BusinessTN

Following his return from a military stint in Korea in 1954, former University of Tennessee football team captain James A. “Big Jim” Haslam II received three job offers. One was from his former coach and mentor, General Bob Neyland, to become an assistant football coach for the Volunteers. Another was to become head football coach at South Pittsburg High School west of Chattanooga. The last was an offer to go to work for a man in the gasoline business in LaFollette, Tenn., north of Knoxville.

“We always say thank goodness he chose option number three,” says eldest son James A. “Jimmy” Haslam III, Pilot’s current president and CEO.

Four decades later, the Haslam family’s Pilot Oil Co., 50% owner of Pilot Travel Centers, is the largest operator of highway travel plazas in the nation and the largest seller of over-the-road diesel fuel. With over 13,000 employees, locations in nearly 40 states and $7.2 billion in annual revenue, it ranks as Tennessee’s largest private company and, according to Forbes, the 68th largest in America.

And don’t feel bad for the General. Neyland went on to hire eventual U.T. head football coach Johnny Majors as his assistant.)

Stark Realities

Retailing is never an enterprise for the faint of heart. In the case of fuel retailers, the risks are magnified by the complexities of the supply chain and the dynamics of their product mix. With the price of oil shooting up 50% in the past six months to a recent $60 a barrel, some retailers have struggled to raise their prices at the pump as quickly as oil prices themselves have risen. Further, the sticker shock of refilling at today’s prices can limit the appetite of customers for other goods sold at the travel centers. As a result, profit margins for some retailers have eroded, and in some cases disappeared.

A dirt-under-the-fingernails, round-the-clock business, travel plaza operation has its own set of challenges, foremost being that it is extremely capital-intensive. Comparable to airports in terms of the heavy pounding they take, travel centers require frequent maintenance and upkeep; otherwise, locations don’t last or retain their customer appeal. It’s also not easy maintaining a large national workforce of mainly minimum wage workers to keep stores clean and customer service high. All told, it’s a wonder anyone would be thankful for being in the fuel stop business.

While such harsh realities make it tough on most independent operators, industry giants like Pilot enjoy greater financial flexibility. They have the advantage of fending off some losses by hedging—buying oil futures or derivatives. Annually pushing billions of gallons of fuel, Pilot has the ability to buy ahead, locking in prices for a set number of years.

Pilot also has the distinct advantage of partnering since 2001 with the nation’s fifth largest oil refiner, Marathon Ashland Petroleum. CEO Haslam concedes that not unlike family members or spouses the equal partners “disagree on occasion.” But Tom Stanford, publisher of RoadStar magazine and a nationally recognized authority on the travel plaza industry, says the partnership’s upside far outweighs any negatives. “The supply line for fuel and the ability to predict refinery turnarounds and trades—things like that open the doors to b2e more competitive, sell more fuel and move fleets at a thinner margin,” Stanford says. “That’s exactly what Pilot has done.”

Neither is the company’s profitability dependent on positive fuel margins alone. It also hinges on pushing myriad ancillary services like retail merchandising, convenience store and fast food operations through its vast distribution network. Each Pilot Travel Center averages 3,000 customers daily and $15 million in annual revenue.

Just about every service and product imaginable has been pushed through the truck stop channel, from electronics equipment to on-site dentists, tattoo parlors, and even hair transplant specialists. Though Pilot differentiates itself among its competitors with smaller, more easily accessible locations less encumbered by such frills, it still spends every day plotting how to maximize its contact with customers through services like ATMs and check cashing for truckers. (Haslam says he “would not preclude” offering full-blown financial services to truckers in the future.)

Pilot is focused on growing the company in other organic ways, too. It recently initiated plans to build 30 repair shops at plaza locations in 2005. After building eight locations, the company brokered a partnership with Goodyear to lease those locations as well as the real estate Goodyear will need to build 10 to 15 Pilot Truck Care Centers in each of the next four years. And Pilot recently brokered licensing agreements with small, family-owned travel center chains in Kansas, Montana and Nebraska, getting company representation in locations where newly built centers wouldn’t have provided a sufficient return on capital.

