“It's an exciting time for a shipper.”
UPS Freight is the fourth-largest LTL carrier and second-largest Teamsters-organized trucking company after YRC Freight. The $2.4 billion motor carrier, formerly Overnite Transportation, has been pushing the boundaries of its business, expanding truckload and multimodal services, aided by its connection to the nation's largest transportation company, $54 billion UPS.
JOC: Since YRC Worldwide tentatively approached Arkansas Best about an acquisition, the question of whether LTL needs more consolidation has come to the fore. There’s been a lot of consolidation since the beginning of the recession, but many carriers still struggle with operating ratios in the high 90s and profit margins too thin to allow much reinvestment in their companies. YRCW CEO James Welch said his interest in Arkansas Best and ABF was driven by the need to build density. Jack, is further consolidation the best way for LTL carriers to build density and drive up profitability?
Holmes: I think the comments from James certainly seemed to indicate they thought they could create density in their operations. And density is critical. You need it on the pickup and delivery side and most importantly the linehaul side of your operation. On the P&D side, your expense is carried by the first pallet. Every other shipment from the same place should have a better operating margin, because you’ve already had to drive to the location to get that first pallet. The other freight is not riding for free, but it’s certainly riding at a lower cost. But the linehaul side is where you find the bulk of your expense in your operations. If you've got trailers that are 60 or 70 percent full, and you can fill them 90 or 100 percent, obviously you’re going to reduce your expenses and improve your margin.
JOC: Is consolidation by acquisition the best way to do that?
Holmes: I do believe there are other ways. As an industry, we have typically taken space in our network and gone out to customers and advertised space available. For example, companies running empties from Florida to Atlanta will look for freight to fill them. Most of the time that freight doesn’t cover the cost, but it’s better than running air back and forth. Our philosophy, instead, has been to remove that piece of equipment from the network. As an industry, there are 15 to 17 percent empties in the LTL network — that’s an estimate for the industry, not us. But if a carrier has trouble getting a handle on its network and is running 20 percent-plus empties, you could see why creating density would be at the top of their strategic vision. When UPS got into the LTL industry in 2005, we were little more than 6 percent market share. Now our market share is 9.5 percent. We’ve done that without acquisitions. We’ve done it by improving our core competency, our technology, our customer tools. ODFL is another good example of a company that has grown by focusing on its core competency.
So I don’t believe that to create density in your network you need to go out and buy someone. You need to pick up market share and you need to figure out which is the best way to do that — improving core offerings, improving customer experience. If you feel you can’t do it any other way, then certainly you look at acquisitions, but acquisitions are a tricky business in LTL. Back in Mr. Cochrane’s day (J. Harwood Cochrane, founder of Overnite Transportation, now UPS Freight), acquisitions typically took place because you needed rights to operate in a certain state, ambitious companies had to acquire other companies to do that. But if you look in the last 30 years at the existing LTL companies that have acquired sizable LTL companies, or railroads buying trucking companies, they have typically failed. At the least, the experience has been a negative one for the companies involved and the customers they served. Whatever their strategic vision was, it was not realized. If you have a value proposition based on quality and you buy a company that doesn’t have the same standards, you put your company at risk.
JOC: You say LTL acquisitions are a “tricky business.” Why is that? What makes a good acquisition?
Holmes: For one, people have to worry about technology. Integrations typically have not worked in LTL, and now they’re more complex today because the companies have different platforms. There are a lot of sad stories out there about recent sizable integrations. The successful acquisition strategy today is not meant to build out networks, but to gain technology tools, features of service or for serving customer needs in various modes. If you have aspirations to be more of a partner with a global shipper, you will have to pool resources and go beyond LTL. If you’re just a typical LTL company, you’ll be looked at as a provider in part of the business. If you really want to be a partner, you have to be able to go in there and provide some consultation as to what mode suits the shipper best. If the customer asks what’s the best way to run our supply chain and you’re just an LTL company … you’re limited.
So, from an acquisition standpoint, companies have to consider whether they’re going to be a provider of a type of service or a partner for a global customer that has needs across all modes of transport. Every company has its own strategy. There are some companies that in the last five years have gotten back into their strength. They’ve trimmed back offerings and geographical coverage, and they’re going back to what they did. That’s fine for them. There are other companies that have built alliances and do interline agreements and for them; that’s good. There’s a lot of different strategies that are taking place right now. With any strategy to grow, there is certainly risk involved when you bring partners on in any capacity because of the cultural and technology issues. Anybody that thinks they can buy a company and assumes that the customer base will just slide over to them, that’s not a realistic view. Customers have many choices. Just because they’re a customer of Company B doesn’t mean they’ll keep that relationship with Company A after an acquisition. And one of the trickiest parts of an acquisition is price rationalization between the companies. Yield is the most difficult part of this business.
JOC: What does the LTL industry need to do to grow — not just individual companies, but the sector as a whole? LTL now represents about 5 percent of trucking’s total revenue. Can that expand?
Holmes: LTL is in a unique position. We’ve got parcel on one side of the business and truckload on the other side. Certainly in the course of the last six years, supply chain inventory levels have slimmed down, and they needed to. So you have to, as a parcel or LTL or truckload company, be more dynamic. If a (disruptive supply chain) event were to happen, you would see the flow of goods slow down more quickly than it used to. The market share that LTL carries is not only affected by the economy and flow of goods, but (also) by what competitors in other modes are doing.
If they want to grow, LTL carriers will have to be more aware and more involved in their customers’ sourcing strategies. The typical customer is bringing goods into a port and running them by intermodal to an inland distribution center. One way LTL companies can grow is by being more involved in those inbound consolidation and sourcing decisions. You could break the shipment down to LTL at the port and move it to other points of the country. Another thing we’ll have to be very aware of on this “omni-channel” phenomenon (in retailing). People are looking at different ways of moving inventory. It’s an exciting time for a shipper. At UPS Freight, we have an advantage. Five or six years ago, some big retailers consolidated shipments and started running bigger shipments less frequently. That moved shipments away from a parcel environment to truckload. For a company like ours, that was one of the challenges, moving from parcel, where UPS is well known, to truckload, where we’re not. In the last five years, we have built up that truckload capability to the point where we can provide anything customers need there. Now with shippers looking at e-commerce fulfillment from stores, that could take bigger less frequent shipments and start turning them back to small, more frequent shipments. It’s going to take some time to figure all this out, but at some point it will change the world we live in.
If anything, these last six years have taught companies that they have to be more agile in running their supply chain. For a trucking company, the linehaul network has to be more agile because the economy is more dynamic. Back in the good old days when you could count on GDP aggressively growing, you knew that even if assets weren’t completely utilized, they would be utilized and you could still reinvest in the business. That’s not the way things are now. You have to build agility into your network and if you don’t you’re going to be in a tough spot going forward.
For more insight into UPS Freight’s strategy, see: