“It would help the industry if we were to see some more consolidation.”
Old Dominion Freight Line, the most profitable and fifth-largest LTL carrier, is considered a model for companies pursuing the “Trucking Renaissance” — sustainable profit. ODFL’s net profit rose 30 percent in the first quarter, while revenue rose 7 percent. The carrier’s operating ratio dropped to 87.6 — almost 10 points below the average for publicly owned LTL carriers. While some competitors are cutting tonnage or seeing freight decline, ODFL increased tonnage in April and May. The company’s strong profits have allowed it to expand aggressively without acquisitions.
JOC: Does the LTL industry need more consolidation for carriers to improve margins and reinvest in their business, or are there other routes carriers can take? And haven’t we already seen an enormous amount of consolidation?
Congdon: No. 1, I am surprised that we did not see any major industry consolidation during the recession. What we did see were a couple of the large carriers reducing their terminal networks, YRC, in particular, and FedEx and Con-way. They all took some service centers out. We didn’t see any weak players exit the market to create a major industry consolidation event. It would help the industry if we were to see some more consolidation. Nonetheless, there was a good bit of consolidation in the recession when you look the number of freight doors and the number of pup trailers in use.
Unfortunately, the yield environment and pricing environment took a nosedive in the recession. Several of the carriers that led that by discounting ... they wound up hurting themselves, in my opinion. It was not a good thing. For every 1 percent reduction in price, you need four to five times more tonnage to offset that price reduction and arrive at the same earnings per share. To maintain the same operating ratio, you need even more. It just didn’t make sense to reduce prices to chase a falling amount of tonnage.
We tried the best we could to uphold our service product with a fair and equitable price so we could continue to invest in our fleet and company. That’s worked for us. That’s the kind of thing the industry needs to look at. If the economy is not going to help us, the only way you’re going to improve earnings is through basic blocking and tackling. Improve efficiencies and know your costs and arrive at a fair and equitable rate for the service you’re providing. That’s what it boils down to for me, and that’s in a nutshell what carriers need to do.
JOC: Other carriers cite your success in balancing costs and yield and achieving sustainable profit as an example of what they’re trying to achieve.
Congdon: We’re flattered by that. It shows our strategies have been working. We’ve had a fairly positive yield environment now throughout 2010, 2011 and even 2012 into this year. Customers understand we’ve got to earn an appropriate return to continue to capitalize our businesses. That’s expensive, too. You’re facing a truck costing $100,000 or more, and that’s a lot of dough per tractor. We have to buy 600 of them every year, and that’s a lot of money.
JOC: Where are costs rising most rapidly?
Congdon: One of the most outstanding areas has got to be health care. It’s on the verge of being out of control. Health care costs are up in the low double digits — between 11 and 12 percent this year is what we’re looking at. Aside from that, it’s your capital expenditures. Everything costs more, trucks, trailers, real estate, construction, and all of that that flows into your capitalization and amortization expenses. Those are the two areas that are hitting us the most.
JOC: How do you think the new hours of service rules for truck drivers will affect those costs — will it affect your utilization?
Congdon: The worst, thank goodness, did not occur, and that would have been if the driving hours allowed had gone back to 10 hours a day. That would have been the most impactful to us. For us, the 34-hour restart is not that big of a deal, as we are a regular route carrier and 70 or 80 percent of our line-haul runs every night on a schedule. Even those extra trucks that run trips are programmed out to work within the hours of service. So we don’t get into the 34-hour restart provision that much. It may impact a city driver who’s worked all week and wants to run a road trip on the the weekend, but it’s not a major thing. We’ve taken all the steps we need to comply with the new regulations. We utilize onboard recording devices and all of our drivers are doing electronic logs now. We had to fix our systems so we can keep up with the changes. So we don’t anticipate a major productivity impact now.
JOC: What’s the capacity situation like in LTL? We’ve seen data that show freight demand is actually higher than active LTL capacity, in terms of terminal doors. What does that mean for LTL pricing?
Congdon: Demand is exceeding supply now. On the supply side of the equation, it’s going to be difficult for our industry to add capacity back until the industry gets its profitability and margins in order to provide shareholders an adequate return on investment. That means the demand-supply equation is going to lean in favor of the carriers from a pricing standpoint. Pricing is likely to stay relatively positive for many years to come, unless we hit a recession or industrywide amnesia. I hope some of the carriers who saw their ORs shoot north of 100 don’t forget what happened to them and how hard it was to get their yields back in order.
JOC: What’s the state of LTL trucking in mid-2013?
Congdon: It appears to me the industry is rather stable now and is making gradual improvements in profitability and operating ratios. You’re seeing every carrier starting to make some levels of improvement. There are a few that are still not doing too well, but just a few. I think the other carriers are going to have to reinvest in their fleets and keep their fleets up. They’re just not going to be earning the return on investment capital they would like until they get their ORs down. You need an OR in the low 90s, given the cost of equipment and assets today, just to be able to replace your fleet in a relatively slow growth economy. You need to get that ratio below 90 to grow your business significantly and branch off into other areas.
JOC: You’ve expanded into areas such as drayage, which grew 21.5 percent for you last year. Do LTL carriers need to diversify more than consolidate?
Congdon: There are LTL companies that do a great job in their niches as an LTL carrier. You have to decide what you want your company to be and do. Going beyond LTL is not for everyone, it takes time commitment and financial resources. Acquisitions in those areas are frankly very expensive. Private equity investors have almost destroyed M&A opportunies. They pay way to much for companies in our view. It’s hard to say I’m going to pay "x" amount for this business, and it’s going to take eight or nine years to get it back. When it comes to LTL acquisitions, there’s a lot of risk, especially with really big ones, where you’re almost betting your company. The seller almost always overestimates the revenue a buyer can retain.
We’ve found over our years of tuck-in acquisitions that our retention rate was as low as 30 percent and on the high-end 70 percent. We’ve never kept all the business. They were selling those companies because they were sick, and they were sick because they had poorly priced freight. When you correct that, there is always somebody else standing in line to take that freight.
JOC: Is there room for LTL trucking to grow? Right now, it represents about 5 percent of all trucking revenue. Where will future growth come from?
Congdon: Satish Jindel (president of SJ Consulting Group) will tell you the LTL industry has been squeezed from both ends of the spectrum. The truckload people have taken heavy LTL shipments and created multistop truckloads and the parcel people are going for smaller LTL shipments. You’ll always have some degree of mode shift up and down, but I do believe the LTL segment is still here and most of its growth will come from economic growth. There’s not a whole lot we can do to change our industry’s nature. But as the population is growing by 2.1 million people per year, there will be continued increases in demand for trucking and for LTL.
For more information on ODFL’s strategy and expansion, see: