Category Archives: Transportation

Missing the Bus

A couple of days ago, I had to catch a flight at Dulles Airport. This is a considerable inconvenience: although Dulles supposedly serves Washington, DC, where I live, getting from Washington to Dulles can take longer than getting from Dulles to your destination. It can be expensive, too. The cab fare is upwards of 80 bucks. So to reach the airport, I took the 5A bus.
I boarded at L’Enfant Plaza, a dead zone of 1960s architecture in Southwest Washington. Only four other passengers joined me, aboard a bus without a luggage rack. Having made this trip before, I knew where my suitcase should go: in front of the rear exit door. The two Brits who boarded with me didn’t believe this was necessary.
They were convinced when we pulled up to the next stop, at Rosslyn, just across the river in Northern Virginia, to find a small army awaiting. Perhaps 50 people climbed on board. The first few put their luggage by the exit door, next to mine, making the emergency exit absolutely inaccessible in the event of an emergency. The next three dozen sat with their suitcases on their laps. Another 15 stood in the aisle, with one hand on their roller boards, the other grasping the silver handrail above their heads. Fifteen or 20 more were left at curbside, informed that the bus was full, and that they’d have to wait for the next one.
All in all, the hour-long ride on the 5A is a pretty lousy way for Metro, the Washington area’s main transit agency, to treat its customers, and it’s certainly not a nice way for the nation’s capital to greet its visitors. It’s worth asking why this problem can’t be fixed.
The answer, of course, is that it is being fixed. The Metropolitan Washington Airports Authority, the agency that runs Dulles Airport, is building a rail line to the airport. The first phase opened last year. The second, supposedly, will open in 2020. Together, they will cost at least $5.8 billion, a good hunk of it supplied by the federal government. When the Silver Line is finished, passengers may have a more comfortable trip from Washington to Dulles Airport, but that trip will take even longer on a Metro train than it does on the 5A bus.
We’ve heard a great deal of lamentation about America’s infrastructure crisis, about the purported lack of investment in vital transportation facilities. There are, indeed, places where the infrastructure is crumbling. But it is equally true that we have a marked preference for expensive solutions to our transportation problems. Yes, I know that many people besides airline passengers will ride the Silver Line. But I also know that for a great deal less than $5.8 billion, and in a matter of weeks rather than five years, Metro and the airports authority could provide more frequent service between Washington and Dulles. They could introduce luggage racks, so passengers who’ve paid $7 for the ride don’t have to spend an hour with their suitcases on their laps. With a better, more comfortable bus service, they might even manage to reverse the declining passenger numbers at Dulles by proving that the airport is not so hard to get to.
Innovation is a tough slog in the public transportation business. Too often, the folks who run transportation agencies associate innovation with expensive new equipment, custom-built infrastructure, and whizzy branding. But as I showed a couple of years ago when I described how the grocery chain A&P became the biggest retailer in the world, the best innovations often involve nothing more than better ways of doing business. It’s a lesson the folks at Metro and the Metropolitan Washington Airports Authority could stand to learn: a frequent, less uncomfortable bus service that gets passengers to the airport on time would be a valuable innovation.

Chain Stores in Chains

Chain stores have a lot of advantages over mom and pop. By purchasing in enormous quantities, they can obtain volume discounts from manufacturers. By signing contracts to ship thousands of containers, they pay far less for freight than a retailer that ships only a handful. By maintaining strong credit ratings, they can lease better locations, at lower rents, than smaller competitors. All of this can help the chains keep customers coming through the door.

Yet chains face some disadvantages, too. Sheer size is foremost among them. When a chain does something wrong–which is to say, something that fails to satisfy customers–the problem can be very hard to fix, because it affects hundreds or even thousands of stores and may have irritated millions of shoppers.

There have been many recent examples of this challenge. Tesco, which only a few years ago fancied itself a challenger to Walmart for global retail leadership, still can’t figure out how to respond to British shoppers’ unexpected attraction to discount grocery stores. Wet Seal, which sells clothes to teenage girls, couldn’t cope with the fact that shopping malls are out of fashion; it has filed for bankruptcy and closed 338 stores. Target Stores, which marched noisily into Canada two years ago, is abruptly leaving with the admission that it failed to please Canadian shoppers. And then there is Walmart itself, which is struggling with U.S. consumers’ newfound preference for shopping close to home rather than in gigantic outlets miles away–a change of taste that presents an obvious problem for a company that has 606 million square feet of space tied up in “supercenters” across the United States.

