THE INTERLINK DEBACLE - A LESSON FOR THE TRUCKING INDUSTRY?

By: Micheline S. Tansey

Many carriers commented on our news release with regards to the Interlink bankruptcy in early July. All but one of the comments were extremely favorable and many indicated they were reproducing our article for distribution to sales representatives, customers, etc.. The one negative comment came from a former employee of Interlink who anonymously, but very eloquently, stated his opinion that our theory that pricing was the “culprit” in Interlink’s downfall was not completely factual.

I want to share some of these comments with you as they are very appropriate. (Since the author is anonymous I could not ask for his permission so I am taking the liberty to quote him.)

• Yes, low prices were a factor. These low prices were carry-overs from the 1990-1992 era when Interlink (then CP) embarked on a volume at any cost strategy to gain market dominance. Sales contributed to bringing on $10M to $25M/year accounts with O/R’s that probably helped in breaking-even on some months. Corporate accounts had the volumes that were required to help meet monthly revenue targets, however their contribution to the overall operating ratio was questionable.
• Competition: There is a variety of cost structure carriers (i.e. brokers, L, freight forwarders, etc.) who had pricing similar or lower than Interlink’s. The mirror should be turned toward the stone-throwers before casting/summarizing a competitor’s pricing strategy.
• Costing Accounts: Interlink’s volumes will fall on the rest of the industry’s trucks. Pricing/Costing Departments will find that a large percentage will fit their particular needs and that ALL WAS NOT LOW.

In the opinion of this former Interlink employee the core reason why Interlink did not succeed is that “Employee Ownership” theorists believed that all departments and employees would work hand-in-hand and build on something new did not materialize. The majority of the work force at all levels did not buy into the concept.

There are many lessons to be learned here.

First - As is the case whenever a carrier ceases operations his competitors scramble to “get the freight” and many agree to honour the defunct carrier’s rates with the proviso that rates will be reviewed at a later date. A few even go as far as offering an even lower rate. The real question is WHEN will the carrier have an opportunity to review it all? Often, it is found the account does not produce a profit but does make a contribution to overhead so it is kept with the hopes it will eventually make a profit. The result is often too high a proportion of marginal freight that the carrier feels he can’t afford to de-market. More than five years after Interlink lowered rates to attract new business, most of these accounts still were not making a profit.

Second - It is also true that no two carriers cost structures are the same. Carriers must be cognizant of this and not attempt to match the prices of all competitors. The third lesson is that unless all employees and management are working towards the same goal i.e. profit, success can be elusive.

To measure the impact of the Interlink bankruptcy on the industry’s capacity as well as profitability, we are running a short-term monthly survey which we feel will be valuable in providing insights as well as giving the survey participants a benchmark to evaluate their performance.

Thank you for participating.

WESTERN CANADA INFORMATION SESSIONS

We recently held information sessions in Vancouver, Calgary, Saskatoon and Winnipeg and are pleased with the outcome. While the attendance was not as good as expected at some of the meetings, we nevertheless gained a lot of insights into the motor carrier operations in these markets.

The purpose of these meetings was:

• Introduce FCA and NFTB and familiarize the carriers with the products, services and software we offer to the industry as well as the forum we provide for the discussion of common problems;
• Establish a rapport with the carriers domiciled in Western Canada and learn more about the peculiarities of their markets;
• With economic deregulation now taking place in several of the Western Canadian provinces, there will be open entry and rates will no longer be set by Provincial Boards. The time is now opportune to proceed with the establishment of baseline rates, both intra and inter provincially, that will provide the industry and its customers with a cost-effective method of pricing.
• Broaden the participation in our benchmarking surveys to give a better representation throughout Canada as well as provide the carriers with a benchmark to evaluate their performance.

While the carrier representatives in every province were very receptive to the concept of baseline rates, some of the provinces are not yet ready to proceed while others want the rate structures as soon as possible. (The Saskatchewan rates are addressed in this newsletter.)

We will be keeping in close contact with the carriers we met as well as those who could not be in attendance to pursue our objectives in this market.

For any information contact Micheline Tansey or Ken Leising at (800) 559-7421 ext. 210 or 203.

WHAT'S WRONG WITH FAK RATES ANYWAY?

