Business News

West Coast port traffic jam: 3 investor takeaways

One reason dockworkers are well paid

It's bad news, good news on the West Coast these days.

The bad news is the ports, especially the ones in Southern California, are still congested. If you are a retailer or manufacturer trying to get goods through the West Coast, your shipment has likely been delayed.

According to one management spokesman, traffic through some ports is moving at less than half the speed it usually does.

The good news is that the holiday traffic rush is pretty much over, so volume through the ports is declining and traffic snarls are likely to straighten out.

Reasons for the congestion center on equipment shortages exacerbated by labor strife. Those causes aside, there are some takeaways for businesses and investors to consider for the future.

1. A retail excuse

Retailers are already beginning to blame the port situation for poor results. It's threatening to become the new "dog ate my homework" for earnings.

"The port delays have been a major challenge for us," said David Jaffe, CEO of Ascena Retail Group, the owner of Lane Bryant, Justice and Dress Barn, during an investor conference call last week. "... Starting in early July, when they had their first slowdowns, we have seen, on average, two- to three-week delays on a significant portion of our product for all of our brands."

Express also pointed at West Coast port problems for some incremental expenses. And earlier GameStop and Ann Taylor cited port congestion in their results as well.

Yes, port delays are costly. But are they entirely to blame? It could be a common excuse next quarter.

2. Going by plane

Air freight is seeing a traffic bump. It's only temporary.

As ocean transport has become more reliable and steady over the years, it's actually taken some kinds of time-sensitive cargo away from air carriers; about 15 million tons worth, according to a study from Drewry Shipping Consultants.

But recently some importers, desperate to keep product on shelves for Christmas, resorted to air cargo carriers to move goods in. Air freight is typically more expensive, but the extra cost can be absorbed somewhat if the product commands a high enough price.

"Congestion on the US West Coast ports is a costly reminder to shippers of the need for risk planning, particularly in peak seasons," concluded Drewry Shipping Consultants. "The issue will help to inflate air rates and demand temporarily, but it will not reverse the longer-term trend towards ocean."

Many major airlines have side air freight operations, in addition to noted operators like FedEex and UPS.

3. Skipping the West Coast

Already some ship lines, saying they are frustrated with the congestion, are beginning to skip Southern California. And ship lines carrying cargo from Asia directly to the East Coast are already seeing a pickup in business.

This is exacerbating a longer term trend where market share has already been on a steady migration away from the West Coast.

"During the past five years, while containerized cargo volumes in North America have risen slightly, the West Coast share has dropped," the Pacific Maritime Association, the employer group representing ship lines and terminal operators, bemoaned in its last annual report.

Source: Pacific Maritime Association

Many manufacturers have taken advantage of beefed up shipping services via the Suez Canal that allow more direct transportation of goods from Asia to distribution centers on the East Coast. That shift is expected to get more pronounced when the new and improved (i.e. bigger) Panama Canal opens in 2016.

The shift is likely to have negative consequences for railroads and truck lines concentrating on cargo flows from the West Coast to the East Coast (think Berkshire Hathaway's Burlington Northern Santa Fe and Union Pacific). Regional truckers and rail lines with strong East Coast presence are likely to benefit (think CSX and Norfolk Southern). And if retailers and manufacturers react to the current West Coast congestion problems more quickly, those benefits may come sooner rather than later.

Of course, there are longshore unions on the East and Gulf coasts, too. The master contract there expires in 2018.