The Similarities Between the Decline of Commercial Shipbuilding Industry and the Future of the Aviation Industry

The Similarities Between the Decline of Commercial Shipbuilding Industry and the Future of the Aviation Industry

October 08, 2015  | ENO CENTER FOR TRANSPORTATION

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of The Eno Center for Transportation.

A new report by Aaron Klein, a former Treasury official, draws parallels between the demise of the U.S. commercial shipbuilding industry and a threat to the future of the aviation industry. The paper, published in July 2015 and entitled, “Decline in U.S. Shipbuilding Industry: A Cautionary Tale of Foreign Subsidies Destroying U.S. Jobs,” examines the systematic elimination of the U.S. domestic shipbuilding industry as a result of subsidized foreign competition and compares this to the massive government-subsidies provided to the Gulf airline carriers today. This historical perspective on the American commercial shipbuilding industry provides clues as to the impact of foreign subsidies on American companies, workers, and the economy.

Klein divides the report into two sections. First, he establishes the parallels between what transpired in the shipbuilding industry in the 1970s and 1980s and what is happening in the aviation industry today. Second, Klein examines the detrimental effects on jobs, workers, companies and communities. He extends this analysis to conclusions on the potential negative impact of Gulf carrier subsidies on today’s domestic passenger aviation industry.

The Decline of American Shipbuilding and What It Means for Aviation Today

The United States had a long and storied commercial shipbuilding industry. After the Second World War, American shipbuilding was at its peak and a worldwide leader. In 1975, The U.S. was building more than 70 commercial ships. However, the United States shipbuilding industry began to rapidly decline when the Japanese and South Korean governments began to subsidize their domestic shipbuilding companies.

During the 1970s and 1980s, South Korea provided capital incentives, trade incentives and tax holidays to commercial shipbuilding companies, while Japan provided large subsidies in the form of easy finance and loan deferments. Unable to compete with the massive subsidies Japanese and Korean companies received from their government, U.S. shipbuilding declined rapidly: in 1975 U.S. companies built 77 ships; in 1990, only three commercial ships were built in the United States.

In 2005, the World Trade Organization (WTO) ruled that South Korean shipbuilders were benefiting from illegal export credits, but it was too late for the U.S. shipbuilding industry. Today, the U.S. ranks nineteenth in the world for commercial shipbuilding, accounting only one-third of one-percent of new commercial shipbuilding.

The result of these trends is clear: when the playing field was no longer level, the bottom dropped out of the U.S. shipbuilding industry. Today, South Korea has 37 percent of global ship construction, Japan has 27 percent, and China has 21 percent. In other words, South Korea is producing more than 100 times the amount of ships as the United States.

Just as South Korea and Japan did for their shipbuilding industries, Qatar and the United Arab Emirates (UAE) have provided over $42 billion in subsidies and unfair benefits to their state-owned airlines, Qatar Airways, Etihad Airways and Emirates. These subsidies coincided with the three Gulf carriers’ rapid expansion in the international marketplace, including the United States. However, recent studies have proven that as the Gulf carriers continue to rapidly expand, they are not creating meaningful demand in the markets they enter. Instead, thanks to the virtually unlimited funding from their governments, they are able to distort the market and divert passengers from U.S. airlines.

Klein explains that many parallels can be made between the aviation and shipbuilding industries. Both are transportation businesses with significant economies of scale. Each industry serves a vital role in the nation’s economy with major effects across its own supply chain. And most importantly, both create middle class jobs.

The end of a level playing field in aviation, with U.S. companies facing direct competition from subsidized foreign carriers, is remarkably similar to what happened to U.S. shipbuilders in the 1980s. If the Gulf carriers are indeed successful in shifting passenger traffic from U.S. airlines, the American aviation industry will suffer. Using the shipbuilding industry’s devastation as a guide, the extent of that suffering, in terms of jobs lost, the effects on workers and on communities, will run deep and wide.

Consequences for Jobs, Workers and Communities

The decline in the nation’s shipbuilding industry decimated a once thriving industry. In 1980 there were approximately 180,000 jobs in private shipyards. That number has fallen by over 40 percent, with only 105,500 jobs still existing in private sector shipbuilding today. And considering the lost potential for growth the U.S. shipbuilding industry, which was estimated to reach 250,000 jobs in 2010 had the playing field remained level, the loss is even more remarkable.

The Department of Transportation estimates that every direct shipbuilding job is supported by or creates three other jobs – the engineers designing the ship, the steel workers producing what will become the ship’s hull, the accountants tracking the project. Thus, the missing 145,000 jobs in shipbuilding today translate into a loss of 580,000 jobs for the U.S. economy.

Klein estimates that if a U.S. airline is forced to cut a single daily round-trip international service, it results in a loss of between 1,700 and 2,200 American jobs. If a Gulf carrier replaces a U.S. airline’s international route, only 15 percent of those jobs would remain in the hands of American aviation workers. Just as in the shipbuilding industry, the jobs lost from the Gulf carrier subsidization are good-paying, middle class jobs. The average wage for an airline employee is about $67,000, almost 50 percent higher than that of the typical private sector employee.

Aviation and shipbuilding are both industries where the employment base is more concentrated in specific communities. Unlike national chains, they are heavily localized and form the backbone of a community. The closing of shipyards devastated communities like Chester, Pennsylvania, resulting in a 25 percent decrease in population after the shipyard closed.

Airline hubs have a similar symbiosis with their cities. One study estimates that “the existence of a hub airport in a region increases that region’s new economy employment by over 12,000.” Unlike shipyards, a hub city has a much greater ripple effect on a local economy, as hub city airports connect the community with other cities, facilitating easier trade and commerce. Klein notes that reduced traffic to hub cities will ripple throughout the local and national economy. For every 100 jobs lost in aviation, almost 475 more are lost as a result of these direct and indirect effects, through the loss of additional jobs in businesses within the community. Those additional job losses are particularly acute near airline hubs, where an extra 12,000 jobs are created as a result of that city being used as a hub.

Potential losses affect not only hubs but also the spoke cities across the United States served by U.S. network airlines. Many of these smaller communities are not served by other U.S. carriers. And although these small cities are not served directly by the subsidized Gulf carriers, they are very much at risk of losing air service if U.S. carriers are forced to shrink their hubs and pare back less profitable flights due to subsidized foreign competition on international routes. Loss of service for these small communities would mean a loss of jobs and economic opportunity for some businesses in the local area.

Klein writes that while industries can change and national competitiveness within an industry can shift over time, these changes should be the result of free and fair competition, not as a result of foreign government subsidies. When American companies face foreign subsidized competition, there can be sharp and disastrous repercussions. This happened to American shipbuilding and it could happen to American aviation.

Those concerned about American workers and middle-class jobs should be particularly concerned about the potential threats to aviation jobs, as they are the type of middle-class jobs that are the key to propelling sustainable and inclusive economic growth

Klein notes that there is still time to act – and that Congress has already shown signs of responding to this current situation. In April 2015, a majority of members of the U.S. House of Representatives signed a letter to the Secretaries of State and Transportation urging them to get involved “in an effort to stem the tide of subsidized capacity that state-owned airlines are deploying on international routes to the United States.” This was followed by a similar bipartisan letter from 22 U.S. Senators to regulators urging action.

Per the Open Skies agreements, the Obama administration has the authority to request consultations with Qatar and the UAE to address the massive subsidies they are providing to their state-owned airlines. Klein’s study of the devastation to the shipbuilding industry foreshadows the damaging effects government inaction could have on the aviation industry, making the case for the U.S. government to request these consultations immediately.

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