Refrigerated Carriers Call for Higher Rates

May 1, 2000
Start a conversation with a for-hire carrier of refrigerated freight and always sooner than later, the subject turns to rates. The industry needs higher

Start a conversation with a for-hire carrier of refrigerated freight and always sooner than later, the subject turns to rates. The industry needs higher rates, they say. Many refrigerated carriers will collapse under the burden of rising costs and stagnant rates, executives argue.

Some carrier executives say that the entire market segment is poised for failure to the extent that major shippers may find a resumption of private trucking necessary. In eight years of an amazingly strong economy, a whole industry, one that is vital to the nation's standard of living and quality of life, has missed the rising tide, they say. Two of the country's largest refrigerated carriers are already takeover targets, and one or two more could easily reach that status if their stock prices do not recover soon.

Stoney M Stubbs Jr, chairman of Frozen Food Express Industries, explains the evolution of the present rate situation in the company's 1999 annual report to its stockholders. In the early 1990s, most fleets put expansion plans on hold as carriers waited out the recession of 1990 and 1991. A slow recovery through 1992 and 1993 was followed in 1994 by an explosion in freight volume. Carriers expanded operations to meet the demand just in time to have too many trucks on the road when volume dropped sharply in 1995. However, most carriers treated the 1995 slowdown as a momentary dip in the growth of freight volume and continued to grow. By 1996, most dry van carriers had returned to profitability with a surge in freight.

Shaky Recovery Refrigerated freight volume recovered as well, but with only 4 percent of total freight requiring temperature control, the recovery was not as robust. Erosion of rates was one result of the over-capacity of refrigerated equipment fueled by growth in the mid-1990s.

FFE reports that its average mileage rate peaked at $1.35 in 1994. During the slowdown of 1995, that average rate per loaded mile dropped to $1.33 and remained at that level through 1998. In 1999, rates improved a little, with the result that the average rate per loaded mile rose to $1.35, exactly what it had been five years earlier. In those five years, driver wages rose, slight inflation ate some buying power, and new diesel engine emission regulations increased fuel consumption, effectively raising fuel cost per mile at a time when fuel prices were relatively stable.

These conditions produced the first loss in the 53-year history of FFE. The company reported a $12-million loss for 1999 compared to earnings of almost $10 million in 1998.

Then came the winter of 1999-2000 and a sharp spike in fuel prices. In some parts of the country, the price of diesel fuel jumped more than 50 cents in a week. In the Northeast, some carriers reported fuel prices of $2.00 or more.

Many carriers, but not all, have had experiences following the FFE model. Marten Transport of Mondovi, Wisconsin, is one of the few that escaped. Marten's annual report for 1999 shows an increase in rates for each of the past three years. However, Marten is one of the few refrigerated carriers to post strong fi-nancial results for several years running. Prime Inc in Springfield, Ohio, and Stevens Transport in Dallas, Texas, are the only other truly strong performers among large refrigerated carriers. Richard Durst, president of Arctic Express, states matters most plainly: "I can count the truly profitable refrigerated carriers on one hand and have a few fingers left over."

He's right. Of the publicly traded refrigerated carriers, only one posted a profit in 1999. The other four lost money, although four of the five were profitable in 1998.

Profitability is a big issue. "We use profitability to make our argument for rate increases to shippers," says Dan England, chief executive officer of C R England. "An analysis of operating ratios for public carriers shows that dry van carriers posted an average OR of 93.2 for the third quarter 1999. In the same quarter, the average operating ratio for publicly traded reefer carriers was 97.2."

Other reasons behind the desire for higher rates are many: rising costs, fleet replacement, falling used truck prices, raising driver pay, and increasing what are currently razor-thin profit margins for many refrigerated carriers. The one thing that most refrigerated carriers do not complain about is a lack of freight. In fact, the availability of freight and the willingness of refrigerated carriers to expand their fleets to handle it are seen as two of the reasons for depressed rates. As long as shippers perceive an oversupply of trucking capacity, they are unlikely to agree to substantial rate increases. "Shippers still tell us that they have no problem getting their freight moved," says Don Mayoras, president of Cloverleaf Transportation in Chester, New York, and Mau Trucking in Ida Grove, Iowa.

