Transportation Industry

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Transportation Industry







Transportation services move people or freight from one location to another. These services are a near necessity for successful operations of businesses and governments. Efficient transportation systems contribute to businesses fulfilling purchase orders in a timely fashion. They also increase residency options for employees because workers are not restricted to living in close proximity to their jobs. Government services also benefit from the use of efficient transportation networks by enhancing governments ability to respond to national emergencies.

Different modes of transportation are available to satisfy business, government, and commuter demands. Shipping volume and geography dictate the most efficient type of transportation service. For example, trucking, rail, and inland water barges generally transport freight within a country or region. Cost advantages from hauling relatively small shipments of 80,000 pounds or less are associated with trucking carriers primarily because such operations face small fixed costs. Often the major source of fixed costs for many trucking carriers is the leasing of trucks. The investment in more trucks and employment of more drivers to meet high volume demand at best is associated with unit costs remaining the same. In contrast, the unit costs of providing shipping service by rail and inland barges declines as volume increases due in large part to the high fixed costs of providing transport. For instance, fixed costs such as the cost of locomotives and barges are substantial and allow for additional freight volume beyond the typical 80,000-pound limit in trucking. Labor costs associated with operating such transport equipment increase less than proportionately with increasing volume given the large hauling capacity of trains and barges.

The shortcoming of trucking, barge, and rail is their inability to provide overseas service. As an alternative, international shippers rely on the services of ocean liners and air carriers. The introduction of containerized shipping by the American entrepreneur Malcom McLean in 1956 contributed to ocean liners capacity advantage over aircraft when shipping large quantities of bulk products. In contrast, aircrafts typically transport small packages and parcels. Air transport service also offers the advantage of faster delivery compared to ocean liner service.

Excluding trucking, the major modes of freight transport also provide passenger service. This service constitutes a large share of air transport business. The ability to provide relatively fast transport across long distances makes this mode of travel a superior choice over rail and water passenger service. Light rail service is more cost effective than air transport for service within localities with high population density. Along with bus transport, rail provides an alternative to the use of private automobiles for local commutation. The benefits associated with rail and bus public transit in high-density areas are the easing of traffic congestion and the reduction of pollution emissions. Commuter demand for privacy and scheduling flexibility, however, makes the private use of automobiles a viable option for local commutes.

The economic significance of transportation services is further highlighted by its large share of national output. For instance, transportations share of total trade of commercial import services varies from a low of 16.7 percent in North America to a high of 28.6 percent in Asia, according to World Trade Organization statistics published in 2004. Transportation services share of total trade of commercial exports varies from a low of 22.3 percent in Western Europe to a high of 38.5 percent in Africa. The interest of governments in the development of transportation services is universally strong given that these services are a major source of economic growth. Hence, the remainder of this entry explores the twentieth-century history of governments influence on the provision of efficient transportation services.


For the majority of the twentieth century, many countries provided state-owned transportation services. Ownership gave governments the power to offer universal service at affordable rates. Other countries such as the United States imposed economic regulation on private transportation operations. Local U.S. governments role in the provision of public transit did resemble that of other countries. Typically U.S. municipalities owned and operated local rail and bus services.

U.S. regulation of transportation services from the 1920s to the mid-1970s restricted carrier competition and set rates along routes. The rationale for limiting competition in rail, air, and water transport was that their high fixed costs made them susceptible to destructive competition. Competition in this type of market leads to periods of carrier foreclosure as firms are unable to cover costs when facing competitive price pressures. Setting the terms for service rates gave rate-makers the opportunity to promote affordable service for a large group of potential customers. Regulation did contribute to reaching policymakers goals of avoiding ruinous price competition and providing extensive network service at affordable prices. For example, minimum freight hauling rates were imposed on railroad carriers to help them avoid financial disaster. Entry restrictions, though, required these carriers to service nonlucrative routes to rural agricultural areas. Rate regulation for trucking and airline carriers were set as mark-ups over cost. Market pressure to keep costs low in trucking did not arise since entry restrictions significantly limited entry of potential rivals along routes. Indeed, potential entrants were often limited to offering service to newly formed routes, and even then incumbent carriers were given the initial opportunity to provide such service. This approach toward entry regulation gave established carriers the opportunity to reject servicing potentially nonlucrative routes. A different regulatory approach was taken for airline carriers as they were required to service low demand locations at the rate charged for high demand locations. Compared to rate regulation in the transportation sectors previously mentioned, ocean liners experienced less government control over rates. Ocean liners were given antitrust immunity in negotiating port-toport rates for lines involving U.S. foreign commerce.