During our recent trip through western Canada we discussed baseline rates with numerous carriers. The discussion with each carrier at some point turned to class (density) vs. FAK rates. Historically within Canada FAK rates were predominant even on long haul traffic. The FAK level was premised on freight of 10 lbs./cu.ft. with the lighter freight being identified on the dock and penalized accordingly. Identifying freight which is less than 10 lbs./cu.ft. is no easy task. To make matters worse there are also many rate agreements based on freight of 20 or 30 lbs./cu.ft.. What happens if the customers traffic mix changes from 30 to 15 lbs./cu.ft., will that be caught on the dock? A short haul carrier who seldom, if ever, cubes out a trailer may decide that he can live with the uncertainty. A carrier who handles medium to long haul traffic cannot.

The goal of any base level should be to provide consistent profitability at each weight group and for each class or density group. This will protect the carrier from shifts in traffic mix that would otherwise reduce or eliminate any profit. An FAK structure which does not always penalize lighter density freight will attract lighter density freight. The differences in cost can be dramatic.

The following table is based on a 1,300 lb. palletized shipment moving 1,300 miles. The Transportation Consulting Group’s LTL Costing Model, recognized as the best in the industry, was used to develop the differences in cost based on density. In this example the operating ratio for traffic moving under FAK rates can vary by 40 points. The difference in operating ratio for a class (density) rate scale are much smaller, in this case only 4 points. Obviously a shift in traffic mix for an FAK carrier can be devastating.

Example of FAK vs. Class (Density)

Type of Tariff	9lbs./cu.ft. CI 100	12 lbs./cu.ft. CI 85	35 lbs./cu.ft. CI 55
	Operating Ratio
FAK Tariff	1.02	0.89	0.62
Class (Density) Tariff	0.88	0.89	0.92

If your current rate level is FAK, or a density scale that does not fully recognize the cost differentials, it is imperative that you continuously analyze your customer’s traffic mix. This is most important for customers who enjoy a large discount based on a high average freight density. In our next newsletter we will look at cost differentials by weight group.

INTRA SASKATCHEWAN TARIFF UNDER DEVELOPMENT

As a result of a meeting held July 17 in Saskatoon, with various Saskatchewan carriers, FCA has undertaken the development of a new Intra-Provincial Tariff for Saskatchewan.

The initial publication will mirror the FAK mileage structure formerly provided by the Saskatchewan Highway Board with the following changes:

• Postal code groupings will be incorporated into the rate structure.
• Rates will be converted to a cents per 100 pounds basis for the usual FCA weight groups, with a shipment minimum charge.
• Rates will be adjusted to offset cost increases since the last adjustment of SK rates by the Highway Board.
• A division of revenue guide will be provided, again closely mirroring the mileage based divisions found in interline Tariff #22.
• Although carriers recognized the desirability to adopt rates that better reflect cost relationships, it was decided it would be best to move in that direction one step at a time rather than in one fell swoop.

The Saskatchewan Trucking Association is assisting in getting the word out to local SK carriers of this project. If enough interest is shown, another meeting will be held in September to review the rates, allowing enough time to incorporate any changes for an effective date of January 1, 1998. If initial interest is minimal the tariff will be developed through direct contact with interested carriers.

Any assistance our member carriers can provide in promoting the Tariff in Saskatchewan will be appreciated. Questions on this matter should be referred to Ken Leising at (800) 559-7421 ext. 203.

EXPANSION OF THROUGH RATE APPLICATION FOR WESTERN CANADA

Current through class rates, between ON/QC and Western Canada (FCA Tariff 501) and between US and Western Canada (NFTB Tariff 525) are restricted to a select group of points in western Canada. The western points with rate application reflect the points served by member carriers at the time the tariffs were developed. With deregulation in the Western provinces opening the area to more carriers, it now seems more practical to expand through rate coverage.

The NFTB General Rate Committee has asked the staff to research the effect of adopting NFTB 2000 groupings in tariff 525 to provide blanket coverage throughout the west. Major western points would retain their current 525 rate level, while many of the smaller locations currently with rates in 525 would change to the NFTB 2000 rate level. A mailing has gone to members of the Committee demonstrating the rate changes that would occur to these locations, asking for comments.

Similarly, the staff is also looking at providing blanket rate coverage in FCA Tariff 501 for Western Canada. In the near future FCA participants in 501 will be provided with information on the new rates, again asking for comments.

Any member carrier with interest in either of these proposed rate changes can get further information by calling Ken Leising @ (800)559-7421 ext. 203.

NFTB TARIFF 505 RESTRUCTURE

The General Rate Committee has authorized a docket to restructure the rates between the USA and the Atlantic Provinces currently published in NFTB Tariff 505.

