The news in May that $4.9 billion trucking operator YRC Worldwide was considering buying Arkansas Best, a $2.1 billion competitor, sent shockwaves running from Midwestern truck terminals to the New York Stock Exchange. The scope of the potential combination — and YRC Worldwide’s chutzpah — caught the less-than-truckload industry off-guard while puzzling analysts, alarming shippers and riling the Teamsters union.
A merger between operating subsidiaries YRC Freight and ABF Freight System would have been the biggest consolidation event in LTL trucking since YRC Worldwide combined Yellow Transportation and Roadway in 2009. YRC Freight is the third-largest LTL carrier, ranked by revenue, while ABF is sixth. The two carriers combined would be trucking’s largest Teamsters employer, and have $4.9 billion in consolidated 2012 revenue.
Arkansas Best rejected YRC’s overture in April, weeks before it was first reported by DC Velocity magazine on May 8, but the much-discussed non-event raised questions not just about YRC’s intent but also about whether LTL trucking would benefit from more consolidation.
After more than three decades of acquisitions and bankruptcies, does the LTL industry still have too many players? Does the small-shipment sector of trucking, which represents 5 percent of all trucking revenue, need to get even smaller in order to regain the broader profit margins carriers say they need to grow? Or are there smarter routes to growth that trucking companies, along with shippers and logistics partners, should explore?
Although further consolidation might benefit some motor carriers — YRC Freight, for example — mergers are no panacea for the challenges facing LTL trucking. Just ask James Welch. Despite his interest in acquiring ABF, the CEO of YRC Worldwide said, “I don’t think consolidation is critical to the success of the LTL industry.” That success, he said, “is more about each carrier being able to manage its costs.”
Top executives at many of YRC’s competitors echo that view. “If the economy is not going to help us, the only way you’re going to improve earnings is through basic blocking and tackling,” said David Congdon, president and CEO of Old Dominion Freight Line, an LTL company enjoying record profits and sustained growth in what he calls “a doggone flat” economy. “You need to improve efficiencies, know your costs and arrive at a fair and equitable rate for the service you’re providing.”
“By itself, consolidation doesn’t guarantee success,” said William Logue, president and CEO of FedEx Freight. “Every company needs growth, but it has to be good growth. You have to put the right volume at the right rate into the right network. And all three legs of that stool have to be standing firm when you’re going through a consolidation.”
Working smarter to attain more sustainable profits isn’t easy. Four years after the Great Recession ended, LTL trucking is struggling to catch up with a plodding economic recovery. The sector suffered an unprecedented collapse in 2009, with the 25 largest LTL carriers losing nearly 32 percent of their business in one year.
The LTL trucking industry is still climbing out of that hole. In 2012, the 25 largest LTL carriers were about $870 million short of the $29.7 billion in combined revenue they enjoyed in 2008, according to SJ Consulting Group data. At $32 billion last year, the LTL sector as a whole — the top 25 carriers and hundreds of smaller companies — was more than $1 billion below its pre-recession peak revenue of $33.3 billion in 2007.
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Even more telling, many LTL operating ratios — trucking’s preferred measure of profitability — are stuck in the high 90s, meaning operating profits are thinner than see-through pallet wrap. In the first quarter, the average operating ratio for the publicly owned LTL carriers tracked by The Journal of Commerce was 97 percent. That’s an improvement from 98 the previous year and 100.6 in 2011, but still too high to allow many carriers to reinvest in their equipment and operations. An operating ratio of 97 means a carrier is making only 3 cents on every dollar of revenue before taxes and interest, amortization and depreciation.
“To earn your cost of capital in this business, you need to be close to an operating ratio of 92,” Stifel Nicolaus transportation analyst David Ross told LTL carriers and logistics operators at SMC3’s Connections 2013 Conference in June. “The average is about 96.4. Pre-recession, it was about 93.”
Getting back to that pre-recession operating ratio is tough in a lackluster market. LTL revenue rose 4.3 percent in 2012 following a 12 percent surge in 2011. Year-over-year increases in yield, a measure of pricing, dropped as well. The year-over-year increase in the JOC LTL average yield peaked at 11.3 percent in the third quarter of 2011 and declined to 2.4 percent in last year’s fourth quarter and 3 percent in the first quarter of 2013.
“You can’t price your way into success,” said Welch, though YRC Freight, along with most of the other large LTL carriers, is asking shippers for higher rates. For YRC, greater freight density in terminals, lanes and trucks is the key to delivering more bang per buck. “Density is always the overriding concern we look at,” Welch said in an interview last month. “There are a couple of ways to approach density. You can either create it yourself, as YRC Freight is taking steps to do by rightsizing its network, or you can acquire it.”
