Truckers continue to cut costs, reduce capacity in down market

As trucking firms continued to report demand declines in the fourth quarter, they were doing whatever it takes to reduce costs, including renegotiating their union wage contracts and reducing overall capacity wherever possible.

Troubled trucking giant YRC, parent of Yellow and Roadway, said a tentative deal with Teamsters union employees for a 10% wage cut will provide $225–$250 million in savings when combined with non-union employee cuts in January. In exchange for the wage cut, Overland Park, Kans.-based YRC will offer its union employees a 15% stake in the company.

But analyst Thomas Albrecht at Stephens Inc. in Little Rock, Ark. warns that history does not provide a positive outlook to truckers making wage cuts. "Precedent for LTL wage rollbacks is not promising. We know six carriers that did this and none survived. But YRC's size at 25% market share and proactiveness in addressing cost and balance sheet issues give it better survival odds than predecessors."

YRC is certainly not alone among truckers looking to reduce costs, given the current level of overcapacity and outlook for LTL demand heading into 2009. Also in December, Menlo Park, Calif.-based logistics firm Con-way reported a steep drop in fourth-quarter demand and reduced its Con-way Freight LTL division's workforce by approximately 8%, or about 1,450 positions. Con-way Freight in Ann Arbor, Mich., said LTL tonnage volumes were down 3.8% in October and 9.2% in November, respectively.

"While we are focused on aggressive cost-reduction measures, over the past two months the effect of decelerating volumes in the LTL market, coupled with pricing pressures and lower fuel surcharges, have significantly curtailed expectations for 2008 earnings, the fourth quarter in particular," said Douglas Stotlar, Con-way president and CEO, in a statement.

Just how much is the trucking market slumping? The American Trucking Associations' seasonally adjusted truck tonnage index, which measures the weight of freight hauled by U.S. truckers based on membership surveys, fell to its lowest level in five years in October. And Stifel Nicolaus analyst John Larkin in St. Louis said he expects the trucking industry to see more capacity reductions and bankruptcies over the next four months. Further evidence: truck engine maker Cummins is cutting jobs and idling plants on the expectation that the market will not come back in 2009.

Certainly, conventional wisdom says when demand is low, rates should come down as well. But as Purchasing reported in its December issue, buyers need to be wary of cutting too close to the bone in trucking contracts. And more recently, Wolfe Research warns that "while truck capacity has moved back in favor of shippers over the past few months, many shippers we speak with remain wary about reducing rates which could materially further reduce capacity, leading to larger rate increases when demand returns. Our sense is that contract rates are likely to remain flat to modestly up, while the spot market has recently inflected down again."

Stifel analyst David Ross says that much in the LTL market, including pricing, depends on the fate of YRC.

"We believe that 4Q08-1Q09 has been/should be so bad that it will likely define the bottom of the freight cycle, as companies can only draw down inventories so far and the credit/lending market should thaw out over time, in our view," Ross says. He adds that if YRC does not make it through the downturn "all other LTL carriers should be immediately made healthy and look to grow profitably and hire again. And if they make it through this downturn, they will have to shed a significant amount of capacity, which should also tighten up the supply/demand environment and improve pricing in the LTL industry."