more bulk commodities at lower ton-mile rates. Conversely, trucking's ton and ton-mile shares of the U.S. freight market are smaller than its revenue share (Table 2).

Table 2: Trucking Share of Freight Industry in 1991
(in billions)
                                Total Freight       Trucking
  Measure          Trucking       Industry          Percent
Revenues ($)         278            360               77
Tons                 2.7            6.4               42
Ton-miles            758          2,881               26
SOURCE: Transportation in America 1992, Eno Foundation.

Several factors limit the precision of trucking industry data: its large size, the ambiguity of terms such as "local" trucking, disparate data sources and collection methodologies, and the fact that much of trucking is exempt or deregulated and, therefore, subject to few or no reporting requirements. One subsector where figures are more readily available is Interstate Commerce Commission (ICC) authorized trucking, composed of interstate, for-hire carriage. This subsector generated approximately $78 billion in revenue in 1991, or 28 percent of trucking's total (Table 3).

Table 3: 1991 ICC(1) Carrier Revenues
                          Carriers         1991 Revenues
   Industry sector        (Number)         (billion $)
All ICC carriers           47,890           78.3(2)
Top 100-total                 100           36.9(3)
UPS carriers                    2            11.7
LTL, general freight           34            13.9
TL, general freight            28             5.2
Other top 100(4)               36             6.1
(1) Interstate commerce commission.
(2) Estimate.
(3) Actual.
(4) Primarily household goods, motor vehicle, and chemical tank.
SOURCES: Interstate Commerce Commission, Section of Systems Development; Commerc
ial
Carrier Journal, July 1992.

Besides pressure from other transport modes, for-hire trucking is itself intensely competitive from within, characterized by continuing expansion of existing firms and entry of new firms. In 1980 fewer than 20,000 for-hire carriers held ICC operating authority. Only a small percent of carriers held 48-state authority, and contract operating authority was limited. By July 1992, the total number of ICC regulated motor carriers was nearly 50,000, including 931 Class I carriers with annual revenues exceeding $6 million, and 1,367 Class II carriers with revenues exceeding $1.2 million. Nearly 17,000 carriers held 48-state authority and some 39,000 carriers could offer tailored contract service to shippers.

Various third parties operating in the industry, especially ICC licensed brokers, have the effect of intensifying competition. Brokers constantly match shippers with carriers, thereby increasing available customer choices and pressuring carrier margins. ICC licensed brokers have increased from about 100 in 1980, to more than 7,200 in 1992. The transport services they booked in 1991 had an estimated value of $6-to-$7 billion. ICC freight forwarders, a smaller group which has grown from about 200 in 1980 to 663 in 1992, essentially function as pick-up and delivery carriers, adding to the competition.

Estimates of total industry employment vary widely, with some sources claiming figures as high as 8 million persons. But this figure presumably includes numerous part-time workers. A reasonable estimate of total full-time industry employment would be closer to 4 million.

Information technology continues to dictate industry service levels and, to some extent, to change the nature of trucking. The deployment of vehicle tracking systems and systems for long distance communication with drivers, as well as the widespread use of bar code scanning of packages, have led to operating improvements, and have expanded rapidly in recent years. Acceptance of these hi-tech products and services, coupled with the marketing agressiveness of suppliers such as IBM, Motorola, Qualcomm, McCaw Cellular, and others, indicates increased usage of these technologies in 1993 and beyond.

In 1992, competitors, Qualcomm and, to a lesser extent, American Mobile Satellite Corporation (AMSC), were providing two-way satellite data links and position location services to an estimated 200 U.S. trucking fleets. Using geosynchronous satellites orbiting at 22,300 miles above the earth, they were serving some 30,000 trucks, each truck equipped with an on-board terminal. Several other companies provide land-based mobile communications services, using radio and cellular phone technology. Motorola and IBM's jointly operated Ardis service, for example, offers radio-based transmission of data. McCaw Cellular and various Bell Operating Companies offer voice and some data services through the nation's approximately 1,100 cellular telephone networks.

With either satellite or land-based systems, drivers can notify their dispatch centers of their location, report shipment delivery status, and be available for new load assignments. Moreover, mobile data transmission capacity could be greatly expanded. A number of low and medium earth orbit satellite systems--with spacecraft designed to orbit at heights ranging from 500 to 6,500 miles--are proposed for launch during the latter part of the 1990's. Motorola's Iridium system, Qualcomm/Loral's GLOBAL-STAR and TRW's Odessey are among these. In addition, AMSC and Canadian partner, Telesat Mobile Inc. (TMI), plan a 1994 launch of two geostationary satellites for mobile voice and data services.

Meanwhile, companies like Apple, Digital, IBM, NEC, and Toshiba have been rapidly upgrading the communications capabilities--primarily data transmission--of portable, laptop, and handheld computers to communicate between drivers and terminal facilities via ground based networks. Finally, bar code scanning and electronic pen devices are increasingly used for streamlining data capture, providing proof of delivery, invoicing and other tasks.

FINANCIAL HIGHLIGHTS

The for-hire trucking industry was showing improved financial results in 1992, following a disappointing 1991 and a mediocre 1990. The start of the recession and dramatic diesel fuel price increases linked to Iraq's invasion of Kuwait depressed results for 1990. In 1991, a weak economy in the first quarter and halting recovery for the remaining quarters resulted in the poorest year in a decade for most carriers. One exception was UPS with $11.7 billion in revenue and $440 million net income. In contrast, the entire ICC 100 large carrier group had revenues totaling $22.1 billion, but net income of only $314 million in 1991. This resulted in a net profit margin of only 1.4 percent, compared with historical norms closer to 2.0-to-2.5 percent.

