COVER STORY : Negotiating a bumpy road
Posted on Sunday, July 20, 2008
These days, profitability is hard to come by for some of the state’s publicly traded carriers as diesel fuel continues hitting record highs, eating into income. As truckers release more quarterly results this week, analysts are predicting the overall freight demand is beginning to grow, according to a July 10 industry note from Morgan Keegan & Co. Inc. transportation analysts in Memphis.
By next year, the trucking industry will exit the tough operating environment that stretches back to late 2006, experts say.
As the weak freight economy has revealed individual carrier strengths and weaknesses, some of which have led to bankruptcy for similar-size, outof-state carriers, Northwest Arkansas truckers are taking different tacks to stay profitable. “Like in most industries, when times are tough, the tough survive,” said Lane Kidd, president of the Arkansas Trucking Association, a statewide lobbying group. Many factors influence a carrier’s ability to survive, Kidd said. But generally, internal management and external factors, such as the type of customers a carrier serves, affect performance in challenging conditions, he said.
RAIL CONTAINERS In Northwest Arkansas, the tough times have had J. B. Hunt Transport Services Inc. relying on the strength of its rail service.
Intermodal has been the Lowell carrier’s leading revenue segment since 2003, when it first surpassed the company’s stalwart truckload segment. J. B. Hunt’s truck-to-rail division, initiated in 1989, continues to dominate its three other divisions and analysts are expecting more of the same.
In the second quarter, intermodal revenue at $ 496 million represented more than half of the carrier’s total operating revenue of $ 977 million. The segment contributed 70 percent to the carrier’s total operating income of $ 94. 05 million.
And with national diesel fuel prices having hit a per-gallon record high of $ 4. 84 on Wednesday, more shippers have explored switching J. B. Hunt freight from the road to rail.
The punishing fuel prices have given the trucker ample opportunities to exploit its “most-favored nation” rail status with its longtime partner, BNSF Railway. The status gives J. B. Hunt cargo the highest loading priority compared with other shipments, according to J. B. Hunt’s Web site.
J. B. Hunt’s relationship with the Fort Worth-based railroad, which dates back to the segment’s founding year, is an approach that has been adopted by others in the industry.
Craig Harper, the carrier’s chief operating officer, said in a second-quarter employee newsletter that in difficult times, diversified carriers have an advantage over the competition. In business since 1969, J. B. Hunt has “experienced cycles where certain business units operate more profitably than others,” Harper wrote. “One of the ingredients of our success is navigating these cycles and funneling our capital toward units generating the best return.” A TRUCKING MAKEOVER USA Truck Inc. remains committed to a corporatewide transformation to help perk up its financial performance since rebuffing an unsolicited buyout offer in late 2006. Former shareholder Liberate Technologies wanted the carrier to go private, and wanted a higher return on its investment. Officials from the Palo Alto, Calif.-based company that owned less than 5 percent of USA Truck’s outstanding stock also offered unsolicited suggestions on how USA Truck’s stock price could be elevated — mostly through internal changes. Cliff Beckham, USA Truck’s president and chief executive officer, said current efforts to transform internal operations are rooted in Liberate’s prompting. “That was the shot across the bow,” he said, adding management noted the warning. In the last year, top-level executives have been replaced. And efforts are under way to improve driver safety, increase its owner-operator fleet and make day-to-day operations more efficient through technology. Amid the transformation, USA Truck will temporarily de-emphasize revenue growth until “acceptable returns” are produced on the assets it already has, Beckham said. “All of the strategies we’re employing are designed to do that,” he said, explaining that USA Truck had previously grown too fast to make money on its invested capital.
In the second quarter, the Van Buren carrier posted a 31 percent increasae in profit at $ 2. 1 million, which management said resulted from internal changes. ACKNOWLEDGED EXPERIENCE Arkansas Best Corp. is likely to continue benefiting from its seasoned management to help navigate a positive earnings path.
The holding company’s management got the credit for lowering costs earlier this year when it rewarded investors by posting a 78 percent increase in first-quarter net income at $ 8. 54 million — the only carrier to post a gain in the period that ended March 31.
The Fort Smith-based business, which operates a less-than-truckload subsidiary and has an organized work force, charts its performance partly on tonnage volumes, which have sequentially dropped.
Less-than-truckload carriers fill their trucks from a variety of sources and might re-sort and redistribute the freight at a company terminal along a truck’s route.
ABF Freight Systems Inc., Arkansas Best’s LTL subsidiary, is expected to post another strong quarter even as tonnage remains down.
“Tonnage volumes will likely stay volatile as weakness in the housing market remains, if not worsens, and energy prices continue to set new records,” Tavio Headley, an economic researcher with the American Trucking Associations, wrote in an e-mail. Changes in truck tonnage often signal recessions or recoveries. Trucking serves as a barometer of the U. S. economy because it represents nearly 70 percent of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods.
AUTOMOTIVE TROUBLES P. a.m. Transportation Services Inc., on the other hand, is seeing its niche automotive parts business add to investors’ concerns. The carrier generates a majority of business from floundering Detroit manufacturers such as General Motors. The carrier’s weakened automotive customer base and inability to push through rate increases led to a firstquarter loss of $ 2. 83 million. Analysts say the carrier could buy diversification through another acquisition. The holding company has grown through acquiring companies over the years. It lists 10 subsidiaries on its Web site. And at least one investment bank predicts a tough quarter for the Tontitown carrier because of high fuel prices. The trucking industry has blamed oil futures prices for pushing the average national price of diesel fuel toward $ 5 a gallon. Kidd, from the state trucking association, said trucking is a high-volume, low-margin business. “And when fuel escalates like it has over the last six months, it’s hard for a carrier to try and get its pricing structure up — whether it’s in the form of a rate increase or fuel surcharge — to cover those expenses,” he said.
BETTER TIMES AHEAD Analysts predict fuel expenses will negatively affect the second-quarter performance of most truckload carriers by as much as five cents per share, year-over-year.
“P. a.m. and USA Truck are smaller carriers that are dealing with diesel prices,” said Neal Deaton, a transportation analyst with Stephens Inc. in Glen Allen, Va.
Fuel prices affect truckload carriers more than less-than-truckload carriers since the LTLs can recoup the fuel surcharge more easily, Deaton added.
While the second-quarter results are not expected to prove inspiring, the last few quarters have represented the “trough of the economic cycle,” according to Morgan Keegan analysts in the same July note.
But the group said trucking “is clearly starting to take a step forward.”
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