Roadway Express, Inc. in 1997^*

As the summer of 1997 came to a close, a cloud hovered over the future of Roadway Services, Inc. Although Roadway had just come off a prosperous year in 1996 following two years of red ink, their contract with the Teamsters Union which set wages and benefits for most of their workforce was due to expire March 31, 1998. The Teamsters had just gained what many considered a dramatic bargaining victory over United Parcel Service. Following a strike by the Teamsters which severely hampered UPS and slowed commerce in the U.S. economy as a whole, UPS made sweeping concessions to the union on wages, benefits, and rules governing the use of part-time and temporary workers. Many observers believed that the Teamsters would be emboldened to seek similar victories in upcoming bargaining. Roadway and other national less-than-truckload (LTL) trucking firms appeared to be the likely next target. Roadway faced the challenge of both continuing to respond to intense competition from nonunion carriers at the same time they were threatened with the increased costs that a new labor agreement was likely to bring. Could Roadway absorb the kind of increases in wages and benefits that UPS had conceded to and still be able to compete with nonunion carriers on freight rates? If not, what were their strategic alternatives?

History of Roadway Express, Inc.

The history of Roadway Express, Inc. was both a short and a long one. Roadway Express had been a subsidiary of Roadway Services, Inc., but was spun off January 2, 1996. The former parent company was renamed Caliber System, Inc. focused more on regional and interregional freight transport using nonunion carriers. Though Roadway Express had existed as a stand-alone entity only since 1996, it had been active in LTL trucking since the former parent company was founded in 1930. For decades Roadway Express had been among the six largest providers of LTL transportation. .. In 1996 Roadway was considered one of the "Big Four" national LTL carriers along with Yellow Freight, ABF Freight Systems, and Consolidated Freightways. Roadway also offered service to and from another 62 countries worldwide. The carrier shipped general commodity freight in the United States and within Canada and Mexico through its subsidiaries. General commodity freight includes apparel, appliances, automotive parts, chemicals, food, furniture, glass, machinery, metal and metal products, non-bulk petroleum products, rubber, textiles, wood, and miscellaneous manufactured products. Roadway’s primary focus was on freight services involving city-to-city routes that required two days or longer in transit.

U.S. Trucking Industry

Analysts generally divided the U.S. trucking industry into two categories: less-than-truckload (LTL) carriage and truckload (TL) carriage. LTL service involved the transit of loads of less than 10,000 pounds. For a national LTL firm, this service typically involved a hub-and-spoke network of terminals and consolidation centers to efficiently transport freight. Freight was collected from shippers, then taken to terminals. Terminals were large warehouses with many large loading ramps and garage doors to facilitate rapid unloading, sorting, and reloading of freight. At the terminals freight was unloaded, resorted, and then reloaded on to trucks. Freight on these reloaded trucks was then routed to regional consolidation centers where it was again unloaded, resorted, and reloaded on to other trucks bound either for final destinations are other terminals. The handling and rerouting involved in LTL shipments necessitated sophisticated logistics systems, so that carriers could track any item shipped. TL carriage, on the other hand, involved shipments of freight greater than 10,000 pounds. These shipments generally went directly to the destination without the unloading, sorting, and reloading typical of LTL shipments. With TL carriage trucks picked up a full truckload of goods from the sender and then transported them directly to the receiver of the shipment with no handling of the goods in between. Because TL shipments required no intermediate handling, TL carriers did not need the advanced tracking and logistics systems characteristic of the LTL market.

The U.S. trucking industry had been heavily regulated, but had been largely deregulated in 1980. Responding to intense lobbying from railroads who were threatened by the growth of the trucking industry, the Interstate Commerce Commission regulated competition in trucking beginning in 1935. The ICC restricted the entry of new firms and the growth of existing firms. Prospective entrants into a market were required to obtain certification before they were able to operate. When a prospective entrant applied for certification to operate on a particular route, carriers who already served the market where the entrant intended to operate were given the opportunity to protest the need for a new entrant. Existing carriers generally did make such protests. The ICC usually offered a certificate to a new carrier only after existing carriers were given the chance to offer the services proposed by entrants. The result was that for many years the number of trucking firms remained almost constant. In 1960, there were 16,276 ICC regulated carriers compared to 16,005 in 1975. Prices were also tightly regulated. Price floors were established by regional pricing bureaus which essentially precluded any price competition between carriers.