Table 4: Results for 100 Large ICC(1) Regulated
Carriers(2)
                                                  Percent Change
  Measure                  1989     1990    1991      1990-91
Revenue (billion $)        20.3     21.4    22.1          3.3
Net income (million $)      414      431     314        -27.1
Tons (million)              167      173     178          2.9
(1) Interstate Commerce Commission.
(2) Figures exlude UPS, contract carriers (which do not report quarterly figures
), and some
large carriers that failed to submit timely reports. Identical carrier set, 1990
 and 1991.
SOURCES: Interstate Commerce Commission, Large Class I Motor Carriers of Propert
y
Selected Earnings

Motor carriers generally were showing good results for the first six months of 1992, although the sharp gains registered in selected markets were offset somewhat by poor results in others. Some large LTL carriers, for example, had double digit revenue and profit gains in overnight and regional markets, but declines in traditional, long-haul markets that require shipment sorting at multiple terminals. Overall, LTL carriers among the ICC's 100 Large Carrier group showed revenue of $7.2 billion for the first six months of 1992, up 7.7 percent over the same period in 1991. As a group, other carriers within the 100 large carrier group showed even stronger gains. Their revenues for the first two quarters of 1992 were $4.4 billion, up 10.5 percent over 1991.

Truck Sales

Sales of heavy trucks appeared headed for a rebound in 1992 from the poor level of about 99,000 vehicles in 1991. Through July 1992, Class 8 truck sales--those with a gross vehicle weight (gvw) of 33,000 lbs. or higher--equaled 64,168 units, 14 percent higher than year earlier levels, and appeared likely to exceed 110,000 total vehicles for the year. Post-1980 deregulation consolidation and the early 1980's recession caused Class 8 truck sales to plunge to an average 86,000 units per year during 1981-83. For each of the next 7 years, Class 8 sales exceeded 110,000, averaging 133,000 annually. The decade's high of 148,000 units was posted in 1988. Modest economic growth could boost 1993 vehicle sales to the 130,000-135,000 unit range.

Annual sales for Class 7 and Class 6 vehicles, so-called medium duty trucks, are considerably less than Class 8 sales levels. Figures in these two categories similarly declined in recent years, and plunged in 1991; Class 6 vehicle sales were regaining strength in 1992 (Table 7). Total trucking equipment outlays for tractor and trailor units easily could exceed $10 billion in 1993.

Table 5: Heavy Truck Sales
(units)
             Full Calendar Year     Jan. Through July
            1989      1990     1991      1991     1992
Class 8    145,068   121,324   98,730    56,335   64,168
Class 7     93,446    85,345   72,598    46,271   41,827
Class 6     39,128    38,209   22,445    13,728   18,272
NOTE: Class 8 vehicles are 33,000 lbs. gross vehicle weight (gvw); class 7 are
26,001-33,000 gvw; class 6 are 19,501-26,000 gvw. Class 8 full year sales repres
ent close
to 1 percent of total U.S. car and truck sales. All figures are "domestic retail
," which are sales
to U.S. end-users and include imports.
SOURCE: Motor Vehicle Manufacturers Association.

GOVERNMENT ACTIONS

Perhaps the most contentious issue affecting trucking in recent years has been the so-called undercharge issue. Although its impact is primarily on shippers and trustees of bankrupt carriers, it continues to affect truckers' interests.

In June 1990, the U.S. Supreme Court ruled in the Maislin case that filed tariff rates supersede any rates which carriers and shippers negotiated but failed to file. If the filed tariff specified, for example, a $1,200 rate for a shipment while the negotiated-but-unfiled rate specified $800, Maislin holds that the shipper is liable for a $400 balance due bill. For numerous shipments over an extended period, single shippers have received "undercharge" bills exceeding $100,000 and more. These somewhat unusual hostile carrier-shipper relationships are largely explained by the fact that solvent carriers generally seek cordial relations with their shippers and shun invoking undercharge claims, but in a state of bankruptcy, carrier trustees often seek additional payment from shippers. Potential shipper liability on Maislin type cases alone could reach $2 billion.

In 1992 there was considerable speculation that other types of rates--contract rates, and filed but coded tariff rates--might also be judged invalid and thereby be superseded by (tariff) class rates. Such an outcome would raise estimates of total potential shipper liability to about $32 billion.

Uniformity

Through the Intermodal Surface Transportation Efficiency Act (ISTEA) of 1991, Congress mandated changes aimed at bringing uniformity to state regulation of interstate carriers. The revisions could eventually save carriers $500 million to $1 billion in total annual expenses. Changes to the most costly requirement--that carriers prove possession of ICC operating authority by registering with individual states, obtaining decals and displaying them on so-called bingo cards--are scheduled to take effect in 1994. Single registration of vehicles under the International Registration Plan (IRP) and single payment of state fuel taxes under the International Fuel Tax Agreement (IFTA), although not scheduled to become fully effective until 1996 and 1998, will eventually add to the "uniformity" savings realized by carriers.

Larger Vehicles

Federal law limits weight and sizes for trucks using the the 45,000-mile Interstate Highway System. Limits on virtually the entire balance of the nation's 3.9 million miles of highways, roads, and streets are set by states, and the limits vary considerably.

The ISTEA Act of 1991 restricted the ability of states to make exceptions to Federal limits on the Interstate system. Truckers not only failed to win uniform increases in weight and size under the ISTEA, but the Act actually prohibited individual states for two years from increasing limits now in existence. Trucking interests, however, are expected to continue their pursuit of larger Federal weight and LCV (longer combination vehicle) limits.

State Deregulation

Despite significant deregulation of trucking at the interstate level, most states continue to regulate economic matters at the intrastate level. A U.S. Department of Transportation study in 1990 found strict regulation among 28 states and moderate regulation among 15. Only eight states were deemed to have deregulated their for-hire trucking industries. Congressional attempts to preempt regulation of intrastate trucking have failed in recent years. A California appellate court decision could accomplish by judicial decree what Congress has been unable to do legislatively. The court found that because Federal Express is a federally certified air carrier, its California intrastate trucking operations were exempt from regulation by that state. That finding could prevail in other states as well.

