TA CEO's 'Fierce' Talk About Pilot Flying J

Net income takes hit as probe into rival's alleged fuel rebate scam intensifies competition

Greg Lindenberg, Editor, CSP

WESTLAKE, Ohio -- In announcing its "disappointing" financial results for the three- and six-month periods ending June 30, 2013, TravelCenters of America LLC (TA) CEO Thomas O'Brien anticipated analysts' most pressing question: What effect has the federal investigation into rival truckstop chain Pilot Flying J's alleged fuel rebate scam had on TA's business?

Knoxville, Tenn.-based Pilot Flying J has been the subject of intense scrutiny since April 15, when agents of the FBI and the IRS raided its headquarters and seized documents, emails and computer files related to the alleged scheme to cheat trucking-company customers out of rebates due to them for purchasing diesel fuel at the chain's more than 650 truckstops.

"TA and Pilot Flying J are fiercely competitive," O'Brien said during the company's earnings call. "When a competitor comes under pressure, that competitor will do what it can to defend against and to mitigate that negative impact of that pressure. It's our job to anticipate, to counteract and to aggressively defend against the potential negative impact on our business of our competitor's responses to turmoil. In plain language, when our competitor feels pressure, it is likely to do what it can to retain its business volume. And as a result, TA has to do what it can to defend its own business volume."

He added, "While TA is sparing no effort to win best business from our competitors, I'd like to lay to rest what I perceive as a misperception by some as a possible impact to the allegations against Pilot Flying J. Our observation is that relationships with customers tend to be sticky in an industry like ours that has so few major participants. The decisions involved for our customers to change suppliers in such an industry are carefully considered. And so long as customers continue to believe in the financial viability of each of their potential suppliers, the turmoil that surrounds one of those suppliers is less likely to have an impact on the customer's decisions. This is all a long way of saying that for those of you who have asked, my belief is that the future scenario that favors TA the most is the one that brings that turmoil to a rapid conclusion. That said, during that turmoil's pendency, TA will continue to act to vigorously defend and improve its own business."

He concluded, "It's a mistake to think that our largest competitor is not in a position to counteract those moves. ... It's not as if we're fighting an unarmed person."

Net income for TA's second-quarter 2013 was $16 million, a $14 million decrease from the prior year's quarter. While total revenue again bested $2 billion for the quarter, total retail fuel volume increased almost 2% while nonfuel revenue increased nearly 9%.

O'Brien attributed the decline in net income in part to the "fierce" competition from Pilot Flying J.

Same-site fuel margin in the 2013 second quarter declined by about $11 million, "a reflection of, principally, lower retail margins as a result of pressure from some of our principal competitor's efforts to retain or gain volume as a result of the current turmoil affecting our largest competitor and to a lesser extent, a modest volume decline resulting from fuel conservation efforts by our customers," he said.

Another factor, he said, was that same-site nonfuel margin oversight level operating expenses in the 2013 second quarter declined by about $2 million.

"Substantially, all of this impact can be attributed to changes in our tire business, which, despite unit sales growth, has seen per-unit margin shrink over the past year due to industry-wide changes and tire pricing. We have, to date, been successful in passing those pricing changes to our customers principally due to increasing competition in the sale of tires to the trucking industry, said O'Brien.

Both of these factors "can be overcome by continued focus on [the company's] current plans," he said.

O'Brien said TA continued "to press the advantages we have over our competition that come from a wider scope of operations and our significant location size advantage," citing its Road Squad Connect emergency roadside repair business, which can respond to emergency repair calls anywhere in the United States. That business call volume was up 23% during the second quarter 2013 versus the prior year.

He also said that the large size of the company's parking lots has allowed it "to begin to effectively monetize that asset by offering ... customers a new tool in their quest for increased miles per truck despite increased regulatory requirements for driver rest periods. [The] reserve parking program allows the driver to reserve a parking spot, eliminating the need to plan a cushion of hours in his or her day to simply look for parking."

During the second quarter, TA reserved 48,000 parking spaces at 205 locations, up from 165 reservations at one location during the 2012 quarter when the reserve program was in its infancy.

In terms of growth and expansion of the TA-Petro network, the company has purchased six travel centers so far in 2013 for an aggregate investment of $28 million. It has also entered intro agreements to purchase two other travel centers for $4.5 million that it expects to close this year. And during the period, it completed the construction of its Gary, Ind., location along one of the busiest sections of interstate highway in the country. It also opened two new truck repair facilities at locations that it acquired in 2011 and continued various expansions during the quarter, making renovations, improvements and additions.

As of June 30, 2013, Westlake, Ohio-based TA's business included 247 locations in 42 states and in Canada operating primarily under the TravelCenters of America, TA, Petro Stopping Centers or Petro travel center brands.