FEW COMPANIES have been more disparaged recently than Seaborne Freight, a ferry company. In March the firm plans to launch a new service for lorries between Ramsgate in Kent and Ostend in Belgium. On December 22nd it was awarded a £13.8m ($17.7m) contract by the British government to run extra services on the Dover-to-Calais route that would ease capacity constraints in the event of a no-deal Brexit causing chaos at the ports. Politicians and newspapers pounced on the company, pointing out that it had no ships, claiming it had little financial backing, and lampooning it for having the terms and conditions of a pizza-delivery company copied and pasted onto its website. Chris Grayling, the transport secretary, defended the move saying, “It’s a new startup business. I mean, government supporting new British business, there’s nothing wrong with that.”
Several British shipping journals pointed out that Seaborne Freight’s business plan for the original service was actually plausible, even if rather risky. Lloyd’s List said that it had seen business-plan documents confirming that Seaborne Freight had sufficient financial backing for the Ramsgate-to-Ostend service. Meanwhile, Loadstar, another respected journal, pointed out that Seaborne Freight’s lack of ships had a simple explanation:
“No one in the media appears to have actually spoken to anyone with any industry knowledge. If they had, they’d know it is not uncommon to secure contracts before actually kicking-off services. This is because the margins are so thin in this business.”
The backlash against Seaborne Freight is an indication of a prejudice that exists among politicians and many journalists against startups in the transport industry. The resulting reduction in competition has done great harm to consumers over the past decade.
Perhaps there is no industry where the damage has been as great as aviation. Prejudice against startups is built into the way the airline industry is regulated. As Gulliver has previously lamented, the way airports allocate landing and take-off slots is determined by the International Air Transport Association (IATA), a trade association made up of established carriers. These rules in effect discriminate against new entrants, preventing startup airlines from gaining a toe-hold at busy hubs such as Heathrow. A wave of consolidation in the aviation industry, coupled with a lack of new carriers, has reduced competition and ended up raising fares. The biggest four airlines in America now control 80% of the market between them, compared with just 48% a decade ago. The harm to consumers is clear: in Europe where the top four carriers control 45% of the market, airlines post a profit of $7.84 per passenger; in North America they get $22.40. The consolidation of transatlantic air traffic into three huge joint ventures has also hurt consumers. Academic research, for instance, has shown that the joint venture formed between American Airlines and British Airways (BA) in 2010 has resulted in higher transatlantic economy fares at BA, whose home hub, Heathrow, is Europe’s most congested airport.
The same trend can be seen at sea. Over the past four years the share of the container shipping industry controlled by the ten biggest lines has risen from 68% to 83%. In the Asia-to-Europe market the top three alliances and joint ventures now make up over 99% of the market, up from less than half four years ago. On ferry routes between Kent and the continent, the number of operators has fallen from seven in the 1990s to two today. (The launch of Seaborne Freight would increase that to three.)
But how should this be fixed? Biasing public procurement to favour startups—as Chris Grayling implies that he may have done—is not the best solution. This risks spending public money on bad business ideas. It also increases the risk of cronyism and corruption in places with worse controls on public procurement than Britain. In similar vein, the government should have held an open tendering process when awarding the contract to Seaborne Freight.
A better way for governments to help startups is by giving them better access to the infrastructure they need to compete against the big boys. One easy way to do this is to reform the allocation of airport slots and quay space in busy ports to favour new entrants. Another is to invest in new infrastructure capacity not under the control of incumbents; for example by dredging Ramsgate’s silted-up harbour to make it usable again by Seaborne and other firms. The transport industry needs more startups not fewer. But doling out public money to prop them up is not the best way to do it.