As it struggles to stay on track and regain speed, Pacer International faces a deadline.
The intermodal traffic consolidator has a long-term, low-rate transportation contract with Union Pacific Railroad that expires in 2011. For years, analysts have said Pacer’s business model is largely based on making profits from those low UP rates.
The $2.1 billion company’s future may hang on what rates it can negotiate when the contract comes up for renewal, with a railroad that holds the pricing power.
That’s put Pacer in a unique position as it strives to recover from a 20 percent drop in first-quarter intermodal freight volume and a 28.7 percent decline in revenue.
The company reported a $13.7 million net loss in the first quarter on $358.6 million in revenue. Before its figures were adjusted for good will impairment charges, however, Pacer’s intermodal unit had a $183.6 million loss for the quarter.
The first quarterly loss in its history galvanized the company. It is seeking to transform itself and shift its business model, said Brian C. Kane, executive vice president and CFO.
“We feel we have enough runway to complete the transformation” before the UP contract expires in 2011, he said. “We believe we have already taken a lot of steps to get us part-way there.” The company shed 140 jobs, or 8 percent, of its work force in the first quarter, suspended its stock dividend to save cash and reduced salaries by 10 percent.
Pacer also plans to cut some operations, such as separate accounting offices for varied business units, while increasing its cartage broker business and retail intermodal sales.
“I think if we do those things we can have a viable entity,” Kane said.
As for Pacer’s model, Kane said, “we recognize from a cost perspective” — mainly for selling and administrative expenses — “that we don’t match up well with some of our facing competitors.”
Its business is largely domestic intermodal, much like its main rivals, but those companies have adapted to more modern pricing.
Meanwhile, tougher market pricing in this recession has cut into revenue and profit margins for most box traffic middlemen and railroads.
Kane said the two-month waiver to its credit agreement negotiated on July 1 with creditors led by Bank of America was a first step toward a more secure financial standing.
“I believe that working with our banks, we will come up with a solution that will satisfy everybody,” he said.
However, J.P Morgan analyst Thomas Wadewitz said the banks
appeared to require “harsh” terms for the waiver and are “tightening their grip” on the company. “We believe the rising financial pressures on (Pacer) and potential for bankruptcy will increase the share gain opportunity” for competitors J.B. Hunt Transport Services and Hub Group, Wadewitz said.
With no clarity on how UP might re-price its traffic, some observers say intermodal shippers are worried by the uncertainty. For Pacer’s managers, “it’s largely outside their control” said Thomas L. Finkbiner, senior chairman of the University of Denver’s Intermodal Transportation Institute. “The decision for Pacer now lies entirely with UP.”
Kane stressed that Pacer had picked up two large retail customers in the first quarter and their feedback has shown them “very satisfied with our service.”
In May, Pacer began direct rail service to and from the Puerta Mexico Intermodal Facility operated by Ports America in Toluca, west of Mexico City, expanding its cross-border business.
“What we’re trying to accomplish is something that we need to do irrespective of the market,” Kane said. Still “in the current economic condition you would say our task is probably a little bit taller.”