Trailer Bridge, Inc. Business Information, Profile, and History

Company Perspectives:

Trailer Bridge's mission is to provide cost and service effective transportation that contributes to the success of both the customers and the company. The mission will be achieved through commitment to a continual improvement process that best matches customers' needs with the company's strength. Attainment of the mission will result in financial strengths needed for sustained growth, overall product improvement and ongoing achievement of customer, employee and shareholder objectives.

History of Trailer Bridge, Inc.

Jacksonville, Florida-headquartered Trailer Bridge, Inc., describes itself as "an integrated trucking and marine freight carrier." Its main business is the transportation of freight via a truck and tug-drawn barge system, principally between the continental United States and Puerto Rico. Its trucks operate throughout the lower 48 states, taking freight containers to the company's marine facilities in Jacksonville or Newark, New Jersey, where they are loaded on company-owned vessels and shipped overseas, usually to San Juan, Puerto Rico. Trailer Bridge owns and operates over 140 tractors and 1,300 trailers and uses its own drivers and equipment. It also owns five Triplestack Box Carriers, which were delivered in 1998. These specially-designed vessels, with their larger freight capacity, were the first ones in 15 years to be fabricated for use in the Puerto Rican trade. They accommodate the company's comparatively-larger, signature 53-foot long and 102-inch wide freight containers, and when completed joined two of the world's largest roll-on/roll-off barges already in use. Trailer Bridge is a primary beneficiary of the Merchant Marine Act (1920), or Jones Act, which stipulates that all vessels carrying cargo between two ports in the United States or its possessions must have been built in the United States, be owned by U.S. citizens, and be crewed by U.S. mariners. Until his death in June 2001, the company's majority stock holder was Malcom P. McLean, the inventor of freight containerization and Trailer Bridge's founder.

1956-91: Malcom McLean and the "Intermodal Revolution"

Trailer Bridge, a relative newcomer on the transportation block, only goes back to 1991, though its founder, Malcom Purcell McLean, carried with him long-established industry credentials that had made him legendary long before he started up Trailer Bridge. McLean started out in the business world as the manager of a service station in his home state of North Carolina, but in 1935 switched to driving a truck on that state's back roads, where he learned that success depended on the ability to move freight on time at competitive prices.

It was McLean, once described by Fortune as one of the ten most important innovators of the century according to company literature, who initially came up with the idea of shipping freight in containers that could be transported by truck and then stacked or piggybacked on railway cars or ships for further freighting. The idea eventually won him a distinguished place in the International Maritime Hall of Fame.

McLean began this "intermodal revolution" in 1956, when his company, McLean Trucking, started experimenting by loading, intact, 35-foot highway trailers onto a freighter, the Ideal X, for shipping by sea. It was a simple but brilliant alternative to the dockside unloading of trailer freight, the reloading of it into cargo holds of ships, and then the reversing of the process when the cargo vessels arrived at their unloading destinations. For some industry observers, McLean had introduced an industrial innovation almost as significant as Henry Ford's Model T assembly line.

Still, the idea met considerable resistance, especially from longshoremen and carriers who had a lot at stake in the old "break-bulk" methods of handling cargo. McLean had to put up his own money to make container vessels from retrofitted oil tankers. Initially, these went only from New Jersey to Houston and back, but eventually they began transporting containers overseas.

In order to fully implement the new system, McLean wanted to set up a new shipping company using barges for carrying the containers. However, because Interstate Commerce Commission regulations prohibited a single company from operating carriers on both surface and water, when he bought Pan-Atlantic Steamship Company, he had to divest his ownership of McLean Trucking. He then reorganized Pan-Atlantic, and what emerged was Sea-Land Service Inc., a company that proved that the container system of handling cargo was very efficient and cost effective. Among other things, it lessened fuel and cargo-handling expenses and, thanks to drastically reduced pilferage, also sent insurance rates spiraling downward.

