Journal of Commerce Senior Editor William B. Cassidy interviewed the presidents of YRC Worldwide’s four less-than-truckload operating companies Feb. 21, shortly after interviewing YRC Worldwide CEO James Welch. The interview at YRC Freight headquarters in Overland Park, Kan., covered the relationship of the four carriers — YRC Freight and regional companies Holland, New Penn and Reddaway — with the parent holding company and each other and the post-recession LTL market.
The interview took place shortly before YRC Worldwide released its fourth-quarter earnings and full-year 2011 earnings report. The company’s biggest losses were at national LTL subsidiary YRC Freight, which is planning a major change of operations for April to improve its efficiency. YRC Freight lost $88.5 million in 2011, despite an 11 percent increase in operating revenue to $3.2 billion. The regional group reported a $32.9 million operating profit as revenue rose 14.8 percent to $1.6 billion in 2011.
Present were Jeff Rogers, president of YRC Freight; T.J. O’Connor, president of Clackamas, Ore.-based Reddaway; Steven D. Gast, president of Lebanon, Pa.-based New Penn; and Mike Naatz, president of Holland, Mich.-based Holland.
JOC: Since James Welch became CEO of YRC Worldwide last July, how has the relationship between the holding company and your operating companies changed?
T.J. O’Connor, Reddaway: It’s been a breath of fresh air. James Welch brought decisions and decision-making authority back closer to the task at hand or to the field organization. Separating the holding company and operating companies allows us to run our businesses and deal with the uniqueness of our respective companies without making decisions or enforcing decisions that may not be in our best interests. It’s the best of both worlds. We can still take advantage of the buying power of YRC Worldwide, but have more autonomy than in the recent past.
Steven D. Gast, New Penn: Decisions definitely have been moved closer to customers. I think in general when you use the word holding company, just for that to be articulated, that’s a major positive. And with James coming in with his ‘Freight is not a dirty word’ comment and with Jeff Rogers and the rebranding of YRC Freight, there’s a theme there. We’re truckers, let’s do that well, let’s focus on that and get close to the customer, get as many of them as we can and keep them happy.
Mike Naatz, Holland: The entrepreneurial spirit has been restored, and that entrepreneurial spirit is one of the things that made the regional companies great.
Jeff Rogers, YRC Freight: I like to say that James got the clutter out of our way so we can actually execute our business. He’s gotten rid of some of the distractions and nonsense that created problems for us so we can do our jobs. That gives us a chance to succeed. Specifically speaking of YRC Freight, our company probably had the most overlap with the holding company. There was so much interaction that I don’t know that anybody could have been successful in my role here without the changes James has introduced.
JOC: Was there a lot of confusion about where YRC Worldwide began and YRC Freight ended?
Rogers: Or even where YRC Freight started. Absolutely. James has given me a better chance for success.
O’Connor: It’s important to remember all these companies are well established. Reddaway turns 93 in June. It’s not like we’re new to the game. We know what to do. It’s refreshing to be able to make decisions with less bureaucracy, and it’s an empowerment issue for our people as well. They’re running the business, they’re closer to the task, and they understand what the customer wants. We’re not getting bogged down in layers of bureaucracy that may not be appropriate to the circumstance. From my perspective it’s much improved, and James has driven that.
JOC: What are your shipper customers telling you?
Gast: There is certainly a much more positive view of the entire organization from customers in the Northeast. I think to the extent that there were dark clouds hanging over the organization, they’ve been minimized. People are saying, “It looks like you’ve made it and you’ve turned things around.” That’s what I’m hearing.
JOC: How is business going on the regional side?
Naatz: Business at Holland has been really good. We have loyal customers who have done business with us for a long time, and as the clouds dissipated, we’ve seen a nice return of customers and growth from within customers. They’re less likely to hedge their bets than they were in the past. It helps when you’re dealing with a company like Holland, they want to do business with a carrier that’s reliable and is one of the better players in the marketplace. So we just eliminated reasons for them not to do business with us. Business has been good, the volume has been nice, our market share has been improving on all three levels — weight, shipment count and revenue, which is a big plus. We’re working in a rate environment that has been stable and improving. The shippers don’t always enjoy that, but at least on the Holland side of the house, the shippers realize they were the beneficiaries of things when the recession came, and they expected that at some point in time they would have to pay more for the services they were getting. It’s a good upbeat market right now.