Because of Federal's corporate structure, it was the only air express company at the time to gain by the ruling. Companies like UPS and Airborne, however, quickly sought legislative remedies to avoid competitive disadvantage, and various versions of Federal preemption legislation have gained renewed momentum as a result.

Safety

Safety compliance measures, such as driver training and proper vehicle maintenance, benefit carriers as well as other motorists. Nonetheless, the measures do impose costs. And, given the sharply increased Federal emphasis on safety--enforced primarily through the Federal Highway Administration's Office of Motor Carrier Safety (at U.S. DOT)--truckers can now view safety compliance as a permanent cost of doing business, and one that may increase at least in the short term.

The Motor Carrier Safety Assistance Program (MCSAP), established by Congress in 1982 strengthens the combined role of states and the Federal Office of Motor Carrier Safety to conduct routine and annual (e.g., "Road-Check '92") vehicle inspections. Data files on some 240,000 interstate for-hire and private carriers are maintained as well. Most carriers have found that minimizing insurance premiums and keeping vehicles in good running condition are incentive enough to spend $6,000-to-$9,000 annually per truck on vehicle maintenance and repair, white at the same time meeting MCSAP's safety compliance requirements.

The Commercial Drivers License (CDL) program, a key feature of current Federal safety enforcement efforts, was established by the Commercial Motor Vehicle Safety Act of 1986. Its purposes are to ensure that drivers of commercial vehicles have only one license and that they be qualified to operate their vehicles. Requirements cover an estimated 5.5 million persons (including bus drivers) who drive commercial vehicles exceeding 26,000 pounds gross vehicle weight (gvw) and drivers who haul hazardous materials in any

vehicle over 10,000 pounds gvw. The CDL requirements cover interstate and intrastate operations. The commercial drivers licenses are issued by the states. To receive a license, drivers must pass a written test and a driving skills test that are administered by the states in conformance with Federal standards. The initial deadline for passing the tests was April 1, 1992. Roadcheck '92, conducted in May, indicated that more than 95 percent of inspected drivers had successfully met the deadline.

INTERNATIONAL COMPETITIVENESS

With the exception of U.S.-Canadian relationships, U.S. presence in international trucking and foreign participation in U.S markets is still quite limited. Nonetheless, U.S. truckers in the 1990's will see expanded international opportunities as well as growing competition here from foreign carriers. Developments such as the North American Free Trade Agreement (NAFTA), the European Community (EC) 1992 cooperative economic arrangement, and also the increasing globalization of trade and emergence of global freight carriers, will fuel this expansion.

U.S. and Canadian access to the crossborder trucking market is already widespread. By July 1992, nearly 2,300 Canadian carriers held ICC operating authority, and about 800 of those held 48-state authority. Unlike the United States, Canadian authority is issued at the provincial level, not the national level. Nonetheless, U.S. carriers in 1991 held about 5,300 grants of Canadian provincial authority, up from 4,300 in 1990. Permits ranged in number from nearly 2,300 issued by Ontario province to as few as 22 for the Yukon territory. The United States and Canada are each other's largest trading partners, with two-way merchandise trade reaching $176 billion in 1991. Cross-border transport costs associated with these goods is $4 to $7 billion annually, including truck and rail service. Cross-border transport should grow as more provisions of the 1989 U.S.-Canada trade agreement phase in. The pending trilateral NAFTA--although primarily affecting Mexican-U.S. ties--could also further stimulate trade and attendant transport between America and Canada.

In contrast to the Canadian market, Mexican crossborder trucking at present is highly restricted. Mexico requires use of Mexican drivers and Mexican equipment to handle shipments there, leading U.S. shippers and carriers to form alliances with Mexican carriers. In retaliation for Mexican restrictions, the United States established an embargo in 1982 limiting Mexican access to U.S. markets. U.S. certificates of registration (CR) restrict Mexican carriers' access to a border zone generally ranging 10-25 miles north of the U.S. border (75 miles near Brownsville and San Diego; also, an application for an exception at the border near El Paso, TX is pending). The number of Mexican carriers holding CRs had grown to 4,083 by August 1992. Mexican motor freight carriers holding broader authority remained frozen at four; none held 48-state authority.

Significant progress has been made recently in U.S.-Mexican trucking relations. Bilateral surface transportation discussions with Mexico aimed at liberalizing crossborder trucking access brought gains in truck safety and commercial drivers license uniformity. Bilateral efforts were superseded by the 1991-1992 trilateral NAFTA negotiations. The NAFTA agreement, formally announced in August 1992, but not yet ratified, will eliminate some Mexican and U.S. restrictions after 3 years, others after 7 years, and virtually all access and investment restrictions on trucking companies in 10 years.

In Europe, U.S. carriers are interested in establishing a presence to better control the European leg of shipments originating in or destined for the United States, and to participate in the growth of existing European traffic (estimated by the EC Commission to grow 60 percent by 2000), as well as to develop new markets such as overnight package delivery. U.S. companies such as Yellow, Consolidated Freightways, and Roadway have made alliances with European companies. UPS has purchased European parcel carriers directly. A third option is for a company to build its own operations in Europe, although Federal Express' 1992 withdrawal from Europe indicates the difficulty of this approach.

The globalization of trade and emergence of global freight carriers are also affecting U.S. trucking firms. Although freight transport is a large and diverse market, there are signs that a consolidation and the formation of megacarriers, so visible in the airline passenger industry, may eventually extend to the freight industry as well.

Outlook for 1993

A general profit squeeze on motor carriers will continue in 1993. Railroad cost cuts and efficiency gains will add to downward pressure on trucking rates, and a tight supply of qualified drivers will force labor expenses higher. Greater access to intrastate markets, modest growth in the economy, and streamlining of regulatory paperwork should offset the profit squeeze somewhat.

