BusinessTN

Few industries that hit the economic pothole of 2001 sustained the crippling damage that trucking did. With fuel prices up and manufacturing down, the coast-to-coast freight market moved to rail—and stayed there. “If you were in long-haul trucking, you had to look for other things to do,” says Donald Broughton, industry analyst for A.G. Edwards & Sons, “and two of the largest long-haul-focus carriers in the United States were U.S. Xpress Enterprises and Covenant.

The permanent change has forced Chattanooga’s twin truckload companies to seek alternate routes to profitability, creating divergence in what had been strikingly parallel paths.

U.S. Xpress CEO and Co-chairman Max Fuller and Covenant Transport CEO David Parker are stepbrothers raised in the business by Clyde Fuller, who owned Southwest Motor Freight. In 1985, Fuller’s son and stepson founded competing companies providing cross-country service primarily to carpet and textile manufacturers. It was a cordial rivalry; the stepbrothers co-owned a less-than-truckload division to flesh out their companies’ rapidly expanding business. In 1994, U.S. Xpress and Covenant went public within weeks of one another; a year later, both announced plans to build new headquarters on opposite sides of the city. By 1997 Chattanooga was home to two of the country’s 50 top-grossing carriers.

But by 2001, sluggish freight demand and skyrocketing oil prices had taken a heavy toll on trucking profits. While terrorism and severe weather helped fuel the loss, Fuller says he and Co-chairman Patrick Quinn, foreseeing permanent change, mapped a plan to move U.S. Xpress’s assets out of rail’s reach.

Through aggressive acquisitions, U.S. Xpress grew its 5,000-truck fleet by half and beefed up regional and dedicated service—two of 10 divisions the company now operates. Where some divisions, like airport-to-airport service, have disappointed, others, like an innovative partnership with the railways for expedited shipping, show promise. Fuller says he expects diversity and growth to drive U.S. Xpress to $2 billion in sales by 2010, “even if the economy goes in the soup this year.”

Meanwhile, the carrier has reduced its long-haul fleet to 500 trucks—a tenth its size six years ago. U.S. Xpress now considers the long-haul a “niche market,” Fuller explains, and has repositioned itself to match the hard new rule of trucking:

“Unless fuel prices go way down and equipment prices go way down, you’re not going to see that freight come back to the trucks. Then it would be a short-term blip, and it’s right back to the rails.”

If Covenant was as quick as U.S. Xpress to recognize that new reality, it was slower to shift gears. Having regained profitability in late 2002, Covenant spent the next three years maintaining that profit margin by fastidiously controlling its fleet size. Finally, in 2005, CEO David Parker announced his own, more cautious diversification plan. While the carrier has kept a quarter of its 3,600 trucks in long haul, its newer, refrigerated division is now almost as large, and another 17% of its fleet are dedicated vehicles. But the hub of Covenant’s realignment strategy is its regional operations, a division further enhanced by the company’s $40 million acquisition last year of Nashville-based Star Transportation.

Covenant has traveled this road before. In 1989 and 1990, the company dabbled in the short-haul market in the Southeast and Midwest, and Parker later directly attributed those red-ink years to the company’s detour from its long-haul expertise. But like almost everything else in the trucking industry, the regional landscape has changed, and A.G. Edwards’ Broughton considers Covenant’s latest investment in the short-haul market a wise one.

"I know regional is the fastest-growing segment of truckload,” he says. “It’s prudent that they expand their operations in that area.”

Relative to U.S. Xpress, Covenant is in the early stages of what analysts say is typically a multi-year journey, with inevitable bumps along the way—late last year the carrier announced it would cut 150 positions and close two terminals as it concentrates assets in its more lucrative divisions. Covenant declined an interview for this story but has downplayed still-shaky quarterly reports as less important than the “long-term success” it expects realignment to bring.

If stability’s the destination, Covenant may be moving in the slow lane compared to its U.S. Xpress. Even so, Broughton predicts, both carriers can get there from here.