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Where have all the carriers gone?

In 1977, Congress deregulated the nation’s air cargo industry, allowing all-cargo carriers to operate free of government economic fiat. Over the next 18 years, each U.S. transportation asset class was fully or mostly deregulated, effectively ending the industry’s more than century-old status as a public utility. The collective actions remain one of the watershed events in U.S. transportation and economic history.

Yet the world today looks very different from what deregulation’s advocates had envisioned. Deregulation is still in place, but the surge of new entrants and the innovative services and competitive prices expected to follow into perpetuity has instead given way to massive consolidations that have reduced the provider universe to microscopic proportions.

Canadian National Inc.’s (NYSE:CN) proposed $33 billion acquisition of Kansas City Southern Industries (NYSE:KSU) will remove the last U.S.-based north-south railroad and shrink the nation’s Class I carrier roster to four: CSX Corp. (NYSE:CSX) and Norfolk Southern Corp. (NYSE:NSC) in the east and Union Pacific Corp. (NYSE:UNP) and privately held BNSF Railway out west. The U.S. air travel market, the largest in the world, has only four national network carriers — Southwest Airlines Inc. (NYSE:LUV), Delta Air Lines Inc. (NYSE:DAL), United Airlines Holdings Inc. (NASDAQ:UAL) and American Airlines Group Inc. (NASDAQ:AAL) — for many travelers to choose from.

The U.S. parcel industry has two network carriers — FedEx Corp. (NYSE:FDX) and UPS Inc. (NYSE:UPS) — that large shippers can consistently trust. The LTL industry, which had hundreds of carriers at the dawn of truck deregulation in 1980, is now dominated by the 10 largest carriers that control about 70% of a $40 billion industry. Other than on domestic maritime routes protected by the 101-year-old Jones Act, there is no longer a U.S.-flag maritime industry 27 years after it was deregulated by the Shipping Act of 1984.

The two exceptions, and they are large ones, are the truckload industry and the brokerage sector that supports a good chunk of it. Both remain very fragmented, by-products of the very low barriers to entry for each. The largest truckload carrier, Knight-Swift Transportation Holdings Inc. (NYSE:KNX), has about 5% of the market. The largest broker, C.H. Robinson Worldwide Inc. (NASDAQ:CHRW), has a bit more than 10% of its market. Yet the truckload sector has its own unique battles with shrinkage, namely in drivers and equipment, that has put shippers behind the eight ball.

The consequences of these trends are potentially material for all stakeholders, which is essentially the entire U.S. population. Even after the massive supply chain disruptions spawned by the COVID-19 pandemic have ebbed, transportation buyers of all types will confront a stubborn shortage of asset-based providers. The result could be elevated pricing and a stifling of innovation for years to come.

The saving grace is that deregulation injected a large dose of adaptability into the transport system. Sensing voids ripe to be filled, new models — whether asset based or not — will join the fray and provide shippers and consumers with the levels of innovation at the core of the original deregulation blueprint.

For now, though, it’s hard to find anything of abundance on the supply side of the ledger. After digging a massive hole more than a decade ago with destructive price wars, the big LTL carriers have leveraged their market dominance by raising rates over and over again for the past seven years. Through difficult macro conditions such as industrial recessions and the pandemic, those rate increases have stuck, a reflection of the industry’s iron grip on its shippers. The railroad industry could not wait until a multitude of multiyear legacy contracts expired to replace them with much higher rates. Airfares, which had been steadily rising until the pandemic because above-deck capacity had shrunk dramatically, are likely to resume their upward trajectory once Americans start traveling again in great numbers and international markets open up.

Perhaps the poster child for the impact of market concentration has been the parcel delivery industry. For decades, FedEx and UPS have operated as a duopoly, particularly in the business-to-business (B2B) arena where the high-margin traffic could be found. The carriers would raise rates, impose add-on fees known as accessorials and change the rules of engagement in tandem and with impunity. DHL Express entered the market in 2002 but exited seven years later in the wake of billions of dollars in losses. The ruthlessness of FedEx’s and UPS’ behavior, and the wellspring of resentment from customers, long ago led to the coining of the term “FedUps.”

The U.S. parcel landscape has changed in recent years. Business-to-consumer (B2C) deliveries account for the bulk of the two carriers’ mix, a trend unlikely to reverse as long as e-commerce activity continues to grow. Here, FedEx and UPS face competition from Amazon.com Inc. (NASDAQ:AMZN), the U.S. Postal Service and the small but growing presence of regional delivery carriers that serve specific slices of the country. However, big accounts tend to shy away from the Postal Service, and regional parcel carriers, by definition, lack the national footprint that FedEx and UPS have. Amazon, for all its logistics capabilities, confines its offerings to companies that also do retail business with it. Only when Amazon rolls out a stand-alone delivery product unconnected to its retail business will FedEx and UPS feel the pressure of a third national carrier.

All of the deregulation bills were designed to benefit users of transport services, a reality that the carriers knew all too well. U.S. airlines had to be dragged kicking and screaming into deregulation, aware that their high fixed cost structure that had long been supported by tariffs would be brutally exposed in a free-for-all market to low-cost, nonunion rivals. LTL carriers, like the airlines beset with expensive infrastructures, high labor costs and weather issues, also saw the handwriting on the wall. Many unionized LTL carriers, especially in the Northeast and mid-Atlantic, went out of business, unable to compete with more nimble, low-cost competitors. The Teamsters union’s LTL-dominated freight division, which at its peak in the late 1970s boasted about 500,000 members, today has less than 40,000.

Deregulation wasn’t a pox on all sectors, however. The railroad industry, which was on the brink of insolvency exiting the 1970s, used the Staggers Rail Act of 1980 to get its financial house in order. Average rail rates, measured by inflation-adjusted revenue per ton-mile, are 44% lower today than they were in 1981, the year after the rail industry was deregulated, according to the trade group Association of American Railroads (AAR). This meant the average rail shipper could move much more freight for the same price it paid more than 40 years ago, AAR said.

In addition, the overnight air delivery industry, led by Federal Express Corp. (NYSE:FDX), didn’t have a legacy model to defend, so it was able to capitalize on deregulation’s benefits. However, other sectors struggled to convert from an environment of government-protected rates, routes and services to a no-holds-barred world of open markets and freewheeling pricing.
Source: Freight Waves

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