Knight Refrigerated grows from ground up

Must be a virus — lots of people have caught it. According to reports, this particular strain of the trucking virus originated in a small community in rural Utah, Plain City along the eastern edge of the Great Salt Lake north of Salt Lake City. In addition to two pairs of Knight brothers, others in the area exposed to it include C R England and Jerry Moyes. The vectors are easy to follow — Moyes' father worked for Chester England, and all the Knights have worked for Moyes.

All have long, successful experience in trucking. Exposure apparently leads to both dry van and refrigerated trucking activity. The case of the two pairs of Knight brothers may be especially instructive. Kevin and Keith are brothers as are their cousins, Randy and Gary. In 1989, with an aggregate 80 years trucking experience among them, they founded Knight Transportation in Phoenix, Arizona, and had generated more than $13 million in revenue by the second year. Within 10 years, annual revenue reached $150 million generated by 1,200 trucks.

Knight was a dry van carrier at the time and remained so until July 2004, when Knight Refrigerated LLC, a wholly owned subsidiary of Knight Transportation was formed. In those formative years between the founding and the move to refrigerated operations, Knight Transportation became a publicly traded company in 1994 and reached the 1,000-employee milestone in 1998, less than 10 years after the start. A year after starting Knight Refrigerated, the company purchased Edwards Brothers Inc, a refrigerated truckload carrier based in Idaho Falls, Idaho. When purchased, Edwards Brothers had 161 tractors and 220 refrigerated trailers and was generating about $30 million a year. After operating under the Edwards Brothers name for a few months, the entire refrigerated organization formally became Knight Refrigerated on January 1, 2006.

Tiny by comparison

With a little more than one full year of operation behind it, Knight Refrigerated remains a tiny fraction of the entire Knight enterprise. For comparison purposes, Knight Transportation operates 3,100 tractors and 7,500 dry vans with 3,400 drivers at 22 service centers while Knight Refrigerated runs 260 tractors and 290 refrigerated trailers with 280 drivers based at three service centers. Knight Refrigerated shares a service center with Knight Transportation only at company headquarters in Phoenix. Even there, Knight Refrigerated operates in an administration building separate from Knight Transportation. The other two service centers are on the Edwards Brothers property in Idaho Falls and at a much smaller property that previously operated as an Edwards Brothers terminal in Green Bay, Wisconsin. For the company as a whole, facilities range in size from 75 acres at the headquarters in Phoenix to one acre of leased property in Reno, Nevada.

Knight Refrigerated will never match the size or revenue of its larger dry van sibling, Kevin Knight, chairman and CEO of all Knight enterprises says. In fact, revenue targets place Knight Refrigerated at somewhere between 10% and 15% the size of Knight Transportation. “We will size the company to fit the market it serves,” Knight says. “More importantly than size, we want the refrigerated operation to grow in a profitable, controlled way. Like Knight Transportation, we want it to have an operating ratio in the low 80s.”

For the immediate past fiscal year, Knight Transportation and its subsidiaries had revenue of roughly $499 million before fuel surcharges and $566.8 million with fuel surcharges included. This represented a substantial increase from non-surcharge revenue of $411.7 million the previous year and total revenue with surcharges of $442.3 million. Total operating ratio for 2005 and 2004 was 82.1. Excluding fuel surcharges, Knight Transportation posted an operating ratio of 80.7 in 2004 and improved it to 79.6 for 2005.

Beckoning market needs

Although refrigerated trucking has not been one of the most successful segments of the transportation industry for the past several years, Knight says the new operation was started because it was an opportunity to fill a need in the market. “A lot of quality capacity fell out of the refrigerated market between 2000 and 2003,” he says. “In the space of three years, the world changed with the demand for refrigerated capacity exceeding the availability considerably. By 2004, we sensed a strong opportunity to get into the refrigerated market, because we knew of customers who were having difficulty finding enough refrigerated trucking capacity. We honestly think of it as an opportunity, because, as far as we can tell, no other carrier has ever approached the refrigerated market with the same operational and financial disciplines that Knight Transportation had already proved would work in the dry van sector.”

In July 2004, when Knight Refrigerated was first introduced, the company could have had its choice of numerous existing refrigerated carriers to purchase. Knight Refrigerated was formed from the ground up as a separate, wholly owned subsidiary of Knight Transportation to fill a desire for an operation built on the same business model and living with the same corporate culture as the parent company, Knight says.

“When a company makes an acquisition, it purchases the culture of the operation it buys,” Knight says. “That existing culture can be changed, but doing so causes a lot of turmoil in the workforce and leads to less than optimal results, because workers and many managers are unsure of expectations. Founding a subsidiary and growing it organically make sure that the culture is in place from the beginning. Culture comes first; the results at Knight Transportation flow directly from the corporate culture.”

Organic growth first

Building Knight Refrigerated internally took place, because that is the way Knight operates. “We are an organic machine, long accustomed to developing our own people,” he says. “We have and will make acquisitions, but organic growth comes first. In addition to the culture clashes, acquisitions carry with them the difficulty of convincing the seller of the real value of a company.”

Knight Transportation already had some experience with refrigerated operations prior to founding Knight Refrigerated. The company had and still operates dedicated fleets for a major supermarket chain. Knight says that dedicated operations don't provide a lot of useful experience for operating a for-hire carrier, but that the fleets did give the company a feel for the equipment it would be using in Knight Refrigerated.

