Mode’s asset-light model set for challenge after Hub sale, intermodal executive says

Mode’s relations with asset-based firms will be critical for its survival, says ex-Hub Group principal Brian Bowers.

Hub Group’s sale of its independent owner-operator business begs the question about how asset-light intermodal marketing companies will compete in an asset-constrained age, says veteran intermodal executive Brian Bowers. 

Bowers, who is also a member of the FreightWaves advisory panel, was one of the original principals at Hub Group and implemented strategic plans during a 10-year span at Schneider National. He says that while Mode has a strong growth profile on its own, a continuing relationship with Hub and other asset-based firm will be needed to ensure capacity.

“Pricing and access to rail and dray capacity are areas of major exposure” for Mode, Bowers said. “Many believe that the non-asset model is headed for obsolescence.”

As reported earlier, Hub sold Mode to diversified investment manager York Capital for $238.5 million. Hub Group chief executive David Yeager said it made the move as Mode did not fit within the Hub business model.

Mode  “is an excellent company,” Yeager told analysts on an earnings conference call. “But if you look at it, it’s basically the same services we have, except in a decentralized agent structure versus our centralized structure.”

The company was originally purchased as Exel Transportation Services from Deutsche Post for $83 million in 2011. At that time, Yeager said Mode’s “services are very complimentary to Hub’s and will give us more scale.”

Mode is a non-asset, based third-party logistics provider offering intermodal, truckload and other services. It consists primarily of 173 agents, including 99 independent owner-operators and 74 sales-only agents. 

According to Hub’s last annual report, Mode utilizes a “dynamic transportation management platform” to provide customers with visibility of shipments, billing and load matching. 

During the first half of 2018, Mode generated $602 million in revenue, growing close to the overall rate of the larger Hub. Operating income of $14.1 million offered about the same margin seen in the rest of the Hub. Business segment breakdown was $271 million in intermodal, $204 million in truck brokerage and $127 million in logistics.   

Mode “is a significant business with quality senior leadership,” Bowers said. But he agrees that Hub’s operations did not necessarily align with Mode’s model   

“Divesting Mode simplifies Hub’s business model and eliminates account ownership issues and expenses tied to Mode’s agent network,” he said.

Bowers says Mode has consistently out grown Hub’s offerings by focusing on serving small and medium sized customers that most of the intermodal industry have not focused on.

Hub and its competitors, J.B. Hunt, Schneider and Knight-Swift, target large clients and simply do not have the resources or process to connect efficiently with small shippers,” he added.

“I’m not sure how often they deployed it, but Mode allowed Hub to offer a different value proposition for accounts that would benefit from a decentralized customer interface,” Bowers continued. “Dropping Mode from their portfolio results in an offering that looks very similar to its key competitors.”

The bigger question, though, is how Mode will market itself going forward without Hub, Bowers says. Mode’s ability to market access to Hub assets “is a strong positive with customers,” Bowers said. 

Hub could offer to continue serving Mode post sale as a contractor, Bowers says. This would protect Mode’s ability to serve and grow within their current rail cost and service model while preserving Hub’s revenue and network flows, he added.

“If I was the decision maker at Hub, I would offer a gradual separation with escalating pricing in the out years,” Bowers said. “This would be supplemented by account specific deals for business with critical network or strategic value.

York Capital could eventually decide to build Mode into an asset-based firm with dray tractors, chassis and containers but there is not a strong economic reason to do so, Bowers says.  Mode could purchase containers and shop their intermodal rail volume, “but market timing could not be worse.” 

In addition to trucking capacity, Bowers says “it will be interesting to see how Hub’s captive rail agreement with the Union Pacific will apply to an independent Mode.

He says Hub’s multi-year rail contract protects their line haul pricing and “is currently well below what the railroad can charge its non-asset customers.” 

“Tied to Hub Group assets, Mode Transportation is a significant and profitable intermodal service provider,” Bowers said. But “the long-term viability of the non asset model hinges on the Union Pacific’s willingness and ability to serve and protect the market segment.”