The incredible shrinking LTL industry

May 31, 2005
While many are asking, "Can UPS integrate non-union less-than-truckload carrier Overnite Transportation into its Teamster-laden parcel organization,"

UPS integrate non-union less-than-truckload carrier

Overnite Transportation into its

Teamster-laden parcel organization," a better question might be, "Why did it take Brown so long to acquire an LTL operation?"

In May, UPS CEO Mike Eskew and CFO Scott Davis told financial analysts the company would consider acquisitions that were in "attractive markets and offer compelling synergies that leverage our strengths." Just days later UPS entered into a definitive agreement to acquire Overnite Transportation for $1.25 billion in cash.Is nationwide-LTL an attractive market? If you listen to financial analyst firms like Morgan Stanley and Legg Mason, the big action is in regional LTL. However, buoyed by a surging freight market, Overnite's spinoff from the Union Pacific organization has led to stellar financial performance since its initial public offering in 2003.

With its union organizing battles largely behind it, Overnite became an independent entity at just the right time. Yellow Freight and Roadway Express were busy figuring out how to combine (or not combine) their operations and trying to stem the flow of customers to other LTL companies. ABF was doing well sweeping up some of the volumes shippers moved out of the perceived single basket of Yellow Roadway Corp., but it wasn't about to let itself choke on greed and pick up too much too fast (or pick up non-compensatory freight), so there was freight to go around.

How much did the Yellow Roadway merger influence UPS's decision to acquire Overnite? That's open to speculation, but the Yellow Roadway combination certainly seems to have been successful marriage. Yellow Roadway was unlikely to enter the parcel market, but its recent announcement that it would acquire the regional network of USF did two things: It built Yellow Roadway into an even larger player in all facets of LTL, and it took an acquisition target off the market. All that were left were premium buys (ABF, Con-Way and Overnite).

UPS waited four years after arch-rival FedEx's acquisition of American Freightways gave it a national network of regional LTL carriers and a full transportation portfolio. (FedEx Freight was built from the American Freightways acquisition combined with the Viking Freight unit FedEx acquired in 1998 when it bought Caliber System.)

What may have made this the right time for UPS to act has nothing to do with the LTL market directly. Instead, the entry of DHL into the U.S. express/ expedited market with its acquisition of Airborne Express, and the willingness of parent Deutsche Post World Network to stick to the market despite mounting losses, demonstrated there was a new player in town. Recent comments by DHL management recognize the company's need to focus on improving the quality of its U.S. operations, reiterating earlier statements that it wasn't out to start a price war to win market share.

If UPS was going to enter the LTL segment and build a portfolio to parallel FedEx, the time to act is while DHL is getting its house in order and before it calls on its cash-rich parent to finance its own LTL acquisition.

What's next? Probably nothing more in the LTL arena. But there is still that persistent rumor about U.K.-based Exel being an acquisition target. First choice among speculators was UPS, but that may be out of the question — at least until Brown can digest last fall's Menlo Worldwide Forwarding acquisition as well as Overnite. FedEx and Deutsche Post top the short list of other possible suitors for Exel.

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