For the first time since the 2008-09 Great Recession, shippers have a “small smile on their faces” when it comes to the economy, National Industrial Transportation League President and CEO Bruce Carlton said. Their increasing optimism in the economy, however, doesn’t quell their concerns over a myriad of other issues, from tightening capacity to infrastructure investment. Carlton in late April spoke with JOC senior editors William B. Cassidy and Mark Szakonyi about the expectations NITL members have for the coming months.
JOC: What are your members seeing in terms of the economy and what are their expectations through 2015?
CARLTON: I think there is a general small smile on their faces. It’s not elation. Things are getting better. It’s been slow. It’s been slow from Day 1. The climb out of the deep hole from the Great Recession has been arduous, but we’re getting there. There are definitely signs of economic growth, and that’s all positive. They would love to see a big adrenaline shot hit the system (but that) doesn’t seem to be in the offing.
JOC: The American Trucking Associations’ tonnage figures for last year were extraordinary. ATA Economist Bob Costello believes a lot of that came from energy production, automotive and to some extent housing supplies, as that market began to recover. Is it more of an industrial freight surge, as opposed to a broader consumer freight surge?
CARLTON: It seems to be. A couple of our members have private truck fleets to serve their own company. I’ve heard from more than one of them, saying, “Man, we can’t keep drivers. They’re all heading up to the northern tier border states, or even to Canada, and doubling their wages.” They can’t compete with that. But you’re right. It seems to be somewhat weighted toward the industrial making-things side, rather than finished-product retail. So much of our finished-product retail, though, is foreign-sourced — clothing and electronics and those kinds of things; that is good for the transportation companies to move that stuff, but, you know, we don’t make that anymore.
JOC: The NITL raised some concerns regarding the P3 when it was first announced. What’s your impression now that the Federal Maritime Commission has given the vessel-sharing agreement the go-ahead?
CARLTON: I think the FMC did the right thing. I know enough about the Shipping Act to say that there was no way the FMC would have a sufficient basis to say no, to block it. That’s the way the law is written. What we asked them to do is what they did. We asked them to test this greatly expanded vessel-sharing agreement and to monitor it for its impact on the marketplace. Our world in that sphere is defined by competition. The carriers told me directly: We will individually compete, individually price, individually market, but the box will go on whatever ship is in the rotation at that moment. I said, “That’s fine.”
Our approach to the FMC was essentially the Ronald Reagan approach: Trust, but verify. Take them at their word that they will compete, but monitor the marketplace to make sure that all of the outward signs continue to be individually priced and marketed services.
JOC: We’ll either see larger vessel-sharing alliances come out or the P3 and G6 will expand in scope. What does that mean for your members?
CARLTON: What league members and what shippers like and treasure is choice. Our best example, of course, is in the domestic trucking industry. The Yellow Pages, or whatever is the equivalent online, there’s hundreds. There are literally thousands of trucking firms. If you don’t get a good price and good service from A, you go to B and then you go to C. The market works very, very well. They like choice. To the extent that choice is limited in the future will be problematic, because then they (shippers) will not be able to use the basic competitive forces of the marketplace to their advantage.
The one thing you left off was the impact of mergers or an acquisition. A personal view on that is for reasons that I will never completely understand, there seems to be much more personal, perhaps even call it ego, involvement of shipowners in their ships. There’s still a lot of family involved in the big companies — MSC (Mediterranean Shipping Co.), CMA CGM. I don’t know whether they’re going to be willing to give up the house flag in order to save the company, build a bigger company. It’s contrary to basic economic analysis and MBA business school analysis. Those things are not supposed to enter in. You’re supposed to be looking at the profit-and-loss statement, and the bottom line.
JOC: I think it also goes beyond the family. It goes into a matter of sovereignties.
CARLTON: That was my next point. There still are any number of companies that are either owned by or supported and buoyed up by national governments. The other interesting thing that we’ve seen, at least in some of the shipping companies, is that the old guard of senior management came up through the shipping ranks.
It wasn’t uncommon to see executive vice president levels with the title of captain. They were ship drivers, and they knew the business from the operating end. Today, what we’re seeing is the finance people, the dollar-and-cents analysts, who have risen to the top. That might make them stronger companies. We’ll see. I know enough about the shipping industry and enough about just basic business to know that what’s been going on in the international shipping business is not sustainable. You can’t continue to lose billions of dollars every year and continue along that path.
JOC: Knowing this, should we expect the industry to be able to hold rates once they push general rate increases?
CARLTON: I am told that service contracts are being signed now at last year’s rates and even below last year’s rates. I don’t get any complaints from shippers about what they’re paying for ocean shipping. It is just silent. They have nothing to campaign about. But I think they might be a little worried about a few years from now.
