More Profits, Higher Rates

More Profits, Higher Rates

Copyright 2004, Traffic World, Inc.

Barely six months into Yellow Corp.''s $1.05 billion acquisition of major rival Roadway Express, the purchase price is starting to look like a bargain.

Buoyed by a booming economy, tightened capacity and nervous shippers ever willing to pay higher freight rates, both Yellow Transportation and Roadway Express are reporting a 15 percent rise in pro-forma second-quarter revenue as both are winning new business and extracting healthy rate increases from old accounts.

Besides eliminating each other''s major competitor in the long-haul arena, Yellow and Roadway are both growing their business in a most unusual manner for trucking - they are not cutting rates. In fact, the opposite is happening.

"As capacity tightens and we head into peak shipping season, the pricing will only get better the second half of the year," said Bill Zollars, YR chairman, president and CEO. "It''s a function of supply and demand."

There''s no sign of a slowdown. "Normally, tonnage levels fall off a little bit in July but that hasn''t happened this year," Zollars said in a conference call.

Yellow Roadway posted $46.9 million net income in the second quarter on $1.67 billion revenue as the nation''s largest heavy freight ground provider. Last year, before the Roadway acquisition, Yellow Transportation reported $18.3 million earnings on $713 million revenue. More importantly both companies, but particularly Yellow, are scoring market place victories with their "one-stop shopping" approach to shippers.

"The biggest place we''re getting that business is from competitors who offer expedited or time-definite services," Zollars said. "It''s from penetration of our existing customer base. It''s really an opportunity for a customer to get rid of a niche player and the costs associated with such a relationship."

Zollars called the second-quarter results "outstanding" and said synergy efforts to save as much as $125 million in Roadway-Yellow costs are ahead of schedule.

"Nothing is running slower than scheduled," Zollars said. "We are either on schedule or ahead of schedule."



The success of the Yellow-Roadway combination has been augmented by a roaring economy that shows no signs of cooling. "We don''t see any sign of weakness anywhere," Zollars said. "It''s consistently strong across all the business areas we are in."

On the economy, Zollars said: "We have a fairly optimistic view on the second half of the year with GDP continuing to grow at more than 4 percent. We see the economy continuing to be strong across the board, both in manufacturing and retail."

Zollars is predicting operating ratios in the low 90s for the total combined LTL operation, which will approach $6.5 billion in revenue when the books are closed for 2004.

"This entire economic shift that''s taking place in this country is actually creating additional shipments," said Satish Jindel, principal of Pittsburgh-based SJ Consulting. "It''s party time in the LTL industry."

There are also some cross-modal shifts, albeit temporary, that are taking place. Railroads, especially the Union Pacific, are stalled, unable to get service to levels where truckers can reliably use it (see sidebar, page 22). That, along with hours of service revisions, has caused some truckload carriers to defer business to LTL carriers.

"There is a cascading effect," Jindel said. "Truckload guys are creating more freight for the LTL guys."



For the first half of 2004, Yellow Roadway reported the following consolidated results:

l Revenue of $3.23 billion, up 11.3 percent over pro forma revenue of $2.9 billion in the same period of 2003.

l Operating income of $129.6 million, up 59 percent compared to pro forma operating income of $81.3 million for the same period last year.

Yellow Transportation posted $45.7 million operating income on revenue of $793 million compared with $36 million operating income on $691 million revenue in last year''s second quarter.

LTL revenue per day was up 13.7 percent from the second quarter last year, Yellow said. Yellow''s operating ratio of 94.2 compared with 94.7 in last year''s second quarter. That''s the best second-quarter OR since 1989, after adjusting for property disposals.

Roadway Express began adding to corporate earnings in the second quarter, a feat YR CFO Don Barger called a "significant accomplishment" given that the $1.05 billion Roadway acquisition doubled the size of the company. YR also reduced its debt by $35 million in the quarter. YR has $730 million debt, a 43.1 percent debt-to-capital ratio, which the company expects to reduce by $150 million this year.

Roadway posted operating income of $36.4 million on revenue of $768 million compared with $12.8 million operating income on revenue of $742 million in last year''s second quarter.

Roadway President Jim Staley predicts fourth-quarter tonnage improvement in the 4-to-5 percent range. "We need to do that through responsible pricing," Staley said.

Roadway LTL revenue per day was up 2.5 percent from the second quarter of 2003. Roadway''s OR was 95.3 compared with 98.3 in the second quarter last year.

"The improvement in profitability at Roadway Express represents excellent performance," Zollars said. "The progress made in the past six months demonstrates the strong operational capabilities of the Roadway Express team."



The pricing environment at Roadway Express continues to improve, Zollars said. "In both Yellow and Roadway, we expect improvement in pricing as we approach peak shipping season, which is fast upon us now."

July tonnage was up 2 percent at Roadway year-over-year "and that trend is strengthening," Zollars said.

New Penn Motor Express, Roadway''s Northeast regional unit, earned $9.2 million operating income on $64.3 million revenue, compared with $5 million operating income on $54.7 million revenue in the second quarter of 2003. New Penn posted an 85.7 OR, compared with 90.8 in the year ago quarter. The most recent quarter was partially aided by the May 23 closing of rival USF Red Star after a brief labor dispute.

"New Penn is doing a great job integrating growth opportunities," Zollars stated. "A second quarter operating ratio of 85.7 is an indication of their effectiveness."

New Penn occasionally used to crack the 80 OR level when it was privately held. While it may not hit that level of profitability, the company is on the upswing, officials said.

"It''s doubtful they''ll be below 80 but we''ll be in the low 80s later in the year," Staley predicted.