The Morning After

The Morning After

Copyright 2003, Traffic World, Inc.

This is how the trucking world is: there are Roadway shippers and there are Yellow shippers but there are not nearly as many Roadway and Yellow shippers. Just as there are hockey fans and basketball fans, but very few rabid fans of both sports.

That's just the way it is in trucking, executives say. Roadway shippers stick with the Akron, Ohio, long-haul carrier because somewhere along the line a Roadway salesman gave a good price, offered an interesting deal or played a nice round of customer golf. Or perhaps the shipper sticks with Roadway because the Yellow sales guy irked him with a bad rate, a crummy deal or didn't play a friendly round of golf.

The new $6 billion "Yellow-Roadway Corp." is going to try to make Roadway shippers out of Yellow guys and gals and vice versa. Even though Yellow Corp. Chairman, President and CEO Bill Zollars swears there will be no massive changes of Roadway's network immediately, nobody expects the new combination to retain 35,000 Teamsters, 715 terminals and duplicate sales forces for long after the $1.1 billion deal is closed, expected late this year.

The other big question is how much of that $6 billion freight the combined operation eventually keeps. Rival trucking executives were palpably excited at the prospect of a Yellow-Roadway combination, almost as if much of that $6 billion in freight is freshly up for grabs.

"If I'm an executive at ABF, Con-Way, Fed-Ex Freight, Overnite, Watkins, NEMF or any of the other top-flight regional LTL carriers right now," said one transportation executive not affiliated with any of those companies, "I'm jumping for joy. If for no other reason, shippers will be contacting those companies for bids in an attempt to keep Yellow and Roadway honest."

This executive further summed up the mood in the LTL industry right now: "We have all been in the doldrums with this economy for quite some time. But this is going to add some fuel to the fire. It's a new day, my friend!"

Even some Roadway sales personnel must feel that way. Within 24 hours of the deal's announcement, one large carrier's national sales director reported getting calls from more than a few Roadway salesmen inquiring about positions with this carrier.

Not everyone is sure that much Yellow and Roadway business is actually up for grabs. But one major competitor said that no matter how much Wall Street may like this deal, the key is customer acceptance.

"I'm not going to venture a guess," said Douglas G. Duncan, president and CEO of $2 billion FedEx Freight. "I'm not an expert in long-haul pricing. I'm not in that market. I think time will tell what the customer reaction will be. That's the piece of the puzzle that is missing. The person paying the bill is the customer. That's who is going to determine whether this is successful or not."

This is how long-haul freight works: approximately 70 percent of Yellow and Roadway's business comes from some 1,800 large, national accounts. It's because of these purveyors of millions of tons of freight that the large national LTL carriers keep national sales executives. It's the reason for all those golf invitations, goodie bags and other perks that large shippers get from carriers coveting all that freight.

Also, the deal is incredibly pricey, even if it results in making instant millionaires of large Roadway shareholders who are getting a 50 percent premium for the $48-per-share acquisition. The debt associated with Yellow Corp.'s $1.1 billion acquisition, including Roadway debt, caused Standard & Poor's rating service to downgrade Yellow Corp.'s credit rating while placing the company on its credit watch with "negative" implications.

Some of the people who actually touch all that freight are leery. Part of that is from watching hundreds of thousands of their union brethren lose their jobs in the thousands of unionized carrier bankruptcies of the past two decades.

"Everybody smells a bad fish," said one Teamster rank-and-file freight worker who works at Yellow and asked not to be identified. "It all reeks. That's because a lot of our guys worked hard previously for Preston (which closed in 1996 after Yellow Corp. bought it four years earlier) and CF (which closed last year) and other defunct carriers. The Roadway guys are hoping they're going to be dove-tailed (by seniority) instead of just being let go."

That's the view from the freight dock. The view from the top of the IBT is just as vague, as Teamsters union President James P. "Jimmy" Hoffa says he still has lots of unanswered questions after meeting with both Yellow CEO Zollars and Roadway's Jim Staley face to face two days after the July 8 merger was proposed.

