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West Coast Ports Dispute May Be Settled, but Big Shipper Challenges Remain

March 11, 2015
Though the union negotiations are over, it could take months for the backlog of containers to clear.

Supply chain managers may have breathed a sigh of relief when the West Coast longshoremen’s union and port terminal employers finally reached a tentative contract agreement after nine months of costly shipping delays, but that relief may be short lived.

The contract talks involved 29 West Coast ports, and the three biggest in terms of volume—the Ports of Los Angeles and Long Beach, and the Port of Seattle/Tacoma—experienced year-over-year reductions in total TEU volumes of 29%, 18% and 13%, respectively, stemming from union slowdowns and later partial lockouts by terminal operators. When the talks ended, Los Angeles and Long Beach port executives admitted it will take at least three months for the backlog of ships waiting unloading to clear.

During the talks shippers and ocean carriers resorted to costly workarounds that ranged from diverting ships to Gulf and East Coast ports, to using expensive air freight services to get goods to market, as well as deliver crucial parts and machinery needed to keep assembly lines operating. Retailers alone experienced additional costs of as much as $7 billion this year as a result, and other industries racked up similar costs.

The contract agreement was reached when the Obama Administration finally stepped in after ignoring repeated urgent requests to intervene from groups representing every segment of the economy, apparently reluctant to make union leaders unhappy.

Contrast this to 2002 when President George W. Bush ended a lockout at the West Coast ports by invoking the Taft-Hartley Act after just 11 days. It took the Obama Administration nine months to act in the face of continuing slowdowns by the union and later partial lockouts by the terminal operators that damaged the economy.

Knowing the history of the ILWU, several months ago the thought occurred to me that perhaps one reason the administration was reluctant to intervene was because they were aware the union’s refusal to finalize an agreement was hung up on an issue so petty and dumb that even a pro-union administration or independent arbitrator wouldn’t be able to go along with it if forced to arbitrate.

You be the judge. According to news reports, early on the employers had agreed to almost all of the union’s wage and benefit demands, including paying the cost of penalties that would be levied on the longshoremen’s “Cadillac” healthcare plan under Obamacare, a substantial increase in pension payments, and giving union mechanics jurisdiction over chassis maintenance and repair, including the inspection of chassis leaving the port.

With the employers offering such general terms, what was the holdup in reaching agreement? The union, unhappy with the actions of a single arbitrator involved in the regular grievance process, demanded they be granted the unilateral right to fire any arbitrator so they could get rid of this person. For the past 50 years an arbitrator could only be fired if both union and the employer group agreed to do so.

If you know something of the history of the ILWU you also know that even if the rank-and-file ratify the five-year contract, that doesn’t mean we can count on labor peace at the ports for the next half decade. In 2012 ILWU slowdowns in LA and Long Beach took place during clerical worker contract negotiations. In addition, the union has either encouraged or condoned wildcat actions at different West Coast ports in recent years over a variety of issues.

In 2011 and 2012, after supporting the Occupy Oakland movement, the union recruited Occupy activists to shut down parts of the Port of Oakland. A blow against the evil capitalist employers? The activists wanted to believe so, but in reality it was because of a jurisdictional dispute ILWU had with another union over who would represent workers at a new grain terminal. A federal court later fined the ILWU Local and its officials $1.25 million for these actions. Other ports have seen similar disruptions.

Exclusive of the ILWU are the ongoing efforts of the Teamsters union to organize drayage drivers, and strikes mounted independently by drivers unhappy over lengthy delays caused by congestion at northern West Coast ports that disrupt operations, creating even more congestion.

Congestion Will Persist

Even after the last container ship becalmed by the contract talks finishes unloading, infrastructure limitations and other challenges remain that promise congestion problems will be with us for some time to come.

Quite simply, the advent of megaships and a growing economy are straining the physical infrastructure beyond what it was designed to handle efficiently. Add to that railroads which last year saw intermodal service deteriorate, a drayage industry in turmoil, and storage facilities straining to keep up with demand.  

For some years now California government officials and port executives have been aware of the threat posed by the growing inefficiencies. Speaking at a recent industry conference, L.A. Port executive director Gene Seroka said about a third of the cargo handled by his port is purely discretionary and the freight lost to those ports will be difficult to win back. “It’s going to be extremely difficult to earn that business back,” he admits.

While freight has been diverted to other ports, there is no evidence that in the long term Asian shippers are looking forward to the prospect of adding 10-12 days of steaming time to their schedules by sending ships to Gulf ports through the Panama Canal once it is widened.

Although shipment volume shrank markedly during the contract talks, the Ports of L.A. and Long Beach previously handled about 43% of the nation’s imports, and geography means they are likely to continue their dominance of the import scene for some time to come.

Readily available solutions are few, but the ports are trying. The Long Beach port is investing $4.5 billion to improve rail connections, automate a terminal and replace a bridge. Los Angeles is spending $2.7 billion in the next decade on insfrastructure improvements. Meanwhile, new projects to improve road and rail access to the ports that depend on public funding await the enactment of a comprehensive highway and infrastructure program by Congress and the President.

There also is some evidence that the mess created by the contract dispute may drive more reshoring of manufacturing operations. A February survey of 100 retail chief financial officers by BDO USA found a large number of them saying they are taking a close look at reshoring because of labor issues at the West Coast ports and congestion expected to cause delays and increase transportation costs over the coming years,

In fact, 43% of them said that North America was the most attractive sourcing option this year, with another 12% citing Central America, including Mexico, and 4% citing South America. (However, although costs of labor and importing from traditional sourcing strongholds like China are on the rise, 37% of CFOs still say Asia is the most attractive for sourcing.)

An MIT survey of American manufacturers conducted late last year found that at least 13.5% of have decided to move some manufacturing activities back to the United States, and another 18% said they are considering bringing back manufacturing activities to this country.

Betting on the ‘Pool of Pools’

One issue the ILWU contract settlement may actually worsen is the chaos besetting the container chassis pool. With union members responsible for inspecting as well as maintaining the chassis, it will take little effort for the union to cripple port operations by simply slowing down the release of chassis.

Several years ago the major steamship lines, which had been supplying chassis they owned to their customers, decided to wash their hands of that business in the face of increasing safety laws and costs. Taking over the bulk of the chassis fleet were three companies run by executives experienced in equipment leasing who trumpeted ambitious plans for equipment and operational improvements—only to learn that nothing is simple when it comes to working in the nation’s largest port facilities.

Even before the contract talks began last summer, drayage carriers and shippers were complaining about the growing lack of availability of chassis. To forge a solution the three chassis companies acquired antitrust clearance to operate a “gray pool,” allowing them to combine their equipment in an effort to resolve positioning and other problems.

The companies—Direct ChassisLink, Flexi-Van Leasing and TRAC Intermodal—began operating the new pool on March 1 with a third-party company responsible for handling billing details. Called the “Pool of Pools,” it is projected to manage about 80,000 chassis spanning 12 major marine terminals, rail yards, container yards and other locations in the greater LA/Long Beach port complex.

The three companies say they will continue to manage their respective pools, independently establish proprietary rates for daily chassis usage, and continue to compete openly with each other for customers. The third-party managing the new pool will audit cross-pool chassis usage to allow the providers to compensate each other, and to prevent exchange of competitively sensitive information between the pools and chassis providers.

It will take time to find out if this solves the chassis problem. One thing we do know for sure is that if we want our nation’s supply chain to function at an optimum level, everyone involved must learn how to work smarter—and learn how to work together better as well.