Last week, at the annual meeting of the Transportation Research Board, a Walmart distribution executive, Douglas Estrada, provided some interesting color about how Walmart is trying to adjust to this trend. The company is opening smaller supercenters to fit in reviving urban neighborhoods, he said, but the company’s growth in the United States is likely to involve opening traditional grocery stores, small grocery stores with limited stock, and even convenience stores with gas pumps out front. Kiosks, now being tested, may compete with e-commerce, allowing a shopper to order anything available in a nearby supercenter and have it delivered to the small neighborhood store the same day.

This sort of innovation is a nightmare for Walmart’s distribution department. Walmart has more than 170 distribution centers across the United States. They are extraordinarily efficient at what they are designed to do: take in containers by the trainload, sort the contents, and pack merchandise into the 53-foot trucks that deliver full truckloads to each supercenter three or four times a day. But they are far less efficient when it comes to loading 28-foot trucks to deliver to urban grocery stores, and even less so in loading 16-foot trucks to replenish inventory at convenience stores. Walmart is trying to cope with this challenge, Mr. Estrada said, by using its supercenters for the purpose. The small-format stores will receive deliveries from a distribution center only once or twice a week; the rest of the time, they will be resupplied by vans coming from the nearest supercenter, often with merchandise picked directly from the supercenter’s shelves.

This means, of course, that goods headed for a smaller store will be handled more than goods going to a supercenter. Can Walmart do this and still offer the low prices its customers expect? Or will the small stores come to be treated as an inferior sort of Walmart, with higher prices and less selection than the real thing? Its distribution costs may determine whether the company succeeds in loosening the chains that bind its chains.

If It Can’t Go On Forever, It Will Stop

The American economist Herb Stein, whom I had the privilege of meeting a few times before his death in 1999, is famed for the aphorism, “If something can’t go on forever, it will stop.” I found myself thinking of him often a few weeks ago during my first trip to Dubai.

Dubai has the feel of a boomtown. The airport, of course, is one of the world’s largest — and yet not large enough, for a second airport, to be even larger, is under development a few miles away. The container port, also among the world’s largest, has just opened its third terminal, and plans for terminals four, five, six, and seven are on the drawing board. Forests of skyscrapers would leave Manhattan in the shade. Dubai Mall, reachable by riding no fewer than seven automated sidewalks from a station on Dubai’s automated metro, boasts Bloomingdale’s, Galleries Lafayette, Marks & Spencer, a two-story walk-through aquarium, an ice rink, a dozen stores selling high-end wristwatches and two dozen selling diamonds, and even a bagel shop.

And the boom is isn’t over. Construction cranes are visible in every direction. An entirely new freight railroad linking the United Arab Emirates and Saudi Arabia is under construction. When one of my interviews fell through and I decided to go to the beach, I found that much of the beach was closed for refurbishment. I mean that literally: the municipal government fenced off not just a few hundred yards, but five or six miles, effectively rebuilding the emirate’s entire beachfront in one go.

It’s all extraordinarily impressive. And it’s successful because Dubai has positioned itself as a place that works in the midst of a lot of countries — South Asia on one side, Africa on the other — that don’t work so well. If India were ever to have smoothly functioning infrastructure and Tanzania to develop an honest and efficient customs service, Dubai might be a much less busy place.

Dubai is also a relentlessly optimistic place, at least at the official level. Doubts and doubters are not encouraged. Yet one can’t help but wonder whether a shakeout is coming in the oasis business. A few miles to the northeast, Dubai’s sister emirate, Sharjah, has its own international airport, its own container port, its own dreams of expansion. A few miles to the southwest, Abu Dhabi has much the same. All of this is happening at a time when the growth of international container trade is slowing and the price of oil spiraling down. Since many of the big investments are being undertaken by entities that don’t publish reliable financial statements, it’s hard to know which parts of Dubai’s investment boom are paying off. But Herb Stein’s words offer a useful caution: the boom can’t go on forever, and at some point it will stop.

