Life after CF equals higher rates, less competition for shippers
David Hannon, News and Transportation Editor -- Purchasing, 3/6/2003 2:00:00 AM
The less-than-truckload (LTL) market took a drastic turn in late 2002 after the third largest LTL provider, Consolidated Freightways (CF), declared bankruptcy in September leaving its 15% market share ripe for the picking. But freight buyers want to know how much the demise of one of the most price competitive LTL suppliers will affect the market in 2003.
It didn't take long before the LTL rates spiked upwards in the weeks following CF's abrupt closure. With CF out of the picture, the remaining LTL carriers gobbled up the extra market share and desperate shippers paid higher rates to keep goods moving. Purchasing's transportation services price index topped out in November at just under 70, up from 63 in August, showing the effect of increasing rates. The preliminary numbers from the Bureau of Labor and Statistics' LTL index peaked in November as well and dropped in December.
A look through some of the major LTL carriers' fourth-quarter financial statements confirms the increased volumes and rates these providers saw in late 2002. Bill Zollars, CEO of top-ranked LTL carrier Yellow Corp., said his company picked up at least $300 million from the CF collapse. Likewise, Old Dominion Freight Lines saw a 17.4% increase in LTL shipments and a 4.2% increase in revenue per LTL shipment. Earl E. Congdon, CEO of Old Dominion, said in a statement, "We currently expect to continue to benefit from this reduction in industry capacity through the first half of 2003, before resuming growth within our targeted range in the second half of the year."
Some industry experts say the closing of CF came at a time when LTL carriers were desperate to make up revenues, so rates may not come back down to pre-CF days. Edward Wolfe, air freight and logistics analyst at Bear Stearns & Co., said in a recent research note that he expects LTL rates will remain high for the foreseeable future due to the consolidation.
But Jared McArthur, president of USFreightways Western Carrier Group and president and CEO of USF Reddaway, says the rate hikes were a spike but many shippers are fighting to bring the rates back down. USF's transcontinental business boomed 45% year-over-year in the fourth quarter, according to McArthur. But in December and January, shippers began asking for the same rates they received from CF and some carriers like USF could not match them and lost the business.
"A lot of the freight we picked up right away didn't stick," McArthur says. "We could not match that price, because that was one of CF's reasons for demise. You have to know your costs versus what you're getting. Some carriers picked up those prices, which speaks to how much capacity was still left in the market."
Phoenix from the flames
But while CF may be dead, it is not forgotten—especially not by Frank E. Snell, who is organizing a new company to buy the assets of the former CF at auction and create a new company, called Rollin' International Inc. While it has been a quiet effort, this is no half-hearted attempt to scrape the bottom of the barrel. The advisory committee for Rollin' International lists some heavy hitters in the LTL world including representatives from the former CF, JB Hunt Trucking, the Teamsters Union and Edward Emmett, the outgoing president of the National Industrial Transportation League, who announced his retirement last year to spend more time with his family.
Snell did not respond to a request for an interview for this story, but in a statement issued on Jan. 23, Rollin' said, "Investment bankers are still working to arrange funding that will allow Rollin' to move forward with its plans. The process is very involved and is taking considerable time and effort. At present it is not possible to establish a definite time frame for this process."
An email from parties attempting to sell-off CF's assets posted on the Web site for the Portland, Ore. chapter of the Office and Professional Employees International Union said, "To date Mr. Snell has failed to engage the professionals necessary to complete this kind of transaction and has not brought forward any credible acquisition proposals. Mr. Snell and Rollin' have been unable to obtain concrete financing and have advanced only noncash structures to purchase the assets of the company. The company's bankruptcy professionals have recommended rejection of these noncash proposals as unworkable on the grounds that CF's creditors would be left at future risk to possible nonpayment of debt."
While Rollin' struggles to get funding, much of the LTL business is being locked down by existing carriers in a competitive market and other assets of CF are being gobbled up. In early February, CF auctioned 11 terminals, generating $25 million that it will use to pay off creditors, company representatives said. FedEx Freight reportedly bought two terminals in Memphis, Tenn. And Another 15 terminals were due to auction at the end of February.
Outlook
Shippers breathed a collective sigh of relief in February when an agreement was reached between the International Brotherhood of Teamsters and the Motor Freight Carriers Association (MFCA), which represents four major LTL firms: Roadway, Arkansas Best, Yellow and US Freightways. (CF was a unionized carrier as well). Only days after the Teamsters voted overwhelmingly to authorize a strike, the two sides reached a tentative five-year agreement for, avoiding a possible slowdown in LTL trucking freight. Unionized carriers feared nonunionized carriers would take valuable market share when shippers moved shipments to ensure carriage.
The contract covers 65,000 truck drivers, dock workers and office personnel, and still must be approved by union members. Smaller freight hauling companies traditionally adopt similar contracts and employ another 20,000 Teamsters.
But while the averted strike means few short-term headaches for shippers, the long-term implications on price could be worse, especially in light of the news that the new contract will cost employers at least $1.7 billion over five years, according to the Teamsters union. The deal will increase the average hourly wage by $2.25 over the next five years paid to drivers and cargo handlers. The contract also requires air-conditioned cabs for drivers on city routes and bars employers from subcontracting work to Mexican carriers.
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