Rising Equipment Prices The pressure on motor carriers is external as well as internal. James L Hebe, chairman of Freightliner Corporation, recently has been quoted as saying that new truck prices have to go up over the next several years. With 37 percent of the Class 8 truck market shared between Freightliner and Sterling, both owned by Freightliner Corporation, Hebe may be in a position to cause such a price increase. In related comments, he has said that carriers need to double driver pay as a way to attract the number of workers they need. This increased pay would have to be funded by sharply increased freight rates, he has said.

The wording of the desire for rate increases may change:

* "God, Yes! We need higher rates."-Tom Grojean, chairman of Grojean Transportation and Burlington Motor Carriers in Daleville, Indiana;

* "Of course, is a pig's [leg] pork?"-John Ameling, president of KAT Inc in Chesterton, Indiana;

* "Yeah, we could still use some increases, although we have hit them pretty hard, sometimes twice, in the past six to eight months."-Richard Durst, president of Arctic Express in Hilliard, Ohio;

* "Absolutely. We've got to get more money."-Dan England, CEO of CR England in Salt Lake City, Utah; but the sentiment is always the same. The returns in refrigerated trucking are too low to fund the increases in driver pay and other expenses faced by reefer carriers.

Financial analysts and carriers themselves are quick to note the discrepancy in operating results between dry van carriers and refrigerated carriers. These two segments of trucking perform essentially the same task for many of the same customers in the same traffic lanes. However, dry van carriers are typically much larger than their refrigerated counterparts, and they post operating ratios that are generally four to six points better than refrigerated carriers. Although dry van carriers suffer from the driver shortage just as refrigerated carriers, they seem to hire and retain drivers with somewhat greater ease.

Two factors seem to feed these situations. First, the trailers used by dry carriers are substantially less expensive than the trailers and refrigeration units required for perishable freight. Secondly, the job required of the drivers is much easier. At a dry van carrier, the driver is usually just that-a driver. In predominantly drop-and-hook operations, the driver hooks up a loaded trailer at the shipper, drops it at the receiver, and proceeds to the next load. When the time comes for a break, the driver can put the tractor and trailer in a secure setting and walk away.

Drivers for refrigerated carriers have no such luxury. Often, they are required to move freight onto the trailer at the shipper and onto the dock at the receiver, remaining with the trailer throughout the loading and unloading process. Studies commissioned by the Truckload Carriers Association Refrigerated Division show that loading and unloading can consume more than 40 hours in a typical week of driving. In addition, drivers for refrigerated carriers must remain with the load from start to finish. They cannot take an extended break away from the load.

Pay is essentially the same for dry van or refrigerated drivers. Considering the heavier work load at refrigerated carriers, many drivers vote with their feet, choosing to walk into the per-sonnel office of a dry van carrier rather than the recruiting office of a refrigerated carrier. Capital Intensive Service Drop-and-hook operations are productive, but capital intensive. Dry van carriers usually operate with a trailer to tractor ratio of 21/2 or 3 to one. According to the Gross Revenue Report published every September in Refrigerated Transporter, the average trailer to tractor ratio for refrigerated carriers is 1.3:1. For small to medium carriers, this ratio is much closer to one-to-one. "Operating revenues at refrigerated carriers simply will not support the investment needed to increase the reefer trailer fleet enough for a drop-and-hook system," says John Ameling.

Trailer pricing almost ensures the inability of refrigerated carriers to perform in a drop-and-hook environment. For the price of a single premium quality refrigerated trailer with unit, a dry van carrier can purchase almost three trailers-the number needed for efficient drop-and-hook operations.

Drop-and-hook may not be the answer to more productivity for refrigerated carriers. "We will do drop-and-hook under very controlled circumstances," Ameling says. "We will spot one trailer for shippers if they will commit to three backhauls or five headhauls per week per spotted trailer."

Mobile Warehousing "We spot trailers for our customers, sometimes without much success," Richard Durst says. "Recently we had a customer call asking for more empty trailers. We checked our loaded trailer report and found 38 trailers sitting on the customer's yard waiting to be unloaded. Some of them had been there for more than a day. We suggested emptying a few of those loaded trailers. We were told that was impossible. The bottom line is that we provide a lot of free warehousing for receivers."

