Why Is U.S. Transportation a Losing Investment?

“Whatever hopes the market held that the Senate would be able to cobble together a last-ditch package for the auto industry vanished when the bill collapsed after Thursday’s close, and markets felt the pain overnight and into the morning,” said David Gaffen in his blog on the Wall Street Journal.

It seems like transportation companies are doomed to fail in this country, be they the automakers, airlines, or – dare I say it – Amtrak. With the auto industry in dire straits right now, many Americans are wondering why transportation companies can’t seem to survive. But maybe we should start focusing on what needs to change rather than how bad things have gotten…

Toyota (TM) vs. General Motors (GM): A Sickening Cash Study

Even though car sales have slumped in the last year, American automakers don’t have an excuse for their poor performance:

“It was a dead heat. General Motors sold 9.37 million vehicles worldwide in 2007 and lost $38.7 billion. Toyota sold 9.37 million vehicles in 2007 and made $17.1 billion. That was the second best sales total in GM's 100-year history and the biggest loss ever for any automaker in the world,” said Ralph Reiland on the Ludwig von Mises Institute website.

The real reason for GM’s inability to make a dollar doesn’t have anything to do with the price of gas or an inability to sell cars. The fact of the matter is that GM can’t escape the massive costs related to their corporate structure. All told, (including the costs of supporting retirees) GM’s compensation expense adds up to $73 per hour per hour, almost twice that of Toyota.

According to Reiland,

With more flexible work rules, GM says it could save hundreds of dollars per vehicle. The company maintains, for instance, that a company-wide use on non-union janitors, earning $12 per hour, would cut costs and increase competitiveness by up to $500 million a year.

Saving half a billion by changing who cleans the floors? What ever happened to shareholder accountability? What ever happened to good business? Something has to change for these giant companies to become competitive.

Ford (F) … First In Line for a Turnaround

To be fair, Ford isn’t in quite the same predicament as its neighbors in Detroit. The company narrowed its losses to $129 million last quarter, a -0.24% profit margin that flirts with breaking into positive territory. Earlier this year, Ford sold two of its prestige brands, Land Rover and Jaguar, to Indian automaker Tata Motors, a prescient move in light of the steps GM is only now making to unload Saab.

Of the Big Three, Ford is also the only company that won’t go bankrupt later this month if the government doesn’t pony up the cash. They told lawmakers that they only want the funds as a safety net, to protect against the negative impact of a bankrupt GM or Chrysler on their business.

And the fact of the matter is that Ford actually builds good cars…

In Europe the Ford Focus has been the 3rd best selling car for the past three years. Despite a soft auto market here in the U.S. the company’s sales actually increased 2.3% across the pond in the first half of 2008. There is a light at the end of this tunnel.

But maybe I’m partial – my first car was a Ford Focus, a red metal box with all the creature comforts of a dentist’s waiting room. While it might not have been the flashiest car in the high school parking lot, it certainly did its job without ever breaking down.

Granted, being the best of the Big Three is like being the healthiest leper in the colony, but at least it’s a start. When (and if) things start to turn around for American automakers, at least Ford is the company to watch.

Flying High? Not So Much…

The automakers aren’t alone though… Let’s not forget about the airlines. Back in 2002, many of them were in very much the same position as Ford, GM, and Chrysler: begging congress for money. Post 9/11, the airlines were facing a recession, nervous travelers, and increasing fuel costs. The only thing unchallenged was their ability to lose money.

“What’s the quickest way to become a millionaire?” asked Virgin Atlantic founder Richard Branson. “Start as a billionaire and buy an airline.”

Guess which airline wasn’t kissing congressional feet six years ago… Hint: it was one of the biggest, but never carried one passenger: FedEx (FDX). With a fleet of 672 aircraft, FedEx actually flies more planes than American (AMR), Southwest (LUV) or United (UAUA). And most years, they’ve managed to do it at a profit.

That’s right folks, moving people isn’t as profitable as moving people's stuff.