Entering the refrigerated market took place rather quickly, requiring only three to four months from the initial decision through final planning and implementation. Knight Refrigerated was not formally announced until about 30 days prior to opening, Knight says. “At that time, we started selling the service, attempting to line up freight so the company would be active from day one,” he says. “We opened for business first with lanes in Arizona and California serving our major shippers and handling a full range of refrigerated products. By competing in a respectful manner and finding business partners who need our services, we are sure that Knight Refrigerated can be just as successful in its market segment as Knight Transportation is in the dry van segment.”

Knight says Knight Refrigerated is expected to grow steadily just as Knight Transportation did in its early years. “We expect to open at least one new service center every year for the next three years,” he says. “Our growth rate should be in the 20% to 25% range for at least the next two to three years.”

Erick Kutter, president of Knight Refrigerated, moved to the company from Knight Transportation, having previously headed the service center in Katy, Texas, on the outskirts of Houston. Kutter says operations at Knight Refrigerated mirror the parent company to a great extent with a few notable exceptions “The steepest slope on the learning curve has been getting used to a much leaner fleet,” he says. “In the dry van operation, we had about 2.5 trailers for every tractor. In refrigerated, that ratio is much lower. Having fewer trailers to work with has taken getting used to.”

Produce to ice cream

Unlike many refrigerated truckload carriers, Knight Refrigerated can't rely on dry freight for a large part of its revenue. “We concentrate on refrigerated loads,” Kutter says. “About the only time we haul dry freight is to reposition a refrigerated trailer closer to a perishable load. Our freight runs from produce — mostly on extended contracts for chain stores — to ice cream. In fact, we think ice cream is good freight, because shippers and receivers load and unload it so quickly.”

While the business model for Knight Refrigerated copies that of Knight Transportation closely, the simple nature of refrigerated service requires some modifications. “Knight Transportation is designed as a medium to short haul regional truckload carrier operating from multiple service centers,” Knight says. “The lanes required to serve refrigerated shippers are longer, and as a result, Knight Refrigerated operates as a medium to long haul carrier, still based on regional service centers.”

Longer lanes, high density

Although the length of haul for Knight Refrigerated may be a little longer than the 580-mile average of Knight Transportation, the concept remains the same. The plan calls for the company to achieve a high level of equipment utilization by operating in predictable, high-density traffic lanes. Operations concentrate in a 750-mile radius of the service centers for dry van operations and a somewhat wider area for refrigerated freight. This concentration allows Knight to minimize empty miles while it provides a high level of capacity and service to shippers. Maintaining a high level of lane discipline allows the company to assign particular drivers and equipment to repetitive routes, increasing the level of customer service.

Basing service on regional centers allows Knight to offer service that is more flexible than rail or intermodal carriers. The size of Knight operations ensures that customers have access to more transportation capacity than is often available from its smaller competitors. In addition, the shorter hauls that result from regional operation are attractive to drivers, because they spend less time away from home while running the miles they want.

In addition to concentration on business surrounding the service centers, Knight has developed a plan to provide transportation services to customers outside its normal operating boundaries. To serve shippers with service requirements on lanes that fall outside Knight's geographic regions, the company instituted Knight Brokerage as a wholly owned subsidiary in July 2005. Knight Brokerage provides third party transportation service for both refrigerated and dry van shippers. It operates from three service centers, sharing facilities with Knight Refrigerated in Phoenix and Idaho Falls and with Knight Transportation in Kansas City.

The addition of the brokerage enables the company to expand service by providing third party capacity when the shipments do not fit the established regional patterns, Knight says.

Service is highly dependent on partnership arrangements with customers. For the company as a whole, the 25 largest customers accounted for 43% of total revenue in 2005. The top 10 customers made up 25% of revenue, and the top five provided 16% of revenue.

Vendor partnerships

Just as relationships with customers are based on partnerships, so are equipment purchases. Knight believes that a standardized fleet based on just a few equipment models allows the company to operate with a smaller parts inventory, reduce maintenance costs, and train drivers more easily. Both Knight Transportation and Knight Refrigerated operate with primary and secondary suppliers. At Knight Refrigerated, Peterbilt is the primary tractor vendor, and Volvo is the secondary supplier. At Knight Transportation, Volvo is primary with Peterbilt secondary. Utility is the primary refrigerated trailer vendor followed by Wabash National. Thermo King takes the primary spot for refrigeration units followed by Carrier Transicold. At Knight Transportation, Wabash National is the primary dry van supplier supplemented by Great Dane.

In line with driver preferences, tractors at Knight Refrigerated are Peterbilt Model 379 longnose conventionals. Most are powered by Cummins ISX-450 engines and use nine-speed Eaton Roadranger transmissions. Caterpillar C15 engines are used as well. Trailers are Utility 3000R refrigerated vans equipped with Thermo King SB-210 units.

Although Knight says the company does not buy equipment ahead of time to avoid imposition of environmental regulations, Knight fleets do operate young equipment. For both fleets, tractors average 1.9 years of age and are replaced on cycles ranging from 36 to 42 months. The trailer fleets average 4.3 years of age and are replaced on cycles of six to 10 years. Rapid tractor replacement helps attract drivers, stabilizes maintenance expense, because components normally are under warranty for the full service life, and maintains high utilization rates, because new equipment requires fewer maintenance hours.

Knight anticipates that equipment prices will increase steadily to pay for new exhaust emission technology. If prices rise high enough, the fleets may have to extend trade cycles; although, that will entail higher maintenance costs over the life of the equipment, he says. Engines manufactured since October 2002 use more fuel and need more maintenance than previous engines, and engines produced after January 2007 are expected to follow the same pattern. “Higher engine costs are simply the price of clean air,” Knight says.

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