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Industry News Updates

• Continued Volatility in Fuel Prices
• Issues Mount at YRCW
• FedEx and UPS Go Toe to Toe Over Railway Labor Act vs National Labor Relations Act
• ABF / Teamster Concessions
• LTL Carrier First Quarter Results
• Parcel Carrier First Quarter Results
• FedEx Expands IEF Service

Continued Volatility in Fuel Prices

• Diesel Prices Hit 18-Month High to $3.122 per Gallon
  The Department of Energy reported May 3, 2010 that diesel prices rose to $3.122 per gallon, which is a 4.4% increase over the previous week. This is the 10th increase in the last 11 weeks. This price level is $0.937 higher than the same week last year. The $3.122 per gallon reflects a $0.363 increase over the last 11 weeks. The diesel price correlates with the rise of oil prices to an 18-month high of $86 per barrel.
  
  
• Diesel Prices Take Biggest One Week Decline
  On May 24th the Department of Energy reported the largest one week decline in diesel prices to $3.021 per gallon over the previous week. This decline was only the third in the last 14 weeks. The price was $0.747 higher than the same week last year. Diesel prices have decreased $0.106 in the last two weeks.   
  
  
• DOE Projects Oil at $108 Barrel by 2020
  2020 the Department of Energy projected in May that an improving economy will result in rising demand for fuel, which will increase oil prices to the $108 per barrel range by. By 2035, the price is predicted to increase to $133 per barrel. The DOE report contained various circumstances that could change the total overall outlook going forward. These could result in prices being as low as $51 per barrel and as high as $210 by 2035.

Comment: The two recent stories on changing fuel prices reflect the volatility of this market and the potential for rising prices long term. Diesel prices have dropped in recent weeks as spot crude oil prices have declined. The most recent DOE nationwide price reflected a $0.73 decline. Since the Fuel Surcharge has become such a key component of LTL carriers pricing strategy, limiting the variation in your Fuel Surcharge factor or index is critical. Restricting this fuel surcharge fluctuation will result in less variation in your pricing, which makes it much easier to budget transportation cost. enVista has found that utilizing an abbreviated or reduced fuel surcharge table in our carrier contract negotiations has been accepted favorably by the carriers, and in turn, limits your accessorial cost fluctuation.

- Joe Heilig

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Issues Mount at YRCW

More Layoffs
It has been reported that YRC Worldwide has eliminated 200 positions at its Overland Park, KS corporate office and satellite facility in Akron, OH. The cutbacks include 90 employees in their  IT department. YRC has eliminated 4,500 positions from its workforce in the past year in an attempt to align labor costs with shrinking revenue and shipment count.

YRCW Reports Significant 1st Quarter Loss
YRCW reported a $274.2 million loss in the 1st quarter compared to a $273.8 million loss in the same quarter a year ago. Revenue reflected a 33% drop ($499 million) to $1.06 billion.

YRC –National Transportation division had a $185.1 million operating loss on $663 million, which equates to an operating ratio of 129.  The regional carriers’ operating loss was $39.6 million on $309 million, which is a 113 operating ratio.

YRCW President & COO Resigns
YRCW reported prior to releasing first quarter results that Tim Wicks, President and Chief Operating Officer had resigned to return to his previous employer, United Healthcare.

Can YRCW Meet Future Pension Obligations?
YRCW’s 35,000 Teamster employees agreed to an 18-month suspension of pension payments as well as wage cuts in 2009 in order to help YRCW maintain financial viability. In January, 2011, YRCW must resume these weekly pension payments of approximately $300 per employee, equating to over $15,000 per year per employee. If YRCW maintains current staffing levels of 35,000, this would result in an annual pension obligation of over $546 million.

Even prior to their significant first quarter $274 million loss, dissident Teamster groups and stock analysts were questioning whether YRCW will be able to meet these contractual payments in 2011.

YRCW has been a big player in advocating the revamping of the multi-employer pension program, which has been a financial burden on the remaining Teamster carriers. The multi-employer pension plan was developed to allow workers to move between companies in the same industry without losing their pension benefits. This plan was a viable entity as long as there were sufficient carriers to cover the pension costs. However, as many Teamster carriers have closed or consolidated, the number of contributing carriers has been vastly reduced and pension plan contributions have fallen significantly short.

YRCW is promoting legislation which would remove the pension liabilities from the pension fund of those retirees who worked for now closed carriers and move this liability to the federal Pension Benefit Guaranty Corporation.             