Major carriers will continue targeting niche markets, such as expedited service in short-haul markets. The comprehensive application of information technology--more widespread use of improved communications/positioning services and shipment tracking capabilities--will facilitate an expansion of services, and further blur distinctions among operators in the various freight modes.

Long-Term Outlook

Trucking will remain the dominant freight mode in this country, but multinational shippers and sophisticated global freight carriers will increasingly determine which firms haul the freight. Improved global logistics capabilities of many carriers--motor, rail, ocean, and air--affirms the importance of understanding global production and distribution. The application of world class information systems to automate shipment, vehicle tracking and data management shows companies are devoting enormous resources to attain this capability. And widescale deployment of these systems in each modal market underscores the corporate commitment to mastering global freight movement. The minimum implication for trucking firms is that they keep abreast of this technology, sophistication, and the potential to control freight movement or else be eclipsed by firms who do.--Thomas M. McNamara, Office of Economics, Interstate Commerce Commission, (202) 927-7684.

[TABULAR DATA OMITTED]

Additional References

The U.S. Motor Carrier Industry Long After Deregulation, March 1992, Interstate Commerce Commission, 12th and Constitution Ave. NW, Washington, DC 20423. Telephone: (202) 927-7684. Transport Statistics In The United States, Motor Carriers Part 2, For Year Ended 12/31/90, Bureau of Accounts, Interstate Commerce Commission, 12th and Constitution Ave NW, Washington, DC 20423. Telephone: (202) 927-6184. Transportation Report, C.J. Nicholas, July 1989, U.S. Department of Agriculture, Office of Transportation, 14th and Independence Ave. SW, Washington, DC 20250. Telephone: (202) 690-1320. Freight Trucking, Promising Approaches For Predicting Carriers' Safety Risks, April 4, 1991, General Accounting Office, Report No. GAO/ PEMD-91-13, Washington, DC 20548. Telephone: (202) 275-6241. Highway Statistics 1990, U.S. Department of Transportation: Federal Highway Administration, Office of Highway Information Management, Washington, DC 20590. Telephone: (202) 366-0180. Impact of State Regulation On The Package Express Industry, 1990, U.S. Department of Transportation, 400 7th St. SW, Rm 9217, Washington, DC 20590. Telephone: (202) 366-4420. American Trucking Trends, American Trucking Associations, Statistical Analysis Department, 2200 Mill Rd., Alexandria, VA 22314-4677. Telephone: (703) 838-1799. Commercial Carrier Journal, "The Top 100," July 1992, Chilton Co., Chilton Way, Radnor, PA 19089. Telephone: (215) 964-4000. Facts & Figures '92, Motor Vehicle Manufacturers Association, 7430 Second Ave., Detroit, MI 48211. Telephone: (313) 872-4311. Financial & Operating Statistics: 1990 Motor Carrier Annual Report, American Trucking Associations, Statistical Analysis Department, 2200 Mill Rd., Alexandria, VA 22314. Telephone: (703) 838-1793. Large Class I Motor Carriers of Property Selected Earnings Data, Quarter and Twelve Months Ending 12/31/91; Quarter Ending 3/31/91; Quarter and Six Months Ending 6/30/92, Bureau of Accounts, Rm 3148 Interstate Commerce Commission, 12th and Constitution Ave. NW, Washington, DC 20423. Telephone: (202) 927-6184. Transportation in America, Tenth Edition, 1991, Frank A. Smith, Eno Foundation, P.O. Box, 2055, Westport, CT 06880. Telephone: (203) 227-2582. Transportation Quarterly, "Economic Regulation vs. Safety Regulation of the Trucking Industry--Which More Effectively Promotes Safety?" Karen Borlaug Phillips and Janie A. McCutchen, Vol. 45, No. 3, July 1991 (323-340), Eno Transportation Foundation, Inc., P.O. Box 2055, Westport, CT 06880. Telephone: (203) 227-2582.

WATER TRANSPORTATION

The U.S. water transportation industry (SIC 44) includes firms employed in freight and passenger transportation on the open seas, the inland waterways or the Great Lakes, and establishments that provide services such as lighterage, towing, and canal operations. Also included in this group are cargo handling operations, excursion boats, sightseeing boats and water taxis. Although the breadth of services provided in this industry is large, this discussion is limited to the firms that provide freight handling services.

The freight transportation and incidental services sectors provide a majority of the industry's revenue ($15.4 billion, or 75 percent in 1987) as well as employment (122,857 persons, or 73 percent). Additionally, U.S. firms transporting cargo internationally are covered here because of the intense competition they face from foreign operators.

According to the 1987 Census of Transportation, more than 6,000 firms operate in the industry and employ about 170,000 persons (Table 6). In 1992, about 22,000 persons were active seafarers involved in domestic and foreign deep sea trades. The total number of seafarers has decreased substantially since 1960 when there were more than 100,000. Today, the availability of U.S. nationals to provide seafaring services exceeds shipboard jobs. Ship operators have few problems crewing U.S.-flag ships in peacetime.

[TABULAR DATA 6 OMITTED]

Significant increases in productivity, and simultaneous decreases in fleet size have contributed to the decline in the number of U.S. seafaring jobs. For example, the average crew size on oceangoing vessels of at least 1,000 gross registered tons was 51 in 1960, but only 27 in 1992. Similarly, there were 951 active U.S.-flag merchant vessels in 1960, but only 411 active by 1992.

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

As of January 1, 1992, there were 619 vessels (23 million DWT) of at least 1,000 GRT in the U.S.-flag oceangoing merchant fleet (Table 7). However, of this total, 208 vessels aggregating nearly 5 million DWT were inactive, of which 2.7 million DWT were government-owned ships.

[TABULAR DATA 7 OMITTED]

In general terms, there are three categories of commercial waterborne freight service: liner, nonliner, and tanker. Liner service refers to regularly scheduled common carriage, often used to ship finished goods. Nonliner service refers to chartered or contracted service, and to freight services offered aboard ships that move from port to port in search of cargoes. The predominant use of nonliner service is for shipments of dry bulk cargoes, such as grain, coal, and dry chemicals, but it is also used to ship certain finished goods.