Maybe We Have Too Much Infrastructure

Not far from where I used to live, in New Jersey, a light rail line rumbles between Newark Penn Station and the much smaller Broad Street Station, on the other side of downtown. This line, about a mile long, opened in 2006, and it cost more than $200 million to build. It was projected to serve 13,300 riders a day by 2015. Actual ridership, though, is just a few hundred. You won’t have trouble finding a seat.

The Broad Street extension is an example of a problem people don’t much like to talk about: misguided infrastructure spending. We constantly hear complaints about inadequate infrastructure, from the archaic main terminal at LaGuardia to the all-day traffic jams at Chicago Circle, and armies of consultants roam the world helping justify yet more projects. The truth, though, is that a great deal of our existing infrastructure is poorly used, and taxpayers often are on the hook for new projects that don’t produce the expected returns.

This isn’t just an American problem. Last week, I was in Europe, where there has been massive investment in container ports to handle the extremely large vessels now coming on line. These ships carry the equivalent of 9,000 truck-size containers, and to accommodate them ports are deepening their channels, lengthening their wharves, expanding their storage areas, and installing bigger cranes. Every port wants the mega-ships to call. The ship lines that own these vessels, though, don’t want to stop in every port; they want their ships to spend as little time in port as possible. Moreover, as these giant ships replace smaller vessels, most ports will see fewer containerships, not more. The bottom line: Europe’s ports now have far more container-handling capacity than required. That overcapacity increases the ship lines’ ability to play one port off against another to force port charges down, making it even harder for port operators to recover the cost of their investments and increasing the likelihood that taxpayers will be forced to pay up.

Container ports are not the only place where there’s excess infrastructure. In the United States, several relatively new toll roads are attracting far less traffic than projected. Pittsburgh airport demolished one of its concourses after passenger numbers plummeted, and the near-empty terminals at Kansas City airport can be spooky. Japan’s high-speed trains are wonderful–but while some carry extremely heavy traffic, others appear to be rather underutilized. There seems to be a surplus of convention centers almost everywhere, and the world is full of stadiums that receive only occasional use.

So while there may be many places where today’s infrastructure is inadequate, claims of an infrastructure crisis deserve careful scrutiny. Often enough, users of infrastructure, such as transportation companies or sports teams, want governments to bear the risk of building facilities that the private sector may, or may not, choose to use. Governments have a hard time saying no to such demands: what politician wants to face accusations that his or her inaction caused a business to leave town? But building too much infrastructure may well leave tomorrow’s taxpayers facing the bill for today’s mistakes.

