Where have all the carriers gone?


In 1977, Congress deregulated the national air cargo industry, allowing all-cargo carriers to operate without government economic fiat. Over the next 18 years, every class of transportation asset in the United States was fully or largely deregulated, ending the industry’s more than 100-year-old status as a public utility. Class actions remain one of the defining events in the history of transportation and the economy of the United States.

Yet the world today is very different from what proponents of deregulation envisioned. Deregulation is still in place, but the influx of new entrants and the innovative services and competitive prices expected in perpetuity have instead given way to massive consolidations that have reduced the supplier universe to microscopic proportions.

The proposed $ 33 billion acquisition by Canadian National Inc. (NYSE: CN) of Kansas City Southern Industries (NYSE: KSU) will remove the last US-based north-south railroad and reduce the list of carriers from Country Four Class I: CSX Corp. (NYSE: CSX) and Norfolk Southern Corp. (NYSE: NSC) in the east and Union Pacific Corp. (NYSE: UNP) and private company BNSF Railway in the west. The US airline market, the largest in the world, has only four national 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 US parcel industry has two network carriers – FedEx Corp. (NYSE: FDX) and UPS Inc. (NYSE: UPS) – which big shippers can always 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 who control about 70% of a $ 40 billion industry. With the exception of the national shipping routes protected by the 101-year-old Jones Act, there is no longer a U.S.-flagged shipping industry 27 years after it was deregulated by the Shipping Act of 1984.

The two exceptions, and they are important, are the trucking industry and the brokerage industry which supports much of it. Both remain very fragmented, a by-product 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, CH Robinson Worldwide Inc. (NASDAQ: CHRW), holds just over 10% of its market. Still, the truckload industry has its own unique battles with the contraction, especially in drivers and equipment, which has put shippers behind the eight ball.

The consequences of these trends are potentially significant for all stakeholders, that is, essentially the entire American population. Even after the massive supply chain disruption caused by the COVID-19 pandemic has ebbed, buyers of transportation of all types will face a persistent shortage of asset suppliers. The result could be high prices and a stifle of innovation for years to come.

The saving grace is that deregulation has injected a great deal of adaptability into the transportation system. Sensing the voids ready 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 heart of the original deregulation plan.

For now, however, it’s hard to find anything abundant on the supply side of the ledger. After digging a huge hole over a decade ago with destructive price wars, the major LTL carriers have capitalized on their market dominance by raising fares again and again over the past seven years. In difficult macroeconomic conditions such as industrial recessions and the pandemic, these tariff increases have been maintained, a reflection of the industry’s iron grip on its shippers. The rail industry could not wait for the expiration of a multitude of old multi-year contracts to replace them with much higher tariffs. Air fares, which had risen steadily until the pandemic because capacity over the bridge had shrunk significantly, are expected to resume their upward trajectory once Americans resume traveling in large 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 operated as a duopoly, especially in the business-to-business (B2B) arena where high-margin traffic was found. Carriers would raise fares, impose additional charges known as incidentals, and change rules of engagement in tandem and with impunity. DHL Express entered the market in 2002, but pulled out seven years later following billions of dollars in losses. The ruthless behavior of FedEx and UPS, and the source of customer resentment, led to the invention of the term “FedUps” long ago.

The package landscape in the United States has changed in recent years. Business-to-consumer (B2C) deliveries represent the bulk of the mix of the two carriers, a trend that is 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 US Postal Service, and the small but growing presence of regional carriers that serve specific slices of the country. However, large accounts tend to shy away from postal service, and regional parcel carriers by definition don’t have the national footprint that FedEx and UPS do. Amazon, despite all of its logistics capabilities, limits its offerings to companies that also retail with it. It’s only when Amazon rolls out a standalone delivery product unrelated to its retail business that FedEx and UPS will feel the pressure of a third national carrier.

All deregulation bills were designed for the benefit of users of transport services, a reality that carriers were all too familiar with. US airlines had to be dragged into deregulation, aware that their high fixed cost structure, which had long been supported by tariffs, would be brutally exposed in a market open to all low-cost, non-union rivals. LTL carriers, like airlines with expensive infrastructure, high labor costs, and weather issues, have also seen the writing on the wall. Many unionized LTL carriers, particularly in the Northeast and Mid Atlantic, have gone bankrupt, unable to compete with more nimble, low-cost competitors. The LTL-dominated cargo division of the Teamsters Union, which at its peak in the late 1970s numbered about 500,000 members, today has fewer than 40,000.

However, deregulation was not a pox in all sectors. The rail industry, which was on the verge of insolvency in the wake of the 1970s, used the Staggers Rail Act of 1980 to get its finances in order. According to the Association of American Railroads (AAR) business group, average rail fares, measured by inflation-adjusted revenue per ton-mile, are 44% lower today than they were in 1981, the year after the deregulation of the rail industry. That meant the average rail shipper could carry a lot more freight for the same price they paid over 40 years ago, AAR said.

In addition, the overnight airline delivery industry, led by Federal Express Corp. (NYSE: FDX), had no legacy model to defend, so it was able to capitalize on the benefits of deregulation. However, other sectors have struggled to move from an environment of government-protected fares, routes and services to an unrestricted world of open markets and free pricing.


About Julie Gray

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