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

The volume of commercial U.S.-flag waterborne cargoes is significant: the fleet delivered nearly 1.1 billion LT of domestic cargo in 1990, the latest year for which complete domestic trade data are available. During 1991, the deep sea foreign shipping sector of the U.S. industry carried about 33.4 million LT in U.S. merchandise, compared with about 39.8 million LT in 1990.

Environmental regulations affect the short- and long-term decisions industry firms make. The three major environmental statutes and regulations facing the industry are the Oil Pollution Act of 1990 (OPA 90), the international Maritime Pollution (MARPOL) agreements, and the Clean Air Act of 1990.

OPA 90 creates a comprehensive prevention, response, liability, and compensation regime for dealing with oil pollution caused by vessels and facilities. The Act substantially increases Federal Government oversight in numerous areas of marine safety and environmental protection.

OPA 90 is far-reaching in terms of its effect on national and international maritime operations. Two provisions of the law will influence corporate decisions concerning the operation of both U.S. and foreign flag tankers in U.S. waters: (1) the requirement for double hulls on tanker vessels; and (2) the liability and compensation provisions.

OPA 90 specifies that all new tankers and tank barges operating in U.S. waters and constructed after June 30, 1990, be fitted with double hulls. Single hull tankers built before June 30, 1990, will be phased out beginning in 1995. By 2015, all tankers that operate in U.S. waters--foreign- as well as U.S.- flag--will have to be equipped with double hulls.

The United States is also signatory to a number of international treaties concerning environmental protection. The most influential of these is MARPOL, which regulates the discharge of oily mixtures from tankers in environmentally sensitive areas. The accord also restricts the intentional dumping of harmful substances and through its safety regulations attempts to limit accidental discharges of these substances.

Amendments to Annex I of MARPOL 73/78 are also being considered to help prevent oil pollution in the event of a collision or grounding. Additionally, as a result of the Clean Air Act and the Intermodal Surface Transportation Efficiency Act of 1991, the maritime community can expect more Federal controls on air emissions from vessels and harbor craft, trucks, equipment, and stationary sources. The effect of these anticipated regulations on mobile sources will have significant consequences for port operations. Ports will be required to develop congestion mitigation and air quality abatement management programs. These regulations may also increase the movement of low sulfur coal on the Great Lakes and on the inland waterways.

Recent industry responses to the higher environmental standards include calls from oil companies for uniform quality inspection societies for tankers, and consortia between universities and businesses to develop marine environmental protection training centers.

DEEP SEA FOREIGN TRADE SHIPPING

The deep sea foreign trade (SIC 4412) includes the ocean transportation of freight between the United States and foreign ports. According to 1987 Bureau of Census data, there were 273 establishments operating in this field. Although companies wishing to participate in this industry face enormous capital requirements, this market has relatively few legal barriers to entry.

Open U.S. Market

The United States possesses the most open international shipping market in the world and American companies compete against foreign-flag carriers that have unrestricted access to U.S. commercial ports and cargo. Foreign-flag operators and their representatives can solicit and transport U.S. foreign trade commercial cargoes on an equal basis with U.S. firms. The openness of the U.S. market also permits foreign-flag operators to establish inland transportation systems and arrangements that mirror those of U.S.-flag operators. This openness to foreign-flag carriers is reflected in the fact that in 1991 about 83 percent of U.S. oceanborne liner trade was carried by foreign-flag ships.

Under U.S. laws, operators of ships in the U.S. international liner trades can freely join other carriers to set rates (open liner conferences) or, if they choose, serve the U.S. liner trades as independent carriers. Companies that choose to join the conferences are immune from Federal anti-trust law.

By comparison, many foreign governments impose restrictions on the operations of U.S.-flag operators. As a result, U.S. liner operators must vie for cargoes with rival carriers in an open market within the United States, but they are not always able to compete on an equal basis with national carriers in foreign countries.

Although maritime capital and operating cost structures vary widely by type of trade and vessel, U.S.-flag vessel operators in the foreign trades generally incur significantly higher costs for vessel operation than their foreign-flag competitors. However, these higher U.S.-flag operating costs can be partially offset by Operating Differential Subsidy (ODS).

Despite receiving less ODS from the Federal Government in 1991 (Table 8), profits increased for the major U.S.-flag foreign trade liner companies. This sector posted an aggregate net profit of $111 million in 1991, a sharp reversal from the previous year's net loss of $25 million. Two factors were responsible for this increase: a temporary surge in traffic created by the carriage of military cargo in support of Operation Desert Storm, and a trend towards lower operating costs and greater efficiency.

[TABULAR DATA 8 OMITTED]

U.S.-flag operators tend to specialize, and this can be seen by examining cargo tonnage and cargo value data (Tables 9 and 10). Although U.S.-flag ships carried only 4 percent of the total cargo tonnage in 1991, this represented more than 15 percent of the total cargo value. This is because most of the U.S.-flag ships employed in the foreign trade are engaged in liner service and carry relatively higher-valued cargo.

[TABULAR DATA 9 & 10 OMITTED]

U.S.-flag fleet operations affect the U.S. balance of payments. The U.S. deficit for all international ocean transportation transactions declined from $1.1 billion in 1990 to less than $400 million in 1991 (Table 11). Much of this decline is attributed to the decline in payments to foreign-flag tanker operators in 1991.