The restructure is deemed necessary due to the fact that the current rates are often lower than the rates for points in Quebec, despite the greater distance for the Atlantic point. This is due to the fact that the 505 rates were originally constructed by calculating combination rates over the Maine/New Brunswick border. The docket will call for a recalculation of the rates based on the combination of rates over Montreal, QC, using NFTB Tariffs 510, 515 or 520 for the US/Montreal rate and FCA Tariff 505 for the Montreal/Atlantic rate. An adjustment for currency will be applied to the FCA 505 rate. The resulting rates will, for the most part, result in increases over the current NFTB 505 rates, though sporadic reductions may also be found.

The restructure will be reviewed and put to a vote at the November GRC meeting. If approved, the new rates will be effective January 1, 1998.

TRUCKLOAD QUOTATION SYSTEM

As this article goes to print, we will be completing the development of our new TL Quotation System. Written for Windows and designed for small and midsize carriers providing TL service, the new Quotation System addresses problem areas common to most carriers.

• Simplifies price determination;
• Uses basic cost formulas and values to produce “compensatory” prices;
• Produces quotations with a professional design;
• Performs “what if” analysis for price analysis;
• Creates and maintains price quotes;
• Determines miles.

The TL Quotation System provides multiple functionality. The program essentially is a:

• Spot Quote Pricing Tool. It eliminates the headaches and reduce the time spent preparing prices for “spot quotes”. The TL program was designed to quickly calculate a compensatory price, based on cost assumptions and basic shipment characteristics. Calculated prices can be accepted, overwritten with a different price or the costs and shipment assumptions can be changed.
• Rate Quotation Management Tool. It facilitates the use of price quotes as sales leads and ends the frustration of misplaced or lost quotations. It retrieves prior quotes based on a variety of inputs and produces reports of quotations provided.
• Mileage Lookup Program. The System contains a proprietary database of mileage’s between all combinations of three character US zip and Canadian post codes. The System can also be integrated with ALK’s PC*Miler.

Additional information can be obtained from Warren Gawley at (800)559-7421 ext. 209.

NFTB ANUAL MEETING

The 1997 NFTB Annual Meeting is returning to San Diego, California from November 20 to November 23. A fixture on many companies’ list of ‘must attend’ functions, the meeting provides an opportunity for carriers to network, hold in-depth discussions on industry issues and become better acquainted with each other.

For a list of subjects click on subjects.

All interested parties are welcome to attend. To encourage participation, the fees to cover social costs are kept low, only $200 for non-members (NFTB members are FREE).

Companies with offices in Southern California or Arizona are encouraged to consider sending a representative.

To register or to obtain additional information about the meeting, contact Karen McSheffrey at (800) 559-7421 ext. 218.

TCG ANNOUNCES NEW TERMINAL P&L MODULE

INTRODUCTION

Treating individual freight terminals as separate profit centers for the purposes of evaluation has always suffered due to revenue allocation inequities. This is because the Terminal Profit and Loss (P&L) Statement relies on a fixed division of revenue (usually 50-50) between origin and destination freight terminal, as well as allocations of rehandling (breakbulk) costs and other non-terminal (linehaul) expenses which can be arbitrary. Since cost incurrance for specific shipments rarely occurs in the same ratio as the revenue split, Terminal P&L Statements will always mask the measurement of freight terminal performance and revenue quality.

Terminals with more inbound will ‘perform’ worse than terminals with more outbound. Terminals serving larger areas will ‘perform’ worse than terminals serving smaller areas. When measured using terminal P&L’s, terminals will look better or worse for these and a variety of other reasons solely to freight mix and type, and not to actual revenue quality or performance.

Many carriers recognize the inadequacies of the terminal P & L and even create adjustments to revenue splits at particular terminals to ‘patch up’ the obvious inadequacies of the reports.

TERMINAL P&L MODULE

Transportation Consulting Group announces a new module to its TRAFFIC Cost Information System which makes use of its ability to cost all traffic on an ongoing basis. This Terminal P&L Module creates Terminal P&L Statements by dividing the revenue on each individual shipment using standard cost as the basis. Thus, shipment-by-shipment, the terminal incurring the most cost will be allocated the most revenue and vice versa.

Terminals performing intermediate rehandling (breakbulk) operations will also receive a revenue allocation for this activity, rather than requiring complex accounting mechanisms to identify, split and ‘bill out’ these expenses to origin and destination terminals.

The Terminal P&L Module will make revenue allocations as part of the monthly TRAFFIC/CIS processing and produce a Terminal P&L Statement each month that is a far better measure of freight terminal performance than any overall revenue allocation method could produce.

For further information contact Dave Sirgey at (800) 559-7421 ext. 214.