Back to the automakers and the same is true – stuff movers make more money than people movers – just look at Volvo AB (VOLVY.PK). Not to be confused with Ford’s Volvo car subsidiary, Volvo AB makes things like tractor-trailers and construction equipment under the Swedish brand name.

Also unlike Detroit’s automakers, Volvo AB actually made a $15 billion profit last year.

The trend holds for companies besides Volvo. Look at most any company whose vehicles move things, not people, and you’re sure to find black ink, not red… Oshkosh (OSK), Wabash National (WNC), and Navistar (NAV) are a few quick examples.

Making Dollars in Detroit

The bottom line is this: there isn’t a huge difference between flying boxes around and flying people; the operations are the same. Likewise, building a semi isn’t a better recipe for profitability than building a sedan. These industries don’t have to be loss leaders – the blueprints for success are out there.

Whether Detroit will pick up on them is anybody’s guess. Regardless of what you think about American cars, the fact is that few Americans want to see our auto industry fail when the Volvos of the world remind us that companies like GM, Chrysler, and Ford could some day be profitable. With answers sure to come to investors in the coming weeks, the question remains: Would you buy the big three right now?

Disclosure: None

Comments

[John D:]

So basically, the credit and financial sectors screw up ROYALY - the government throws BILLIONS at them - No Questions Asked - the Auto sector gets caught in the middle after taking much burden off the tax payers for the last century - now that they cannot support the workers with health & pension anymore - we should just throw them and all of those families that will lose everything to the dogs ....Hhhmmm - More weapons of mass destruction right here in the good old USA - Help the world BUT screw our own - "Buy an Import and drive North America to DEPRESSION"

2008 Dec 17 07:59 AM

[Jonas Elmer...:]

John, you're absolutely right if you think that the employees and shareholders are going to be left holding the bag if the big three collapse. The fact of the matter is that companies (not just car companies) have gotten too used to seeing their employee pension funds as assets they can leverage to expand their business. After all, a well-designed pension fund is supposed to be self-sufficient... that's what they pay all those portfolio managers and actuaries the big bucks for.

But if you look at the companies I mentioned, you'll see that these guys make a profit and provide benefits to their employees at the same time (I know, a crazy concept these days). Having worked for one of the biggest pension fund managers in the world, I can tell you that profitability and employee benefits aren't mutually exclusive. Once a lot of companies realize that, the world will definitely be a better place.

2008 Dec 17 10:28 AM

[67 Valiant:]

The Japanese government has been subsidizing all their major industries in the form of lower taxes, kickbacks, tariffs, etc. since 1946. We can't LOAN, (yes loan, it's not a REAL bailout, it's a frickin' LOAN for chrissake) a little operating cash to any of our major industries without a major amount of screeching and wailing, which is why the Japanese and Germans are going to be the only car companies left for us to choose from. The big three have repeatedly made the cars that all the loudmouth Ralph Nader, tree-hugger types have screamed for over the last three decades and nobody ever buys them. Talk about quality is at least two decades behind the facts. It's just the media selling newspapers and getting TV ratings.

Something else to chew on:

The fastest growing automobile market on earth is China.
There are currently 30 some odd car manufacturers in China.
The average market share of most of these companies is less than 2%.
The car company that is far and away viewed by the average Chinese car buyer as having the highest quality is.......General Motors.
The car company with the largest market share, 30 percent, yes that is NOT a typo, 30 percent of the Chinese market is......GM.
And who is American car companies greatest competition? The Japanese. Why don't the Japanese have the biggest share of the Chinese market? Well, they inconveniently invaded China in the 1930's, created a holocaust that the Nazis would have been impressed with, (anybody here remember Nanking?) and no adult Chinese in his right mind will buy a Toyota, no way, no how. Who was the only country that came to their rescue? The good old US of A, flying Curtiss P-40 Warhawks powered by GM Allison engines firing Oldsmobile built cannons.