Consultant Stanford sees nothing but positive growth ahead for Pilot and its chief competitors, even without consistently good fuel margins. “The industry’s outlook is very positive, there’s no question,” Stanford says. “And Pilot in particular is lean and mean.”

The Fewer, the Proud

Today, Pilot is one of just five companies retailing diesel fuel nationwide. Stanford sees another round of consolidation ahead and predicts Pilot will survive since its smaller-sized travel centers cater well to fleets wanting to get truckers in and out quickly.

According to Haslam, Pilot anticipates no major acquisitions in the foreseeable future similar to the company’s 60-unit Williams Travel Centers acquisition in 2003. Through new development and purchases of small independents, though, Haslam expects Pilot to grow by about 12 units this year, and eventually from its current 262 centers to 400.

Opportunities for growth appear good. Pilot owns 24 centers in Georgia but only 10 in California where it is aggressively seeking new locations. The company expects to be in Canada within three years. Based on population alone, far greater opportunity may someday exist in Mexico. A government oil company currently controls everything in Mexico’s fuel industry, including retail mark-ups. Should that ever change, the prospects are great, particularly in the commercial triangle of Guadalajara, Monterey and Mexico City, already a hot bed for big rig production. “It’s such a large country,” Haslam says, “and there are no travel centers in Mexico as we know them today in the United States.”

One possible impediment to growth is the threat of federal and state governments allowing commercialization of highway rest stops. The travel center industry has labored hard in recent years to stave off any such legislation.

“We make the decision to buy a piece of real estate based on a set of known criteria,” says Haslam, a board member of the National Association of Truck Stops and Travel Centers. “For the government to then turn around and commercialize these rest areas, we feel, is changing the rules of the game.”

If the railroads in America could ever get their act together, they too could strike a significant blow to the diesel fuel/travel center industry. But a far more tangible threat to Pilot’s immediate prosperity would be failure to continue the simple day-to-day execution necessary to stay on top.

“It’s about blocking and tackling,” Haslam says. “For a football play to be successful, 11 people have to do their jobs correctly. If one player lets down, the play probably doesn’t work.”

“Big Jim” passed up his chance to be a football coach. But his Pilot Oil team has a long history of reaching paydirt. All indications are that Pilot Oil will be hearing the strains of “Rocky Top” for years to come.

Pilot Oil Corporate Timeline

1954 * “Big Jim” Haslam accepts a job working for Sam Claiborne in the gasoline business in LaFollette.
1958 * ”Big Jim” launches Pilot with the $5,000 purchase of a single gas station in Gate City, Virginia. 1964 * Pilot enters a partnership with Marathon Oil, which buys half of Haslam’s company and infuses him with capital to grow it.
1964-1988 * In partnership with Marathon, Pilot Oil expands exponentially.
1976 * Pilot enters the convenience store business after “Big Jim,” seeing the company is no longer making enough money in the petroleum business, instructs eldest son Jimmy, a recent U.T. graduate, to figure out how to get it done.
1981 * Pilot opens its first travel center, the core of its business ever since.
1988 * The Haslams envision tremendous upside in the nationwide travel center business. Partner Marathon, meanwhile, wants to concentrate on the c-store business. The two agree to disagree and split on amicable terms with Marathon taking one-third of the stores and some cash.
1988 * That same year, Pilot begins operating fast food restaurants at their locations. Today, Pilot owns and operates 242 fast food restaurants and is the 10th largest franchisee in the nation. (The Haslams actually introduced Subway founding partner Fred DeLuca to the petroleum business.) The company also leases out restaurants to McDonalds for a percentage of sales. The company’s restaurant sales alone topped $200 million in 2004.
2000 * Pilot tops 140 travel centers nationwide. Anticipating industry-wide consolidation, and wanting to be a consolidator and not a consolidatee, the Haslams partner with Marathon Ashland Petroleum, the successor company of Marathon Oil. In a 50-50 partnership finalized in 2001, Pilot gains a strong financial partner and industry leverage. Marathon, which already had 93 travel centers of its own, picks up Pilot’s industry expertise.
2003 * Seventeen months after the Marathon merger, industry consolidation comes. Pilot Travel Centers acquires financially troubled, 60-unit Williams Travel Centers, catapulting Pilot to yet another level in the industry.