Arkansas Best (ABFS)

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Lulu Cheng

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Arkansas Best Corporation (ABFS) is a trucking company that ships general commodities like food, apparel, furniture and chemicals. Its principal subsidiary, which represents ~79% of revenues, is ABF Freight System, a less-than-truckload (LTL) firm that operates in all 50 states, Canada, Puerto Rico and Mexico^[1]. As a LTL shipper, ABFS consolidates freight from several customers in one trailer-load. Compared to truckload shippers who contract an entire trailer-load to a single client, LTL companies need broad networks of pickup and delivery service centers, as well as larger “breakbulk” facilities where shipments are consolidated and separated. Companies also need complex IT systems in order to track freight status information. The asset-intensive nature of the LTL business provides a barrier to entry for new firms.

As a transportation company, Arkansas Best’s earnings are closely tied to the overall health of the economy. The firm maintains a diversified consumer base, with no client accounting for more than 3.0% of revenues in 2007^[1]. Another concern is rising fuel prices. Excluding taxes, ABFS paid $2.30 per gallon of fuel in 2007, compared to $2.12 per gallon in 2006^[2]. Another challenge ABFS must contend with is the entry of shipping giants FedEx and UPS into the LTL business. These firms bring extensive resources and strong brand names into the LTL market.

Approximately 76% of Arkansas Best’s employees are covered under a collective bargaining agreement with the International Brotherhood of Teamsters (IBT) ^[3]. Union companies generally pay higher amounts for wages and benefits compared to nonunion competitors, and union work rules typically restrict members from performing multiple job functions^[3]. On the other hand, unionized firms usually experience less employee turnover and higher productivity^[3]. Driver turnover at ABFS is a fraction of the industry average^[4], which gives the firm an edge in a tight drivers’ market and leads to dependable delivery services.

Business Financials

Arkansas Best’s principal subsidiary (and only operating segment) is ABF Freight System, a less-than-truckload (LTL) firm that comprised 96.4% of total revenues in 2007^[1]. Although the company’s historical focus has been on national LTL shipments, management is looking to expand into the larger and more rapidly growing regional LTL market^[5]. ABFS began advertising its “Regional Performance Model” (RPM) in 2006, and the firm’s regional network now spans the eastern two-thirds of the U.S.^[5] Successful expansion of RPM into western states depends on whether IBT will continue to be flexible in allowing its members to perform a variety of tasks (i.e. pickups, loading and unloading, driving, deliveries, etc.) ^[6].

ABFS's strong cash flows (it had $173.2M in cash and short-term investments at the end of 2007^[2]), means the firm has plenty of room to take on debt for strategic opportunities like acquiring a regional hauler, or to implement cost reductions. For instance, the firm announced in 2008 that it will pursue an option to withdraw from a poorly funded multiemployer pension obligation included in its collective bargaining agreement with IBT^[7]. By paying a penalty to free itself of this pension liability, Arkansas Best can invest in its own fund and negotiate directly with employees, steps that will reduce long-term pension expenses^[8].

In the four years prior to the economic downturn of 2007, ABFS averaged ~ 6.75% annual growth rate^[2]. Expansion declined in 2007, with revenues totaling $1.8B, a 2.4% decrease from 2006^[2]. In the same period, net income fell by 32.4% to end at $56.8M^[2]. Two major causes of this decline include a year-over-year decrease in tonnage per day of 6.2% through the first nine months of 2007, as well as a more competitive pricing environment^[2]. Both of these trends reflect the weakened freight industry that took hold in 2007 after the credit crunch^[2]. Arkansas Best also incurred additional operating expenses in 2007 for investment in its regional service initiatives^[2]. Record fuel prices put an added strain on the firm’s operating costs. Excluding taxes, ABFS paid $2.30 per gallon of fuel in 2007, compared to $2.12 per gallon in 2006^[2].