O’Connor: The same applies for Reddaway.
Gast: The East is about the same. We had a good fourth quarter, a little bit of a drop-off over the Christmas holidays, which is normal, and then January and February have been very good. Admittedly, the weather has helped. We feel good about our prospects for 2012.
JOC: Are we seeing normal seasonal patterns this year, the end of last year?
Rogers: You know, that’s an interesting question. I was at a conference recently, and that question kept coming up. When are we going to get back to a normal seasonal pattern? And I don’t know that anybody can say what a normal season is because we haven’t seen one since 2006. We’ve been in a freight recession since then. I don’t know what a normal freight pattern is anymore. I can tell you what it’s like compared to a previous year, but it’s kind of hard to say what a normal pattern is, because it’s been so odd for the last five or six years.
Gast: Well, November has been strong now the past two years in a row, and November used to be a very frightening month. I don’t know if that means that’s the “new normal” or not.
Rogers: I think we need to have a good normal year economically and then maybe things will shake out and we can tell you what a normal freight pattern would be, but I really couldn’t tell you what a normal freight pattern is right now.
JOC: Does that really reflect shifting inventory and freight management patterns among shippers?
Rogers: Yeah, I think so.
Naatz: The dynamics of the marketplace are changing with catalog and Internet growth continuing, and distribution channels have changed. So I do think there is a new normal; we’re just not exactly sure how that’s going to work out yet.
Rogers: We don’t the same surges in freight we traditionally saw in the past, when the last week of September would just be over commitment of all equipment and resources. It makes freight flow a little more manageable, so it’s smoother. You don’t see the same peaks and valleys that we did before.
JOC: We’re always looking for that peak season, whether it be trucking or ocean shipping. Maybe it’s not there so much anymore.
O’Connor: And e-commerce, I think, is an influence there with supply chain management. Business happens so quickly, the lead time isn’t what it used to be, so I don’t think our customer base feels compelled to have massive inventory from a cost standpoint and a supply chain management standpoint.
JOC: Are you seeing inventories becoming leaner in general?
Naatz: I would say it depends on what industry you’re serving. With a more industrial customer, it’s a little bit of a different story than on the retail side. At Holland, while we do retail, it’s not a primary focus for us. It might be a different story at YRC Freight.
Rogers: It’s hard to say whether you’re seeing inventory replenishment on a more continuous basis. We’re just seeing things be a lot more smooth. I mean, volumes are extremely consistent except for a few blips for a few days. It feels pretty good.
Naatz: We still see a little bit of a push at the end of the month. But even the shipping patterns during the week have changed, which has been interesting.
JOC: In what ways?
Naatz: Typically, heavy days during the week have begun to shift. They’re either more balanced, or the day of the week that used to be heaviest has changed.
JOC: Is freight traffic more evenly spread out over the week?
Rogers: Friday used to be your heaviest day, and then Friday became your lightest day because people went to four-day workweeks during the recession, and a lot of people weren’t working on Fridays. That pushed a lot of that freight to Mondays. Now Fridays are coming back and getting heavier again, so it’s a little bit of a shift in what happened through the recession in how customers staffed their facilities.
JOC: How does the freight mix differ among the regional companies, with Holland being right in the industrial belt — how does it differ for Reddaway and New Penn?
Gast: New Penn is probably a little bit more dependent on traditional warehousing activity. If you think about the demographics in the Northeast, we’re going to be handling copiers, TVs, microwaves, probably more things like that than Holland runs into. The typical weight per shipment is reflective of that. Ours is in the low 900-pound range, and I think Holland’s is over 1,000 pounds. T.J., I think you’re up there, too. It seems to be that kind of difference. We partner with both Reddaway and Holland. The freight Holland sends us is more traditional manufacturing-oriented freight, while the freight New Penn handles is more consumer-oriented. Not heavy big box retail, but it could be appliances, things like that.
JOC: Do you touch the ports much?
Gast: We’re at the ports, and we serve Puerto Rico. We’re the largest non-vessel-operating common carrier out of the Port of Elizabeth (N.J.) going down to Puerto Rico, so we’re in and out of there quite regularly. We’re at the airports in Newark and LaGuardia, too, but not as much as some other companies.
