MT: The strategic reasons behind the Yellow-Roadway merger arrangement have been much discussed, but often mergers run into difficulties not because they don't make sense on paper but because of cultu...
MT: The strategic reasons behind the Yellow-Roadway merger arrangement have been much discussed, but often mergers run into difficulties not because they don’t make sense on paper but because of cultural differences between the organizations. Are you hoping to escape that because the two companies will be kept separate?
Welch: The road has been littered with nothing but disasters when companies try to merge. Typically the difference between what we are doing and what has happened in the past is that it was a healthy company acquiring or merging with an unhealthy company. That’s been the typical mode of mergers/acquisitions in the past in our industry. This situation is very different. You have two very healthy companies that are very well respected in the marketplace and are doing things to make their companies successful. What we want to try and do is grow both companies. If you look at past acquisitions and/or mergers, the ability to slam two companies together has resulted in very poor service, customers leaving the companies and ultimately disaster. There have been a lot of lessons learned from the past. But, even if we wanted to, there is no way we can merge these two companies together. We physically cannot take $6B worth of revenue and put that into one system. It would require millions of dollars of capital, and just having the physical ability to do it would be very limited. If, for example, in Dallas we have 320 doors and Roadway has something like 280, a 600-door terminal would be so unmanageable you couldn’t logistically handle it, and as you were trying to do it your service would be so bad customers would probably leave you. It would also be hard to grow a company that is trying to slam together such facilities. So we really want to leave the networks separate, cooperating just where we can. And, over time, we want to find ways to differentiate the brands. There are certain reasons why companies do business with Yellow and there are reasons why customers choose to do business with Roadway and we want to continue to deliver that to the marketplace and grow each company and utilize the power of coming together to do things such as invest more in technology. It will be a stronger company because of what we can do with the backroom synergies to help the profitability of both companies.
MT: Some shippers are concerned that down the road this arrangement may go beyond backroom synergies towards rationalizing terminals, service and pricing. Have you seen any change in that concern?
Welch: I think our message is being well received. We’ve had virtually no defection of business due to the acquisition and Roadway is saying the same thing. I think both companies have done a good job of steadying customers’ concerns and being honest. We are going to keep the brands separate. It’s not unlike GM that has Chevrolet, Buick, and Cadillac. There are reasons why customers buy a Cadillac and reasons they buy a Chevrolet and that’s really what we are trying to do with our two companies and we think it’s going to work. I know a lot of people in some ways doubt that but I think the doubters don’t really understand the physical limitations of taking a $6B corporation and trying to put it into one network. Even if we had the money to build huge terminals in certain locations, the likelihood is we would not be able to get approval from local government agencies. Cities don’t want huge trucking terminals being built.
MT: How will the merger impact Yellow’s presence in Canada since Roadway owns Reimer, one of our largest carriers?
Welch: Going into the acquisition our position is that we are going to keep the brands of Roadway and Yellow separate. That doesn’t mean we won’t be looking for synergies between the companies but our stated goal – and we are working hard to ensure this happens – is not to have any change at the customer level. We will cooperate where we can and we will have healthy competition in other areas. You will still see Yellow with its current operation and you will still see Roadway-Reimer with their current operations. Where we can figure out ways to work together we will, but those areas have not been identified yet as we are waiting for approval from the Department of Justice.
MT: Will Yellow and Reimer continue to offer different pricing in Canada?
Welch: Yes, you will see pricing differentials between Yellow and Reimer. But there is not a lot of overlap in our lanes. Reimer in a lot of ways is an intra-carrier. They do more transborder now than they used to but their main presence is in intra-border whereas our presence is in inter-Canada shipments; we really don’t pick up freight in Montreal and deliver it in Toronto.
MT: Are there any areas in particular that you are looking to add services and would those services be offered in the Canadian market?
Welch: Nothing from a definitive standpoint but some of the areas we would be looking at include the further development of premium services, time-definite guaranteed services and global offerings. But we are not able to get on the road with these until after the close of the deal. Through Yellow Global we want to try to expand further into Canada at some point.
MT: Motor carrier rates have been depressed for some time on both sides of the border. At the same time there continues to be downward pressure on transportation spending at the corporate level. How do you see the struggle over rates unfolding over the next few years?
Welch: The market will always win and a lot of that is governed by how the whole economy is doing. If the economy comes back I think you will see the amount of capacity that has been taken out of the market – with CF going out of business and the failure rate among smaller carriers – have an impact. I really think it gets back to a blend of supply and demand. When things are going good, it’s easier to maintain rates because capacity is so tight. When it loosens up, people become more competitive for the businesses and that’s when discounts come up. What we are going to try to do is maintain the pressure on our internal organization to improve our value in the market place. Over time we believe we can hold our rate structure better if we are providing superior value and providing our customers with more opportunity to utilize our portfolio.
MT: Capacity of course has an impact on rates. What’s your view of the North American truck capacity situation?
Welch: There is still capacity in the system but it is getting tighter no doubt. We are on average at 90-94% capacity. If the economy does pick up and sustains growth I think we will see capacity issues. One of the things the industry is fighting is the shortage of drivers and I think that’s going to cause heartburn for some companies. But I don’t think we are in immediate danger of being so far out of capacity that people can’t move their loads. And I think we are seeing probably a bit of a spike in capacity because inventory levels were pretty low and we are seeing some replenishment. Also, as manufacturing continues to exit our country, that’s changing the distribution patterns significantly. I think the next two to five years are going to be pretty interesting but I don’t see an immediate crisis.
MT: What is your view of the latest Customs pre-notification proposals and how they will impact the way your company will be able to conduct business?
Welch: I think there are pros and cons to any change but I continue to believe the Canada-U.S. border crossing will continue to improve over time because they are doing a much better job of utilizing technology. It’s really about trying to get people to change as things progress. I think anything we can do from an information standpoint is key to progress.
MT: Has your company worked out what impact all the new security requirements will have in terms of your cost structure? Are these costs that shippers should expect to be passed on to them?
Welch: I can’t put an exact number on it, but it is significant dollars. We definitely have committed more resources to making the process work. I think the market ov
er time will dictate whether we can pass these costs on. Hopefully if you are doing it in a very valued way your customer will assist but that gets back to the fact the market will always win. We haven’t been as aggressive as other carriers in implementing a security surcharge and it’s not something that’s active for us right now.
MT: Security costs is one example of the many issues that require healthy dialogue and understanding between carriers and shippers. How would you describe the state of the shipper-carrier relationship right now? Any areas in particular that need improvement?
Welch: I think the shipper-carrier relationship is better than it has been in the past. Certainly the amount of transition that has occurred in the transportation industry with a lot of carriers going out of business and the supply chain process and distribution patterns changing has required carriers and shippers to work closer together than they ever have. But the system that everybody uses to price shipments is antiquated. We are a deregulated industry that is still using pricing mechanisms from a regulated industry and somehow over time that has to change. I hope by building a better shipper-carrier relationship we can hopefully make progress.