The Panama Canal’s Next Century

This month marks the hundredth anniversary of the Panama Canal. Work on a major expansion is in full swing. If all goes well, deeper channels and a third set of locks, wider, longer, and deeper than the two constructed in the early 1900s, will enable larger ships to cross the isthmus by the end of 2016. As I saw on a recent visit, the $6 billion or so being spent on canal construction and the billions more going to build a new metro system are fueling an economic boom. Yet as Panamanians celebrate the canal’s centennial, concerns about the future are not far below the surface. The canal’s next century may be a challenging one.
To start with, it’s no sure bet that enough ships will use the enlarged canal to cover the cost of construction. The expansion was conceived at a time when world trade was growing about 7 percent per year, as it had done since the aftermath of World War II. But the growth of trade has slowed considerably since economic crisis arrived in 2008, meaning that there will be far fewer ships passing through the expanded canal than its promoters envisioned. In addition, a growing number of manufacturers are concluding that Mexico is a better location from which to serve the North American market than Asia. While many ships carrying Japanese-made cars to the U.S. East Coast transit the Panama Canal, Japanese models produced in Mexico will move to U.S. and Canadian dealers by road or rail.
Then there is the matter of competition. For many decades, the Panama Canal had no competition. Starting in the 1970s, large volumes of cargo bound for the East Coast began moving through West Coast ports, and the water/rail route became a direct competitor to the canal’s all-water route. More recently, some ocean carriers have been moving cargo between Asia and the U.S. East Coast via the Suez Canal, which can accommodate larger vessels than the Panama Canal. According to some estimates, more than one-third of the container traffic between Asia and the East Coast now moves through Suez rather than Panama, a shift encouraged by steep increases in Panama Canal tolls. And now there is serious discussion of a Chinese-backed canal through Nicaragua. While it seems unlikely that such a canal could be completed by 2019, as its promoters promise, a Nicaraguan canal could siphon off Panama’s traffic at some point in the next decade.
How will Panama respond? One possibility would be to cut tolls. The Panama Canal Authority has yet to disclose how much vessels will have to pay to transit the enlarged canal, but comparatively low rates could draw carriers back from the Suez route and also make life hard for the sponsors of the costly Nicaragua project. Trouble is, lower tolls could squeeze the Panamanian government, which receives a large share of the Canal Authority’s profits.
Another option would be to give ship lines inducements to use the canal. The canal is now 100 percent owned by the government, and selling shares to ship operators seems to be out of the question for political reasons. Nor are there discussions about offering bargains to carriers that would sign contracts guaranteeing to use the canal; the Canal Authority has never done this. But the Canal Authority is toying with the idea of offering volume discounts, so that carriers moving large amounts of cargo through the canal would enjoy lower tolls per unit of cargo. This concept involves some complications. For example, many carriers participate in alliances in which they book blocks of space on other carriers’ ships in addition to running their own vessels, and it would have to be decided which cargo would count in determining the volume discount. But volume discounts might be a way to tie some ship operators more closely to Panama and to discourage them from using a competitive routing.
It is the third response, though, that seems most promising. Manufacturers are making increasing use of Panama not just as a transit location, but as a place to do final manufacturing of products destined for multiple markets in the Caribbean and Latin America. Shoes from Vietnam and drugs made in Mexico are offloaded in the port of Colon, at the Atlantic end of the canal, and the products inside are then customized for individual markets within the region. This can mean anything from adding price tags in Venezuelan bolivars or inserting warranty documents compliant with Costa Rican law to making physical modifications. In many cases, the cargo is repacked on pallets for individual retail outlets. The pallets headed to each country are then stowed in separate container, so that when the container arrives in-country, the local distribution center needs only to load the pallets aboard delivery trucks. This kind of value-added work creates jobs in Panama. But it also gives shippers reason to insist that their cargo move through the Panama Canal, assuring that the expensive new facilities will see a steady flow of freight.

A Reminder of the Joys of Regulation

Not too long ago, I had occasion to take a trip on Metro, Washington’s subway system. My trip required a change of trains at Metro Center station, from the Red Line  on the upper level to the Orange Line on the lower. Three escalators connect the platforms. One was stopped. The other two were going up. So of course I complained to Metro, asking why, if one escalator was out of service, the station manager did not reverse one of the other two, so that one went up and one down.

The answer I received surprised me. Here’s what it said: “Metro’s policy states that the majority of our escalators are set so that in the event of an emergency we can get as many customers out of the system as quickly as possible. In addition, all station escalator configurations were evaluated and modified to reflect the most efficient usage of these assets. Metro Center station was included in this analysis. We now have a set direction for each escalator and the set configuration cannot be changed by the station manager.”

As I read and reread this response, it made me think of nothing so much as the days of rail regulation. Back then, before railroads were deregulated in 1980, they didn’t much care what their customers thought. They offered what they offered,  and customers could pretty much take it or leave it. Rigidity was the norm. The concept that some flexibility and customer sensitivity could build business was foreign.

That’s the type of attitude Metro seems to have. Its experts have determined the most efficient way to do business–which means, at Metro Center, two escalators going up and one going down. That’s how Metro will operate, and it’s not going to change just because circumstances have changed and the down escalator isn’t working. And Metro is not going to give its employees the flexibility to make changes as conditions change. The rules are king, not the customers.

Once deregulation came, the railroads figured out that they needed to take a different attitude toward freight shippers. By doing so they turned their very stodgy industry into a growth industry. Regrettably, there’s no such competitive pressure on Metro. I don’t expect either its attitude or its escalator service to improve soon.