JOC: (to O’Connor) How about Reddaway?
O’Connor: We touch the ports, not necessarily going in and out of the ports itself, but from distribution centers. Containers may be drayed to a facility where the goods are deconsolidated into LTL shipments, and from there we would handle a lot of that stuff that originated offshore in Asia or elsewhere. Our footprint is large. Geographically, we have the western 12 states, which includes Alaska and Hawaii, so our length of haul may be a little longer than the other guys. Where Holland might have more industrial freight, we might have more retail, so we’re probably somewhere in between Steve’s and Mike’s freight mix and our length of haul is longer. We serve as far east as Colorado and, of course, everything West.
JOC: YRC Freight will implement two changes of operations in April, focusing more squarely on long-haul freight and moving away from next-day. How will that affect the relationship between YRC Freight and the regional carriers?
Rogers: I think there’s been a little misconception about what we’re going to do with these changes of operations. We’re not exiting the next-day market; we’re always going to do next-day business. We’re just shifting our focus to be more focused on long-haul. Traditionally, where we would do next-day business from a DC to a satellite, we’ll still continue to do that. We’ll do next-day within an existing market, such as Atlanta to Atlanta or Chicago to Chicago. I actually think we’ll do more next-day business a year from now than we do today because our overall service product will improve and we’ll pick up shipments where a customer wants to give us all their freight. There is absolutely no freight that is shifting from YRC Freight to the regionals. They’ll continue to focus on next-day and two-day; we’ll focus more of our freight on the long-haul, but there will be no shift in freight between the companies because of this change in operations. People don’t give us next-day freight now because we’re really good at next-day. These guys are really good at next-day. They give us business that’s next-day because they have two shipments and we’re at their dock. One shipment is next-day, say 300 miles, and the other is long-haul, and they just give us both shipments because we’re there. It’s not a big part of our freight mix. But if I were a gambling man, I’d say we’re going to have more next-day freight a year from now because our service is going to get better.
O’Connor: As far as the working relationship between the different operating companies goes, it’s very collaborative. We each have our strengths, and we try to play to our strengths and position those strengths to the customer. I can call any of my counterparts and have a high degree of certainty that they will support Reddaway in any way possible. So, as Steve said, all four of these companies do a lot of business with one another. It’s a good healthy relationship.
Rogers: In theory, we should get better at it because we’ve taken out some of the complexity of how we’ve done things in the past. Again, I think we need to get better at optimizing what each of the companies does, in other words, taking advantages of the assets we have, and optimizing the use of those assets, but also taking advantage of where we can collaborate across the top. In the past, it seems we worked at it so doggone hard, but we never really got it right. Now I think we’ll get it right because, for one, the relationship between the four of us is so good, and, two, I think it’s in our best interests, not just in the interest of some of the folks in the previous leadership who may have thought they had the best way to do it.
Gast: And it’s in the best interest of the customer.
Naatz: We still have an obligation to think globally, we just have more ability to act locally now.
Rogers: Taking out the complexity is what I would say. The customer is going to do what the customer wants to do. They’re going to utilize us in the way they see fit. We’ll just provide a better approach by taking advantage of each of our strengths. Sometimes we tried to fit a square peg in a round hole in the past. I think we’re going to try to fit the round pegs in the round holes, now, where it makes sense.
JOC: In terms of pricing, what kind of action do you see going forward on simplification of LTL pricing? What needs to be done in that area?
Naatz: To clarify that, are you insinuating that the pricing mechanisms that are in place today are not as clear and convenient as they should be?
JOC: Perhaps. I’m thinking of the classification system in general.
Rogers: Yeah, I’d agree with that.
Naatz: We agree. The question is how does the industry undo that, and who is going to the first one to take the bite of that apple. And that’s an interesting question, because I don’t think I’ve talked to anyone inside the industry who wouldn’t like to see the pricing structures change. They’re a bit antiquated. But how do you do that? There’s a lot of tools and systems and contracts and structures that are built around classification. Does it need to change? In my opinion, yes, but how is the million-dollar question.