Trends and Forces

ABFS’s Business is Susceptible to Economic Conditions

As a transportation company, ABFS relies on a healthy economy to keep goods moving about the country. The firm maintains a diversified consumer base, with no client accounting for more than 3.0% of revenues in 2007^[1]. However, when overall demand slows, asset-based trucking firms like Arkansas Best experience declining margins until they can adjust their capacity. In the four years prior to the economic downturn of 2007, ABFS averaged ~ 6.75% annual growth rate^[2]. Expansion reversed in 2007, with a 2.4% decrease in sales from 2006^[2]. Additionally, many customers use a bidding system to determine trucking carriers, which tends to keep prices fairly competitive. For instance, when Wal-Mart Stores (WMT) needs freight shipped, it asks several shipping firms to submit how much payment they are willing to accept. The lowest bid usually wins the contract. When shipping volume decreases in a weakening economy, small competitors bid down prices in order to win loads so that they can cover the cost of their tractors.

Arkansas Best’s Costs Are Affected By Fuel Prices

Since 2004, diesel prices have more than tripled from $1.50 per gallon to $4.72 per gallon in May 2008 ^[9]. Like most of its competitors in the transportation industry, ABFS determines shipping rates by charging a base rate plus or minus a change in diesel prices. However, this fuel surcharge is not always fully and immediately transferable to the customer. For instance, fuel consumed when trucks are empty, off-route, or idling are not recoverable. Excluding taxes, ABFS paid $2.30 per gallon of fuel in 2007, compared to $2.12 per gallon in 2006^[2].

The entry of FedEx (FDX) and UPS into LTL Shipping Poses a Threat to ABF Freight

The two giants of global shipping, FedEx and UPS, announced in 2005 that they would enter the less-than-truckload shipping business^[10]. While ABF Freight’s established track record offers it a short-term advantage over these competitors, UPS and FedEx have greater resources and infrastructure networks. However, some industry analysts feel that UPS and FedEx will compete most heavily with each other, in terms of clients and in business models, leaving ABFS to its existing economic niche^[10].

New Government Regulations Increase ABFS’s Operating Costs

The transportation industry is subject to a number of state and federal rules on issues such as insurance requirements, environmental standards, safety requirements, etc. In 2004, the Department of Transportation reduced the amount of time that drivers can spend behind the wheel^[11]. And in 2002, the Environmental Protection Agency instituted new guidelines designed to reduce diesel truck emissions by 2010^[12]. The latest stage in this process came into effect January 2007, after which all newly manufactured truck engines have to comply with a set of more restrictive engine emission requirements^[13]. Trucks manufactured with the new engines have a purchasing price ~$5,000 to $10,000 higher than older models, are less fuel-efficient, and have higher maintenance costs^[14]. ABFS maintains a relatively young fleet by replacing its trucks after three years on the road^[15], a policy that boosts equipment reliability and driver morale.

ABFS’s Depends on a Unionized Workforce in a Tight Driver Market

The driver market is the tightest it has been in 20 years, with turnover rate exceeding 100% in some large trucking companies^[16]. According to the American Trucking Association, the trucking industry faced a national shortage of 20,000 drivers in 2007, a number that will swell to 111,000 by 2014^[16]. This shortage increases the costs of trucking companies like ABFS as they struggle to attract and retain drivers. Around 76% of Arkansas Best’s employee base is unionized ^[3]. Worker compensation and related costs are the largest components of ABFS’s operating expenses, amounting to 60.5% of revenues in 2007^[3]. Besides being more expensive to maintain, unionized employees are often restricted by rules limiting the number of different tasks they can perform. However, there are benefits to being a union firm, including lower driver turnover and higher productivity. Driver turnover at ABFS is a fraction of the industry average^[17], which gives the firm an edge in a tight drivers’ market and leads to dependable and high-quality delivery services. To take one example, in the second quarter of 2008, ABFS’s claims for damaged freight were only 0.63% of revenue^[18].

Competition and Market Share

Arkansas Best Corporation competes with a range of regional and national transportation and logistics companies. ABFS's direct competition is with other less-than-truckload firms who consolidate cargo from several different customers in one trailer-load. Key competitors in this segment include:

• Conway Inc (CNW)
• YRC Worldwide (YRCW)
• Landstar System (LSTR)
• Old Dominion Freight Line (ODFL)
• FedEx Freight
• UPS Ground Freight
• Saia (SAIA)
• Vitran (VTNC)

ABFS also competes with truckload carriers who contract entire trailers out to one customer. Competitors in this category include:

• Werner Enterprises (WERN)
• J.B. Hunt Transport Services (JBHT)
• Universal Truckload Services (UACL)
• Heartland Express (HTLD)
• Knight Transportation (KNX)

Market share figures assume trucking industry revenue of $357.7B in 2006^[19]. Several of the listed companies earn a portion of revenues outside of transporting goods, such as warehousing and logistics. These instances usually account for less than 10% of the total sales.