Table 11: U.S. Receipts and Payments for
International Ocean Transportation
(in millions of dollars)
  Item                              1989(1)   1990(1)   1991(2)
Total Receipts                       11,822    12,202    12,195
  Passenger Fares                       132       154       156
  Export Freight                      3,882     4,011     3,779
  Port Expenditures                   7,609     7,815     8,020
  Charter Hire                          199       222       240
Total Payments:                      12,420    13,326    12,582
  Passenger Fares                       193       248       279
  Import Freight                      9,391    10,290     9,593
  Port Expenditures                   2,228     2,174     2,093
  Charter Hire                          608       614       617
Surplus (Receipts less Payments):
Total Surplus                          -598    -1,124      -387
  Passenger Fares                       -61       -94      -123
  Export Freight                     -5,509    -6,279    -5,814
  Port Expenditures                   5,381     5,641     5,927
  Charter Hire                         -409      -392      -377
(1) Revised.
(2) Preliminary.
SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, Balance of
Payments Division.

Cost Cutting Innovations

The industry has been an innovator in the world shipping and transportation communities. Recent operational improvements include intermodal transportation services, hub-and-spoke operations, and joint ventures/consortia. Through these developments, some water transportation firms are becoming more vertically integrated and are providing point-to-point transportation services, rather than merely ocean transportation services. Although these improvements help American firms to provide quality service at competitive rates, the accessibility of the U.S. market allows foreign firms to adopt U.S. operators' innovations.

Hub-and-spoke, or linehaul and feeder systems, are designed to take advantage of a company's intermodal capacities to provide regularly scheduled transportation services to more regions of the world. In hub-and-spoke systems, a shipping company provides regular feeder service from a variety of origins, either by train, truck, ship, barge or a combination of these, to a central port. At the central port, the cargo is loaded onto a linehaul ship, shipped to another central port, and then offloaded onto a feeder ship bound for its final destination. As in the airline business, hub-and-spoke maritime systems place a premium on efficient, well-coordinated operations.

To offset rising costs associated with finer operations, vessel and terminal sharing arrangements joint ventures) have been initiated by many carriers. Such arrangements permit companies to use capital more efficiently by sharing costly assets, and offer expanded marketing opportunities through increased sailing frequencies and port coverage. The overall effect of these innovations has been to expand the activities of traditional maritime transportation companies. Diversified transportation operations permit these carriers to spread their costs among a number of different subsidiaries and associated companies and to share costs with other shipping firms.

Outlook for 1993

The performance of the U.S. deep sea foreign water transportation industry will depend on the ability of companies to control their labor, fuel and other costs. Many liner operators are entering into vessel sharing agreements to reduce excess capacity on many of the principal trade routes, and they are expected to continue to do so in 1993.

The performance of this sector will also depend on several factors over which operators have no control. One such factor is the volume of trade. The International Trade Administration (ITA) estimates that the real value of U.S. imports will increase by 4.2 percent in 1993, with a 4.4 percent increase in merchandise imports and a 6.5 percent increase in imported petroleum and petroleum products. The ITA also estimates a 5.6 percent increase in total U.S. merchandise exports, with an increase of 5.0 percent in real agricultural exports.

According to DRI/McGraw-Hill and Mercer Management Consulting's World Sea Trade Service Review (WSTS), inbound liner trade for the United States will grow on a tonnage basis by 9.0 percent and outbound service will increase by 6.2 percent in 1993. In the tanker trade, WSTS estimates that inbound U.S. tanker product volume will grow by 2.7 percent in 1993 and outbound tanker volume by 3.6 percent. In the non-liner dry cargo trade, inbound volume is anticipated to grow by 3.2 percent in 1993, and outbound volume by 2.0 percent.

Another factor that will affect the performance of the U.S. shipping industry is the reduction of U.S. military forces abroad. As the number of troops stationed abroad falls, fewer U.S.-flag ships will be needed to carry military equipment and supplies to bases overseas, although U.S.-flag ships will be needed in the shorter term to transport equipment and supplies that are returned to the states. The regulatory environment facing U.S. operators in foreign trade may change. Laws to revive the shrinking U.S.-flag merchant fleet may be enacted. These laws would promote efficiency and, encourage productivity. Legislative, regulatory, and administrative changes to help U.S. ship operators compete more effectively also may be established.

Long-Term Outlook

World market conditions are expected to be favorable for shipping services. World import volumes are expected to grow at rates between 4.5 and 6.5 percent through 1996.

Additionally, WSTS believes that U.S. inbound liner trade volumes will grow about 6.3 percent per year between 1991 and 1996--up from the 2.1 percent growth rate between 1986 and 1991; outbound liner trade will grow about 6.8 percent annually during the same period-down from 10.7 percent in the previous 5 years. U.S. inbound dry bulk volumes are forecast to grow about 2.1 percent annually, a substantial improvement from the 2.6 percent annual decline between 1986 and 1991. Outbound dry bulk volumes, however, are forecast to increase only about 1.8 percent per year, down from 3.5 percent.

WSTS expects that U.S. inbound tanker volumes will increase approximately 3.0 percent per year between 1991 and 1996, down from the 3.3 percent annual increase reported for the 1986-to-1991 period.

The North American Free Trade Agreement (NAFTA) could provide opportunities for U.S.-flag carriers. The agreement, if ratified, is likely to lead to greater industrial specialization and greater regional trade. A possible beneficiary of this increased trade is the water transportation industry.

A decline in Alaska crude oil production, which accounts for approximately 10 percent of U.S. daily oil consumption is expected to result in an increase in U.S. oil imports-most of which will be carried by foreign flag tankers.

U.S. foreign policy considerations, such as the reduction of U.S. military forces stationed overseas, will reduce the volume of cargoes reserved for U.S.-flag operators. U.S. liner companies in particular could lose a significant amount of business.

Additionally, most existing ODS contracts are scheduled to expire by 1998. Although many ship operators rely on ODS payments to offset higher U.S. operating costs, the program will not be extended. However, there is an ongoing effort to replace the ODS program. One alternative that has been proposed is a flat-rate payment designed to ensure that U.S.-flag ships will be available to meet national security requirements while also maintaining an American presence in international commercial shipping.

