The Transport Business Trap and Why It Looks Attractive to Dabble In

For this post, we will have another bite at the transport business, taking a glimpse of how companies fared in this business from high-end to low-end and then hazard a few reasons why, despite its dismal record, this industry looks attractive to dabble in.

Just a few days ago, a major news item hit the cyber newsreels with the filing for bankruptcy of American Airlines, US 3rd biggest airline.

The airline finally filed for  Chapter 11 bankruptcy protection after years of downhill struggle in one of the world’s most unprofitable industries, perennially beset by “high labor costs in the face of high fuel prices and dampened travel demand”.

Sounds familiar, but let us cut to the chase, the airline simply went bankrupt, period.

The demise added another item to the lengthening  list of airlines which went bankrupt: United Airlines, Northwest Airlines, Continental Airlines, Eastern Airlines, Trans-World Airways, Pan-Am, Japan Airlines, and so forth.

Some of them, of course, eventually resurrected after bankruptcy relief period, others merged with other airlines while others simply disappeared in the firmament for good.

The fact is that airlines proved to be so difficult an industry to make money in.

Until Herb Kelleher of Southwest Airlines  business fame reinvented the airlines industry with no-frills, budget carrier business model.

Not until the advent of the low operating cost structure model  has the airlines industry became rejuvenated. This then gave rise to today’s new generation of seemingly flourishing budget airlines which include Ryanair, Air Asia, Tiger Airways, Jetstar Asia, Cebu Pacific, and a host of  other airlines.

In the Philippines shipping industry, I grew up to witness a host of domestic shipping lines of which most of  the major players were based in Cebu and plied the attractive Cebu-Manila route: William Lines, Sweet Lines, Escano Lines, Go Thong, Aboitiz Shipping.

Of these names, only Go Thong and its spin-off cousin Sulpicio Lines practically remains to this date. Aboitiz Shipping which until recently, has been thought of, as the monolith survivor with its huge Superferry fleet, sold out  only recently to Negros Navigation which is reported to have foreign partners with deep pockets.

Meanwhile in the land transport sector I witnessed a long list of names of bus companies which graced Metro Manila’s roads since about mid-1970s when I first set foot the metropolis as a bungling college freshman.  The list included JD Transit, MD Transit, CAM Transit, DM Transit, De Dios Transit, California Bus Lines, Pascual Liner, Del Pilar and later the Metro Manila Transit.

To my knowledge, not one of these  names survived to this date.

Of course, you see hundreds of buses plying Metro Manila route everyday. The fact however is that, for every bus company that folds up, two or more new bus companies  would want to fill in the shoes and thus we have one of the most overcrowded road networks in the world.

This same thing is patently true in the low-end small and micro transport sector: mini-buses, taxis, jeepneys,  multi-cabs and even tricycles.

I grew up and have seen with my own eyes, dozens of friends, relatives or plain province-mates who dabbled in this low-end transport business sector.

Mini-buses, taxis, jeepneys, multicabs and even the lowly tricycle, you name it, I have seen somebody familiar dabbling in it.

As far as my eyes could see, no one ever…ever prospered, let alone became successful in this business. Each one that I have seen, added to a long list of failures in this sector.

Now we may therefore ask, why, despite the easily observed  unprofitability of this type of business, it still looks so attractive for just about everybody to dabble in?

Well let me hazard a few reasons.

These reasons of course apply only to the low-end or the small and micro business subsector of the transport sector. They may not necessarily apply to the higher end: the airlines or to the shipping business which are not of much concern to us anyhow.

Here the reasons are:

1. Inherent attractiveness of transport business plus  the “two-birds-one-stone syndrome”.

There is inherent attractiveness to the transport business due to the mobility it affords to the operator. Hence, the “two-birds-one-stone syndrome” (where you have a business and at the same time you  have mobility at your beck and call for your family) looks just  too  strong to pass up.

Having mobility just simply offers a symbol, or a statement rightly or wrongly. You can also call it glamour or you can call it something else.  It is something psychological.

2. Low barriers to entry.

There are simply  low barriers to entry in this sector. As long as one can produce the amount, say for one unit of taxi or jeepney, then one can always arrange for a franchise or whatever to operate a taxi or jeepney business.

It does not matter that one doesn’t know anything about the business. The  thinking is that the business is just too simple to operate and as long as the wheels run, then earnings simply follow.

3. Herd mentality

I have mentioned about herds and herd mentality in several past posts and said that the eventual end-results of herds are fairly predictable. Herds routinely end up at the shearing machines in case of sheeps, or at the slaughterhouses in the case of cattle.

I have had friends who were among the first to buy and operate multicabs (the cheapest version of the jeepneys) just as these cheap second hand vehicles imported mainly from Korea hit Philippine markets way back in early 1990s.

There was very little competition in the beginning but in a matter of months, they were already complaining of their units being unable to ply their route due to overcrowded scheduling from the terminals.

There was just too much competition as everybody with a few tens of thousands to spare simply joined the fray, immediately depleting whatever profit opportunities there were.

Well, one may ask, if indeed the transport business is a trap, why is this so, or what makes it so unprofitable?

Interesting question, but let us reserve this for the next post or so.

Remember, one bite at a time.

Related Post: The Friend Who Lost His Shirt in the Transport Business

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