Arkansas Best Corp. Rolls Out ?Regional?

Those green trucks headed down highways could start hauling in even more green for president and CEO Robert Davidson.
ABF Freight System Inc. of Fort Smith has become one of the nation’s largest less-than-truckload carriers, ringing up $1.86 billion in revenue during 2006, but there is more opportunity, Davidson said. He’s steering a plan to push the revenue pedal to the floor, revving up the company’s RPM.
ABF’s Regional Performance Model initiative could add more than $1 billion to the company, Davidson said.
In 2005, Davidson and ABF began the RPM operational model, which allows for the continuation of its long haul service, but also delves into regional markets, using time and prices as leverage against competition.
ABF started with 13 terminals in the Northeast, and success had led to expansion of the model to the Southeast and Central regions of the ABF competes against UPS Freight, formed after the acquisition of Overnite Corp., and FedEx Freight of Harrison, but now pits itself against smaller, regional carriers.
“It’s the most significant thing this company has done in years,” Davidson said.
This momentous new model is costing ABF about one point on its operating ratio of 92.5 percent. ABF did not disclose how much has been invested in the RPM, but the company has forecasted expenses of $20 million in 2007. Davidson is banking on good returns.
“If we just achieve a modest market share of about 5 percent, which is again modest, in a few years we’ll be a $3 billion company, instead of a $1.9 billion company,” he said.
Rampin’ RPM
Full marketing of the program began in January, and ABF expects to break even on its investments in RPM later this year. To reach that goal of 5 percent market share, Davidson estimated it will take another two to three years.
Stephens Inc. trucking analyst Thom Albrecht has cautious optimism about RPM.
“I think it’s a good initiative,” Albrecht said. “I don’t think it’s guaranteed that it will be successful, but they do need to get into the regional markets — which are typically defined as deliveries made either overnight or second-day deliveries.”
Albrecht said ABF needs to jump into the regional market for two reasons: First, ABF’s traditional services, comprising about 60 percent of business, of third-day or later deliveries is a flat, if not shrinking, market. Second, regional distribution is growing quickly. He said the market is growing faster than gross domestic product, which is about 3 percent.
Albrecht said the regional markets are growing faster because of the just-in-time inventory practices by a number of industries. It’s adoption comes because it’s easier to synchronize JIT inventory when shipments are coming from hundreds of miles away rather than thousands.
Davidson said the logistical changes also are related to broader changes in the national economy. As manufacturing moves overseas, distribution has been shifted primarily to finished goods that are shipped into the country. Now people, especially in the retail segment, want more local distribution in areas, for example around Atlanta or Memphis.
“In the freight below 800 miles,” Davidson said, “there’s about twice as much tonnage and it’s growing faster.”
Demand for the RPM services will begin with existing customers, Davidson said, already having relationships established, but it also opens a new market.
Market Curves
Business needs are always evolving, and transport companies must adjust accordingly.
Arkansas Best actually owns other subsidiaries for diversification and support. It owns FleetNet America Inc., a third-party vehicle maintenance company that conducts services to truck fleets and manufacturers. It uses a network of more than 60,000 vendors to repair trucks across the nation.
The company also enlists the help of its own Data-Tronics Corp., which is a computer information services provider for the company, and Transport Realty Inc., the real estate subsidiary.
A previous holding, Clipper Exxpress, it’s intermodal operations, was sold in June of 2006.
While Arkansas Best has other subsidiaries, ABF is the largest, accounting for more than 97 percent of its business.
Davidson said 2006 was like two different years for ABF, putting a bump in the road for the company.
ABF was in overdrive through the first three quarters. In the third quarter, revenue was up 11 percent compared to the third quarter in 2005.
Tonnage was tracking well against the previous year, and it was looking good into the fourth quarter, leading into the Christmas season. But, things slowed down.
“We surveyed our customers, asked them what’s going on,” Davidson said. “We did that in early- and mid-October, and they said not to worry — everything is on track. But it wasn’t on track.”
Traditionally one of the busiest times of the year, October and November busted, leaving quarterly revenue down 7 percent from the same period the year prior as tonnage fell.
Part of the drop-off may have been attributed to the post-Hurricane Katrina environment where construction was doing well, Davidson said. That appeared to become exaggerated when consumers began clenching their wallets as the housing market softened, impacting retail sales.
Arkansas Best stock prices were as high as $50.67 in July, but fell to $35.68 in December on the news.
ABF still walked away with a 6.5 percent increase in revenue over 2005, but income fell 20 percent.
Davidson said profits suffered because of the fixed element to cost. Labor accounts for nearly two-thirds of ABF’s annual expenses. With its customers predicting everything would be fine, ABF was slower to react to the shipping downturn.
He said he regretted layoffs but they are part of what has to happen to remain viable — labor has to flex with the market.
On the other side, in an upmarket swing, Davidson said ABF uses the railroad as a pressure valve. ABF can get access to more trailers, but the company will slide more freight to the rails until the number of tractors and trailers can catch up.
Davidson said some analysts might consider weakness in ABF’s use of union workers.
“There’s a little bit of a negative connotation with being a union company,” he said. “And it’s true that our pay and benefits are higher than those of our competition, and there are some areas where we don’t have the flexibility we would like to have.”
He said ABF offsets the increase labor cost by having better employees with more productivity, fewer accidents and better cargo care.
“With labor, like a lot of other things, you get what you pay for,” he said.
“I think the connotation of being a union company is perhaps more severe than the reality is,” he said.
The current contract ABF has with the International Brotherhood of Teamsters expires in March 2008. Davidson said the two parties are not yet in negotiations. The Teamsters are currently renegotiating its contract with UPS Freight.
Lane Kidd, president of the Arkansas Trucking Association, said the use of union labor in trucking isn’t as popular as it was before deregulation in 1981, but before, many large companies used them.
“I think that the unions do bring some unique characteristics to a trucking company that are manifested at ABF,” he said. “ABF has virtually no turnover in its drivers.”
Turnover rate is important because recruiting and training is about $9,000 per new hire, Kidd said, but ABF is able to avoid that expense.
Davidson said tenure at the company is outstanding, and the main reason people leave the company is retirement. He said the average tenure of those working in the general office is 27 years, and including those in the field, it’s about 25 years.
Greening Trucks
ABF is purchasing 495 new tractors for its fleet of 5,130 tractors and 21,267 trailers. Of the purchases, 208 will be equipped with engines with new emissions mandates from the Environmental Protection Agency.
The EPA’s 2007 requirements call for 90 percent less particulate matter than engines manufactured in 2004. ABF is also anticipating further expenditures when EPA standards will change again in 2010, reducing particulates another 90 percent.
The puchases will affect the bottom line. Compared to an engine built in 2004, the 2007 engine costs about $15,000 more. (Due to confidential manufacturing agreements, ABF was unable to provide actual cost of the tractors.)
Davidson said the new engines also cost more in maintenance, and could suffer from lower reliability. Also, the engines are less fuel efficienct. ABF expects about a 3 percent decrease in mileage.
“They do cost more, but everyone benefits from it in that the trucks are polluting less.”
“ABF’s positioned to do very well, I think, in the trucking industry for the future.”
ABF has been a cornerstone in Arkansas trucking, Kidd said, and is one of the reasons the state is viewed as a hub for the industry.
“The company has great respect from its peers, even its competitors, in the state and nationally,” he said. “In Arkansas, it is the dean of our trucking companies.”