The Motor Carrier Act of 1980 deregulated both entry and price. The Act greatly eased the restrictions on entry and gave carriers pricing freedom. By the end of 1991 there were 47,890 ICC certified carriers in operation. Many of these carriers were owner-operators or small, non-union firms that focused on specific city-to-city routes. Pricing freedom resulted in sharply reduced rates in many cases. A sharp increase in the number of carriers ceasing operations or filing for bankrupts also followed the 1980 Act.

LTL Market

The LTL market included two segments, long-haul and regional. National LTLs used a network of costly hubs (consolidation centers) and spokes (terminals) to distribute freight. Analysts had estimated that 400 terminals and 13-15 hubs would be adequate to offer national service. Many of the regional carriers were able to service their geographic areas with much less investment in network infrastructure. Competition for freight was based primarily on price and service. The most important component of service was transit time. Regional shipments typically involved less handling of freight. The most important components of costs were labor, fuel, and equipment.

Labor

The largest component of costs for LTL carriers was labor. National LTL firms were covered under a uniform bargaining agreement which industry participants termed "the contract." The contract stipulated wages, benefits, and various rules regarding aspects such as what a union member could or could not do in a job, the use of nonunion labor by carriers, and the use of temporary and part-time workers. Many of the regional carriers were non-union and thus enjoyed lower labor costs and freedom from inflexible union rules. For example, the agreement with the Teamsters banned union drivers from loading or unloading within 75 miles of a terminal. This lack of flexibility meant that if no dock workers were available, then cargo sat idly.

Equipment and Fuel

Aside from labor equipment and fuel were the other major costs for LTLs. Several major tractor manufacturers supplied trucks to the industry. The most commonly-used size trucks could be purchased for little more than $100,000. Little savings could be gained by purchasing in volume. Fuel constituted a major cost for trucking firms. Firms used swaps, options, and long-term contracts to hedge against fluctuating fuel costs. For example, approximately 20% of Yellow Corp. anticipated fuel costs for 1997 were covered under various types of agreements.

Customers

Millions of customers purchased freight services. No single customer accounted for a large percentage of the industry’s revenue. Competition for freight was based primarily on price and service. Customers tended to be price sensitive. In many cases, they would switch from one carrier to another for a small savings on price. The most important element of service was transit time. While customers valued reliability and on-time delivery, however, these were often taken for granted and not criteria by which carriers could differentiate themselves. Some customers were coming to rely on LTLs for more than just the physical tranport of goods. These customers (package recipients) wanted carriers to be able to locate shipments on demand, verify that senders were shipping the required goods. In effect, they sought to outsource much of the shipping and receiving function to LTLs. Such demands required LTLs to make additional technology investments and develop additional logistical capabilities.

Non-LTL Freight Services

Customers had alternatives to LTL in shipping goods. TL carriers were viable for large shipments. Premium freight such as Federal Express and UPS was suitable for smaller items, and intermodal (or multimodal) which involved the use of both trucks and rail to ship goods was being used increasingly.

Truckload Freight. Since TL shipping required no intermediate handling of freight, its cost structure was much different than LTL. TL carriers did not require investments in terminals, consolidation centers, or in logistics and tracking systems. Most TL carriers were non-union and were able to pay drivers less than union wages. To become a TL carrier required little more than to purchase or lease a truck and a chauffeur’s license. Many small firms competed in the TL segment.

Revenues from TL freight had risen to $98.8 billion in 1995 from $71.1 billion in 1991 (see Exhibit 1). This compared to $58.1 billion in 1995 and $46.6 billion for LTL. LTL tonnage rose 3% in 1996 while truckload tonnage dropped 2.8%.