JOC: What will the likely growth of major vessel-sharing alliances mean for service? Proponents of the P3, for example, say the VSA will help the trio reduce dropped port of calls. Then you have the other side saying the P3 will use more transshipment hubs, which adds to the handling and might add more time to the voyage.
CARLTON: I think they’re probably saying yes to both. I think for a lot of folks it’s a bit of wait and see. Very big shippers have much more leverage than small to medium-sized companies. The carriers cannot afford to alienate the really big shippers. They’ve got to cover those requirements, no question. The little guys might have to basically draft behind the solution sets that are established to handle the heavy load guys. So, for — I don’t want to call them the mom-and-pop — but the small retailer or whatever, they’re going to be takers, rather than market setters, but that’s typically the case, anyway. I’ve not made a study of what the strings are going to look like and which ports and terminals are going to be served. I guess I’ll be learning as we go along, as well.
The service will be there. It’s just that it may change from Monday-Thursday pickup to Tuesday-Friday pickup. And it might not be at the terminal that you’ve been accustomed to dealing with in Los Angeles, but maybe it’s a terminal in Long Beach. They’re going to have to adjust.
JOC: How will the inland connection fit into this?
CARLTON: Some things are not adjustable. The railroads are where they are. For the intermodal market, the ships are going to have to come to where the railroads are, or as close as they can get. Southern California will get a lot of service because there are millions of people living there and it’s a huge local consumption market. The motivation for the carriers is clear, and it’s defensible and understandable. They need to cut their costs. It all boils down to the slot cost on the container ship. So they’re building bigger ships. One crew can carry what two crews used to, or three. I get it.
I’m not sure how they’re financing all of this. I mean, the debt overload is just unbelievable. I don’t think any bank is willing to pull the plug on it because the whole house comes down if you start calling these debts. It’s a tough business.
JOC: Switching inland, very recently, the NITL finally got in front of the two Surface Transportation Board members and talked about the reciprocal switching proposal. Can you give us a refresher on your proposal?
CARLTON: Let me just say at the outset what it is not. It is not forced switched, and it’s not perpetual winter. It’s not a taking. Fundamentally, forcefully, it is not re-regulation. All of those terms have been used to describe the proposal. What we have put forward we think is a very modest, very fair idea to inject a degree of competition, head-to-head competition in marketplaces where there is none.
Very briefly, what we have asked the board to do is to publish a rule, a new rule that would set the parameters for a shipper to receive a competing bid to move their freight by rail. And only shippers who are captive would be eligible to ask for this. If you’re a shipper and you already have two rail lines serving your facilities, you cannot take advantage of this new rule. You have to be captive, or singly served.
And you have to demonstrate that your incumbent railroad has market power. We’ve done that by suggesting that if the — this is where people fall asleep — if the revenue-to-variable cost ratio is 240 percent or more, we are saying that is a conclusory presumption of market power. Or if the incumbent railroad has 75 percent of your market share for an origin-destination pair, that is also conclusory — meaning that the shipper would not have to present any additional evidence of market power.
If you can’t meet the conclusory presumptions, you could still go into the STB and argue your case that the facts and circumstances of your facilities and your rail transportation merit the green flag, open door, to getting a competing bid. Thirdly, we have said that your facility has to be within a reasonable distance of an interchange — an existing interchange, where cars are regularly switched. And we’ve defined that reasonable distance, again, for a conclusory presumption, at 30 miles. Is 35 a better number? Again, argue your case to the STB.
The fourth provision is the one that is generally overlooked by my friends in the rail industry. It’s a safety valve for the serving railroad. If the railroad can demonstrate to the STB that it’s unsafe or would greatly diminish service to other customers, if it can demonstrate that, show that, not just proclaim it, then it could stop the switch.
JOC: How do you think the STB commissioners view the idea of forcing railroads to give shippers with access to only one Class I line the ability to use another major railroad?
CARLTON: I think it was an excellent hearing. The two members, Chairman (Daniel) Elliott and Vice Chairman (Ann) Begeman, asked very good questions. We think we had a very good experience there. We had a tremendous amount of support from other shippers and shipper organizations. Not surprisingly, the Class I railroads and the Association of American Railroads were adamant in their opposition. So, we’re left with a decision-making point by the board.
JOC: Any idea on when they will make a decision on whether to pursue rule-making?
CARLTON: There is none. There’s no statutory or regulatory requirement on the board to issue a decision by some date certain. We hope it’s rather quickly because, again, going back to the very beginning, what we’ve asked them to do is publish our rule or our proposed rule, as modified by the board. Publish it out there for public comment. And that’s easily an 18- to 24-month process in its own right. We’ve been at this now for just under three years. I’m getting older. I still hope to be here when this is resolved.