Comment: The first quarter operating results cast serious doubts as to the long-term viability of YRCW. While they have continued to reduce their workforce in recent months, most significant number of their first quarter results is the 33% drop in revenue. There is a long held truth in the trucking industry that revenue will fix many operating problems; however, without revenue and in particular revenue growth, a carrier cannot survive. With YRCW’s vast network of terminals, their fixed cost is significant and requires a minimum revenue level to support and maintain this terminal network. Carriers can only cut costs (labor, trucks on the street) so far and also maintain an acceptable level of service for their customers. Otherwise, shippers will take their business to other carriers.

The President and COO resignation does not project a positive outlook to the shipping marketplace. It is unknown if he was pushed out or chose to depart over growing concern about the long-term future of YRCW. It is interesting to note that he did return to his last employer.              

With a recent $274 million loss in the first quarter, including a $136 pension cost advantage or suspension, YRCW must begin to very quickly demonstrate a strong turnaround to their bottom line if they expect to meet pension obligations by 2011. Will YRCW be forced to go back to the Teamsters for more concessions or even an extension of the non-pension payments?

Bottom line:  YRCW is facing serious issues in the months ahead. It remains to be seen if they will be able to regain lost shippers, grow revenue to required levels and meet their pension obligations next year.

- Joe Heilig

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FedEx and UPS Go Toe to Toe Over Railway Labor Act vs National Labor Relations Act

enVista reported on this issue in our last Newsletter. The confrontation between FedEx and UPS continues to heat up and we want to keep you abreast of the latest developments. These carriers have been at each other for three decades and temperatures continue to rise concerning the labor issue of what law should govern FedEx Express workers. The resolution of this issue is now in Congress and both carriers are waging an all out lobbying effort for their respective sides.    

FedEx Express non-union workers are currently covered under the Railway Labor Act, which requires the entire workforce to vote for a union before it can be certified. However, UPS’s Teamster workers are covered under the National Labor Relations Act, which only requires a single location or facility to vote in the union. If a union was able to establish a stronghold in several FedEx locations, they could force strikes or job actions that would disrupt FedEx’s network operations and service levels.
While FedEx has created a marketing campaign to fight this potential Congressional labor law change, UPS has claimed that they do not have a dog in this fight and this is only a question of both carriers’ workers being governed by the same law. Make no mistake about it; UPS is fighting for this change so that FedEx Express will be easier to unionize and drive up FedEx Express’s labor cost, making it easier for UPS to compete on price and market share.

In fact, Teamster President James Hoffa recently demanded that Congress pass legislation requiring that both carriers operate under the same labor laws. He promised to organize workers at FedEx Express once the law is enacted. Hoffa said, "There is one law for FedEx and another law for UPS. We need to level the playing field and when we do that, we're going to organize 100,000 workers at FedEx. "

The Congressional fight over this law is split according to party lines, with the unions and Democrats supporting UPS’s position and business, and Republicans siding with FedEx. The heavily Democratic controlled House of Representatives has already passed an FAA funding bill with wording that implies FedEx Express workers would fall under the NLRA. The fight is now in the Senate, which has failed to include this wording in their FAA funding bill. The current temporary funding bill expires July 3, 2010.

FedEx’s Chairman Fred Smith has vowed in the past to withdraw a 15 plane Boeing 777-F order if FedEx workers are placed under the NLRA.

FedEx’s Fred Smith does not fear UPS; his major concern is the Teamsters. If they are able to organize within FedEx Express and create labor strife, they may be able to do the same at FedEx Freight, which is currently covered under NLRA. So far the Teamsters have not gotten a foothold within FedEx Freight.

Comment: On May 10th, FedEx announced agreements with Boeing and two other sources to purchase six B777Fs with the stated goal of increasing capacity to Europe and Asia. This brings the total B777F orders to 38 (of the six that have already been delivered, four have already gone into service). In March 2009, FedEx threatened to delay or cancel orders of additional capacity if Congress enacted legislation that changed FedEx’s governance from the Railway Labor Act (RLA) to the National Labor Relations Act (NLRA). This has been a point of contention between FedEx and UPS for many years. UPS asserts that FedEx has an unfair cost advantage due to the fact that the RLA prohibits the formation of unions and generally makes collective labor actions more challenging.

This issue is beginning to heat up again, and FedEx must take it seriously. However, with both carriers’ profits relying ever more heavily on Export and Import volumes, FedEx cannot afford to lag behind on international capacity. Moreover, these recent orders suggest that FedEx sees signs of an economic recovery on the horizon.

What does this mean to you? This additional Export/Import capacity will need to be filled. If you have regular Import/Export volumes from/to Europe and China, remember that unutilized or underutilized capacity translates into a buyers’ market. Keep this in mind when discussing incentives on these volumes.