The YRC Freight and ABF terminal networks are “nearly on top of one another,” Welch said in an earlier interview. “When you think of the density of one full truck going from Dallas to Amarillo versus two partially full trucks, that’s what I’m talking about.” A merger of the two networks — which would mean eliminating duplicate or excess terminals — “would create a much more financially secure company,” he said.
That strategy might work for YRC Worldwide, but not every carrier. “Every company has their own strategy, and there are a lot of different strategies at work now,” said Jack Holmes, president of UPS Freight, the fourth-largest LTL carrier with $2.4 billion in annual revenue.
UPS Freight’s strategy is focused on gaining market share organically. “I don’t believe that to create density in your network you need to go out and buy someone,” Holmes said. “You need to pick up market share and you need to figure out which is the best way to do that, whether it’s improving your core offerings or improving your customers’ experience. If you feel you can’t do it any other way, then certainly you can look at acquisitions, but acquisitions are a tricky business in LTL.”
Attempts by YRC Worldwide and others in the last decade to build trucking enterprises with dominant market share and scale to serve global shippers through acquisitions were fraught with problems, not the least of which was the downturn in freight demand that began in 2006 and became the 2008-09 recession. Differences in corporate culture, technology platforms and poor planning also played a role.
“Anybody who thinks they can buy a company and assumes its customer base will just slide into their base, that’s not a realistic view,” Holmes said. “And one of the trickiest parts of an acquisition is price rationalization” between the buyer and the company being acquired. “Yield is the most difficult part of this business. Customer defections quickly eat into margin.”
UPS, the United States’ largest transportation company, acquired its LTL freight business, formerly Overnite Transportation, in 2005 for $1.25 billion. Since then, UPS Freight has increased its LTL market share steadily each year. “We’ve done that without acquisitions by improving our core competency, technology, customer tools,” Holmes said.
How much room is there for further consolidation in the LTL market? Although trucking as a whole is a fragmented industry with hundreds of thousands of operators, a surprisingly small number of companies today dominate the LTL business, which created the original blueprint for trucking by taking less-than-carload freight from the railroads in the 1920s and ’30s. The 25 largest LTL carriers account for 90.2 percent of industry revenue, while the 10 carriers with more than $1 billion in annual revenue took in 72.5 percent of all LTL spend, according to SJ Consulting. The largest of those top 25 carriers, FedEx Freight, had $5 billion in revenue in 2012, while the smallest, Wilson Trucking, had $150 million. The 15 largest LTL players are either national or multiregional carriers.
The next 10 are regional operators, but most have partnerships with other carriers — such as the Reliance Network that includes Averitt Express, Pitt Ohio and six other carriers — that give them a national footprint as well as access to Canada. “Most companies don’t have a need to buy,” Ross told the SMC3 meeting. “The ‘old acquirers’ all have a national footprint, and carrier experience with mergers is terrible.”
Many regional companies are finding that close partnerships can provide opportunities for growth once only attainable through acquisition. Vitran, in fact, which expanded into the U.S. Southwest by acquiring Sierra West Express in 2005, now plans to serve that region through interline partners and close several terminals in four western states. That will allow Vitran Express to concentrate on getting density in its core eastern market.
Any future LTL acquisitions and consolidation likely will reflect the deep scarring the sector suffered during the recession and changes shaped by the slow recovery. The collapse of Consolidated Freightways in 2002 and the 2003-06 economic recovery spurred a wave of mergers, starting with Yellow’s $1.1 billion purchase of Roadway in 2003, aimed at rapidly building market share. YRC revenue soared from $2.6 billion in 2002 to $9.9 billion by 2006, before tumbling to $4.3 billion in 2011. For at least the near future, LTL acquisitions won’t be about adding new revenue but building profit.
Acquisitions “are really about positioning your business for future growth,” FedEx’s Logue said. “It’s important to consider the value of consolidation to the customer base. Ours was an example of healthy consolidation.”
Rather than just combining and expanding two networks, FedEx Freight re-engineered its business to create “a new value proposition for the customer,” FedEx Freight’s priority and economy service, which makes use of intermodal rail. That modal switch once would have been anathema to LTL carriers that built their business taking freight from the rails.
“The more we can run an efficient network, the more opportunities our customers will have to grow their business,” Logue said. “As an LTL carrier, we will grow with them.”