TARIFF ADVISORY COMMITTEE AND QUÉBEC COMITÉ CONSULTATIF TO CONSIDER REVENUE NEED

Since its inception in 1988, FCA’s Tariff Advisory Committees TAC closely monitor the operating costs of motor carriers, market conditions and the financial position of the industry.

The TAC will meet in Montréal on September 3, 1997 to review increases in labour, non-labour and fuel costs as well as the analysis of the latest operating results. One of the aspects of the cost monitoring deals with compliance with more stringent safety standards and other regulatory requirements. We invite our members to FAX their comments or opinions on the need for rate increases or adjustments.

Your input is extremely valuable to us in developing the information necessary for our Committee to make a decision well founded in fact.

SMALLER SHIPMENTS SHOW POOR PERFORMANCE

On-time delivery of shipments under 10,000 pounds which essentially defines less-than-truckload shipments, showed overall on-time performance of just under 80 percent, according to a study completed for Logistics Management by Strategic Technologies Inc.

STI analysts examined a total of 16,901 shipments moving in 40 lanes between Sept. 1 and Nov. 29, 1996. The result was far below the service levels shippers have come to demand from their LTL carriers.

The problem is not universal. On-time performance in 12 of the 40 lanes came in at 95 percent or above, with seven lanes reporting 100-percent performance during the period. On five lanes, however, shipments arrived on schedule less than half the time.

If there is a silver lining to the overall performance, it’s this: On all but a handful of the worst-performing lanes, shipments average less than half a day late. In five lanes, shipments on average were more than one day late.

STI measures carriers’ on-time performance against their own published transit times. The table below gives a sampling of performance on key lanes around the USA.

Not surprising, on-time performance for shipments grater than 10,000 lbs. tracked at just under 91% for the same time period.

TRANSIT TIMES Three months, Sept. 1, 1996 - Nov. 29, 1996
Origin	Destination	Published	Actual	% on-time
Mira Loma, CA	Phoenix, AZ	1.49	1.83	79.2
Memphis, TN	Indianapolis, IN	2.92	2.69	99.9
Des Plaines, IL	Washington, DC	1.53	1.55	98.3
Mascot, TN	Charlotte, NC	1.15	1.40	83.3
Parsippany, NJ	Syracuse, NY	1.67	2.56	40.6
Atlanta, GA	Orlando, FL	1.41	2.69	49.3
Brooklyn, NY	Indianapolis, IN	2.93	2.92	100.0
Buffalo, NY	Rochester, NY	1.00	1.31	83.2
Edison, NJ	Norfolk, VA	2.30	3.57	30.6
Santa Fe Springs, CA	Boise, ID	3.63	4.86	23.7
Total Sample (16,901 shipments)				79.9

THE GST - A REVERSAL OF OPINION CLOSELY    AVERTED COULD HAVE COST INDUSTRY    MILLIONS

Prior to the implementation of the GST, FCA and NFTB met repeatedly with Revenue Canada to obtain formal opinions on the application or non-application of the GST on various types of charges and in various types of circumstances faced by general freight carriers on a day-to-day basis. These formal opinions were then published in our GST Handbook to provide carriers with guidelines so they could be in compliance with all the rules.

One of these rulings dealt with revenue adjustments or short payments. Because of the unique situation in our industry, Revenue Canada had opined carriers could claim GST input tax credits on unpaid balances written off without the issuance of a credit memo.

Late in 1996 Revenue Canada considered reversing this ruling as it feared this practice could be causing significant tax revenue leakage. It was even considered to make this reversal retroactive to 1991. It was revealed during our conversations with them that some carriers had been audited and had paid for the denial of GST input tax credits previously claimed without making mention that Revenue Canada had previously ruled otherwise (obviously non-member carriers).

We met with Revenue Canada to make them aware of the severe hardship such a reversal would cause our industry as well as the undue financial burden that would be occasioned if the issuance of credit memos for all revenue adjustments was mandated. They showed some appreciation for the difficulty such a reversal would cause and agreed to postpone their decision until more information relative to revenue adjustments could be developed.

FCA-NFTB ran a special survey in November 1996 and a supplemental survey in February 1997 the results of which were presented to Revenue Canada (preserving the confidentiality of individual carrier’s data of course). Because we had excellent cooperation from carriers (34 carriers representing 50% of total general freight carriers’ revenue) we were able to demonstrate the present method of handling input tax credits for short payments is not causing significant tax revenue losses for the Government. Revenue Canada decided to let the prior opinion stand.

Our thanks to all carriers who participated in this survey. Because of your cooperation, you and the rest of the industry will not be faced with potentially large GST liabilities.

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