- Joe Wilkinson

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ABF / Teamster Concessions
ABF and Teamsters Agree to Talks

On March 12, the Teamster union’s website posted a notice that the Teamster union had agreed to enter into discussions of possible wage and benefit concessions with less-than-truckload (LTL) carrier ABF Freight System. The Teamster said this decision was based on ABF’s current financial position and the overall poor state of the LTL industry. The Teamsters noted that ABF's 2009 revenues were off 21 percent from 2008 levels, that it recorded a $100 million operating loss in 2009 versus an operating profit of $49 million in 2008, and that it has been "exhausting cash at an alarming rate" since the end of 2008. ABF has been asking to reopen contract negotiations since YRCW was granted significant wage reductions and an 18-month suspension of pension payments.

ABF Chief Operating Officer Wesley Kemp stated that ABF would demand 15% wage cuts for the remaining 4 years of the NMFA and the same 18-month pension payments elimination.

Comment: An ABF account manager relayed to me last year that ABF would not be pursuing any concessions from the Teamsters. He had stated they felt this would send a bad message to their shippers. It appears that ABF’s financial position has forced them to ask the Teamsters, “How about us?”

ABF and Teamster Union Agree to a 15% Wage Cut
ABF Freight and the Teamster union have reached a 15% wage cut agreement subject to approval by union membership. The agreement requires that the managers and non-union workers also take a similar wage cut. The wage cuts would be restored as ABF’s profitability improves.

The union’s local leaders support the wage cuts and will be encouraging their rank and file to support this proposal. Voting on the agreement began on April 29th.

“Local union leaders understand that we need to take a bold step to help ABF get through this terrible economy and that we must act now to prevent far worse problems down the road,” Tyson Johnson, director of the union’s National Freight Division, said in a statement on the Teamsters’ website.

Teamsters Vote Against 15% Wage Cut at ABF
ABF’s union employees have voted down a union proposal to grant a 15% wage reduction to ABF. The union workers voted against the proposal 3,764 (56%) to 2,936 (44%). Approximately 8,000 employees were eligible to vote.

According to ABF, the proposal included an “earnings plus plan” for all employees that would have paid quarterly payments when the company’s operating ratio reached certain profitable levels and an equal reduction of non-union compensation. “It is unfortunate that our union employees have chosen not to participate in better aligning ABF’s cost structure with those of its LTL competitors,” said Judy McReynolds, chief executive officer of Arkansas Best Corp. , ABF’s parent company.

“The current economic decline has been unprecedented in its depth and duration [and ABF]. . . has made significant financial sacrifices during this period. Going forward, we will evaluate our various options in dealing with our cost structure and the other issues we face during this challenging freight environment,” she said in a statement.

Comment: We suspect that YRCW’s first quarter operating results ($274 million loss) had an impact on the ABF Teamsters vote to not accept a pay cut. Why take a pay cut such as the YRCW employees have taken if it is not going to provide expected results and save the company from bankruptcy? The ABF Teamsters are showing extreme short sightedness since ABF is much better positioned to recover from the economic downturn with a favorable labor contract.  

- Joe Heilig

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LTL Carrier First Quarter Results

FedEx Freight
While FedEx Freight’s revenue and shipments grew 14% and 26% in the first quarter, their average yield per cwt declined 8%. The net result was an operating loss of $107 million.  

Comment: While the parcel side of FedEx’s business units is improving significantly, FedEx Freight has major issues. Based on RFQ pricing proposals enVista has received in the past from FedEx, they had not been an aggressive pricing carrier. However, we have seen and heard in recent months that they have become more aggressive in their pricing approach. One theory making the rounds in the industry is that FedEx was going after YRC while they were on the brink of bankruptcy to push them over the cliff. Based on these operating results at FedEx Freight, I would expect that they will not be nearly as aggressive in the near term. It appears they may have over extended in their discounting, which resulted in significant losses. Their shipment count and revenue grew significantl,y resulting in added market share, but their revenue per cwt declined 8%. The bottom line is they cut their pricing too much to cover variable and fixed cost.

ABF Freight
Arkansas Best Corp. reported a first-quarter $35.7 million loss compared to $26.8 million loss in the same period in 2009. Revenue was $333 million, which was a 2.2% per day increase, but its operating ratio declined to 110.7 versus 108.3 in 2009. These poor results only place more emphasis on ABF’s need for wage and benefit concessions from the Teamster.

"Despite some signs of improvement in our nation's economy resulting in the stabilization of our business, Arkansas Best's first-quarter results illustrate the ongoing effects of low freight levels combined with a weak pricing environment," said Judy R. McReynolds, Arkansas Best's president and CEO, in a statement. McReynolds said ABF's operating results will not significantly improve without "further increases in freight demand, strong improvements in pricing, and the positive financial impact of wage concessions. "

UPS Freight
UPS’s Freight and Supply Chain division reported improved first quarter operating results with an income of $53 million over $40 million in the same period in 2009. This projects to an operating ratio of 97.3, which is noteworthy in the winter months and slower economy.    

