W(h)ither ABF?

Mark B. Solomon
DC Velocity
December 12, 2012

For more than a decade, ABF Freight System Inc., the less-than-truckload (LTL) unit of Arkansas Best Corp., has convened a media reception on the first night of the joint annual meeting of the National Industrial Transportation League and Intermodal Association of North America. After a convivial hour of socializing, ABF's then-CEO would step to the mike to field mostly hardball queries from the assembled scribes.

The 2012 joint meeting came off as planned. But the ABF reception didn't happen.

ABF didn't comment on why the event, which would have taken place Nov. 11, wasn't scheduled. However, it may be more than coincidental that five weeks from that date, the unionized company would begin negotiations with the Teamsters union on a new contract covering about 7,500 employees. Given the talks' critical nature, it's doubtful ABF executives would have been comfortable answering questions on the issue.

The talks, scheduled to start Dec. 18, are aimed at replacing the current five-year pact when it expires March 31. On Nov. 29, the Teamsters fired the first shot, proposing a two-year agreement calling for a $1-an-hour wage hike in each year and maintenance of the union's current pension, health, and welfare benefits. Union leaders did not say at the meeting why they sought a shorter contract duration, according to those in attendance. However, the duration of the proposed contract aligns with the expiration of the union's current pact with YRC Worldwide Inc., ABF's chief unionized rival.

For Fort Smith, Ark.-based ABF, the goal is twofold: to reach an agreement as quickly as possible to avoid marketplace uncertainty and possible customer defections, and to fashion a deal that mitigates what are the LTL sector's highest labor costs. The company declined all requests for comment for this story.

As of mid-2012, salaries, benefits, and the cost of purchased transportation represented 71 percent of ABF's expenses, according to data from SJ Consulting, a Pittsburgh-based consultancy. A source who asked for anonymity said executives at several nonunion carriers estimate they hold a wage and pension cost advantage of between 25 and 40 percent over ABF.

Virtually every public pronouncement from Arkansas Best contains a reference to the economic burden imposed on the unit by the current labor pact. The parent said in a statement accompanying its third-quarter 2012 results the "most significant costs affecting ABF are associated with our labor contract." ABF reported a 1.4-percent year-over-year drop in third-quarter tonnage, blaming the drop on sluggish macroeconomic conditions.

Judy R. McReynolds, Arkansas Best's president and CEO, said in the statement that "we have remained diligent in our efforts to address ABF's high cost structure." She did not go into detail in the statement.

Arkansas Best has already taken steps to distance itself from the Teamsters. In June, it bought Panther Expedited Services, a leader in the time-critical delivery market, for $180 million in cash and debt. The purchase of nonunion Panther, a nonasset-based company that also has a growing presence in international freight forwarding, will diversify ABF into businesses outside of LTL, where before the Panther purchase it generated about 90 percent of its revenue. It also takes the company into a segment where organized labor plays a minimal role, though its workforce may benefit if Panther's sales generate additional over-the-road business.

MORE CHALLENGES AHEAD

ABF's woes aren't limited to labor, however. The company faces other challenges that will remain long after the contract talks conclude. Its "operating ratio," a measure of expenses to revenues, hit 105.5 in the first quarter of 2012. That meant ABF spent $1.05 for every $1 in revenue it took in. This was the worst performance of any publicly traded LTL carrier during that period, according to SJ data.

The company improved its operating ratio as the year progressed. Still, it stood at about break-even as of late November, and its fourth-quarter ratio was expected to climb above 100. By contrast, during 2004, the company achieved an impressive 91.9 ratio even though wages, benefits, and purchased transportation costs accounted for 76.8 percent of total expenses, SJ said.

According to the consultancy, ABF generates about $380 in revenue per shipment, $104 per shipment more than rival YRC Freight, YRC's long-haul unit, and $109 more than Old Dominion Freight Line Inc., considered by many the best-run carrier in the sector. ABF's rising revenue is due largely to pricing discipline by LTL carriers that has enabled recent rate hikes to stick.

ABF continues to expand its presence in the regional trucking category, whose trends are more favorable than the national LTL market's; ABF's regional network now accounts for 61 percent of its total tonnage, double the levels when the network was formed in 2006.

The company wins plaudits for its conservative management style and is considered a leader in driver and network safety, security, and information technology. Some analysts believe the parent's stock—which had fallen from a 52-week high of $22.79 a share in January 2012 to a low of $6.43 a share in mid-November—is significantly undervalued and will rebound smartly once the fog of uncertainty lifts over its labor situation. As of Dec. 4, ABF stock was trading at $8.31 a share.

Yet ABF's overall tonnage count, shipment volume, and profitability continue to stagnate. Erratic freight flows and its uncompetitive labor cost structure are likely contributors, but data from SJ Consulting reveal other factors at work.