DOMESTIC SHIPPING

Under U.S. law, waterborne commerce between any two points in the United States, including most territories and possessions, must be carried aboard vessels built and registered in the United States and owned by U.S. citizens. Domestic shipping is categorized into three distinct trades: the inland waterways, the Great Lakes, and the domestic ocean. The inland waterways trade includes shipments on the internal waterways of the Atlantic, Gulf, and Pacific coasts, and the Mississippi River system. Great Lakes movements, called lakewise trade, refers to waterborne movements of domestic cargoes on the Great Lakes. Domestic oceanborne shipping refers to trade between deep sea ports in the contiguous and noncontiguous states and U.S. territories, as well as the offshore oil supply boat industry. Vessels involved in the domestic trade move almost 1.1 billion long tons of cargo annually (Table 12).

Table 12; Trends in U.S. Domestic Waterborne
Commerce
                         1989(1)             1990(2)
                     Amount   Percent    Amount   Percent
Total Volume(3)       984.0       100   1,070.5       100
  ANS Production       92.9         9      88.4         8
  Deep sea domestic   181.3        19     258.9        24
  Lakewise             97.3        10      99.1        10
  Inland              612.5        62     624.1        58
Total Revenues(4)     6,420       100     6,427       100
  Deep sea domestic   3,049        47     3,008        47
  Lakewise              580         9       576         9
  Inland              2,791        44     2,843        44
(1) 1989 data are revised.
(2) 1990 data are preliminary
(3) Volume data are in millions of long tons and exclude local shipments.
(4) Complete information on revenues are not available. Revenues shown are expre
ssed in millions
of dollars and are a quantity called the Nation's Freight Bill, which includes p
ayments for freight,
mail, express, subsidies, and user fees, as applicable to domestic water transpo
rtation.
NOTE: Detail may not add to total due to rounding.
SOURCE: U.S. Department of the Army, Corps of Engineers, "Waterborne Commerce of
 the
United States; and Eno Foundation for Transportation, "Transportation in America
." (9th ed.)

Inland Waterways Transportation

The U.S. inland and intracoastal navigation system consists of more than 25,000 miles of waterways with depths of at least six feet. Of that total, approximately 11,000 miles are considered commercially significant (depths greater than 9 feet). The inland waterways are made up of both inland and local traffic.

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

The major commodities carried on the inland system are petroleum and petroleum products (40 percent), coal (20 percent), grains (10 percent), and chemicals (7 percent). Energy and energy-related products account for more than 60 percent of all inland waterways tonnage.

According to U.S. Army Corps of Engineers estimates, inland waterways tonnage increased about 1.9 percent in 1990, compared with 1989, expanding from 612.5 million long tons to 624.1 million tons. Commerce grew 17 percent on the Illinois River, 12 percent on the Tennessee-Tombigbee, 9 percent on the Ohio and Mississippi, but declined 6 percent on the Cumberland, 11 percent on the Columbia, and 25 percent on the Apalachicola-Chattahoochee-Flint.

According to industry statistics, approximately 750 companies operate 18,300 hopper barges, 3,000 tank barges, and 3,500 towboats. The industry has been consolidating. Presently, the top 9 operators control over 45 percent of capacity. Market conditions have hurt the profitability of some smaller barge operators who have difficulty in competing with the larger carriers. The small size of these companies and turmoil in the banking industry makes it difficult for them to finance equipment.

Great Lakes Transportation

About 78 percent of all tonnage on the Lakes is comprised of three major commodities: iron ore, coal, and limestone/gypsum. The Lake Carriers Association reported that iron ore shipments decreased from 61.5 million long tons (lt) in 1990 to 57.4 million It in 1991, down almost 7 percent. Deliveries of coal declined from 33.8 million lt in 1990 to 31.5 million It in 1991, down nearly 7 percent, and shipments of limestone and gypsum decreased from 30.1 It in 1990 to 24.6 million It in 1991, down about 18 percent.

The decline in tonnage moved on the Great Lakes during 1991 can be attributed to the sluggish state of the economy. Steel mills operated at lower capacity in 1991, resulting in less demand for iron ore. Shipments of coal to power plants were down in 1991 because the demand for power, due to lower industrial production, declined. Additionally, less stone and gypsum-building components-were shipped because of the weak state of the construction industry.

As of April 1, 1992, the total U.S. flag Great Lakes fleet consisted of 71 vessels: 69 bulk carriers and 2 tankers (2.1 million DWT). As of July 1, 1992, 52 of these vessels (1.8 million DWT) were actively trading.

Deep Sea Domestic Transportation

The volume of cargo carried by firms operating in the deep sea sector of the U.S. water transportation industry increased from 274.2 million LT in 1989 to 347.3 million LT in 1990. Alaska North Slope (ANS) crude oil shipments decreased from 92.9 million LT in 1989 to 88.4 million LT in 1990.

As of January 1, 1992, there were 161 ships (8.7 million DWT) active in the domestic oceangoing trade. Of this total, 96 vessels (3.6 million DWT) participated in the coastal trades, and 65 (5.2 million DWT) were involved in the noncontiguous trades. About 75 percent (121 vessels totaling 7.9 million DWT) of the number of ships in this industry were tankers.

As of January 1, 1992, there were 30 (646,000 DWT) liner ships in the deep sea domestic fleet, a 7 percent increase in the number of vessels (13 percent in tonnage) since January 1, 1991. Twenty-two of these ships were operating in the noncontiguous trades, mainly with Alaska, Hawaii and Puerto Rico. The eight dry bulk ships operating in the domestic trade remained constant.

Liner cargoes and dry bulk commodities moving in the coastwise trade totaled 38.4 million LT during 1989. Coal and coke accounted for the largest share, 11.6 million LT. Shipments of nonmetallic minerals accounted for the next largest share, 8 million LT.