And America, dumb idiots that we are, is going to allow this industry to go down when we could simply loan them some cash and MAKE MONEY DOING SO LIKE WE DID WITH CHRYSLER IN THE 1980's. Pitiful. Just pitiful. We will save investment banks but not our largest and most American industrial base. Morons.

Something else to think about:
The country with the healthiest industrial base has won pretty much all the major armed conflicts in history. Those countries that let their base erode have a name: Losers.

One more thing:
One of the main gripes quoted in the major media these days (and we all know how diligent and accurate they are) is that GM got where it is by making cars people don't want.
If this is so, then why is it that GM vehicles in aggregate have consistently sold more volume than any other car manufacturer in the world EVERY SINGLE YEAR since they took over the lead from Ford somewhere in the 1940's ? INCLUDING THIS YEAR!!!

2008 Dec 17 11:09 AM

[John D:]

BRAVO Well Said !! It's too bad you weren't in congress to lets them know - i'm pretty sure they've had the doors closed a long time and have no idea whats going on in their own backyard - "Buy an Import and drive North America into Depression"



On Dec 17 11:09 AM 67 Valiant wrote:

> The Japanese government has been subsidizing all their major industries
> in the form of lower taxes, kickbacks, tariffs, etc. since 1946.
> We can't LOAN, (yes loan, it's not a REAL bailout, it's a frickin'
> LOAN for chrissake) a little operating cash to any of our major industries
> without a major amount of screeching and wailing, which is why the
> Japanese and Germans are going to be the only car companies left
> for us to choose from. The big three have repeatedly made the cars
> that all the loudmouth Ralph Nader, tree-hugger types have screamed
> for over the last three decades and nobody ever buys them. Talk about
> quality is at least two decades behind the facts. It's just the media
> selling newspapers and getting TV ratings.
>
> Something else to chew on:
>
> The fastest growing automobile market on earth is China.
> There are currently 30 some odd car manufacturers in China.
> The average market share of most of these companies is less than
> 2%.
> The car company that is far and away viewed by the average Chinese
> car buyer as having the highest quality is.......General Motors.
>
> The car company with the largest market share, 30 percent, yes that
> is NOT a typo, 30 percent of the Chinese market is......GM.
> And who is American car companies greatest competition? The Japanese.
> Why don't the Japanese have the biggest share of the Chinese market?
> Well, they inconveniently invaded China in the 1930's, created a
> holocaust that the Nazis would have been impressed with, (anybody
> here remember Nanking?) and no adult Chinese in his right mind will
> buy a Toyota, no way, no how. Who was the only country that came
> to their rescue? The good old US of A, flying Curtiss P-40 Warhawks
> powered by GM Allison engines firing Oldsmobile built cannons. <br/>
>
> And America, dumb idiots that we are, is going to allow this industry
> to go down when we could simply loan them some cash and MAKE MONEY
> DOING SO LIKE WE DID WITH CHRYSLER IN THE 1980's. Pitiful. Just pitiful.
> We will save investment banks but not our largest and most American
> industrial base. Morons.
>
> Something else to think about:
> The country with the healthiest industrial base has won pretty much
> all the major armed conflicts in history. Those countries that let
> their base erode have a name: Losers.
>
> One more thing:
> One of the main gripes quoted in the major media these days (and
> we all know how diligent and accurate they are) is that GM got where
> it is by making cars people don't want.
> If this is so, then why is it that GM vehicles in aggregate have
> consistently sold more volume than any other car manufacturer in
> the world EVERY SINGLE YEAR since they took over the lead from Ford
> somewhere in the 1940's ? INCLUDING THIS YEAR!!!

2008 Dec 17 03:05 PM

[Chris B:]

As the author points out, there's no reason to see market share as the cause of the big 3's problems. They still have more than enough share and should, in theory, be able to operate at a profit.