State-owned operations achieved the goal of providing universal and affordable service by using government revenue to subsidize transit operations. Subsidization of commuter transit was not limited to publicly provided services as commuters using their own motor vehicles drive on roads constructed and maintained with significant financial support from government revenue.


While incumbent transportation carriers, consumers in rural areas, and commuters were the intended beneficiaries of regulation and state ownership, transportation workers also enjoyed significant benefits from these policies. Transportation labor markets became highly unionized following regulatory reform in the early part of the twentieth century. The restriction of competitive entry into transportation services contributed to a large share of these industries work forces belonging to a union.

Three years following enactment of the 1935 Motor Carrier Act, the number of trucking employees belonging to the International Brotherhood of Teamsters rose to 370,000 compared to 75,000 in 1933, according to a 1986 report by Charles Perry. Union membership reached 920,000 by 1948. The Teamsters membership was concentrated in the highly profitable intercity carriage sector, where 80 percent of workers in that sector belonged to the Teamsters by 1940. Representation of such a large group of workers contributed to the Teamsters ability to negotiate lucrative contracts for its members. Rate regulation that allowed trucking carriers to pass on costs to shippers further contributed to the Teamsters ability to negotiate high wages. Indeed, researchers reveal that union truck drivers received wages 30 to 50 percent above wages paid to nonunion drivers working in less lucrative sectors of the trucking industry.

Union growth in rail, airlines, and ocean shipping differed from trucking. Rather than a single dominant union representing the work force, workers belonged to several unions. Labor law guidelines of the 1926 Railroad Labor Act influenced union development in rail and airlines. This act prohibited rail and airline unions representing different occupational groups of workers employed by the same carrier. Most rail workers belonged to the United Transportation Union, the Brotherhood of Maintenance of Way Employees, and the Transportation Communications Union. Negotiating with several unions presented rail carriers with the opportunity to target the weakest union and use that settlement as a pattern for successful negotiations with other rail carriers. Rail unions addressed this problem in 1973 by collectively negotiating with a group of major carriers. Shifting to group negotiations contributed to union rail workers receiving lucrative contracts.

In contrast to rail, labor relations in the airlines were characterized by the proliferation of more than 100 bargaining units across industry carriers under the administration of the Railroad Labor Act. Such a large number of units made it difficult for airline unions to cooperate among each other. Even though the industrial relations environment for airline workers lessened the negotiation strength of the industry unions, workers were able to attain relatively high wages because the major occupations such as pilots and mechanics are vital to carrier operations and command lucrative compensation.

Philosophical differences among union leaders led to the 1937 development of two major U.S. ocean shipping unions. The International Longshore and Warehouse Union (ILWU) under the leadership of Harry Bridges split from the International Longshoremans Association (ILA) and negotiated contracts primarily for workers on the West Coast. Both unions were able to negotiate high wages even though their members faced significant risk of job loss due to technological innovation. The ILA and ILWUs monopolistic control over the supply of workers on the coasts contributed to their ability to secure high wages for their members.


Using regulation and state ownership as government approaches to promote universal and affordable transportation services unintentionally helped create a business environment that fostered inefficient operations and poor financial performance. Faced with rate regulation that removed price competition, transportation carriers often engaged in costly nonprice competition. For example, airline carriers provided passengers the convenience of nonstop service with frequent daily departure times as a strategy for distinguishing their service from that of rivals. This type of nonprice competition reduced carriers ability to fly with a significant number of seats filled per flight.

Rate regulation of ocean liners influenced carrier profitability by prohibiting them from directly negotiating low rates with inland transport carriers. Poor financial performance was much more severe in rail and air transport as carriers in these industries were required to charge relatively high rates on high demand routes to subsidize servicing less profitable locations.