Outlook for 1993

The inland tank barge fleet is expected to be in balance for the first time since the late 1970's. A return to more normal weather and economic conditions coupled with a resumption of grain exports to the Commonwealth of Independent States (C.I.S.) could help make 1993 a good year for the dry cargo carriers. If the CIS continues to receive U.S. agricultural aid, shipments of grain should improve slightly over 1992. Furthermore, the Clean Air Act amendments could alter coal transportation patterns, requiring low-sulphur, western coal to be shipped eastward and providing inland river operators with market opportunities. The projected increase of coal exports could mean a 5 to 7 percent increase in export coal tonnage over 1992 volumes. Domestic coal activity is expected to increase moderately over 1992.

The Great Lakes trade is primarily affected by the level of steel production. In 1993, the ITA estimates that U.S. production of light vehicles is expected to grow by about 13 percent. Increased steel production will probably follow this growth. A likely beneficiary of this increased production is the lakewise trade.

The outlook for the deep sea domestic freight industry in 1993 is highly dependent on the quantity of oil produced in Alaska. If world petroleum market conditions remain unchanged and petroleum prices remain at or near their current level in 1993, then oil companies will have little incentive to reverse the expected decline in ANS crude oil production. That, in turn, will mean a decline in U.S.-flag carriage of ANS crude.

Long-Term Prospects

The long-term outlook for the domestic waterborne transportation industry is closely linked to the national economy. Shipments of crude oil, petroleum products, chemicals, coal, grain, iron ore, and limestone comprise the bulk of domestic waterborne cargoes. Events that affect the domestic markets for any of these commodities directly affect the domestic water transportation industry.

In 1993 and 1994, the ITA expects Gross Domestic Product to grow at around 3 percent. Additionally, The Review of the World Economy reports that U.S. industrial production will grow by over 4 percent annually. Economic growth will have a positive effect on the domestic water transportation industry.

However, there are several issues that could have a significant effect on the industry. Two of the most critical issues involve recent environmental legislation, and financing capital improvements to the inland waterways system.

The immediate impact of OPA 90 and the double-hull regulations on major barge operators is expected to be small because many of the tank barges have double-skins and are already in compliance with the OPA requirements. Most of the impact of OPA 90 will be felt closer to 2015, when single-skin tank barges built between 1985 and 1990 will need to be replaced. However, even this may not be significant since only about 125 single-skin and 23 double bottom/double side barges have been built during the last 10 years. Some tank barge operators with small fleets may cease operations or be taken over by larger carriers if they are unable to finance the acquisition of double-skin barges.

OPA 90 will also have an impact on the domestic deep sea trade, although declining oil production on the Alaska North Slope means that many tankers will not be replaced when they reach the end of their economic lives.

A concern of the inland waterways industry is the availability of financial resources to maintain the system of locks and dams. To remain reliable, the inland waterways infrastructure will need a significant amount of investment over the next two decades. There is concern that present funding methods will not be adequate. The industry, represented by the Inland Waterways User Board, is expected to continue to meet with the Army Corps of Engineers in an effort to resolve this problem.

The number of liner ships involved in domestic trade between the U.S. mainland and Hawaii, the U.S. mainland and Alaska, and the U.S. mainland and Puerto Rico is expected to remain fairly stable, although the domestic liner fleet will have greater capacity and increased efficiency. Liner ships currently employed in certain trades may be replaced by barges.--Compiled by Robert Sienkiewicz, Office of Policy and Plans, Maritime Administration, U.S. Department of Transportation, (202) 366-5484.

Additional References

Census of Transportation, Bureau of the Census, U.S. Department of Commerce, Washington, DC 20233. Telephone: (301) 763-4100. American Shipper: The Monthly Journal of International Logistics, 33 South Hogan St., Suite 230, P.O. Box 4728, Jacksonville, FL 32201. Telephone: (800) 874-6422, (904) 355-2601. Barge Fleet Profile for the Mississippi River System and Connected Waterways, Leeper, Cambridge & Campbell, Inc., 1051 Marie Ave. West, St. Paul, MN 55118. Telephone: (612) 454-0607. Containerisation International, National Magazine Company Ltd., 72 Broadwick St., London, W1V 2BP, United Kingdom. Telephone: 071-439-5000. Fairplay, Fairplay Publications Ltd., 20 Ullswater Crescent, Ullswater Business Park, Coulsdon, Surrey CR5 2HR, United Kingdom. Telephone: 081-660-2811. Jane's Containerisation Directory, Jane's Information Group, Sentinel House, 163 Brighton Rd., Coulsdon, Surrey CR5 2NH, England. Telephone: 081-763-1030. Journal of Commerce, Two World Trade Center, 27th Floor, New York, NY 10048. Telephone: (800) 221-3777 Lloyd's Shipping Economist, Lloyd's of London Press Ltd., One Singer Street, London, EC2A 4LQ, United Kingdom. Telephone: 071-250-1500. Offshore Fleet Economics, Offshore Data Services, Inc., P.O. Box 19909, Houston, TX 77224-9909. Telephone: (713) 781-2713. Seatrade Week, Seatrade North America, Princeton Forrestal Village, 125 Village Blvd., Suite 220, Princeton, NJ 08540-5703. Telephone: (609) 452-9414. Transportation in America, Eno Foundation for Transportation, Inc., Publications Department, P.O. Box 753, Waldorf, MD 20604. Telephone: (301) 645-5643. The Waterways Journal, 319 North Fourth St., Suite 650, St. Louis, MO 63102. Telephone: (314) 241-7354. World Sea Trade Service, DRI/McGraw-Hill, Inc. and Mercer Management Consulting; DRI/McGgraw-Hill,Inc., 24 Hartwell Ave., Lexington, MA 02173; Mercer Management Consulting, 33 Hayden Ave., Lexington, MA 02173. Telephone: (617) 861-7580. The American Waterways Operators, 1600 Wilson Blvd., Suite 1000, Arlington, VA 22209. Telephone: (703) 841-9300. Lake Carriers Association, 614 Superior Ave. West, 915 Rockefeller Building, Cleveland, OH 44113-1383. Telephone: (21 621-1107.

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