"The proposed merger raises many questions," Hoffa said. "The job security of our members is at stake. We intend to thoroughly review the proposal to ensure that the financial integrity of both companies remains strong and the job security of their workers is protected."

Hoffa said he specifically questioned both CEOs on the long-term impact of the merger and how the economic outlook would affect any current projections. Despite the companies' promises, Hoffa pointed out the proposed merger potentially affects more than 35,000 Teamsters members - about half the remaining Teamsters' work force in the freight industry. That is down from more than 500,000 Teamsters in the freight sector prior to the Motor Carrier Act of 1980, which deregulated trucking.

The IBT currently is analyzing the proposal and the crossover business that both companies share. Yellow's Zollars says only about 30 percent of its shippers also use Roadway.

"Sure, we both carry retailers," said Staley, who will stay on as Roadway's top executive after the merger closes in the fourth quarter, "But we're strong with Home Depot; they're strong with Lowe's. They're strong with Wal-Mart; we're not."

But that does not reassure large shippers in light of the prospect that soon there might be one less option for long-haul freight. John Gentle, global transportation leader of carrier relations for Owens Corning, Toledo, Ohio, says he's "very concerned" about the real possibility of reduced service options for shippers.

"Certainly the thing that concerns us is the issue of the limitations that would impact service, price and capacity," Gentle said. "It's a nationwide issue. If this does hold up, what we're going to see is another round of consolidation. I can only imagine what's going on with ABF and other suitors."

ABF Freight System, Fort Smith, Ark., which had $1.3 billion in revenue last year, once only slightly trailed CF as the fourth member of what was trucking's "Big Four" LTL carriers. Now ABF is a distant No. 2 - behind Yellow-Roadway Corp. - among unionized long-haul carriers. United Parcel Service, which does about one-tenth of its $32 billion-a-year revenue in the LTL sector, often has been mentioned as a possible buyer of an established LTL carrier, although UPS officials would not speculate on any possible purchase.

Still, few shippers expected Yellow-Roadway Corp. to long operate two terminals - one Yellow, one Roadway - directly across the street from each other, as is often the case now. The combined Yellow-Roadway Corp. has more than 600 terminals, each about the size of Yellow, Roadway and CF's networks in the early 1990s before all three downsized significantly (realizing they did not need all that real estate, brick and mortar).

"You'd have to think they would not maintain terminals in the same area," Gentle of Owens Corning said. "That would mean capacity would have to come out. After CF went out, everybody got a little healthier. I just have to believe in addition to administration traffic, they will eliminate facilities to reduce redundancy. Certainly capacity will suffer.

"Once you do that, if everybody is capacity-constrained, what happens to service?" Gentle asked. "Service falls off. Then it becomes a matter of price."

There is a probably a proverbial snowball's chance that Washington will nix the deal on antitrust grounds, but few are counting on it. It's theoretically possible that Yellow-Roadway Corp. might draw the scrutiny of folks at the Federal Trade Commission or Justice Department, despite the Bush administration's reluctance to interfere in nearly every other major merger in all industries.

But if the relevant market is defined narrowly, including only national long-haul LTL carriers, the proposed transaction could be viewed as dramatically increasing concentration in an already highly concentrated market by combining the two largest competitors and reducing the number of independent competitors from as few as three to two.

If the relevant market is defined more broadly, however, including competition from regional LTL carriers, truckload carriers and parcel carriers including FedEx and UPS, the competitive impact of the proposed transaction could be viewed as more benign.

No matter how the shakeout from Yellow-Roadway Corp. turns out, few shippers expect this to be the end of the decades-long consolidation in the long-haul industry.

"I would think there certainly would be other reactions," Gentle said. "You can't be prophetic but one would think it would be more."

As Michael Belzer, a industrial relations professor at Wayne State University and author of "Sweatshop on Wheels," said, "They say they don't have immediate plans to merge the systems but they keep talking about economies of scale and economists have proven they don't exist in trucking. There are economies of density but not of scale. If they could magically combine the two carriers, they could achieve economies of density, but we will have to leave magic to Harry Potter."