Consolidated Freightways to Buy Emery, Creating U.S.’ Biggest Heavy Cargo Shipper

Consolidated Freightways agreed Monday to buy its troubled rival, Emery Air Freight, for $230 million in a deal that signals further consolidation in the intensely competitive air cargo business.

Analysts said the merger, which must be approved by federal regulators and the shareholders of both firms, would give Consolidated Freightways an extensive international network of air routes, an impressive customer list and Emery’s giant cargo hub in Dayton, Ohio.

For Emery, the merger ends its struggle to remain competitive after its fateful merger with money-losing Purolator Courier two years ago. That merger, aimed at gaining a share of the small-package delivery business for Emery, has not been a success, analysts said.

“Emery was not going to make it on its own,” said air cargo analyst George V. Robertson with Alex. Brown & Sons, a Baltimore investment firm. “That’s why it was sold.”

The marriage of Consolidated and Emery, headquartered in Wilton, Conn., would create a giant shipping company with annual revenue of about $4 billion and air cargo revenue of about $1.6 billion. Although Consolidated is the larger, more profitable company, Emery’s air cargo business is three times the size of Consolidated’s. Consolidated, based in Menlo Park, has been known mainly as a trucking firm.

In the highly competitive domestic air cargo business, the new company, to be named “Emery Worldwide, a CF Company,” would rank third behind Federal Express--which recently bought the Flying Tiger air cargo line--and United Parcel Service.

Emery and Consolidated Freightways signed a definitive merger agreement in which Consolidated would pay $7.75 a share of Emery common stock and $21.10 a share of preferred stock.

Common shares in Emery, which provides worldwide air courier and air cargo services, rose $1.50 to $7.625 on the New York Stock Exchange after the offer was made public. However, Consolidated’s shares fell $1.875 on the New York Stock Exchange to $32.875, reflecting investors’ concerns.

It will take a year and maybe longer for Consolidated to make Emery’s operations profitable, analysts said. In the meantime, Consolidated’s earnings will suffer as it absorbs and seeks to stem Emery’s losses.

The combination of the two firms would create by far the largest heavy cargo shipper in the United States. The merged company would have domestic cargo shipments worth $1 billion a year. The next largest heavy freight specialist is Burlington Northern, with domestic cargo shipments of about $320 million, according to the Colography Group, a transportation consulting firm headquartered in Marietta, Ga.

The merger is the latest in a string of business combinations in the air cargo industry, which has been plagued by overcapacity and depressed profits. Last December, shipping giant Federal Express agreed to buy Tiger International, the parent of Los Angeles-based Flying Tiger, for $880 million, in a move that would create the world’s largest air cargo concern. That merger has not received final government approval.

Earlier, smaller freight forwarders had merged, including WTC International of Torrance, which was merged into Burlington Air Express, a larger air cargo carrier based in Irvine.

Traditional air cargo carriers have had a hard time making money recently, even though air freight shipments have increased. They have faced increased competition not only from freight forwarders--which arrange air cargo shipments on planes owned by others--but from passenger airlines as well. The passenger airlines can frequently charge low rates for air cargo because they are not dependent on cargo to produce profits.

Most analysts said the merger of Emery into Consolidated Freightways will not immediately help the industry’s profitability. “The merger won’t reduce a significant amount of capacity or increase the amount of pounds shipped,” said Theodore R. Scherck, president of the Colography Group. “There is still too much capacity for too little freight.”

Consolidated said the merger allows it to cancel a $250-million expansion plan that called for it to set up its own international air route network and build a hub in Indianapolis. With the merger, “we get 45 foreign countries, compared to a dozen or so that we have now,” said James Allen, a spokesman for Consolidated.

Consolidated had tried to buy Emery last November, Allen confirmed, but Emery was busy trying to refinance its debt. Emery completed the refinancing in November. The company reported a $35.4-million loss on $956.2 million in revenue for the first nine months of 1988.

Consolidated reported income of $113.2 million on revenue of $2.7 billion for 1988. Its air cargo business had operating profit of $10.2 million on revenue of $389 million.

Analysts said Emery, the nation’s largest heavy freight carrier, was a troubled company before it acquired Purolator Courier. Robertson, the Alex. Brown analyst, said Emery’s customer service had slipped and that it had lost some business to competitors.

Its effort to enter the highly competitive small-package delivery business by buying Purolator only caused more problems. Purolator’s delivery system was “not profitable and poorly organized,” said Edwin C. Laird, head of Air Cargo Management Group, a consulting firm in Seattle.

CONSOLIDATION IN THE AIR CARGO BUSINESS Burlington Northern buys WTC, a Torrance air freight forwarder, in July, 1987.

Emery Air Freight buys Purolater Courier for $302 million in August, 1987.

LEP Transport buys Profit Freight Systems of Atlanta in February, 1988.

Federal Express acquires Tiger International for $880 million in December, 1988.

Consolidated Freightways makes $230-million offer for Emery Air Freight in February, 1988.