State?s Public Trucking Firms Ride Rough Year

For Arkansas’ four publicly traded trucking companies, 2007 has been a bumpy ride.

Only J.B. Hunt Transportation Services Inc. of Lowell reported an increase in net income in the first half of 2007, and that was despite a steep revenue decline in its trucking division.

“For the industry, both publicly traded and non-publicly traded companies, so far 2007, while it hasn’t been a devastating year, it certainly hasn’t been a good year either,” said Bob Costello, chief economist and vice president of the American Trucking Associations in Washington, D.C.

Trucking industry experts see three factors at play in the slump:

•  A decline in tonnage, largely attributable to the decline in the homebuilding industry, though that decline affects only the less-than-truckload segment of the trucking industry.
•  Higher labor costs.
•  Higher fuel costs.

Tonnage, literally the number of tons of freight delivered by trucks, fell again in June and so far this year is down more than 2 percent from the same period in 2006, Costello said. The number of loads, though, is up slightly for the year.

“What’s happening is things like the housing [industry], which is a lot of heavy freight, is having a disproportionately large impact [on tonnage],” Costello said.

A load of lumber and other building materials can weigh two to three times more than a shipment to a retailer, Costello said.

“Loads are up slightly, because a load is a load,” Costello said. “But when you look at the tonnage, the housing impact is going to be much greater on the tonnage.”

The decrease in tonnage, however, only impacts the less-than-truckload segment of the trucking industry, which charges by the weight, said Lane Kidd, president of the Arkansas Trucking Association.

Arkansas Best Corp. of Fort Smith’s main subsidiary, ABF Freight System Inc., is a less-than-truckload carrier. The long-haul carriers, such as J.B. Hunt, USA Truck of Van Buren and P.A.M. Transportation Services Inc. of Tontitown, charge by the mile, Kidd said.

Kidd said higher labor costs and fuel costs have hurt the trucking industry this year.

The cost of fuel is typically covered by the client in the form of fuel surcharges, but that doesn’t mean high diesel prices don’t hurt the bottom line, Costello said. “Not all the runs are loaded, which means they might not get compensated for all the miles,” he said.

The high fuel prices also hurt consumers who end up spending their disposable income on fuel rather than goods, said David Humphrey, director of investor relations for Arkansas Best.

“The bottom line is we need more freight,” he said. “More freight would cure a whole lot of woes.”

Until more freight arrives, J.B. Hunt will turn its focus to its intermodal sector, USA Truck’s new CEO Cliff Beckham will look for ways to turn the company around, and Arkansas Best will try to iron out a new agreement with the Teamsters before its current contract expires in March.

J.B. Hunt’s New Focus

J.B. Hunt has turned its focus away from its trucking business to its intermodal sector for growth. The intermodal system – in which freight in a container is delivered by ship, then moved to rail by a crane and then to a truck without having to unload the cargo – is typically faster and cheaper.

J.B. Hunt’s revenue rose 2.17 percent from the first half of 2006 to $1.653 billion in the same period in 2007. Its net income also rose 3.56 percent to $108.03 million.

But take a look at J.B. Hunt’s truck division. Its income fell from $45.9 million in the first half of 2006 to $27.9 million in the first half of this year.

For the first six months of 2007, J.B. Hunt’s fleet shrank by 412 trucks, or 8 percent, compared with the same period in 2006.

Meanwhile, J.B. Hunt ended the second quarter with 29,500 containers for its intermodal sector, up 18 percent from the same period in 2006. By the end of the year, J.B. Hunt is expected to have 34,000 containers, according to a research report by analyst William Fisher of Raymond James.

“We surmise that J.B. Hunt is converting selected truckload freight to intermodal, which we view positively as returns in the intermodal segment are an estimated 15 percent higher while requiring significantly less capital,” Fisher wrote in his report.

Fisher projects that by 2008, J.B. Hunt’s intermodal business will account for 57 percent of the company’s income. In 2005, the intermodal sector accounted for 40 percent.

The truck sector will fall from 32 percent of the company’s net income in 2005 to a projected 12 percent in 2008. J.B. Hunt’s third business sector is its dedicated contract services. In that segment, a customer, such as a large retailer, hires J.B. Hunt to exclusively handle its freight. Typically, the contract is for three or five years.

