A ''Clear Opportunity''

A ''Clear Opportunity''

Copyright 2003, Traffic World, Inc.

The largest trucking merger in history has at least one rival trucking company rethinking its marketing and operations strategy.

As Yellow Corp.''s $6 billion acquisition of Roadway nears final shareholder approval (expected this week), rival carriers are positioning themselves for what they see as inevitable changes in the marketplace.

FedEx Freight, the combination of the former Viking Freight and American Freightways, quietly offered interregional and long-haul service before this summer''s Yellow-Roadway announcement. But the company more recently began selling its coast-to-coast three-to-four-day service more aggressively as it tries to turn the merger into a selling opportunity.

Pat Reed, president and CEO of FedEx Freight East (the former American Freightways) said there is "a lot of caution out there" in the market. "There''s a lot of uneasy feelings about capacity."

Yellow Corp. Chairman, President and CEO Bill Zollars remains confident his formula for keeping Roadway and Yellow separate will work in the LTL marketplace.

"Our strategy at Yellow-Roadway is to continue to provide our customers with a broad variety of high-quality services supported by best-in-class technology from both companies," said Zollars. "Although the competitive landscape will continue to change, that formula will ensure our future success," he said.

Al Giunchi, corporate traffic manager for Hartz Mountain, Secaucus, N.J., said carriers certainly have been knocking on his door and that the merger is spurring "a lot of new thinking" about LTL services. "Maybe it''s a good thing," he said. "Time will tell."

"We''ve gotten intros from USF Bestway on doing a national program and we''re looking at that," Giunchi said.

Hartz Mountain is considering using FedEx Freight and USF, carriers Giunchi already uses on a regional basis, for longer-haul traffic.

Executives at FedEx Freight know a bit about combining companies, systems and cultures. The company was created from the combination of AF and Viking.

Reed spent 10 and a half years with Con-Way Western before moving to AF in 1996. He was one of the key executives involved when AF and Viking merged as FedEx Freight in 2001. Now a $2.1 billion company with financial stability as part of $23 billion FedEx Corp., FedEx Freight is thriving after its merger.

"From personal experience, mergers, acquisitions and consolidations - whatever you want to call it - are very challenging for employees and very challenging for customers as witnessed by several through the years," Reed said recently. "Even putting two companies like AF and Viking together, it''s been two and a half years we''ve been tying systems and best practices together."

FedEx Freight says all that can lead to shipper angst. The long-haul sector already has lost $1.8 billion competitor Consolidated Freightways, which closed suddenly on Sept. 3, 2002, after 74 years of service.

Dan Moore, trucking analyst with Stephens Inc., says his analysis shows that only $800 million to $900 million of that former CF business landed with traditional LTL long-haul carriers Yellow, Roadway and ABF Freight System. The rest is scattered among, well, who knows?

"All competitors are going after their (long-haul) business in ways they historically haven''t," Moore said. "FedEx Freight is a viable candidate to take business. They have been, currently are and will continue to take business away from the less cost-competitive, unionized marketplace."

Although Moore says competitive pressures always have been present, the pending Yellow-Roadway combination is upping the ante in the $16 billion LTL sector.

"FedEx is not the only carrier," Moore said. "You have other nonunion regional carriers trying to take market share, near and long term. Estes Express is clearly in a position to take market share. UPS''s Hundredweight continues to grow. Then you have carriers such as Con-Way that are very actively marketing their deferred products. USFreightways, too."

Moore said the "common thread of all these companies is they have a clear cost advantage over their long-haul LTL brethren. They''re in the sweet spot."

Leo H. Suggs, chairman, president and CEO of $1.3 billion Overnite Corp., says his company isn''t moving after Yellow and Roadway shippers and hasn''t seen any shipper migration.

"They have done a very good job in their public communications," he said. "They have done a very good job reassuring their customers. I have seen little or no signs of leakage from their operation up to this time based on customer concerns."

Overnite is looking for more long-haul business, but that''s a longstanding strategy.

"I think long haul is an opportunity, but it has to be managed as well," Suggs said. "When you look at the size of Roadway and Yellow at $6 billion, we don''t have the capacity to take on huge amounts of additional business. I do not look at that as a driver of windfall opportunity for Overnite."

FedEx Freight argues that all this competition can lead shippers to rethink their options. After all, the LTL Big Four is about to become the Big Two less than 16 months after CF''s demise.

"Shippers are concerned about the future, not specifically Yellow and Roadway," Reed said. "They''re more concerned about the landscape of the industry. There have been 10,000 bankruptcies in the last three years. Shippers are starting to align themselves long term with strategic, flexible solution-providers. Stability is very important."

Concern about mergers is heightened at a time when capacity is growing tighter in trucking as the economy recovers. The future is a big unknown for many shippers.

"A lot of them are taking a wait-and- see approach," Reed said. For the regional carriers, after three years of what Reed calls a "freight depression," the confluence of hours-of-service changes, tightening capacity and other factors is creating some pricing opportunities not seen in the market for several years, executives of several carriers said recently at the National Industrial Transportation League annual meeting.

"It''s a very dynamic business," said Dennie Carey, senior vice president of marketing at FedEx Freight. "We see some firming (of rates). Economy and hours of service are going to have an impact on capacity. It''s supply and demand. When you have supply short and demand high, there''s going to be upward pressure on rates. Firming of rates is very likely."

Carriers can be choosier about the freight they haul, Carey pointed out. "We want those companies that value speed, precision and reliability. We value those customers who want those at a fair price," he said.

Reed said the experience of previous mergers offered some guidelines for the new Yellow-Roadway combination.

"Take care of your people, regardless of whether they are union or nonunion," he said. "People need to be well informed. You have to be honest. If you take care of your people, they will get through the worst of times. They''re the ones in front of your customers, whether drivers or salespersons. They''re the face of your company."

When the slowdown started in the third quarter of 2000, FedEx Freight decided to refuse layoffs on a major scale. "We juggled hours," Reed said. "We kept people working. The payoff long term is indescribable."

The no-layoff policy "creates loyalty, it reduces turnover. It gives you the ability to hire the best of the best. Taking care of the ultimate customer is the key to success," Reed said.

"It''s not just telling people what you''re doing, but why," he added. "Everybody is afraid of the unknown."

Carey cited a recent Morgan Stanley Dean Witter study of all modes that showed continuing migration of national freight to regional carriers.

"It has nothing to do with unions, nothing to do with mergers and acquisitions," he said.

"It has everything to do with fast-cycle logistics. Users of products want the source of those products closer to them. They want that replenishment tomorrow. The only reason there is second and third-day delivery is because there is no good way to get it there next day."