Monday, January 17, 2011

Longshoremen Win While Carriers Lose

Union labor has dealt another blow to common sense and good business.  The International Longshoremen's Association has extorted ocean container carriers into shutting out competitive bids for chassis maintenance.  In layman's terms, this means that those container chassis you see hitched to trucks on the highways will cost a lot more to maintain.

Those chassis enable TEU containers to travel directly from ports to logistics distribution centers, saving time and money for importers who rely on streams of bulk deliveries.  Upkeep on those chassis extends their useful lives and increases their salvage value.  Since these chassis are standardized to the point that they are commodified, it makes sense for owners of the commodity pool (i.e., shippers like Maersk who contribute assets to Direct ChassisLink) to find the lowest bidder for maintenance contracts.  Now shippers must restrict themselves to union shops for chassis maintenance thanks to the ILA's totally irresponsible threat of work slowdowns by way of excessively thorough container inspections

I am dismayed that shippers who aren't even signatories to the ILA's regional agreement are going along with this nonsense.  They should have applied some game theory and tested the probability of a slowdown and its resolution through arbitration.  I would have called the ILA's bluff and then taken them to court.  Citing the "national security" implications of forced work stoppages at critical infrastructure nodes can be a persuasive argument in this day and age. 

Now shippers have to live with high chassis maintenance costs.  Fleet managers calculating these higher costs will conclude that it's more economical to sell a chassis before its useful life can be extended with high-cost maintenance.  That means higher replacement costs (Tobin's Q alert!) for established shippers and bargain prices for truckers and shippers in emerging markets who want to buy used but functional chassis.  I'll bet shippers servicing Shanghai's exploding TEU traffic would love to get their hands on like-new chassis that don't require union labor. 

Consider what this Journal of Commerce podcast transcript reveals about chassis costs.  Smaller truckers are going to be priced out of the container market if they can't afford to lease chassis from pools, and this will only get worse as maintenance costs rise.  Even larger LTL truckers will be hurt if the daily fee they have to pay to lease from that chassis pool rises thanks to union-driven costs.  I hope YRC Worldwide explains that to their Teamsters the next time they need their concurrence for financial restructuring.  Drivers need to know that longshoremen are not watching their backs with this move. 

The ILA has just handed another competitive advantage to non-U.S. logistics providers.  Way to go, unions.  You've accelerated the outsourcing of your jobs.

Full disclosure:  No position in Maersk or YRCW.