In 1969, for $500 million, McLean sold Sea-Land to R.J. Reynolds, though he did not leave the business. He stayed on as a Reynolds director, but after becoming frustrated with corporate rigidity in the face of new ideas, he resigned. In 1978, he bought U.S. Lines, which at the time was ailing financially. Five years later, in 1983, at age 69, he set out to take the container system into Pacific waters, and commenced the manufacture of 12 container ships in South Korea. At the time, they were the largest container ships in the world and were designed to circumnavigate the globe. The venture did not go well, however. The U.S. Lines' Econoships, designed to keep fuel consumption as low as possible, were fuel efficient, yes, but very slow, and they lost their appeal when the oil boom ended with the market glut of the mid 1980s. McLean's company went bankrupt in 1986.

Indefatigable and undaunted, McLean started up his new venture, Trailer Bridge, when he was closing in on 80, a time of life when most would simply lack the energy for such an undertaking. Officially, Trailer Bridge started up in 1991, but it did not begin operations until 1992.

1992: Company Begins Full Scale, Profitable Operations

Trailer Bridge set out to transport stacked containers to embarkation points in the United States and then ship them via barges to Puerto Rico, and began actively offering the service in 1992.

After it recorded a net loss that partial business year, it made a profitable run for the next four years, despite the fact that its revenue dropped off in 1995 and remained basically level through 1997.

The company's "differentiated" service soon garnered the acceptance of companies shipping goods to Puerto Rico from the U.S. mainland, and in 1993, its first full year of operation, the company achieved a 93 percent outbound (shipments from continental U.S. to Puerto Rico) vessel utilization rate, capturing about 5 percent of that particular market.

By 1996, Trailer Bridge's success prompted the company to modify both of its triple-deck barges. It contracted a New Orleans shipyard to add a section to each, increasing the barges' length from 450 feet to 736 feet, turning them into what at the time were the biggest trailer barges in the world. The additional length increased their capacity by 56 percent, allowing them to transport 416 containers, 150 more than they had previously been able to carry. Still, the company needed to do more. By 1997, Trailer Bridge controlled only about 8 percent of the country's southbound, Puerto Rico container-barge transport business, way behind its chief competitors, Navieras, which claimed about 33 percent, and Crowley American Transport, with a 29 percent share. Ranking fourth, Trailer Bridge also ran behind Sea-Land, which had about a 19 percent wedge of the market pie.

That the company needed a greater volume of trade was evident by the start of 1997. Despite its early success, Trailer Bridge faced the problem that its annual revenues were leveling out. In 1995, the company earned a net income of $4.4 million on revenue of $62.5 million, but it showed only a slight increase in 1996, when its revenues increased by just $0.6 million and resulted in a net income that dropped to $2 million.

In order to command a bigger market share, Trailer Bridge took additional steps to increase its freight-carrying capacity. In March 1997, it ordered two new, specially made, 408-foot ocean-going container barges, which, when completed, would double the company's cargo hauling capacity. The low-draft barges were designed specifically for the company's integrated cargo system and were able to accommodate 213 53-foot containers stacked three-high on the vessels' decks.

In the meantime, Trailer Bridge opted to go public, and in mid-1997 filed plans for an initial public stock offering of $31 million to be underwritten by Alex, Brown & Sons Inc. The company planned to use the funds generated by the offering for the purchase of new equipment, as well as to reduce its debt, garner some working capital, and pay a dividend to its private stockholders.

It was also in 1997 that the company started its New York-Florida service, between the ports of Newark, New Jersey, and Jacksonville. For this coastal run, which put the company in competition with trucking and rail carriers, Trailer Bridge planned to build another three Triplestack Box Carriers. Initially, the company scheduled two runs per week from New York to Florida. At the time, as it indicated in its SEC filing, Trailer Bridge's growth strategy called for initializing marine service to additional destinations protected under the Jones Act, including Hawaii and Alaska. Such ambitious plans had to be put on hold, however, for, starting in 1997, despite annual increases in revenue, Trailer Bridge's bottom line went into the red. Its loss of $2 million in 1997 was its first recorded loss since its initial year of operation.

