Cost Reductions Will Help Restore Profits at Con-way Freight, Company Exec Says

This story appears in the Sept. 20 print edition of Transport Topics.

NEW YORK — Con-way Freight expects to achieve progress on restoring profit margins through cost reduction and efficiency efforts in the upcoming quarters, the chief financial officer of its parent company said.

Speaking Sept. 9 at a Dahlman Rose investor conference here, Con-way Inc.’s CFO, Stephen Bruffett, said the unit will achieve cost reductions faster than it can raise prices, a process that may not be completed until sometime next year.

He made his speech about the Menlo Park, Calif.-based company’s less-than-truckload unit less than a month after President John Labrie left the company. Labrie’s abrupt departure on Aug. 24 followed a second-quarter LTL earnings performance that featured falling profits and a sharp spike in expenses in a period when most rivals’ results improved.

“Even in an economy that is going sideways, it is time to increase pricing,” Bruffett said, acknowledging that Con-way was one of most aggressive price discounters last year.

“That game has been played,” he said. “It’s back to more normal behavior now. We are at the forefront now in trying to restore that pricing discipline.”

In this year’s second quarter, Con-way’s revenue per 100 pounds of freight fell to $15.06, nearly 20% below pre-recession levels, and the operating ratio skidded to 97.9, much worse than the 92.5 in last year’s second quarter or 90.8 in that period of 2008.

“It is much easier to lower prices than it is to raise them,” Bruffett said. “It will take some time to get back. We can address the cost and efficiency side in a quarter or two.”

“There has been so much change at the company,” said Dahlman Rose analyst Jason Seidl. “It has needed to change. Things are getting better but they are getting better slowly.”

“It is encouraging to me that the two carriers that were seemingly causing all of the pricing angst in 2009 — Con-way and FedEx Freight — are now reversing course and trying to raise rates,” he said. “That will only lead to a healthier LTL industry.”

“We perhaps lost our balance a little bit with a couple of surges that created some operating inefficiencies,” Bruffett said. “There was more freight than the network was built for. We tried to be too many things to too many people.”

“We are working through a sustainable yield improvement program,” Bruffett said. “It’s better to build around a more sustainable and rational pricing program,” he added. “It’s about shifting our mentality to raise prices as we revisit contracts. It is not a Herculean task. The pricing admittedly will take time.”

“The environment is right for price increases,” he said. “Tonnage has been moving through the LTL networks. To say [the environment] is right for big price increases is not the case.”

Industry consultant Satish Jindel urged Con-way to step up the pace.

“They make it sound like it is a difficult task to ask the right price for their freight,” said Jindel, who leads SJ Consulting, Sewickley, Pa. “They should be able to do it in a matter of weeks. It should have been by now.”

He added, “All they have to do is shed some of that low tonnage. Give those customers 30 days’ notice. That’s the basics.”

Asked if Con-way can again reduce its operating ratio below 90, which last occurred in 2006, Bruffett responded that the real question was how much the entire industry could improve profits.

“It will be a challenge for the industry to get back to the 2005 and 2006 margins,” he said. “If the industry can get there, I think Con-way can.”

LTL carrier profits rose at that time because of tight capacity, a stronger economy and a driver shortage in the truckload sector that diverted freight to LTL fleets.