The Corporate Roots of Port Congestion

Shipping Companies Are the No. 1 Cause, Trucking Companies No. 2

By Paul Rosenberg, Senior Editor

Port congestion has been a dominant fact of life overhanging the ports of Los Angeles and Long Beach throughout the prolonged contract negotiations between the International Longshore and Warehouse Union and the Pacific Maritime Association.

But it has also been a dominant fact of life overhanging the heroic efforts of port truckers this past year just trying to gain recognition as workers with the basic right to organize. One of the most basic facts that you need to know about port congestion is that shipping companies are the primary cause of it—although trucking companies fighting against the ports’ clean trucks programs also have played a significant role.

This is not a particularly political analysis, it’s what industry insiders and analysts have been saying at least since early this past year. For example, in late September, Jared Vineyard, who blogs for Universal Cargo Management, wrote a post identifying “5 Factors Causing Congestion” at Southern California’s ports. No. 5 was the fire at the Port of Los Angeles, a headline-grabber at the time, but thankfully was little more than a blip in the grand scheme of things. No. 4 was a strong peak in seasonal shipping, the first to match pre-recession volumes.

But, it was not something that should have caused major problems, given the years of port development spending since then.

The top three factors Vineyard cited were all industry-related, with the first two directly attributable to shipping companies.

Vineyard cited “Bigger Ships & Alliances,” as the top factor:

As the international shipping industry has trended toward bigger and bigger ships — yes, you can say it, megaships — carrier alliances have formed to fill those ships.

Because of alliances loading bigger ships with larger and larger quantities of cargo, unloading cargo ships quickly and efficiently has become more of a challenge for the longshoremen working on the docks.

And not just for longshoremen, of course, but for the entire system spreading out around them. He quotes Peter Leach, writing for the Journal of Commerce:

As carriers deploy ever-larger ships, the sheer volume of containers aboard those vessels is starting to overwhelm major gateway ports, challenging their ability to unload import containers on a timely basis. The delays are exacerbated by the alliances carriers are joining to operate and fill the mega-ships.

As for those alliances, Vineyard has had some fun writing about this trend as if it were a post-season playoff bracket:

The Carrier Craziness Bracket is all about shipping lines forming alliances (or even merging), a trend that began after carriers suffered losses in the billions of dollars when the global recession hit. To increase efficiency, market share, profits, and just plain survive, alliance after alliance has been formed between carriers.

But it’s misleading to think that this consolidation is primarily a direct result of the recession. Rather, as Bloomberg News explained in a 2012 story about Maersk’s losses at the time, “Global [shipping] rates have dropped because the industry has added too many ships in anticipation of an economic recovery, causing overcapacity.”

Almost the entire industry lost money for multiple years as a result.

This is not an anomaly. Modern transportation systems—railroads in the 19th century, airplanes and container ships today—involve massive investments in fixed capital, which initially look quite attractive, but then result in over-capacity, leading to fierce rate-cutting wars.

As a result, bankruptcy waves wiped out most railroad companies in both England and America at different times in the 19th century. Economic historian Michael Perelman described this dynamic and how economists reacted to it in Railroading Economics: The Creation of the Free Market Mythology.

The economic distress of the shipping industry has also led to the second major channel contributing to congestion.  This was the sell-off of their chassis fleets to third-party transportation companies, which has created the second factor, “Lack of Chassis,” Vineyard cited:

“Carriers used to provide chassis for their container shipments in the U.S. However, as part of the process of recovering from losses in the billions during the Great Recession, carriers phased out that part of their service and sold off their chassis.”

In February of this past year, Bill Mongelluzzo wrote about the crisis for the Journal of Commerce:

The root cause of the chassis problem is that after gradually exiting the chassis business at other locations around the country the past three years, carriers are finally selling their chassis in Southern California to container leasing companies, chassis pool operators and other third-parties.

Carriers waited until the very end of their chassis-divestment program before selling their equipment in Southern California because they feared that the chassis environment at the 13 container terminals in the harbor is so complex that it would be difficult to pull it off. They were certainly correct on that point.

The problem was bad enough then—after the peak shipping season—and only has gotten worse since. But it was the shipping industry’s decision to exit the chassis business that remains the root of the problem.

Vineyard’s third factor was the shortage of truckers.

“A major problem facing the international shipping industry, especially right here in the U.S. is a trucker shortage problem,” he wrote.

The shortage is an industry-wide problem, citing a New York Times story by Neil Irwin, which underscores a key contradiction:

Even as trucking companies and their trade association bemoan the driver shortage, truckers—or as the Bureau of Labor Statistics calls them, heavy and tractor-trailer truck drivers—were paid 6 percent less, on average, in 2013 than a decade earlier, adjusted for inflation. It takes a peculiar form of logic to cut pay steadily and then be shocked that fewer people want to do the job.

But things are even worse for port truckers, who are disproportionately underpaid, misclassified, and subject to wage theft. Unsurprisingly, their ranks have plummeted—by as much as 30 percent, some industry insiders say, since the Clean Trucks Plan was implemented. The plan made it dramatically more difficult for individual truckers to own their trucks.

The Clean Trucks Plan originally was conceived as a holistic plan that would improve truckers’ livelihoods by ensuring employee status and subsidizing companies in purchasing new clean trucks. But the trucking industry sued to prevent this, after which companies almost universally made life even harder for the truckers they employed. One consequence has been the sharp decline in port truckers, which has nonetheless not resulted in higher pay to attract more workers.

The fact that state and federal labor laws are now accomplishing what the Clean Trucks Plan was blocked from doing—giving truckers rights as employees—may finally help to begin overcoming the port trucker shortage. It won’t be fast enough to solve the current congestion crisis, but it could help prevent a future recurrence.