14

PRICE, PRODUCTIVITY AND FINANCIAL PERFORMNCE IN THE TRANSPORTATION SECTOR

Lower transport prices continued to sustain economic growth.
While the demand for transport services was growing,
fuel prices increases in 2000 were a major concern.

This chapter examines the productivity performance of the different modes of transportation in Canada and assesses how these productivity gains offset increases in factor prices in transport industries through measures of cost per unit of output. It also reviews the performance of each transport industry segment, highlighting the most recent years for which data are available. The effect of higher fuel prices on each segment of the industry is also explored. At the end of the chapter, a series of tables shows price and output indicators, user and cost savings and cost structures, productivity and unit cost indicators, and the possible effects of fuel price increases.

After a period of robust annual productivity growth in the early 1990s, productivity increases in the transportation industry remained firm at 2.5 per cent a year during the second half of the decade,Note 1 as shown in Table 14-1. From 1998 to 1999, productivity improved by 2.3 per cent.

When markets are competitive and efficient, some or all benefits of productivity gains can be passed on to users in the form of lower prices, and while the prices of selected transport industriesNote 2 increased nominally by 0.1 per cent during this time, they fell in real terms by 0.8 per cent annually. Thanks to these lower prices, and a growing economy, demand in the transport industry grew during this period. Between 1994 and 1999, the output of large transport firms grew annually by 6.8 per cent, whereas the output of the economy's business sector grew annually by 3.9 per cent. Based on the first half of the year 2000, the output growth of selected transport industries still exceeded the one of the whole economy.

In 2000, the increase in fuel prices was a particular concern. This chapter discusses several effects of this increase, including the rise in total costs that can occur when there are no productivity gains to offset the impact of the price changes, and the increase in transport prices if the fuel cost increments are passed on to transport users. The analysis presents a worst-case scenario, based on the assumptions that 1) all increases in the price of crude oilNote 3 are transmitted to the transport industry's fuel costs and 2) carriers do not use hedging strategies to minimize the cost increases.

Crude oil prices hit a low of US$12 a barrelNote 3 in the first quarter of 1999, and by September 2000 had climbed to US$34 a barrel, averaging US$30 a barrel for the year. In 1999, the members of the transport industry did not pay fuel prices that reflected the changes in crude oil prices, so that in 2000 the fuel prices they paid included the catch-up in refiners' and distributors' margins. This is why 1997Note 4 has been used in this report as a base year for analyzing fuel price changes. In 1997, fuel costs accounted for about 11.6 per cent of the transportation sector's total costs.

Although it is unusual for an annual report to examine an issue such as higher fuel prices by simulating its effect, this report does so because the subject is an important one for many and it provides valuable insights. Therefore, in the modal sections of this chapter, the results of such simulations are presented under the heading "Effects of Higher Fuel Prices."

Fuel prices, prevailing during the year 2000, would have increased transport fuel costs by 32 per cent, assuming constant fuel efficiency. Table 14-2 shows that this would cause total costs to increase by 3.7 per cent and that transport prices would have had to rise by 4.2 per cent had the increased fuel costs been passed on totally to transport users.

The effect of increased fuel costs on government carriers has been significantly different. In 1997, government-owned carriers had a lower fuel cost share than commercial carriers - 3.4 per cent compared with 12.8 per cent of total costs. This means that had increased fuel prices been applied, fuel costs would have added an extra 1.1 per cent to public carriers' total costs and 4.1 per cent to business carriers' total costs. However, if the higher fuel costs had been absorbed by users of public carriers' services, transport prices would have climbed by 2.6 per cent. Since public carriers' operating subsidies are equal to their revenues from users, subsidies likely would have increased by as much as transport prices.

Rail Industry

Trucking Industry

Bus Industry

Air Transport Industry

NOTES:

1 Different database definitions, assumptions, coverage, reference years and calculation procedures may produce different results and affect observed trends in productivity and prices. Changes in available databases entail methodological changes that alter the results. This explains differences between the series shown in this annual report and the series presented in previous annual reports.

2 Larger firms in rail freight, air and trucking, or 93 per cent of the revenues of all the firms reviewed in this chapter.

3 Reference price of Cushing.

4 Table 14-14 at the end of this chapter shows the effect that higher fuel prices have on 1999 data.