The big problem, as everybody knows, is the health and pension costs. Is it "fair" that Toyota, Honda, Hyundai, Nissan, Kia, etc. don't rack up massive debts to pay for retiree's healthcare or offer pensions? Wrong question. Profitability is profitability, and unprofitable businesses eventually go out of business. Bankruptcy is a function of numbers, not employee relations.

It's the same story with the airlines. They offer a great service, when it's on time, but still cannot make a profit due to their fixed costs being too high, despite the fact that the government built their airports and air traffic control systems for them and indirectly subsidises their fuel costs.

The common thread here is that non-union businesses like Toyota, FedEx, and smaller airlines, have lower costs than GM, United Airlines, or Ford because either their employees have less leverage or their management is less prone to giving in. Thus, they can afford to set market prices lower.

The GM/Ford/Chrysler pension problem was predicted a decade ago, but both management and the union pretended there was nothing wrong until now.

2008 Dec 17 03:21 PM

[buildcastles:]

Why not pay people and let them take care of their own INS. and IRA? Don't you think people can do that on their own?

2008 Dec 17 04:56 PM

[Miken:]

There isn't a single piece of news in this article. Same stuff we've all read a thousand times. And with all due respect, I'm not interested in this young man's opinion about anything.

2008 Dec 18 02:01 PM

[overtaxed42...:]

Most articles here are opinion based and have facts to support their views. So the opinions cited can be thought of as news. Here's some more facts about the airline industry and in my opinion more reasons why they will always show a loss.
1. When airlines report sales numbers and their related losses, the empty seats on a flight are calculated at the highest fare price that particular seat had. We all know the seat prices change drastically from one day to the next. When reporting the numbers, those empty seats get a much higher loss value than if those seats were occupied and recording a sale. Ie. the empty seat shows a loss of $400 and the same seat sold shows a sales revenue of $275. That right there generates large operating losses to continue the airlines fleecing of American taxpayers every year since Braniff first got bailed out. This is the reason why every single passenger carrier, except one that I know of(Southwest), shows a loss every year. Now tell me how a company can show losses yoy and still remain not only competitive but in business? Eventually you go out of business, it just takes longer with the backing of our corrupt politicians and all their paying lobbyists and research firms etc.
2. Whoever wrote that the big companies have to maintain their pension funds fells asleep back in the eighties when every other company out there changed owners and eliminated those ridiculous costs. I don't care how big and how much a company is perceived as being needed, they have to think about keeping the company alive without the help of subsidies. As soon as subsidies become regular that is when they start to whine and cry about going out of business every single year. Ie. Railroads, airlines, auto industry, oil industry. All get subsidies and all are going out of business every year they have a pullback in their industry. All have always seemed to pull through too. In the end it is all about who's accountants can wrangle the numbers to satisfy the IRS and stay in business at the same time. The IRS needs to be erradicated and replaced with nothing more than a national sales tax. No more corporate tax that only ends up being paid by the consumers. fNo more hidden taxes all along the routes of a "things" manufacturing process, to its final spot on the shelf waiting to be purchased and then of course taxed again at that point and if a car or house to be taxed yoy for its entire existence.
The point I'm making is the fact that government has become too greedy and takes without production too much too much too much too much. America wanted change with Obama, too bad you didn't realize he meant change from your pocket to his.
And for those of you who actually believe these bailouts are loans? Ha ha ha ha ha. I cite AIG for just one of many examples. AIG will probably go out of business or become owned by the gov't.(what a joke) and of course as a gov't owned entity they will be "loaned" money every year in order to stay afloat. Have the same proper and transparent operating priciples and accounting as FNM and FRE. Yep it's just a loan alright.


On Dec 18 02:01 PM Miken wrote:

> There isn't a single piece of news in this article. Same stuff we've
> all read a thousand times. And with all due respect, I'm not interested
> in this young man's opinion about anything.

2008 Dec 24 01:23 PM

[anarchist:]

No


On Dec 17 04:56 PM buildcastles wrote:

> Why not pay people and let them take care of their own INS. and IRA?
> Don't you think people can do that on their own?

Jan 09 01:28 PM