J.B. Hunt officials didn’t answer questions about its intermodal business.

Chaz Jones, an analyst for Morgan Keegan, said moving freight by intermodal is cheaper than by truck.

“Their intermodal business continues to perform extremely well despite sort of the broader economic weaknesses,” Jones said. “And it’s really carrying the company’s earning during this sort of less favorable environment on the truckload front.”

Jones said he didn’t think J.B. Hunt will ever dismantle its trucking fleet because about 80 percent of its customers use all three of J.B. Hunt’s services.

“It’s really their platform,” Jones said. “We don’t only provide you with a … truckload carrier service, we also have the ability to move containers coming in to the domestic market from the international marketplace, or moving containers domestically.”

Jones said the growth of J.B. Hunt will be tied to its intermodal business over the next five to 10 years.

J.B. Hunt’s stock price is the only one of the four that has risen in the last couple of months. Its stock price hovered around $20.50 a share at the end of December. In mid-August, it was just over $28 a share.

Other firms weren’t as fortunate. Arkansas Best has seen its stock price fall from above $48 in October to just over $35 in mid-August.

P.A.M. stock also had a high of around $26 dollars in November. As of mid-August, it was trading around $18.50.

After hitting $19 a share in November, USA Truck’s stock price bounced around between $15 and $17 a share. It closed recently just under $17 a share.

Under New Management

On Aug. 10, USA Truck Inc. of Van Buren installed a new CEO, Cliff Beckham, to replace Jerry Orler, who reached the company’s mandatory retirement age. Orler had been CEO since January. At 35, Beckham is the youngest CEO of any of Arkansas’ publicly traded companies.

Beckham said USA Truck is considering making a move toward more intermodal business, like J.B. Hunt. And it also will consider reducing its trucking fleet by adding more owner-operators – drivers who own their own tractors.

Beckham said that by using owner-operators, USA Truck won’t have to invest in new tractors.

“And that’s attractive,” Beckham said. “It’s an avenue to grow the fleet we really haven’t penetrated before.”

USA Truck’s net income is down 78.23 percent in the first half of 2007 compared with the same period in 2006.

“The last nine months have been very difficult,” Beckham said. “We were hit a little harder than most.”

Beckham said USA Truck has stopped adding trucks to its fleet.

By limiting the capacity of the fleet, USA Truck can manage the empty miles better and improve its rate per mile. USA Truck saw a 2.4 percent decrease in revenue per loaded mile from the first six months of 2006 compared with the same period in 2007.

Beckham said the trucking environment still is weak. But typically, the second half of the year is stronger for the industry.

It is difficult to know whether the trucking industry will recover by then.

“A lot of it depends on the American consumer,” Beckham said.

Driver Issues

Arkansas Best will be dealing with its own driver issues soon. Its contract with the International Brotherhood of Teamsters ends on March 31. Negotiations for a new contract are expected to begin in the upcoming months.

“We feel very good about the relationship we have with our employees,” said Humphrey, of Arkansas Best. “We feel very positive about the situation at this point.”

Others, though, are concerned about the contract talks.

“I think there’s potentially some near-term risk of freight being diverted or the possibility of a strike,” said Art Hatfield, an analyst who covers Arkansas Best for Morgan Keegan. “I think the environment we’re in today, I think labor is being a little bit more aggressive about everything they do.

Still, for the long haul, Hatfield said labor talks aren’t an issue about which people need to be overly concerned. Neither side has made public what it wants during the contract talks, Hatfield said. Arkansas Best saw its revenue fall 2.59 percent from the first six months in 2006 compared with the same period in 2007. Its net income, though, took a much bigger hit: down 36.37 percent to $24.4 million in the first half of this year.

At Tontitown

P.A.M. Transportation Services Inc. of Tontitown, saw its net income fall by two-thirds compared with last year, from $10.43 million in the first six months of 2006 to $3.46 million in 2007.

P.A.M. officials didn’t respond to a request for comment. But the company’s second-quarter report filed with the Securities & Exchange Commission blamed some of its problems on the softer freight market.

It didn’t help that wages rose from $39.5 million during the first six months in 2006 to $42.7 million in 2007.