Intermodal transport involved using trucks along trains to transport goods. Trailers that could be either pulled by trucks or carried on railway flatcars made intermodal feasible. Since railroads had costs as much as 10-15% below that of trucks for long haul transport and trucks could provide the convenience of door-to-door pick-up and delivery, intermodal was seen as a way to achieve greater efficiency without sacrificing service. Roadway was a leader in using intermodal. It found significant savings by using rail for over 23% of its total linehaul miles. The weakness of intermodal was that it typically took longer to ship goods by rail than by trucks. Thus, some observers believed that intermodal involved a tradeoff in service to customers who were sensitive to the time required to deliver freight.

Premium Freight providers such as Federal Express and UPS were the likely choice for shippers who had small packages to send or who needed next-day delivery. The premium providers both restricted and to a large extent standardized the size of packages they processed. This allowed them to achieve a high degree of automation and efficiency in their operations. Like the LTL firms, Premium freight carriers possessed national networks of terminals and the ability to pick up and deliver packages. UPS, with its fleet of trucks and network infrastructure, possessed many of the same assets and capabilities as LTL carriers. UPS did some LTL shipping and clearly possessed the capacity to enter more heavily into the LTL segment if it chose to do so.

Competitors

Roadway’s three major national competitors were Yellow Freight System, CF MotorFreight, and ABF Freight Systems. Like Roadway, each had experienced a decline in operating margins in the decade preceding 1997. In 1987, each had enjoyed operating margins in the four to five percent range. Those margins had declined to less than three percent for all four by 1996 (see Exhibit 2).

Roadway’s largest competitor with 1996 revenues of $2.4 billion was Yellow Freight System, Inc. Yellow Freight was the largest division of The Yellow Corporation accounting for 77% of its revenues. Yellow Corporation also operated three regional LTL carriers: Preston Trucking Company, Saia Motor Freight, and WestEx. Another subsidiary, Yellow Technology Services provided logistical solutions to customers. Yellow Freight expanded internationally in the 1990s. Expansion into Asia in 1996 followed a move into Europe four years earlier. International expansion was a top priority for the firm in 1997.

Yellow Freight had implemented a vigorous cost reduction program. Cost savings from improvements in pickup and delivery and reduced general and administrative expenses had been achieved. The carrier reduced terminals from 449 in 1995 to 334 in 1996. This reduction along with a write off of computer software resulted in a $46.1 million special charge. Yellow Freight also sought to improve its operations in other ways. Organization restructuring into five geographic business units was implemented by Yellow Freight to give front line employees more authority to respond quickly to customer requests.

Yellow Corporation did not report financial results for Yellow Freight, but the corporation as a whole had lost money in 1996, 1995, and 1994. Yellow Freight instituted a general rate increase of 5.8% in January 1996 which applied to customers without long-term contracts. Tonnage declined by 2.8% while revenue per tone increased by 2.4%. Operating expenses for Yellow Freight were up 0.6 percent in 1996 despite higher fuel costs and the 3.8 percent increase in union wages and benefits imposed on all the national LTLs.

CF MotorFreight (CFMF) was spun off from Consolidated Freightways which subsequently changed its name to CNF. CFMF had been the poorest performer of the national LTLs despite extensive cost reduction efforts. CFMF had reduced the number of its terminals from 650 in 1992 to 380 in 1995. Routes has also been restructured to reduce the freight handling and increase the amount of city-to-city shipments. Despite these efforts CFMF had not been able to achieve profitability. With CNF’s other subsidiaries all occupying leadership positions in their niches, some analysts believed the spin off was part of an effort to emphasize CNF’s other businesses.

ABF Freight Systems had become a national LTL carrier after deregulation by pursuing a strategy of aggressive acquisitions. Historically, ABF had fewer terminals and consolidation centers than the other of the "big four." ABF also enjoyed the highest operating margins of any of the "big four" and the highest growth rate.

In addition to the "big four" several interregional carriers and many regional firms competed for LTL business. These firms tended to be nonunion and enjoy cost advantages because of their lower labor costs, lower investment in infrastructure, and more direct routing which reduced handling. As a result, the regional and interregional LTLs enjoyed higher operating margins than the "big four" (see Exhibit 2). Despite the numerous competitors, though, capacity in the industry had declined in the mid 1990s.