As carriers try to explain their thinking about rate increases, they voice a number of opinions. "Higher rates are necessary to return this industry to profitability," Dan England says. "And we are not talking about a small increase. We probably need something in the range of 24 percent more. We think that should be spread over a three-year period. In reality, we're looking at a four- to five-year process that would allow most efficient refrigerated carriers to drop their operating ratios by four points-down to the 92-range where some actual profit would be available."

A large portion of this proposed rate increase would have to go to drivers, England says. "We would have to pass on at least half of any increase to our drivers," he says. "We're telling our shippers that our drivers make about $35,000 a year from their mileage compensation. To bring stability to our driver pool, we need to boost that mileage compensation to at least $52,500 a year. That figure does not include pay for multi-stop deliveries or unloading. If refrigerated carriers are not profitable, we can't afford to pay our drivers properly."

Other carriers take the matter of rate increases fairly personally. "I'm tired of my creditors talking to me as if I don't knowhow to run my business," Richard Durst says. "Banks and other financial institutions are loaning us millions of dollars annually, and they insist that this be a for-profit business."

What Should Drivers Get? Durst is not sure how much drivers should receive of any rate increase. "I don't think it's our responsibility to give most of any increase to drivers," he says. "Perhaps, we should pass through half of the increase, but our first mission should be to restore our businesses to profitability. In our case, we still have almost 400 trailers that haven't been traded for 53-footers yet. In the other part of the fleet, we have an almost even mix of 53-ft reefers and 53-ft insulated vans. We either have to begin making a profit from refrigerated freight or we have to trade those 48/102 reefers for 53-ft vans."

John Ameling agrees with Durst on driver pay. "It would be good to give drivers the majority of any rate increase, but we just can't do that," he says. "Other parts of the business have a claim on any rate increase as well. However, we all recognize that a share of any increase must go to drivers because of the job they do. A driver for a refrigerated carrier is a baby-sitter for the load as much as a truck driver. Having to stay with the load constantly puts drivers for reefer carriers at a distinct disadvantage compared to drivers at dry van carriers."

Other carriers are more emphatic about driver pay. Tom Grojean says that at least 80 percent of any increase should go to drivers, because drivers at dry van carriers get more pay in comparison to the job they are asked to do.

Rates to Cover Costs "Carriers need at least a 5 percent rate increase simply to remain financially whole," Don Mayoras says. "That rate increase should be divided to give about 2 percent to drivers plus 1 percent each for fuel, insurance, and recruiting. The reason the driver share is not higher is that most carriers have already raised driver pay. A rate increase is needed to offset costs that have already been incurred."

Motor carriers discount the prospect of rising rates contributing to inflation. "I know that Alan Greenspan is worried about freight rates contributing to inflation," says Richard Durst, "but they really won't. A small increase will have no impact."

Tom Grojean has the impact of rates on inflation quantified. "Rates account for only 2 percent to 3 percent of total consumer product costs," he says. "A modest increase in rates would never be noticed."

Dan England does not consider inflation at all. "I don't lose a lot of sleep worrying about inflation," he says, "but I do miss a lot of sleep thinking about the number of trucks we have parked-92 out of 2,550 right now-and our driver turnover rate which hovers between 100 percent to 110 percent a year."

Although all carriers seem to want higher rates, they can't agree on what those rates should be. For instance, one carrier says the mileage rate from Atlanta to Boston should be somewhere near $1.90 per mile and that the rate from Chicago into the northeastern quadrant should be at least $2.00 per mile with an absolute floor of $1.85 per mile. However, other carriers are willing to haul freight in these lanes for 40 to 50 cents per mile less.

As a general rule, many carriers say that no rate should be lower than $1.25 per mile if the length of haul is at least 1,000 miles. However, some carriers routinely charge less than 95 cents per mile for such freight.