For instance, consider that in mid-2012, ABF operated 265 terminals nationwide. By contrast, Old Dominion and Estes Express Lines operated 217 and 191 terminals, respectively, over similar geographies as ABF, SJ said. As of mid-year, ABF handled 70 shipments per terminal per day. By contrast, Estes handled 184, YRC Freight handled 155, and some private carriers handled more than 350, SJ said. The data indicate that ABF either lacks sufficient density or that its terminal network is too large for its traffic.

Between 2008 and 2011, financially ailing YRC, facing possible bankruptcy and coping with massive customer defections, shed 38,000 shipments a day, according to SJ data. This translated into an 18-percent compounded annual shipment loss. ABF reported a 1.8-percent annual shipment decline during that period, meaning it was unable to capitalize on YRC's woes.

YRC Freight's share of the long-haul market dropped to 27 percent in 2011 from 42 percent in 2006. Yet ABF's share fell to 7 percent from 10 percent during that time, according to SJ data.

"There is no question that labor costs are an issue for ABF," said Satish Jindel, SJ's president and a long-time industry executive and consultant. "But they are not the only issue, and they are not the biggest issue."

MAKING LABOR PEACE

Still, a Teamster contract that affords ABF some degree of cost relief would go a long way toward allaying marketplace and investor concerns. It has been a difficult last five years for the company as its labor costs have spiraled to levels that make it tough to compete just with unionized YRC, not to mention the nonunion companies that constitute most of the LTL segment.

ABF's current problems began in the 2007-08 period, when the last National Master Freight Agreement (NMFA), the compact that governs labor relations between the Teamsters and the remaining unionized truckers, came up for renewal. At the time, ABF wanted to exit the NMFA and bargain independently. According to ABF, it was persuaded by the union to remain in the pact under the proviso that the contract's terms would apply to all parties in the NMFA. A Teamster spokeswoman did not respond to a request for comment.

ABF's worst fears were realized the following year when YRC negotiated the first of three extraordinary agreements with the Teamsters calling for wage and pension cuts through 2015. ABF asked its rank and file for similar concessions, but its employees, defying the recommendations of Teamster leadership, rejected management's proposal.

ABF then sued YRC and the Teamsters' negotiating arm over the separate concessions, claiming they were illegal because they were negotiated outside of the NMFA. It also requested $750 million in damages. But in late 2010, U.S. District Court Judge Susan Webber Wright rejected ABF's claim, ruling it had no legal standing to contest the agreements. After the case was remanded to Judge Wright on appeal by a federal appeals court, she ruled against the company again in 2012.

ABF is considering another court challenge, despite calls by some to drop the legal fight and concentrate instead on the contract talks. "We've been told all along by our lawyers that they had no case," said Ken Paff, national organizer of Teamster dissident group Teamsters for a Democratic Union.

Paff called the ABF suit a "propaganda ploy" that could actually succeed in scaring the rank and file to agree to contract terms favorable to the company. Jindel took the opposite view, arguing the specter of legal action against the Teamsters doesn't create an atmosphere conducive to a productive dialogue.

Already burned once, ABF announced in August that it would end its involvement in the NMFA and bargain independently with the Teamsters. The company is also unlikely to agree to the union's Nov. 30 proposal, preferring a longer-term contract with little or no wage hikes.

PENSION HEADACHES

ABF's chief headache has been the 8 percent compound annual increase in its union pension contributions negotiated in the 2008 contract. The headache turned into a migraine in 2009 after the separate agreements between the union and YRC allowed the carrier to suspend pension payments from the end of 2009 through mid-2011, and then to resume contributions at about one-fourth the rate in place prior to the suspension. YRC is not expected to return to a full payment schedule until 2015, at the earliest.

Paff estimates that the pension expense today accounts for as much as two-thirds of the $11 to $12 an hour cost gap, per employee, between YRC and ABF.

What's more, ABF participates in about two-dozen union multiemployer pension plans, where the pensions of retirees from failed trucking companies are paid for by surviving firms. About half of ABF's pension expense is for workers who were never employed at the company, according to data from investment firm Stifel, Nicolaus & Co. The millstone around ABF's neck is the result of a multitude of unionized trucking bankruptcies over the last 30 years that stuck surviving companies with a larger share of the pension tab.

The company has sought legislative relief on the issue, but none has come to pass. It could negotiate a withdrawal from multiemployer pension schemes, but the exit would come at a price. It would cost ABF about $1.7 billion to pull out from its largest multiemployer plan, the Teamsters' Central States plan, according to recent estimates from investment firm Robert W. Baird & Co.

Paff said there's virtually no chance ABF employees will agree to concessions equal to the current differential with YRC. However, some help for the company may be on the way. The Central States plan has agreed to freeze the company's contributions at current levels through the life of the next contract. In addition, the rank and file will likely accept very small wage increases in any new contract, though the company will still have to make healthy contributions to the workers' health-care plan, Paff said.

Those factors, combined with the specter of YRC's resuming regular pension contributions by mid-decade—assuming it will have the resources to do so—should narrow the cost gap between the two carriers.


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