Roadway’s Strategy

Marketing

Roadway’s marketing strategy centered around developing stable, long-term relationships with customers. Roadway worked with individual customers to identify possible efficiencies is serving a specific account where both the customer and Roadway could benefit. Despite this emphasis, Roadway had not been immune from aggressive price competition. Profit margins suffered during 1995 as the firm lost $12.7 million in 1995 during a year of intense discounting. Freight rates rose 5.7% in 1996 and Roadway adopted a less lenient discount policy. Rates had remained stable in 1996 and early 1997. Roadway attributed the increased stability in rates to a reduction in industry capacity. Roadway offered or negotiated discounts with many customers. These discounts were negotiated on an account-by-account basis.

Roadway served over 500,000 customers in 1996. No customer accounted for more than 2% of total revenues in 1996 and the ten largest customers accounted for less than 10% of revenues that year.

Technology and Operations

Roadway operated 30 major consolidation/distribution centers and 424 terminal facilities in 1996. The 30 centers were located in strategic locations throughout the U.S. Of the 424 terminal facilities, Roadway owned 285 and leased the other 139. These leases were generally for terms of three years or less. The company owned 9,665 tractors and 30,082 trailers. For tractors and trailors used for intercity transport, the average age was 7.6 and 9.0 years respectively. Freight handling capacity was typically measured by the number of loading spaces. Roadway owned 11,861 spaces and leased another 1,905. Consolidation centers accounted for 5,340 of these loading spaces.

Cost reductions were attributed to several improvements. Increased use of rail lines to transport freight in linehaul operations was a major element in cost reduction. Roadway also had achieved a leaner network infrastructure. Roadway operated 424 terminals down from 585 at the beginning of 1995. The company planned to reduce its network by another 30 terminals in 1997. Roadway executives anticipated that the elimination of these terminals would reduce fixed costs and increase network utilization. Claims on freight shipped declined by 11.2% in 1996 which indicated improved freight handling. Roadway attributed this improvement to network refinements which reduced the number of times freight was handled in unloading, sorting, and reloading. Improved freight handling techniques were also cited as a reason for the decline in claims. A decline in depreciation expenses was another reason cited for the reduction in costs. The decline resulted from fewer terminals, a greater proportion of fully depreciated equipment, and limited capital expenditures in prior years.

Human Resources

Approximately 75% of Roadway’s 25,500 employees were represented by unions. Most were represented by the International Brotherhood of Teamsters. Wages and benefits were governed by the Master Freight Agreement ("The Contract"). Under the contract, union labor wages and benefits increased 3.8% in 1996 and another 3.8% on April 1, 1997. LTL drivers received on average wages of $18 to $19 an hour and pensions of $2,500 a month. In their 1997 agreement with UPS, the Teamsters had negotiated a 15.5% wage increase in wages to an average of $23.05 an hour. The agreement also included a 50% increase in pensions to $3,000 a month for drivers with 30 years of service.

Roadway experienced a 24-day strike by the Teamsters in April of 1994 following the expiration of the previous Master Freight Agreement. The Master Freight Agreement was scheduled to expire on March 31, 1998. Many observers expected the Teamsters to push for major concessions from the national LTL carriers on wages and benefits.

Exhibit 1

Trucking and Courier Services (SIC 421) — Estimated Motor Carrier Revenue, by Size of Shipments

Commodities Handled, and Origin and Destination of Shipments: 1991 Through 1995.

Exhibit 2

Comparison of LTLs on Key Measures

Unionized national LTLs

Nonunion regional LTLs

Nonunion interregional LTLs

1For the 12 months ended June 30. 2Excludes special charges. 3For period ended Dec. 31, 1996. 4Operating income over shareholders' equity plus long-term debt.

Sources: Forbes. Company reports; Transportation Technical Services' Blue Book of Trucking Companies; Alex. Brown & Sons.