1998 and Beyond: Fierce Market Competition and Rising Costs

The losses continued in 1998 and 1999, when, respectively, the company inked red figures of $2.5 million and $2.1 million. Still, in the same period, revenues rose, up to $77.2 million in 1998 and $88.6 million in 1999. The company continued to get a good share of the business, and it was devising strategies designed to make it even more competitive. For example, in February 1999, Trailer Bridge put a web site on the Internet, highlighting its "Advantage" theme. In addition to stressing its dedication to providing each customer with "more value, service, and growth," the site provided shipping information and sailing schedules, with daily updates for both its Atlantic Highway and Puerto Rico services.

As the century drew to a close, Trailer Bridge also continued to land major shipping contracts, insuring its continued revenue growth. In September 2000, it signed a multi-year agreement with Sensormatic Electronics Corporation, the world's leading supplier of security systems. Although based in Boca Raton, Florida, Sensormatic operated a large plant in Aguadilla, Puerto Rico, and the company contracted Trailer Bridge to transport hundreds of 53-foot high container loads from Puerto Rico to various destinations in the United States. Yet later in the year, Trailer Bridge also won a multi-year contract with DaimlerChrysler Corp., becoming the exclusive carrier for that company's new vehicles shipped to Puerto Rico from the U.S. mainland.

Despite the new business, Trailer Bridge's net loss reached $10.3 million in 2000. According to an April 9, 2001 Journal of Commerce piece online, a contributing cause was what CEO John McCown termed a "brutal price war" that was "producing extraordinary losses in the endgame of the long overdue market shakeout." Other factors contributing to the inflated net loss were increased fuel costs, shipment cancellations due to inclement weather, and unexpected increases in trucking costs as well as a $3.7 million non-cash charge against income necessitated by reversing tax credits taken in previous years. A plus factor for Trailer Bridge that could help it down the line was the disclosure in 2000 that the company's vessels, burning cleaner fuel than those of its competitors, offered distinct air quality advantages over its competitors. Conceivably, the company's growing environmental-friendly reputation could draw additional business in a difficult and contentious market.

The heated price war of the late 1990s led to Trailer Bridge's accusations that one of its main competitors, Sea Star, was offering noncompensatory rates for shipments to and from Puerto Rico in a predatory pricing strategy designed to win new shipping contracts and dominate the U.S. mainland-Puerto Rico maritime shipping trade. In its complaint to the Surface Transportation Board, Trailer Bridge charged that Sea Star, majority-owned by Matson Navigation Inc. and Totem Express, was illicitly receiving federal subsidies from Matson's joint service agreement with APL Ltd. in the Pacific. APL was collecting federal subsidies of $2.1 million annually for each of the nine ships in its international service, subsidies for which ships under the Jones Act were ineligible.

Trailer Bridge and other container shippers taking advantage of the exclusionary protection of the Jones Act faced some risks. There were some pressures to open a Jones Act window to allow the use of foreign-built and owned and operated vessels to transport freight between U.S. ports, including those in its possessions. Also, although the independence movement in Puerto Rico was not supported by the majority of the people in the early 2000s, attitudes were subject to change. Yet as long as the law remained in effect, and the political situation in Puerto Rico remained the same, Trailer Bridge would easily hold its own against its competition. It will not, however, have the guiding spirit of Malcom McLean: he died of pneumonia on May 25, 2001.

Principal Competitors: Crowley Maritime Corporation; CSX Corporation; Navieras de Puerto Rico; Sea Star Line; Sea-Land.

Chronology

• Key Dates:

• 1956: Malcom P. McLean starts "intermodal" container shipping.
• 1991: McLean founds Trailer Bridge. Inc.
• 1993: Company begins first full-year of operation.
• 1996: Trailer Bridge increases vessel capacity by 56 percent with insertion of midsections in its two barges.
• 1997: Company goes public.
• 1998: Trailer Bridge completes the addition of five Triplestack Box Carriers to its fleet.
• 2001: Founder McLean dies at the age of 87.