UPS Freight reported a 6% revenue increase in first quarter 2010, which was the result of a 10% increase in revenue per hundredweight. Total revenue rose to $1.99 billion from $1.75 billion, which is a $249 million increase or 14%.

Comment: A 14% increase in revenue during the current economic times indicates that UPS Freight is gaining market share and the operating ratio shows that UPS is controlling their costs.  

Old Dominion Freight Lines
Old Dominion Freight Line, Inc. announced financial results for the first quarter ended March 31, 2010. Revenue for the quarter was $317.8 million, an increase of 7.7% from $295.1 million for the first quarter of 2009. Net income was $7.7 million, with an operating ratio of 94.8, which was an improvement over the 96.6 for 2009.

A 5.8% increase in tonnage for the first quarter was driven by a 5.7% increase in weight per shipment and a 0.1% increase in the number of shipments.

Comment: ODFL continues to be the operating ratio pacesetter in the industry. In recent months they have become less responsive in their pricing proposals. The bottom line is they are taking a harder stance in their pricing going forward.

Con-Way Freight
Con-Way Freight released its first-quarter results and reported a 97% reduction in income loss from a year ago as the freight and logistics markets improved. Its net loss for the quarter was $4.1 million, compared with a $154 million loss a year ago. Revenue grew 20.7% to $1.13 billion, the carrier said in a statement late Tuesday. Con-way Freight’s actual operating loss fell to $3.2 million, compared with $23.4 million a year earlier.

LTL revenue jumped 26.3% to $725 million, while tonnage per day increased 34.8% over the previous year.

Comment: Con-Way Freight historically has been an operating ratio leader in the industry; their results over the past 18 months have been surprising and reflect the financial crisis which has struck the LTL industry. That said, it appears that Con-Way Freight has recovered and will most likely be profitable in the second quarter. Many LTL carriers have reported to enVista that they are experiencing record freight levels since the last week of March and into April and May.

SAIA Motor Freight
SAIA Motor Freight reports its first-quarter loss narrowed to $3.2 million from a loss of $6.3 million a year ago. Its operating loss was $2.1 million, compared with an operating loss of $7.5 million last year. Revenue rose 3% to $212.2 million while tonnage increased 2.8%.

- Joe Heilig

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Parcel Carrier First Quarter Results

FedEx Express
FedEx Express reports improved fiscal third quarter results based on strong results in its domestic and international air operations. Revenue rose 7% from year to year to $8.7 billion, while net income jumped 146%. FedEx reported these improvements were driven by improving demand and strict cost controls implemented in recent months. These cost controls included the elimination of 401K contributions, bonus pay and merit increases. FedEx is optimistic about its fiscal fourth quarter earnings; however, these results could be negatively affected by the reinstatement of some employee compensation programs mentioned above in the cost controls.

FedEx's international air-express segment was the quarter's leader as Asian export demand volumes rose 18% over a year ago and revenues jumped 49%. FedEx’s Ground domestic posted revenue gains of 7% with volume increases of 5% as a result of growing business-to-business demand, and a 32% gain in operating income.

Comment: FedEx Express and FedEx Ground have made significant improvements in operating results in recent months. DHL bowing out of the market has resulted in market share gains and reduced pricing pressure now that UPS is their sole competitor for parcel shipments. FedEx continues to wage war with Congressional Democrats and the Teamster union to block legislation that would make FedEx susceptible to unionization.   

UPS
UPS released its first-quarter earnings statement and reported that its parcel revenue rose to $9.73 billion from $9.19 billion in the previous year, which equated to a 6% increase in revenue. Quarterly profit was $541 million versus a $480 million profit last year. First Quarter operating ratio was 95.1.    

“We expected the first quarter to be the most challenging of 2010 as the economic recovery gathered steam through the year,” Chief Financial Officer Kurt Kuehn said in a statement. “As it turned out, revenue was stronger than we expected due to international volume gains, increased yields in the U.S and growth in forwarding and logistics. ”

- Joe Heilig

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FedEx Expands IEF Service

FedEx Freight recently announced that they would expand their International Economy Freight coverage from about eighty (80) countries to one hundred fifty (150). FedEx freight is a “. . . customs-cleared, time-definite delivery service. . . “Given the price differentials between FedEx’s IEF and IPF (International Priority Freight) services, this could be a real opportunity for shippers with heavy import/export volumes. A careful review of your current parcel agreement is essential to ensure that your discounts for this service are properly structured.

List Rate Examples:

- Joe Wilkinson

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