''The real question is not why we are purchasing Sea-Land, but why such a transaction has not occurred before now," states Hays T. Watkins, chairman and chief executive officer of CSX Corp., in testimony prepared for the Interstate Commerce Commission.
The ICC is considering an application by CSX, a $7.3 billion railroad and natural resource company, to merge with the $1.6 billion Sea-Land Corp. Sea- Land, the innovator of ocean containerized shipping, is the third largest containership company in the world.Mr. Watkins points to three reasons why railroads should be interested in acquiring international ship transportation companies.
"First," he says, "transportation is a very competitive industry in which the ability to provide customers first-rate service at the best possible price is absolutely critical to achieving success. Moreover, all modes of surface transportation - rail, truck and barge - have increased their competitive capabilities in recent years, making this business tougher than ever. In short, deregulation has worked."
Second, he adds, "we are confronted with the decline in smokestack America. Unfortunately, because of competition from abroad, and at times
because of inflexibility in domestic labor-management relations, our basic industries have not shared in much of the recent growth achieved by our service industries. Traditionally, railroads especially have relied to a great extent upon the transportation needs of these basic industries, and as those needs have declined, the railroads have suffered along with those industries.
Third, he concludes, "our business has been substantially affected by the globalization of the world economy. The United States imports great amounts of raw materials, parts and finished goods. Thus, even when a product is stamped with the label Made in the U.S.A., many of its component parts may come from abroad."
It would appear, therefore, that a good part of the rationale for purchasing an international steamship company by a railroad is the same rationale for running track close to a utility or grain elevator - it provides a source of controllable traffic. For example, American President Lines, another major U.S.-flag containership operator, expects to be able to move 5,000 containers by rail a week by next year. If you are a railroad, where else can you get that much high value container traffic in one swoop?
In 1984, steamship lines accounted for 25 percent of the U.S. railroad industry's 1985 intermodal revenue. This year, it appears that ocean carriers will contribute 30 percent or more of that revenue.
The ocean carriers also are on the cutting edge of the development of the double-stack train units. When railroad companies like CSX purchase steamship companies they not only are purchasing double-stack cars and an on-going double-stack transcontinental network, but they're buying a leg up on the learning curve needed to develop an efficient double-stack service.
Increasing a railroad's double-stack capability also helps reduce the railroad's cost. A recent study by the Association of American Railroads indicates that the low weight and drag of the double-stack container trains reduce line-haul costs by 40 percent - primarily by requiring less motive power per container than the typical single-stack train.
CSX's Malcolm Sanders, vice president intermodal, emphasized in his prepared testimony to the ICC the monetary savings that can come from consolidating the marketing and administrative activities of a railroad and steamship operation. He cites in particular the potential reduction of information gathering and monitoring and transaction costs. Since marketing decision-makers can rely to a far greater extent on information provided by personnel who are part of the same corporate family and with whom the decision-maker has had frequent previous dealings, Mr. Sanders says, consolidation reduces duplication in market research, analysis of service options and other sales and marketing functions.
Other cost savings can come from a reduction in lawyer and executive time spent on negotiating inter-carrier operating arrangements, which must be negotiated in advance by unaffiliated carriers, says Mr. Sanders.
The key, however, to benefiting from a merger between the railroad and international steamship company lies in coordinating both companies' operations so that the railroad can carry the steamship's inland traffic. "On the one hand, Mr. Sanders says, CSX's schedules can be tailored to Sea-Land vessel calls. And, on the other hand, Sea-Land may strive to coordinate its equipment utilization and scheduling requirements with those of CSX, wherever
CSX offers the lowest cost, most efficient service.
In other words, it often can be a lot easier to obtain the traffic if you buy the traffic bearer.