Teamsters employees sent a clear message to ABF Freight System when they rejected wage concessions last week: Use pricing, not pay cuts to balance the books.
|It’s a message heard throughout an industry in which some carriers almost priced themselves out of a recovery with aggressive rate-cutting last year and right through the first quarter. |
Trouble is, it’s a lot easier to say “raise prices” than to do it, especially when competitors are willing to drop rates to gain volume and customers are reluctant to accept the substantial rate hikes many LTL carriers reportedly seek.
“LTL pricing is starting to move gradually higher,” R.W. Baird & Co. transportation analyst Jon A. Langenfeld said in a note to investors last week. But it’s not moving fast enough to bring immediate bottom-line relief to Fort Smith, Ark.-based ABF.
That could pressure the carrier to cut into operations, said Longbow Research analyst Lee Klaskow. “We believe ABF’s management could be forced to hold trailers, keeping delivery times tighter, which could end up hurting service levels,” Klaskow said.
Langenfeld suggested a shift toward more profitable regional LTL freight. He also noted the company has about $144 million in net cash, providing it with “the ability to ride out the economic cycle,” a point its Teamsters employees apparently also noticed.
The “no” vote won by a landslide at ABF, despite strong efforts by the company and the Teamsters to win the concessions they negotiated and proposed in April.
A 56 percent majority rejected a 15 percent wage cut that would have saved ABF Freight $60 million to $75 million a year and helped to level the playing field with YRC Worldwide, which won a 15 percent wage cut from the Teamsters last year. More than 6,500 employees returned ballots — about 80 percent of ABF’s Teamsters.
The ABF Teamsters also rejected a gain-sharing or profit-sharing plan analysts called ground-breaking. It would have returned portions of the wage cut to employees as ABF began to profit, with the size of the payback tied to its operating ratio.
“It is unfortunate that our union employees have chosen not to participate in better aligning ABF’s cost structure with those of its LTL competitors,” said Judy R. McReynolds, Arkansas Best president and CEO. “Going forward, we will evaluate our various options in dealing with our cost structure and the other issues we face during this challenging freight environment.”
“We took a proactive approach to help ABF get through the worst economic recession since the Great Depression, but our members have rejected the plan,” said Tyson Johnson, director of the Teamsters National Freight Division. “The union will regroup to determine if there are other means to protect jobs and benefits.”
ABF executives complain they have been at a disadvantage since the Teamsters granted YRC concessions that left ABF with the same labor contract but higher wages.
YRC may not believe it has much of an advantage over its smaller unionized rival. It formed one joint committee with the Teamsters last week to “find ways to enhance YRCW’s competitiveness” and another to examine pension options.
With such a commanding majority against the wage cuts at ABF, the international union and less-than-truckload carrier will be hard pressed to come back with a similar offer. They are expected to try, as ABF struggles to return to profit in a low-priced LTL market.
“LTL trucking is lagging,” Wes Kemp, president and CEO of ABF Freight, said at the annual NASSTRAC meeting of freight shippers in Orlando last month. “The truckload guys have pretty much recovered, but it’s not a lot of fun on the LTL side.”
ABF reported a $35.7 million operating loss in the first quarter despite a 2.2 percent-per-day increase in revenue to $333 million. Its operating ratio rose to 110.7 from 108.3 in the 2009 first quarter, as operating costs increased 6.8 percent.
Much of its increase in revenue reflects higher fuel surcharges, as fuel prices rose and the carrier’s fuel costs jumped 17.1 percent, by about $10 million, from a year earlier.
ABF’s tonnage improved 3.3 percent in the quarter, and 11 percent in April, indicating the carrier has grabbed a share of the freight returning in the recovery. But that higher freight volume came at a lower price. In documents filed with the federal Securities and Exchange Commission, ABF said its LTL pricing was down by “single to mid-single” digit percentages in the first quarter from a year earlier, despite a general rate increase in January that covers about 45 percent of ABF’s business.
Its billed revenue per hundredweight, a measure of pricing, dropped about 1 percent.
Other carriers were willing to make deeper cuts in pricing to gain volume in the quarter. Most LTL carriers reported losses, with only Old Dominion Freight Line reporting a profit. All say they are committed to firmer yield management and hiking rates.
But as ABF told the SEC, “Obtaining base rate increases involves a lengthy process to address the pricing and resulting profitability of individual customer accounts.”
The company took a step in that direction last month when it added yield management to the duties of Roy Slagle, senior vice president of sales and marketing, and promoted Daniel Loe, previously director of marketing, to vice president of yield management.
Before ABF and other LTL carriers can improve yield significantly, more capacity must exit the market, said Satish Jindel, president of SJ Consulting Group.
“The whole industry is responsible,” Jindel said. “Just like the railroads, they all need to take capacity out.”
Contact William B. Cassidy at email@example.com.