LTL Consolidates Its Benefits

LTL Consolidates Its Benefits

Who would have thought that 26 years into the deregulated motor carrier environment we would still be seeing such changing industry dynamics in LTL trucking? This industry is a great example of the market economy at work, where shareholders and customers alike are benefiting from an ever-improving industry structure. Currently, there are plenty of carriers offering adequate capacity at a reasonable price with high service levels, in all subsegments of the LTL industry.

In just the last 10 years, we have seen significant industry improvements in services available to shippers due to consolidation.

FedEx built a very strong portfolio of regional LTL carriers through its acquisition of Caliber System and American Freightways. This year FedEx rounded out its portfolio by adding long-haul LTL specialist Watkins Motor Lines.

None of these three was in a weak position at the time of acquisition. Rather, they were all highly respected independent operations.

As part of the FedEx family, the acquired companies should enjoy greater purchasing power, better access to capital, faster revenue growth through direct sales and the leverage of a strong brand. Of course, FedEx, through its acquisition of Caliber (formerly Roadway Services), also acquired Roadway Package System, now FedEx Ground, and Roberts Express, now FedEx Custom Critical. FedEx constitutes a textbook case of smart growth through acquisition.

Yellow's acquisition of Caliber spin-off Roadway Express in 2003 strengthened the challenging long-haul LTL segment.

The days of the Big Three (Yellow, Consolidated Freightways and Roadway) are gone as we essentially have one remaining entity, albeit with two different logos on the tractors and trailers.

However, there is still plenty of quality competition. For example, ABF offers an excellent alternative. Overnite lengthened its average haul to offer competition in some of the traditional long-haul lanes. 

The traditional long-haul LTL market could not support three independent players the size of Roadway, CF and Yellow. Survival of the fittest proved out. YRC (formerly Yellow) also strengthened its regional offering with the acquisition of US Freightways (Holland, Bestway, & Reddaway) in 2005 for $1.3 billion and New Penn Motor Express, which Roadway had acquired in 2001.

YRC now has a complete portfolio of long-haul and regional LTL service. 

The purchase of Overnite by UPS in August 2005 is also good news. Overnite operated independently until the blockbuster acquisition by Union Pacific in 1986, and then again after its IPO in 2003. Union Pacific grossly overpaid by spending nearly as much in 1986 ($1.1 billion) to buy the $470 million Overnite as UPS paid 19 years later for virtually the same company -- although it included the Motor Cargo acquisition in 2001 -- when Overnite had grown to $1.7 billion in revenue.

Shippers who have come to rely on UPS for parcel and air shipments can now buy LTL services from the same entity.

 

Mergers and acquisitions are not the only mode of change. Weak carriers simply exit the market.

In September 2002, CF closed their doors after posting 2001 revenue of $2.2 billion. Significant players such as NationsWay, A-P-A Transport and Preston all closed down. Some may think that all of this consolidation decreased competition and may have led to increasing prices for LTL services. That is not the case.

LTL prices net of fuel surcharges are increasing only 2 to 4 percent per year.

In every regional market segment and in the long-haul segment, there are strong players looking to grow through  competitive prices and services. In the Southeast carriers such as Con-way, Averitt, Old Dominion and Estes all vie for the same regional freight.

What does the future hold? Probably more of the same. There are still some very good regional and medium-haul carriers operating independently. The Southeast regional carriers would all be attractive acquisition candidates. Con-way is exceptionally strong and has proven the ability to grow without acquisition. ABF could be a buyer looking for more regional coverage or a seller to someone needing a good long-haul footprint.

What is not likely is much interest in buying troubled carriers and trying to turn them around. That strategy rarely pays off in trucking. It is also very difficult to buy overlapping carriers and merge the networks, as ABF found back in 1995 when it bought bankrupt carrier Carolina Freight. Most of the weaker carriers are gone and consolidation created positive efficiencies in the market. LTL trucking has not become as concentrated as rail. however, so there is not as much need to worry about monopolistic or duopolistic pricing.

Is there anyone out there longing for good old days? Only two of the 10 largest LTL carriers from 1979 are standing (Yellow and Roadway) while CF, Ryder, McLean, PIE, Spector, Smiths, Transcon and ETMF have all gone by the wayside. I am confident shippers and shareholders are in much better hands today, with a strong but competitive LTL


Tom Sanderson is president of Transplace, a third-party logistics and technology company based in Plano, Texas.