Rogers: “Not me, I don’t want to be first.” That’s what everybody is saying. All of us have probably dabbled with simplified pricing from time to time, whether it be some type of pallet pricing, some type of cube pricing. We’ve dabbled in density-based pricing, and at the end of the day, the shipper is going to cherry pick you and say, “Well, if the density pricing comes in lower, I want that, but if my class pricing is lower, I want that.” So going to some new pricing scheme isn’t going to raise the bar on pricing. I just don’t see a shift there, because I don’t think anybody is ready.
JOC: I want to turn back to the regional companies. Your recovery began well before the recapitalization and the return of James Welch. What were the factors that drove the three regional companies as a group out ahead of the curve?
Gast: First, we had three very well established brands. They always gave top-notch service, even in the depths of the recession. The basic product was there all along, there just wasn’t enough freight in the network. When the tide turned, it turned very quickly. Once we got into late 2010, when it was clear there was some sort of economic uptick occurring, we at New Penn particularly saw our customers start worrying about their customers more than they had the prior 18 to 24 months. All of a sudden, they wanted to ensure their customers got their product right on time. That pulled us back into the game as a group. Shippers made some quality trade-offs in that ’08 to ’09 period, when some buyers were looking to get cost savings.
Naatz: When you’re in manufacturing or a just-in-time operation, you need reliability of service. The regionals were very well positioned to take advantage of that. As companies that got a little sloppy during the recession shored up their operations, good service providers became all the more in demand. That’s why I think Jeff’s emphasis on improving service is absolutely the right thing to do.
JOC: Beyond that, do you see more demand for regional hauling, more regionalization of freight shipping?
Gast: I think there’s that, too. Industrywide statistics show regional tonnage has grown more than long-haul tonnage for many years.
Rogers: I’d agree with that. But YRC Freight’s biggest opportunity is to create our own economy, somewhat. We’ve not been as good as we should have been for the last three or four years from a service perspective or a volume perspective. There is such an opportunity for us if we do start providing better value from a service perspective. Even though regional may be the bigger part of the market now, there’s still such an opportunity for long-haul carriers. If you talk to customers about our competitors, it’s like everybody has shifted their focus to regional. There’s a real need for a good long-haul carrier. I think we can fill that need. We’ve just got to get our act together and get a whole lot better from a service and quality perspective.
JOC: There’s been so much redesigning of networks in the LTL industry in the past couple of years. At one time, LTL meant a hub-and-spoke network, and one network was much like another. Now we’re seeing different approaches — why is that?
Naatz: Necessity is the mother of invention. Things were rough in the last couple of years, and when times are rough, it’s time to look at things you might not have looked at when times were good. That probably explains a lot of the network changes we’re seeing. The industry needs to evolve. Certainly, the shippers are evolving. The tools the shippers use, whether it’s 3PLs or large customers with their own TMS or dynamic optimization tools, are evolving. We need to keep pace.
JOC: In terms of technology, what things are you most interested in rolling out for your customers? Several of you are working on mobile apps.
Naatz: Mobile applications are all the rage. Certainly, the younger demographic is embracing that and others, and we don’t want to be left behind. We need to provide conveniences for our customers. They don’t necessarily have to tell us they need those. We like to be out in front of it. Certainly, we want to meet their requirements.
JOC: Are you seeing a change in the way shippers interact with you, with other carriers, based on technology?
Naatz: I think the preponderance of our activity, again, tends to be through traditional channels. It’s EDI for larger customers and telephone calls for smaller shippers. Those are still the predominant ways of doing things. When it comes to tracking or tracing freight, that’s where a mobile app comes in.
Gast: You’ve got different levels of tracking technology. You’ve got automatic e-mails sent to shippers when a shipment is delivered. You’ve got all kinds of ways to communicate with people depending on their preference. The technology is there to do just about anything when it comes to moving data. Moving data is as important as moving freight. We’ve got all these levels of expedited service … It’s like a menu, like going into a restaurant and picking what you want. We see much more of that, probably more than we would ever have guessed 10 years ago. You think you’re a next-day carrier, but does that mean delivering in 12 hours or less? In some cases, that’s what we’re doing. We make a pickup at 10 at night and have it at the dock at 10 the next morning. I’m seeing more expedited demand, and then the technology sits on top of that to send messages to people to say that we’ve been successful.