WATERSHED YEARS IN INTERMODALISM

If the railroad industry can get through the present, Stephen Ailes, former president of the Association of American Railroads, used to say, the future looks good. That is an apt observation these days for the outlook of intermodalism.

Deregulation of the railroad and trucking industries in 1980 and the ocean shipping industry in 1984 have helped create a competitive environment in U.S. transportation that is forcing each of those modes to become more efficient and cost-effective in moving container freight. Also, competition among modes has been compounded by the U.S. economy becoming part of a world economy. The slowing down of our own manufacturing capacity and the increased use of offshore sourcing has forced railroads and trucking to become more dependent on moving international freight.Broadly speaking, the future of intermodalism will be greatly influenced by three things:

* World trade;

* Transportation strategies for handling that trade; and

* Politics.

Quickly, let me touch on each of these.

Over the last 20 years, trade has expanded by $200 billion to an annual total of some $2 trillion. The United States' share of that trade has gone

from 25 percent in 1950 to 14 percent in 1985. On the other hand, trade has increased as a share of the U.S. gross national product. In 1970, it represented 8 percent of our GNP, not including trade in insurance and

financial services. In 1985 it represented 15 percent of our GNP, not including trade in insurance and financial services.

Trade involving the United States has also changed directions over the years. During the first two centuries, the lion's share of our trade was with Europe. Beginning in 1978 or thereabouts, trade with the Pacific Rim surpassed that of Europe. In 1983, two-way trade in the Pacific totaled $130 billion, $30 billion more than in the Atlantic.

In the future, although many people are not anticipating this, I think more of our trade, and Japan's, for that matter, will be hemispheric. The United States will experienced increased trade with Canada (our largest trading partner today), the Caribbean, Central America and South America. And Japan will dominate trade in the Pacific.

Since 1980, containership operators involved in the U.S. market have developed two separate and distinct operational strategies:

(1) An intermodal service in which ships drop off containers on either coast and then rely on trains and trucks to take the containers to the doorstep of the consignee; and

(2) An all-water, often round-the-world service in which containerships

serve the United States via the Panama Canal.

Sea-Land and American President Lines have been the leading proponents of the intermodal operations. Evergreen Lines of Taiwan, U.S. Lines and many other carriers have opted for the all-water round-the-world service.

Naturally, the intermodal service has had the greatest impact on domestic transportation in this country. Sea-Land Service Inc. began a double-stack service in 1980. (For the uninitiated, double-stack service involves putting two containers, 40 foot or 48 foot, on top of one another on a modified rail flat car.) This revolutionized railroad service in the country. Already there are an estimated 38 trains of double-stack cars operating in the United States. A double-stack train usually carries anywhere between 150 and 280 containers. Today some 5,000 double-stack cars are crossing the country each day. That should double in a decade.

What is most startling about this is the drasticness of the dynamic change that is taking place.

What does this mean to the operators of the various modes? Simply that those companies that are being too cautious and waiting to see what shakes out will have difficulty competing with operators that attempt to adapt to change. Case in point. Santa Fe Southern Pacific Corp. three years ago said there was no need to rush into the double-stack business. Well they are suffering for that.

But taking a chance can also be costly. Anticipating that fuel costs would reach $90 a barrel by 1988, U.S. Lines built too many large fuel-efficient slow containerships. But with diesel fuel selling for less than $15 a barrel, the company has difficulty competing against less fuel efficient faster ships.

American President Lines, which has made most of the right moves over the last five years, is probably making an error by choosing to build five new huge ships capable of moving 1,800 40-foot containers - ships that will be too wide to go through the Panama Canal. But that's not the problem. The problem, in my opinion, is that the ships will be designed to cruise at 24 knots. For those ships to be highly profitable, oil must stay at around $20 a barrel or lower. That is not something I would count on. A more conservative way would be to build six vessels with a cruise speed of around 21 or 22 knots, which would provide APL with weekly West Coast service from Asia. Then if oil goes higher, they still will be able to make money.

Finally, let me quickly touch on politics.

Legislation is expected to be reintroduced in the 100th Congress that would extend and possibly expand operating subsidy payments to U.S.-flag liner (containership) operators.

Also, if this country would accept the United Nations Conference on Trade & Development Liner Code of Conduct, the so-called UNCTAD Code of Conduct, something most other nations in the world are going along with, overnight our liner industry would double its share of U.S. foreign cargo. The value of Sea- Land, APL, U.S. Lines, Lykes would perhaps more than double.

Finally, there is protectionism. Some kind of protectionist trade legislation will pass in 1987 or 1988. If I had my guess, I would think 1988 to go along with the presidential election. If the bill increases barriers against the free flow of trade, it will not only affect international shipping companies but the domestic companies that are moving those containers inland.

All in all, this is an exciting time for intermodal carriers to make or lose money.

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