Celadon tries to reverse decline

In just over one quarter, shares of Celadon Group lost nearly half their value as profitable cargo got harder to find in
a slowing economy.

The stock closed at $9.13 on Dec. 19, down from nearly $17 in late August. The stock is down nearly two-thirds from its peak
of $22.41 in July 2006, before the industry slump.

Celadon isn't alone: Yellow Freight parent YRC Worldwide, for example, has also been hammered on Wall Street. YRC now
trades around $17.50, a steep decline from its 52-week high of $47.

"At these very low valuations for the company, at what point do you entertain the thought of taking the company private?"
Oppenheimer & Co. analyst Bruce Olipha asked Celadon's chairman, Steve Russell, during a recent earnings call.

"It's difficult to answer that question," replied Russell, mindful that four years ago the stock had tanked
below $4 and later grew sixfold. "Let's see what happens in the months ahead."

Celadon founder Russell, for now, is seeing what his new president–former General Electric trailer leasing executive Chris
Hines–can do to put more stuff aboard Celadon's trucks.

Hines, who came aboard in August, didn't waste any time. In October, he switched Celadon's 30-person sales force
from salaried to incentive-based compensation.

"We just needed to motivate our sales force to be more effective. We're seeing that's had an impact," Russell
said this month.

Celadon is the largest transporter of truckload freight between the United States, Mexico and Canada. It has about 2,700
trucks and almost 4,000 employees, about 20 percent of whom work at its headquarters and garage near East 30th Street and
Post Road.

Russell and his team have learned to be patient, sometimes by necessity. They planned to take the company private in 1998,
during another severe stock slump, only to cancel the plan when financing fell through.

Fewer goods to ship

With Celadon trading at roughly half of what it did when Hines arrived, the pressure on him is immense, but the national
economy could stand in his way in the short term.

The biggest reason Celadon's earnings per share at Sept. 30 fell to 11 cents, from 30 cents a year earlier, "is
directly related to not having enough customer freight to put on our trucks," Russell told analysts.

Investment firm Stifel Nicolaus & Co. notes that rising energy prices, slowing manufacturing growth and subprime mortgage
lending problems that have slowed consumer spending and brought tighter credit standards are to blame for the trucking industry
slump.

"The short-term outlook remains bleak for trucking," said the investment firm, which sees the industry bottoming
out during the first half of 2008.

On the bright side, the recent cut in the federal funds rate "should begin to gain traction and the trucking stocks
should begin, at least in theory, to move notably higher."

Often, transport stocks are on the front end of any pickup or slowdown, said George Farra, of Indianapolis investment firm
Woodley Farra Manion Portfolio Management. The transport sector's being down "is probably reflecting investors'
belief that we've seen a peak in activity, for now" in the economy, Farra said.

Low-margin freight

While Celadon's revenue for the quarter ended Sept. 30 climbed to $133.8 million from $127.7 million a year ago, profit
dropped to $2.5 million from $7.1 million.

Revenue is higher, but margins have tanked. With less business from existing customers, Celadon has been taking on a "substantial
increase" in low-margin broker freight for logistics companies, such as Minnesota-based C.H. Robinson. Celadon collects
as much as 40 cents a mile less from this freight.

A nearly 4-percent decline in the use of its trucks drove earnings per share down 4 cents, the company said. As Celadon's
trucks ran farther to find more loads, they also ran into more "dead-heading," or operating without cargo.

Celadon can't assess fuel surcharges on empty trailers, so it incurred higher fuel costs. Higher taxes and a rise in
the value of the Canadian dollar also shaved earnings for the quarter.

One of Russell's directives to Hines is to wrest additional business from the company's existing customers. The elite
group includes such customers as Campbell's Soup, Phillip Morris and Wal-Mart. Hines, he said, has spent the last three
months visiting customers and key prospects nationwide and in Canada and Mexico.

"Over the past few years, if one excluded the customers brought on through acquisitions, it is evident we have not successfully
grown our customer base in a meaningful way," Russell told analysts.

But "we believe the amount of additional freight required to bring our operating ratio back to last year's level,
or better, is achievable."

Russell also has his eyes on growing market share. The company is a giant among carriers that run between the United States
and its neighbors, but it's not huge domestically. Running just 2,700 of the 1.2 million over-the-road trucks in the United
States means "we're a pimple on this enormous body."

Celadon remains in the hunt to buy other trucking companies–a selection likely to grow as smaller carriers groan under financial
distress. Russell noted that one of the company's acquisitions brought Campbell's into its customer base.

Among recent acquisitions were Tennessee-based Digby Truck Lines and the truckload business of Indianapolis-based Air Road
Express.

Acquisitions have not come without a downside, according to Morgan Keegan & Co. analyst Chaz G. Jones.

"We believe [Celadon's] aggressive fleet growth, both organic and via acquisitions, over the last 18 months has
presented additional challenges in sourcing quality freight in a truckload market currently plagued by excess supply and inadequate
demand," Jones wrote in a recent report.

He noted that Celadon announced a 2-million-share buyback two months ago that the carrier said could boost its stock value
and could be used as currency for future acquisitions. Earlier this month, Celadon announced another 2-million-share buyback.
Still, said Jones, the company likely "will struggle to regain material earnings momentum until freight demand turns
more positive."

Russell, for one, thinks the company is better positioned to withstand a downturn than it was in 2003, when Celadon's
stock was trading at half of its now-languishing price. Since then, Celadon has improved its systems, technology and footprint.
This year, it was named best fleet in America by Fleet Owner magazine.

"We're a much better company than we were then," Russell said.