Note: A parenthesis around the figure indicates a negative number, i.e. (5.4%) is a decrease of 5.4%.

References

1. ↑ ^{1.0 1.1 1.2 1.3} ABFS 2007 10-K pg. 7  
2. ↑ ^{2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 2.11 2.12 2.13 2.14 2.15 2.16 2.17 2.18 2.19} ABFS 2007 10-K pg. exhibit13  
3. ↑ ^{3.0 3.1 3.2 3.3 3.4} ABFS 2007 10-K pg. 8  
4. ↑ Morningstar Report 2008 pg. 2
5. ↑ ^{5.0 5.1} ABFS 2007 10-K pg. 5  
6. ↑ Morningstar Report 2008 pg. 1
7. ↑ Morningstar Report 2008 pg. 1
8. ↑ Morningstar Report 2008 pg. 1
9. ↑ U.S. Energy Information Administration: U.S. No.2 Diesel Retail Sales By All Sellers. Retrieved on June 27, 2008.
10. ↑ ^{10.0 10.1} Bnet: Shippers React to UPS Move Into LTL. Retrieved on August 19, 2008.
11. ↑ U.S. Department of Labor: Truck Drivers and Driver/Sales Workers. Retrieved on July 2, 2008.
12. ↑ DieselNet: Emissions Standards. Retrieved on July 2, 2008.
13. ↑ KNX 2007 10-K pg. 3  
14. ↑ ^{14.0 14.1 14.2} WERN 2007 10-K pg. 4  
15. ↑ Morningstar Report 2008 pg. 2
16. ↑ ^{16.0 16.1} ERE.net: Truck Driver Slowdown. Retrieved on July 2, 2008.
17. ↑ Morningstar Report 2008 pg. 2
18. ↑ Morningstar Report 2008 pg. 4
19. ↑ UACL 2007 10-K pg. 4  
20. ↑ ^{20.0 20.1 20.2 20.3 20.4} YRCW 2007 10-K pg. 17  
21. ↑ ^{21.0 21.1} YRCW 2007 10-K pg. 4  
22. ↑ ^{22.0 22.1 22.2 22.3} FDX 2007 10-K pg. 47  
23. ↑ FDX 2007 10-K pg. 14  
24. ↑ ^{24.0 24.1 24.2 24.3 24.4} CNW 2007 10-K pg. 18  
25. ↑ CNW 2007 10-K pg. 12  
26. ↑ ^{26.0 26.1 26.2 26.3 26.4} JBHT 2007 10-K pg. 15  
27. ↑ JBHT 2007 10-K pg. 7  
28. ↑ JBHT 2007 10-K pg. 16  
29. ↑ ^{29.0 29.1 29.2 29.3 29.4} LSTR 2007 10-K pg. 18  
30. ↑ ^{30.0 30.1} LSTR 2007 10-K pg. 4  
31. ↑ ^{31.0 31.1 31.2} UPS 2007 10-K pg. 20  
32. ↑ ^{32.0 32.1 32.2 32.3 32.4} WERN 2007 10-K pg. 16  
33. ↑ ^{33.0 33.1 33.2 33.3 33.4} ODFL 2007 10-K pg. 17  
34. ↑ ^{34.0 34.1} ODFL 2007 10-K pg. 5  
35. ↑ ^{35.0 35.1 35.2 35.3 35.4} SAIA 2007 10-K pg. 13  
36. ↑ ^{36.0 36.1} SAIA 2007 10-K pg. 12  
37. ↑ ^{37.0 37.1 37.2 37.3 37.4} UACL 2007 10-K pg. 21  
38. ↑ ^{38.0 38.1} UACL 2007 10-K pg. 3  
39. ↑ ^{39.0 39.1 39.2 39.3 39.4} VTNC 2007 10-K pg. 10  
40. ↑ ^{40.0 40.1 40.2 40.3 40.4} HTLD 2007 10-K pg. 13  
41. ↑ ^{41.0 41.1 41.2 41.3 41.4} KNX 2007 10-K pg. 14  
42. ↑ ^{42.0 42.1} KNX 2007 10-K pg. 4