Link

The Kansas City Star ran an article today about a 1,300-acre logistics center southwest of KC recently opened by BNSF, Warren Buffett’s railroad. What’s particularly interesting about the article, which you can find here http://www.kansascity.com/2014/01/13/4750127/hail-the-humble-container.html, is that the author, Kevin Collison, treats the massive new facility not as a railyard but as a transfer point on global supply chains.  The article quotes me, but perhaps the most important quotation is from a BNSF spokesman, who says, “We’re in the transportation business.” No railroad guy would have said such a thing in pre-container days; back then, railroads thought they were in the railroad business. Since then, they’ve figured out that their job is moving cargo. Trains are merely a tool to help do that, not the railroad’s reason for being.

So BNSF looks at its logistics center as a port. A seaport, after all, is nothing more than a point where transportation modes come together; it has massive cranes that move containers between oceangoing vehicles and land-based vehicles. The logistics center serves the same function, using massive cranes that move containers between vehicles that travel on rails and vehicles that travel on roads. As they travel internationally, containers will make a switch in Kansas City, another in a West Coast ocean port such as Long Beach or Oakland, another at a foreign seaport, and perhaps a fourth at an inland logistics center in China or India. BNSF’s new facility  is expected eventually to handle 1.5 million containers a year, more than all but a handful of U.S. seaports. Although the ocean is not close at hand, the logistics center really does make KC a port on the plains.

Cooperation at Sea

Capitalists, in my experience, are often less than enthusiastic about competition. To be sure, they (and their speechwriters) know to praise the virtues of market forces. But the reality is that competition can be bad for business: all other things equal, it erodes profits, costs jobs, and drives firms to failure. It is always tempting to cooperate with the enemy.

How much cooperation to tolerate was one of the subjects of an unusual event today in Washington. The discussions at the first-ever joint meeting of shipping regulators from the United States, the European Union, and China were private, but it’s a good bet that a proposed collaboration among the world’s three largest container shipping lines was the major topic of conversation.

Between them, Maersk Line of Denmark, Swiss-based Mediterranean Shipping Company, and the French line CMA CGM control close to 40% of the world’s container shipping capacity. These companies have battled for market share for many years, to the benefit of freight shippers and consumers. But now, if the various governments agree, they would like to work together. They propose to create something called the P3 Network, through which the three companies would share space on up to 180 containerships sailing between East Asia and Europe, Europe and North America, and North America and East Asia. The companies would not share price information, and each would strike its own agreements with customers. But by working together, they could squeeze capacity out of the market, which might help prop up shipping rates.

The container shipping industry is awash in excess capacity, which is great for shippers but terrible for ship owners. A number of major carriers have been bringing very large vessels on line at a time when demand is growing slowly; the largest of these can carry more than 9,000 standard 40-foot containers. All this capacity has depressed rates and driven most ship lines into the red.

Given the economic importance of container shipping, cooperation among the three largest sip lines would be no small deal. Shippers could obviously face higher rates, but ports, stevedoring companies, railroads, and trucking companies might be even more severely affected. As part of their proposed agreement, Maersk, MSC, and CMA CGM would be able to consolidate the land side of their operations. This could mean that their vessels would stop serving some ports and expand at others. They would be able to bargain jointly with stevedores and land transportation companies, using their very large combined market share – the three companies jointly carry about 41% of container traffic between Europe and North America, for example – to demand lower prices. On the plus side, shippers might benefit from more frequent service between certain ports. Also, the three carriers may try to establish joint barge or feeder-ship services to move containers among U.S. ports, something none of them alone has enough traffic to do profitably.

As they weigh the P3 proposal, competition authorities and shipping regulators will be very much aware that it is not the only collaboration in the works. The six carriers in a competing group, the G6 Alliance, have shared vessels between Asia and the East Coast of North America since last May, and now they are seeking permission to cooperate on services between Asia and U.S. Pacific coast ports.  Meanwhile, several container lines are rumored to be seeking merger partners.

All of this is very much in line with the history of the container shipping industry. Since its earliest days, it’s been a treacherous business; each time rates rise, shipping lines order new vessels, overcapacity returns, and the most troubled companies exit. That’s the way capitalism is meant to work, but it’s a tough way to make a profit.