For some truckers, it's the best of times, a golden age in which they find their trucks packed, their revenues solid and their profits at record levels. For others, it's the worst of times, a nightmarish period in which they scarcely emerge from one crisis before being battered by the next round of fuel price hikes or staffing shortages.
But whichever type they may be, truckers at least agree on this: their industry is going through an unprecedented period of upheaval, one marked by mergers, acquisitions and closures. In the words of Ted Scherck, president of the research consultancy Colography Group, "There is no shortage of turmoil in the trucking industry."
By all accounts, that turmoil will result in a wholesale reduction in the ranks of truckers. "There are going to be fewer carriers to deal with and fewer options in the marketplace," says Cliff Lynch, principal of C.F. Lynch & Associates (a logistics advisory service) and a DC VELOCITY columnist. "There will be lots more acquisitions in LTL. This industry is consolidating," adds Mike Regan, chairman and CEO of Tranzact, a freight payment and audit company. The message is not going unheard on Wall Street. In a report issued in May, Bear Stearns research analysts Edward Wolfe and Thomas Wadewitz called the surface transportation sector "ripe for consolidation"—an assessment that was validated just days later when UPS announced its bid to buy less-than-truckload carrier Overnite Transportation.
As for what's causing the shrinkage, the reasons are numerous and varied. Skyrocketing operating costs—for drivers, for fuel, for equipment and insurance—have taken their toll on truckers in recent years, leading to a rash of business failures (or absorptions by other carriers). And the carriers exiting the market aren't being replaced. The days when an entrepreneur with $50,000 in the bank could go out and start a trucking company are long gone, thanks to entry barriers such as insurance costs and the need to invest in high-priced technology like state-of-the-art tracking systems.
But there's more to the story than just economics. It's also true that the transportation market as a whole has been undergoing a structural shift, partly as a result of the explosion in international sourcing and continued pressures to keep inventories lean. And many expect demand for regional service to soar as more companies invest in regional DCs to insulate their operations from the kinds of disruptions that have rocked global supply chains in recent years.
Diversify, diversify
In the meantime, the traditional lines between industry segments continue to blur—parcel, express, LTL and logistics providers are becoming one and the same. That's largely a reflection of customer demand. Shippers today expect their carriers to offer multiple services—they want domestic service and they want international service. They want long-distance service. And increasingly, in response to pressures from their own customers, they want speedy regional moves to increase the velocity of inventory through their systems. It's that pressure to diversify—to offer both longhaul and regional service, express deliveries and whatever else the customer might want—that has led to some of the more high-profile mergers and acquisitions in the trucking industry. Both big integrated carriers looking to branch out into new types of service and large trucking companies hoping to bolster their competitive positions have snapped up LTL carriers in recent years. And it appears that the consolidation is far from over.
Take Yellow-Roadway, for instance, a company that has been particularly aggressive in its expansion drive and shows no signs of slowing down. First came the Yellow-Roadway merger in December 2003, which brought together the two largest national LTL carriers. That was followed by the recently completed purchase of USF Corp., a group of regional carriers, which gives Yellow-Roadway an important stake in the critical next- and second-day delivery business.
"What Yellow-Roadway is trying to do [by acquiring USF] is build a more robust network [that] will not only handle long-distance loads, but have more integration with regional business," says Bill Rennicke, a managing director of Mercer Management Consulting. Yellow-Roadway already owned New Penn, a regional carrier in the Northeast, and the USF purchase gives it a nationwide regional network. Beyond that, Rennicke sees Yellow-Roadway building broad international capabilities.
FedEx Corp., too, has followed a carefully plotted strategy for diversifying its operations. It started out by purchasing Caliber System from the then independent Roadway in 1998, and later acquired American Freightways. Those acquisitions gave FedEx important stakes in LTL, ground parcel and contract logistics.
Not to be outdone by rival FedEx, United Parcel Service in May announced its intention to acquire Overnite Transportation, an LTL carrier. Though its choice of Overnite took some by surprise, UPS's purchase of an LTL business to round out its portfolio was widely expected. The UPS acquisition of Overnite makes particular sense considering that UPS's main competitor is FedEx, whose businesses include LTL carrier FedEx Freight, a next- and second-day company. "FedEx showed that customers do value an integrated product," Rennicke says. "From the UPS standpoint, they had the Hundredweight program, but having an LTL carrier in their portfolio was important for them."
Regan believes that UPS is not finished shopping. "UPS is going to have to buy more trucking companies," he says. "They're not done. Overnite does not give it the critical mass [it needs] to compete with FedEx."
As the industry continues to consolidate, it's anybody's guess who will be left standing. Rennicke has identified a number of carriers as potential acquisition targets, including ABF Freight System, the only remaining long-haul unionized LTL carrier outside of Yellow-Roadway; Con-Way Transportation, which boasts a network of regional carriers plus logistics services; and regional carriers like Estes Express and Saia Motor Freight. Regan adds that he wouldn't rule out the possibility that someone will gobble up multi-regional carrier Old Dominion and regional LTL specialist New England Motor Freight.
No cause for alarm?
But what does all this consolidation mean for shippers? Though conventional wisdom holds that buyers—in this case, shippers—suffer when suppliers' ranks thin (thus decreasing competition), that may not apply here. Rennicke, for example, doesn't believe the Overnite deal will hamper competition. It may even make the LTL market more competitive, he says. "Overnite will be a stronger LTL competitor. The Overnite customer will get access to an array of top-notch services. I think it is very positive."
He's equally optimistic about Yellow-Roadway's acquisition of USF. "I think it's the same with Yellow-Roadway," Rennicke says. "USF was never able to integrate even basic information services. I think just the customer service and technology overlay that Yellow has eventually will migrate to USF."
Regan agrees that there's no cause for alarm. "If I were a shipper, I wouldn't necessarily be fretting [about the prospect of] consolidation of the industry," he says. "I think in the LTL sector, you have to focus less on price than on customization of services. That's what will drive more significant savings in the supply chain."
