Consolidated Freightways' bankruptcy filing brings back memories of those that accompanied the industry's deregulation in the early 1980s. Although the circumstances are different now than two decades ago, the fundamental issues remain the same.
No matter what the final analysis yields as the cause of the CF bankruptcy, the bottom line is the carrier was not able to adjust its operations and financial structure in time to meet debt obligations.
Likewise, many carriers that went bankrupt just after deregulation had not adjusted their financial structures or operations fast enough to survive the rate declines and interest rate bubble of the early 1980s. So the lesson here is: Do not underestimate the importance of keeping on top of operating standards and financial benchmarks to ensure that operations can continue.
As far as CF is concerned, the immediate question is “How will the freight be moved?” It appears unlikely that the three or four largest LTL carriers still out there will be able to handle all the freight that CF was moving. In fact, truckload operations with have to be used for linehaul loads, and regional LTL carriers will have to expand into short-haul volumes in order keep this freight moving. In addition, small-package carriers will have to step in to handle some of the lighter weight freight.
Over the next month or two, there is likely to be some shortage of capacity in lanes that were primarily served by CF. The total amount of freight that's likely to be disrupted is minor, but it won't be minor to the shippers or receivers involved. Fortunately, the trucking industry is so flexible that service will quickly be provided as before, assuming the market is willing to bear the cost.
This brings us to the issue of appropriate shipping costs. One danger is that, in the rush to capture more volume, carriers may take on the new freight at the existing rates. Since it's unlikely that all freight moved by CF was done so at a profitable rate, shippers served by CF should expect some rate increases.
An economist might argue that the additional freight should be handled at marginal cost, plus a modest margin. But this is not appropriate. It sets up a pricing differential that cannot be sustained, since it will lead to reduced profits and misallocation of equipment and drivers over time. Shippers should be willing to pay a fair rate to move their goods — not the low rates they may have been used to from CF.
The group that is likely to be hurt the most by the CF shutdown is that of small shippers and receivers. Small shippers may have a hard time catching the attention of LTL carriers, both because of the CF freight diversion to this segment and the approach of the busy holiday shipping season.
There are at least two lessons to be learned from the loss of this venerable giant. First, be absolutely sure that you pay attention to basic financial ratios. Once they get out of line, they are very difficult to bring back into place. Second, don't be afraid to walk away from bad freight.
