Why Is U.S. Transportation a Losing Investment?

by: Jonas Elmerraji

“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 (NYSE:TM) vs. General Motors (NYSE: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 (NYSE: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 (NYSE:FDX). With a fleet of 672 aircraft, FedEx actually flies more planes than American (AMR), Southwest (NYSE: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 (OTCPK:VOLVY). 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 (NYSE:OSK), Wabash National (NYSE:WNC), and Navistar (NYSE: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