Over the past couple of weeks, two stories have dominated the headlines in the North American transportation market. The decision to terminate DHL’s domestic transportation business and lay off 9500 workers signals a major contraction in the small parcel market. The other major announcement was YRC’s decision to integrate Roadway and Yellow, two of North America’s largest LTL carriers, closing 200 of 650 terminals and laying off thousands more workers.

Back in 2003 there were the big three LTL carriers, Roadway, Yellow and Consolidated Freightways. Then Yellow bought Roadway and ran the two businesses initially as independent entities. And now there will be one.

This blog will focus on the consolidation that has taken place and is taking place in the LTL market. In the next blog we will look at some of the lessons to be learned from the merger activities in this market.

Most people who follow the industry know that capacity is leaving the LTL market on a daily basis. As part of the 2500 U.S. based trucking companies that have closed their doors this year, this has included LTL carriers such as Jevic Transportation and Alvan Motor Freight. In Canada, Al’s Cartage has been one of the casualties. A number of companies have announced terminal closures and layoffs. Vitran indicated that it would close more than a dozen terminals in the upper Midwest. More recently Con-Way announced that it would close 40 terminals. Capacity is also coming out of the market as companies park trucks and ship used equipment to Russia and other overseas markets.

As you look at the various mergers and LTL carrier integration activities that have taken place or are taking place, they essentially follow one of three models.

1. The Rebranding/Back Office Consolidation Model
2. The End to End Carrier Integration Model
3. The Side by Side Carrier Integration Model

Each of these models is explained below.

1. The Rebranding/Back Office Integration Model

This is a model that has been followed by FedEx, UPS, TransForce, and others. In essence, the companies that are acquired (e.g. American Freightways, Overnight) are then rebranded (e.g. FedEx Freight, UPS Freight). As part of the rebranding exercise, the company graphics are changed to correspond with the parent company graphics and the fleet graphics for all of the divisions are standardized to provide the companies with a common look.

In some cases, core back office functions (e.g. IT, Accounting, Human Resources) are centralized and the divisions are all required to report and manage their financials according to the parent company’s standard procedures. The individual companies still operate as independent entities within the new corporate structure with their management structure largely intact. They are not merged with other transportation companies unless they do not perform at an acceptable level. In some cases, terminals may be shared by more than one division.

The objectives of this approach are to improve operating efficiencies and shrink the pool of competitors in a market in order to increase margins. On the surface, this would appear to be a low risk approach to consolidation since the companies continue to operate in the same geographic areas with the same operations and sales personnel as before they were acquired. In some cases, multiple divisions may offer essentially the same service in the same markets (e.g. Yellow and Roadway, TST Overland, Canadian Freightways, Daily Transport and Kingsway Transport). The keys to success are driving out redundant costs while retaining key employees and the customer base. The decision to integrate Yellow and Roadway is not what was envisioned back in 2003 when Roadway was acquired. This highlights the challenges that exist in trying to maintain the financial benefits of the back office integration model over time.

2. The End to End Carrier Integration Model

In the end to end model, two trucking companies with complementary geographic coverage (e.g. southwest USA and Midwest USA) are linked together (e.g. American Freightways and Viking Freight). The benefits of this model are that both sets of customers now have access to a larger market area. This can provide the combined company with more revenue potential than the sum of the parts. Cost reductions come from being able to pick up and deliver more LTL freight to and from current and new customers. Other benefits include increased shipment density, particularly in small markets.

3. The Side by Side Carrier Integration Model

These types of mergers have occurred countless times. I have personally been involved with this type of merger on both the buying and selling side. This is in essence what Roadway and Yellow are about to undertake. By combining two companies with overlapping service areas, they plan to reduce their number of terminals by 200 and terminate redundant people and schedules. Excess equipment can be sold off. Cost savings will come from increased terminal and line haul efficiencies and better equipment utilization. Yields can be improved by retaining the highest quality freight and purging money losing accounts. This is a complex undertaking with significant risks.

The Results of Previous Consolidation Activities in the LTL Freight Industry

The track record of mergers and acquisitions in the LTL freight industry is not encouraging. The rebranding/back office integration model is the lowest risk of the three models and there have been some successes, notably FedEx Freight and UPS Freight. However, there have been plenty of failures. The closure of TNT Pilot and TNT Red Star come mind. Looking at the other models, there have been some large and notable failures such as Gateway-Maislin (end to end), Ryder/Pacific Intermountain Express (end to end) and Helms/Burns (side by side model). A look back at the top 50 carriers of twenty-five years ago, in both Canada and the United States, reveals how few mergers and acquisitions have been successful. Published studies indicate that over sixty percent of consolidation activities fail. In the next blog we will look at what are some of the keys to success and failure.