UPS Freight Acquisition Impact on LTL Shippers and Turbulence in the Ocean Markets
Feb 3, 2021
BY MIKE REGAN, CO-FOUNDER OF TRANZACT
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Now that the shock of TFI’s acquisition of UPS Freight has worn off, shippers are starting to focus on how this transaction will affect the LTL marketplace in the near and long term.
First, it's important to note that in their presentation to the marketplace, UPS noted that UPS Freight had revenues of $3.2 billion dollars and a margin around 1%. Even in 2018, arguably one of the strongest years for trucking in recent memory, their margins were just above 2%. This isn’t anywhere close to the margins that other LTL carriers like Old Dominion or XPO are getting.
And make no mistake about it, TFI International isn’t spending $800 million to earn such narrow margins. In fact, the CEO of TFI, Alain Bedard, has let it be known that he expects the margins from this acquisition to be at least 10% within five years. That leads to two very important questions: Why were UPS Freight’s margins so low? And how are they going to increase their margins?
A key factor impacting UPS Freight’s margins was the fact that UPS used a bundling strategy that paired UPS Freight with their parcel offerings. In essence, in certain cases, they were using UPS Freight as a loss leader. This won't be the case at TFI International.
Practically speaking, how will TFI improve those margins? They can either become much more efficient, lower their costs, increase their rates or execute a combination of these factors. Since UPS Freight is a union carrier, how will TFI’s relationship with the union affect their cost structure? TFI is familiar with unions and a percentage of their current labor force is currently unionized, which makes acceptance of the large group of Teamsters from UPS Freight they'll acquire more likely.
That said, shippers will be paying attention to TFI’s future negotiations with the unions. But given the value of retaining workers who know the business, and the tight logistics labor market we’ve been experiencing, there are legitimate questions about whether TFI will achieve significant cost savings on the labor side of the equation – especially in light of the fact that they will need those associates to provide the reliable service that made UPS Freight a valuable carrier.
Can TFI improve margins by making the carrier more efficient? Perhaps. But this march to better efficiency can take time. That is why in looking forward, it is likely that rate increases are expected to be a part of TFI’s margin enhancement formula. One hope for shippers is that TFI will mitigate potential increases by finding alternatives or creating better efficiencies from a larger network.
Ocean Obstacles Continue
Ocean carriers are providing notices to their customers letting them know the next 4-6 weeks could be challenging. The Chinese New Year will soon take place on February 12 and China is still experiencing some significant issues with COVID. Currently, their factories aren’t yet producing to full capacity, and they're also seeing issues at the west coast ports making it difficult to get goods through. If you're a shipper with ocean freight, consider planning even further in advance than anticipated. And if you’d like to talk with one of our ocean experts, give us a call at 630-833-0890 or send us an email.