JOC: Since the recession hit, we’ve seen shippers move freight to slower but cheaper modes. That can be seen from the shift of some goods from air to ocean, and from truck to intermodal. Will the pace of this shift toward deferred transportation slow as the economy picks up and companies are more generous with their transport budgets? Or will this trend continue?
CARLTON: I think it’s going to be a continuous process. What I hear from shippers, people who have to place the cargo on a conveyor somewhere to get it moved, is the pressure to reduce cost is relentless. Everybody is squeezing cost out. And so keeping in mind that the transportation and logistics function in a company is a cost center — it’s not a profit center — they are spending company resources, not earning money. The pressure is relentless.
And there’s that balancing act between reducing cost and on-time deliveries to get product where it’s needed and when it’s needed.
JOC: What are you hearing from your members about their concerns on trucking? We’ve heard a lot over the first quarter and into this quarter about rapid increases in rates taking a lot of people by surprise, or being higher than people anticipated, partly because they couldn’t get trucks when states were closed down because of the snow.
CARLTON: For three or four years, people have been saying the sky is going to fall. The sky did not fall. With recovery comes more movements. You have to take the good with the bad. Trucking companies, some of them have assets parked. They can pull them out of storage if you can find a driver. You can put it back in. But it’s not a perfectly flexible, perfectly fluid market. So, yeah, there are — I know from what I read and what league members tell me. There are parts of that market now that look like their capacity is capped or partially capped. They’re not as resilient about being able to bring more capacity in. So, yeah, rates are going to go up. They are going up.
JOC: Again, just as with a capacity crunch, we’ve heard this for like three or four years, the sky is going to fall. We’ve talked about collaboration for a couple of decades. Do you see this as really being a trend that’s got legs?
CARLTON: At least at the margin, these collaborative relationships are taking root. There’s always going to be room for a shipper to buy some ad hoc spot service. “We’re going to work a double shift this weekend. We got to get this stuff out of here. Find some trucks.” But for the steady state business, I don’t think it has changed the world yet. Folks are interested in having that discussion between service supplier and the service buyer. Entering into something that works for both. I think shippers know that prices are going to go up. They’re not naïve. They weren’t born yesterday. Prices are not going to go down.
JOC: What are you telling your members in terms of preparing for any kind of International Longshore and Warehouse Union labor action?
CARLTON: Our basic message is that there will not be a contract signed on July 1. Labor management negotiations don’t typically work that way. Expect some protracted negotiations. The good news is that the two sides, the union and the Pacific Maritime Association, seem to be voicing their demands and wants in a very respectful way. It’s a considerable contrast from our experience last year on the East Coast, Gulf Coast and a considerable contrast with the 2002 West Coast situation.
It’s going to be a tough negotiation. I think a lot of shippers, where they can, are front-end loading pickup and delivery. You may not know what the toy of the season is going to be, but you know they’re going to be selling Christmas lights. Lights are always selling. Get them now.
Some are probably mapping on paper — well, on the computer — alternatives, if they have an alternative. I don’t think there’s going to be a strike or a lockout. I would fully expect some informational picketing, maybe a bit of slowdown, maybe a little bit of, not every day, but an occasional emergency meeting of the union and its membership that makes the one-hour lunch three hours. These are pressure points to put on the PMA to remind them that they do have power.
Overall, though, the atmospherics are so much better than what we’ve seen in the past. Adults are in the room, but they have a tough job ahead of them.
JOC: The NITL has obviously advocated for a rise in the fuel tax, indexing it to inflation. But as insolvency for the Highway Trust Fund nears, what are you expecting out of Congress in terms of dealing with a new service transportation bill, or at least keeping that fund giving money to the states?
CARLTON: My guess, sitting here it’s almost May 1, is that they won’t have time to get a comprehensive bill done and they’ll have to patch over the problem with another transfer from the general fund and some sort of temporary extension. Maybe they come back and fix it after the election. Maybe it’s next year. It’s got to be fixed, and I will salute both (Rep. Bill) Shuster, (R-Pa.) and (Sen. Barbara) Boxer, (D-Calif.). They’re saying all great things, but it’s just the crunch of the calendar that makes it a really rough road. I would love to be proved wrong, but I think we’re going to see another “x” billion dollars transferred from the general fund.
JOC: What does that mean for your members?
CARLTON: Well, it’s bigger than that. It means it’s another chapter in our inability to do what we need to do as a nation to fix these big problems and resolve these big issues. I think they’re just caught up in that. It’s a much bigger impact on state governments and the highway builders. The roads will be there. It’s just that this continuing focus on trying to do the right thing, whatever that means, it kind of saps the energy out of the system. People lose hope; they lose faith. They lose any sense of competency of government, which is unfortunate.