The potential for enhancing efficiency by promoting competition led to the deregulation and privatization of transportation sectors in the last quarter of the twentieth century. Deregulation gave carriers greater freedom to set rates and to enter markets previously restricted to incumbent carriers. This more competitive environment created a greater incentive for carriers to adopt cost-saving strategies across all transportation sectors. For instance, the introduction of the hub-and-spoke distribution system in the airlines industry resulted in a marked increase in the percentage of seats filled per flight. This type of system transports travelers from originating cities into a major airport, which is the airlines hub. From the hub travelers from different originating cities are grouped together to take connecting flights to a common destination.

Postderegulation efficiency gains in the railroad industry were achieved in part by consolidating operations through mergers and by abandoning low-use routes. Efficiency gains in rail were further enhanced by carriers adoption of labor saving technologies such as electronic-based communications and information systems. New communications technologies in tandem with logistics software contributed to enhanced productivity in the trucking industry by allowing carriers to coordinate efficient delivery and pick-up schedules. Deregulation in the ocean liner sector facilitated efficiency gains by allowing these carriers to negotiate door-to-door rates. Such negotiations set rates for the international delivery of cargo to the final destination terminal inclusive of any inland transportation. These rates differ from the pre-deregulation requirement of port-to port negotiations that limit rate determination for transport freight from one port directly to another. Setting rates for the final destination allows liners to take advantage of economies of scale by choosing ports with the capacity to service large container ships and also provide intramodal service to the final destination point.

Privatization of public transit operations encourages cost savings by granting operating rights to low-bid service providers. Private providers are thought to have an advantage when competing for the provision of public services because managers in this sector are subject to more demanding incentives than those faced by their public sector counterparts. Evidence of public transit efficiency gains indicate cost savings in the range of 9 to 23 percent in the U.S., according to a 1988 report by Roger Teal. Similar cost savings from privatization are also reported for other countries.


The labor market for transportation workers has been substantially influenced by the more competitive postderegu-lation and pro-privatization business environment. The pressure to lower costs led to declining work force sizes in U.S. rail and ocean shipping. The shift to greater efficiency and lower costs in ocean shipping also facilitated job loss in other countries. In 2006 James Peoples and colleagues reported that the introduction of new technology in the United Kingdom contributed to a 49 percent job reduction from 1989 to 1992. Ocean shipping jobs declined up to 66 percent at six major French ports following work rule reforms in 1992. Waterfront reforms introduced by the Australian government in 1989 contributed to a 42 percent reduction in stevedore jobs by 1991.

The approach toward labor cost savings did not result in a shrinking work force in U.S. trucking and airlines. Rather, the work force in these industry sectors grew over 70 percent in twenty years following deregulation, according to a 1998 report by Peoples. Declining labor costs in trucking and airlines were the result of eroding union wage premiums.

Transportation labor market changes influence other aspects of social welfare. For instance, the growing number of truck drivers on the road poses greater risk of environmental degradation from the emission of pollutants and greater risk of traffic accidents. Demand for quick service that places scheduling pressure on transportation operators further contributes to dangerous roads. Concerns over the social impact of increasing transportation demand promoted the enactment of several safety and environmental regulations following deregulation. In conjunction with safety-enhancing technologies, regulation limiting hours of operating service and regulations setting minimum standards for attaining driving permits helped the trucking industry avoid increasing injury rates following economic deregulation. Stiffer fuel efficiency standards and requirements for cleaner burning fuel have been enacted to help protect the environment from the debilitating health effects of emission pollutants.

In sum, the role of transportation services as an engine of economic growth will gain in importance during the twenty-first-century trend toward economic globalization. Those economies that are able to provide easy access to affordable services will enjoy a competitive advantage over other economies. In the future, such success will rely heavily on the ability to make efficient use of non-renewable energy sources in addition to the ability to develop new energy alternatives.

SEE ALSO Aviation Industry; Industry; Railway Industry; Shipping Industry


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James Peoples

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Transportation Industry

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