Complete Fall 2009 Newsletter .pdf

As the economy begins its slow recovery, markets in all maritime sectors and the players themselves will change. As change occurs, it brings opportunity. Over the years, I have watched many companies define their success by market share, sometimes in sacrifice of profit margins. It is easy to get wrapped up measuring the success of your company by published market share statistics that are easily accessible. This is where battles for market share likely originate. Although market share should not be ignored, another important question should be asked. What percentage of the industry's profits are you earning? What is your "profit share"? It is possible to be a small company with a disproportionate share of an industry's profits. Both Apple and RIM (Blackberry) have done this in the mobile phone market. Together they have account for 3% market share, but have captured 35% of operating profits worldwide. Those companies that focus on profit share are worth watching. Unlike market share focused companies who have little impact outside of their direct competitors, profit share focused companies can change the rules of the game and the economics of an industry. Their actions are felt by competitors and non-competitors alike.

CSX, a major U.S. East Coast railroad, has been advertising nationwide for the past year on NPR, National Geographic and Fox News. I regularly hear their ads on the west coast about moving a ton of freight 423 miles on a gallon of fuel. Being in the maritime industry, my initial reaction is "so what". On inland waterways, we move a ton of freight 576 miles on one gallon of fuel, while at the same time producing fewer greenhouse gases and fatalities.

Although CSX's claims are interesting, it's the reach and overall message of their ads that are indicative of a company trying to bolster their profit share. Their campaign message boasts that rail transportation reduces traffic and causes fewer emissions while promoting general brand awareness. One advertisement features a little girl eating her cereal. The tag line is "Before it gets to your spoon, it probably took a ride on our rails." With some confidence, we can assume that customers really do not care how the cereal ended up on the local grocer's shelves. Consumer spending habits are driven by the brand of the cereal, the cereal's price and whether the cereal is available. It is similar to oil. The average consumer does not know, nor care, how the oil came out of the ground, how it was refined, how it was transported or how it ended up powering their car. On the surface, it looks as if CSX is trying very hard to reach an audience, many of whom are far from CSX rail lines. Even those close to the rail line are unlikely to change their behavior based on an ad campaign. But it's not the consumers that CSX is targeting, it's the investors.

Born in 1980 out of a merger of Chessie Systems and Seaboard Coast Line Industries, Ltd. Hays Watkins, Chairman of CSX at the time, stated that their mission was to be a leader in transportation and natural resources and to be known in the financial and investing communities. This, CSX has accomplished. Mr. Watkins wrote, "We think corporate advertising is an important tool in acquisitions and divestitures. The better known we are, the better position we are in. We are also convinced that our corporate advertising has an influence on our stock price....is a good investment...not something you turn off to save money or turn on when you have an extra dollar." The message of their ads today focus on making CSX appear distinguished from the rest of the transportation industry, poised to take advantage of future economics such as high fuel costs, carbon emission caps and congestion on the nation's highways. For years, CSX's stock has performed significantly better than the Dow, S+P 500 and the Nasdaq. In that framework, their slogan "How Tomorrow Moves" makes a lot of sense.

Financing acts as a multiplier of a company's own resources. Those companies able to use other people's money, in addition to their own, can take advantage of bigger opportunities, be they for growth or cost savings. This is the first area that the marine industry is likely to feel the effects from CSX's actions. There are limited dollars available to the transportation industry. While we are not going to run out of investment capital, the cost of those dollars will be higher. Cash can be either cheap or expensive and CSX is naturally working to secure a larger portion of the "cheap" cash. On a federal level the same holds true, congressional budgeting only allows so much monetary and political capital to be allocated to transportation. CSX's lobbying efforts for rail are consuming a lot of that capital.

In addition to political contributions, CSX has spent more than $17 million in the U.S. lobbying the government since 2005. They employ at least six full time lobbyists in addition to contracting eleven other lobbying firms this year. Obviously CSX's "bread and butter" continues to be its rail line and over the years it has worked hard to protect its interests by encouraging favorable government policies that have reduced their cost of business and taxes. During a period without a lot of growth, this is particularly important, because it increases profit margins. These are smart actions for any company.

The key difference between the marine industry and CSX is organizational. The waterborne transportation industry does not have the financial or political capital to create as favorable an economic climate on the same scale as CSX. There are more participants and they are far more diverse in the marine industry than in rail. While, the marine industry does have strong organizations like the American Waterways Operators (AWO) who represents the owners and operators of tugboats, towboats and barges serving U.S. waterborne commerce, the various organizations are disadvantaged because their participants have too many individual and, sometimes, disparate goals, and they are not necessarily rewarded equally for their efforts. It is far easier to define a brand, create a strategy and execute that strategy for an individual company with one focused goal than for an industry. This reality is reflected by the difference in the lobbying efforts between railroads and sea transport. So far in 2009, rail has spent over $23.6 million employing 320 lobbyists. Just over $12.4 million has been spent for sea transport spread among 390 lobbyists.

Going forward, whether your competitor is a company like CSX or another intermodal operator, do not start by duplicating their strategy. Securing profit share is best served by changing the economics on a local or regional level - in the United States or overseas. This is healthier for the market, sustainable for small companies and more difficult for large, national and international corporations to duplicate. Although it is a cliche - there is truth to "one size does not fit all". So what if a vessel operator only has 0.3% of market share, if he has 4% of the local share of industry profits.

The marine industry worldwide is taking steps in the direction to change its economics by investing in capital intensive improvements such as more modern and more fuel efficient vessels to operate with reduced manning and lower emissions. Lest we forget, there are also some low cost methods to achieve similar goals in changing our local economic climate. Small ports and shipping companies do not necessarily have the dollars to make major infrastructure changes - especially in today's economic conditions. They can start by making simple procedural and local regulatory changes to remove the roadblocks that short-sea shipping and your company faces. This can benefit ports, operators and the local economy.

The realm of finance can also benefit from a simple closer relationship between the investor and the operator. Interest rates reflect risk. Where investors are unaware of the risks and unable to price them accurately, they create a "fudge factor" which obviously means a vessel operator is paying a higher interest rate. What is it worth to an operator to get a lower interest rate, not only on one vessel, but an entire fleet? The same can also be said for relationships with insurers. An accurate estimate of risk can increase profits for operators, investors and insurers. Investors and insurers who free up risk and capital, can invest in more opportunities. The market as a whole is healthier.

On the state and national level, many representatives know very little about the tug and barge industry. One comment we heard lately was from a conversation with a congressional representative's office, "no one on the staff knew anything about this industry, except that it was an old, outmoded way of transporting cargo from the early 1900s that relied on a skinny little rope to tow mammoth barges full of ‘dastardly' oil and was collectively responsible for oil spills". Let your representatives know of the "road-blocks", but more importantly educate them. Communicate data. This can be done through a simple monthly or quarterly e-mail - both to local political figures and their aides. How much freight did you move, how many people did you employ and what revenues did you bring to their district?

Over the years there has been a lot in common between the marine and rail industries. Technology has regularly traded back and forth. Both went from steam to diesel and are on the verge of hybrid propulsion. Both are closely working together to reduce greenhouse gases. While containers started in the shipping industry with Malcolm McLean and there was initial strong opposition from the railroads, both adopted it. Global shipping underwent a major change and was greatly expanded.

The marine industry is not just a historical trade left over from the days of sail or the 1900s.

It is the future.