The problem with this rate disparity is that it is not limited to smaller carriers. "Some of our largest competitors charge some of the lowest rates," Richard Durst says, "and we don't know how they make the numbers work. I can understand some low rates. For instance, we also have a lot of competitors that we categorize as second tier carriers. They are relatively small and operate mostly with used equipment. They don't have large computer systems, and they do not invest heavily in new technology such as vehicle tracking and communication. Those carriers have lower costs and probably can afford to charge lower rates."

Is Consolidation Coming? Consolidation may be the key to changing the rate structure for refrigerated carriers. Both KLLM and Dick Simon Trucking seem to be ripe for acquisition. In fact, the board of directors of KLLM has set up a bidding process to sell the company. Acquiring one of these companies would represent a way for another carrier to grow without increasing the total capacity of the industry. Richard Durst sees this as a good thing. "Maybe the best thing that could happen in refrigerated trucking would be for Jerry Moyes at Swift to acquire a refrigerated carrier," he says. "At least, Moyes won't give away services that he knows he can charge for."

Shippers play their part in the overall rate structure. Meat rates from Iowa to the Southeast actually have fallen 3 percent to 4 percent in the past year, Midwestern carriers say.

In some instances, shippers suggest lower linehaul rates and higher accessorial charges. "We've already made that mistake once," Dan England says. "Some customers are quick to take the lower linehaul rate; then, they just don't pay the higher charges for things like waiting, unloading, or pallet exchange. The truth is that we have done about all we can do to become more efficient, given the current environment at most receivers' docks."

"Receivers are a big part of the problem," Durst says. "We haul into one receiver that requires our driver to apply bar code stickers to each case as it comes off the trailer. Imagine watching a driver put 5,000 stickers on cartons as they go by on a conveyor belt."

Give Up Poor Business Refrigerated carriers may have to give up some business if they cannot get agreement for higher rates. Stevens Transport in Dallas says it has walked away from some freight in the past few months. Large carriers must insist on higher rates and be prepared to walk away if they are not forthcoming, Tom Grojean says. The big carriers need to show some leadership and set an example by finding ways to increase rates, Dan England says.

Walking away from low rates doesn't always mean permanent loss of business. A few shippers will refuse to return as a matter of wounded pride, but usually the need to get freight moved will take precedence, Richard Durst says.

"If we walk off over a rejected 5 percent increase, the shipper will usually come back within 45 to 60 days and propose something like a 3 percent increase," Tom Grojean says. "A careful negotiation often can nudge that offer up a little."

"We've seen shippers come back within weeks," says John Ameling. They discover that small carriers and logistics providers cannot cover their requirements. That's particularly true of logistics providers. They need the big carriers to provide their capacity."

Big Carriers for Efficiency Using a few big carriers instead of a multitude of small ones is not always an economic issue, Don Mayoras says. Shippers can get their freight moved with small carriers, but they have to work a lot harder. Making five calls to move 75 to 100 loads a day is a lot easier than making 50 or 60 calls to move the same amount of freight, he says.

Trucking capacity remains a big part of the rate issue. Many shippers claim that they have no trouble getting service. John Ameling sees that claim as partly denial of a problem and partly a negotiating ploy by shippers. Richard Durst says that trucking capacity and freight volume remain remarkably balanced on Arctic's lanes. FFE has curtailed growth plans to ensure that capacity matches volume.

CR England has 45 percent of its fleet in dedicated operations. "Our dedicated fleets are the only growth in the company," Dan England says. "Those dedicated operations are the most efficient in the company, and their driver retention is twice as good as our general freight fleet. We have a much better operating ratio in our dedicated operations. That tells us plainly where to put our assets."

Whether refrigerated fleets can gain the rate increases they say they need is open to question. Refrigerated trucking is the most competitive segment in for-hire trucking. Successful dry van carriers must be much larger on average. Bulk haulers face huge start-up costs from equipment that is even more specialized than refrigerated equipment. The barriers to entry for refrigerated trucking are almost nonexistent in comparison. Tractors and refrigerated trailers are easy to come by. And freight is readily available from brokers and logistics providers if a small company does not already have a few reliable customers. The real question is whether refrigerated carriers can set their industry on the path to long-term profitability or whether it will remain highly fragmented with marginal profits at best.

About the Author

Gary Macklin

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