In The News

Pilot, Flying J merger appears to be home run, but some are crying foul

A NEWS ANALYSIS

The merger of Pilot and Flying J is a home run.

The basic business of selling fuel improved during the second quarter.  The total gross profit on fuel sales showed a hefty increase as the margin per gallon increased significantly along with a modest rise in the number of gallons pumped.

Likewise, profits on non-fuel revenues improved as a result of increased traffic.

Pilot also increased the “street prices” on all Flying J locations by 6 cents to 8 cents per gallon.  This will result in at least $100 million of additional profit.

Transportation Clearning House (TCH), now 50 percent owned by Pilot Flying J (PFJ), is a major growth business.  Its TCH fuel card is now accepted at all PFJ locations.  TCH is also actively recruiting new trucking company customers by linking fuel discounts to the use of the card.

TCH has also increased the transaction fee, from $1 a transaction to 1.65 percent to 1.95 percent per transaction, resulting in additional revenue of between $15 and $25 million, according to Oil Express.

In addition, PFJ has entered into a transaction with Denny’s Corporation to operate the food operations at most Flying J locations.  Denny’s will pay PFJ $250,000 for each location, a total of about $35 to $40 million, and will invest $200,000 to $300,000 in upgrades on each location.   Denny’s will pay rent of 7 percent to 8 percent of sales. Overall, this arrangement is expected to improve PFJ’s cash flow by $15 million per year.

But not everyone is a happy trucker.

Owner operators are upset about the higher street prices.  And past customers are concerned about the higher fees for such services as check cashing and showers, the new food service arrangements, and the lower level of personalized service as the Flying J locations are “pilotized.”

National and regional trucking companies also feel threatened as they are being pressured by PFJ’s aggressive sales representatives to switch to the TCH fuel card in order to receive most favored nation pricing.

They are also concerned about higher diesel fuel prices given PFJ’s market dominance, especially now that the previous low cost supplier, Flying J, has been absorbed into the Pilot network.

And independent operators and smaller chains feel threatened by PFJ and its huge marketing muscle as evidenced by the letters to the Federal Trade Commission from AMBEST, North American Truck Stop Network, Professional Transportation Partners, and TravelCenters of America, all of which opposed the proposed Consent Agreement permitting the acquisition of Flying J’s truck stops by Pilot.

These operators are concerned that PFJ, which now controls over 50 percent of the diesel fuel market for long haul interstate trucking companies, will use its market muscle and pricing power to increase its already dominant market share.

PFJ is also increasing its market share by making selective acquisitions of independent operators that have a strong local market presence or through its Fuel Island Leasing Program where it controls the marketing and pricing of diesel fuel at a selected location.

These operators are also concerned that PFJ is discriminating against their locations, charging them higher TCH fuel card fees compared to PFJ locations, thereby hurting their relative profitability. They are also concerned that TCH might share highly sensitive information with PFJ.

All these issues stem from the merger of Pilot, the largest truck stop operator, and Flying J, the second largest seller of over the road diesel fuel.  And while the FTC determined that there were some significant antitrust issues, the forced divestiture of 26 lower performing locations represented only 4.5 percent of the combined locations and even a lesser amount of the fuel sales. In essence, the major market participants are now PFJ and TA/Petro, with the leveraged Love’s Travel Stops a distant third.

At the same time, PFJ is being very aggressive in acquiring or controlling new locations and using its market power to bundle sales with its TCH card.

Several of the complaints to the FTC claim that its analysis was superficial and flawed.  This was also asserted by Dennis Kucinich, a powerful seven term Democratic Congressman from Cleveland, who also commented to the FTC on whether the divestiture of 26 locations to a regional operator was meaningful.

Perhaps these serious concerns are why the FTC has not confirmed the proposed Consent Agreement subsequent to the end of the comment period on July 30?     

There is speculation that the FTC will conduct a more thorough and formal review of the competitive impact of this merger.  This may result in additional restrictions on PFJ, such as limiting future acquisitions or franchising of independent truck stops, prohibiting discriminatory pricing with respect to the TCH fuel card, assuring the confidentiality of customer information for users of the TCH fuel card, and prohibiting the bundling of its services with pricing discounts.  In addition, the FTC may consider whether additional divestitures are required.

Of course, the FTC could require that the merger be unwound, but it would be very hard to put Humpty Dumpty back together again now that the Flying J’s headquarters staff has been dismantled.

If the FTC reopens this case, the politics in Washington and the interaction between the truck stop operators, the trucking companies, and the TCH fuel card competitors and all their lawyers and lobbyists should make for interesting reading in the coming months.

Jack Humphreville can be contacted to comment on this article at [email protected] . He is also affiliated with Recycler Classifieds (www.recycler.com ).

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