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VOL. 37 | NO. 16 | Friday, April 19, 2013

Pilot Flying J raid focuses on incentive practices

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NASHVILLE (AP) — When Pilot, the country's largest truck stop chain, bought its nearest competitor Flying J out of bankruptcy in 2009, federal trade officials worried the combined entity owned by the powerful Haslam family could corner the market on diesel fuel.

To alleviate "competitive concerns," the Federal Trade Commission in 2010 required Pilot to sell some truck stops to a competitor, Love's, and share its fuel purchase technology before it could merge.

A federal raid this week at Pilot Flying J's headquarters in Knoxville signaled fresh scrutiny of competition issues involving the nation's top retail seller of diesel fuel.

CEO Jimmy Haslam said the raid was part of a criminal probe into unpaid rebates owed to trucking companies. Haslam, who also owns the Cleveland Browns, denied any wrongdoing and said the company was not in any tax trouble. His brother is Tennessee Gov. Bill Haslam.

Rebates are used to boost customer loyalty and discourage them from buying the same product from the competition, but experts say overly aggressive practices can lead to trouble.

"There's a thin line on whether a rebate is really a kickback," said Paul Chaney, an accounting professor at Vanderbilt University. "You want to provide incentives for your customers to buy your product. But if you're not doing it equally among your customers, it runs into problems."

Pilot Flying J is a privately owned company that posted $29 billion in revenues in 2012 from 650 retail locations. The majority of the company is held by the Haslam family, including the company's CEO, the governor and their father, Jim Haslam, who founded Pilot.

Jimmy Haslam confirmed that several members of the company's sales team were subpoenaed, but said nobody had been arrested.

Asked by reporters whether the probe was related to the FTC's previous concerns about unfair competition, Haslam replied: "We would not think so."

An FTC spokesman declined to comment.

According to the IRS, it is common for fuel stops to hand out monthly rebates on purchased fuel. Rebates should be reported as income, as a reduction of expense, or as a reduction to the cost of the new asset, the IRS said.

Miro Copic, a marketing professor at San Diego State University, said companies such as Pilot Flying J must make sure their paperwork is in order, so the rebate money can be accounted for and properly tracked by authorities.

"Did the rebate go directly and fully to the trucking company, or did money go to trucking company executives, for example, who make decisions?" Copic said. "It's a fine line of how rebates flow and what decisions are made around those rebates."

Copic said investigators also could be looking at whether rebates were paid in full, or in the agreed upon time period. He said probes into the proper use of rebates could have anti-trust implications.

"The playing field has to be level," Copic said.

Not all customers doing business with Pilot are on the rebate program.

Pat Marsh, chairman of Shelbyville, Tenn.-based Big G Express, said his trucking company had a rebate program set up when it was a client with Flying J. Since the Pilot takeover, that system has been replaced with pre-negotiated prices paid at the pump with swipe cards.

"The more we buy, the cheaper the price is," said Marsh, who is also a Republican state representative. "We negotiate our price talking to the corporate people and the sales people and by how many gallons we purchase."

The swipe cards system tracks the mileage on trucks, the identity of the driver and the amount of fuel purchased, he said. Pilot was required to share its fuel card purchasing system with its competitor Love's under the 2010 FTC ruling.

Marsh said his fleet of 425 trucks had long done business with Flying J despite a personal connection to Jimmy Haslam that dates back to when they were fraternity brothers at the University of Tennessee.

"They tried for years to get our business, but we got a better deal from Flying J," Marsh said with a laugh. "We keep telling them that the reason they're doing business with us now is because they bought the competition."

Marsh said he was surprised to see the Pilot Flying J headquarters raided.

"We've had nothing but a great relationship with those guys," he said. "They treat us fairly."

The elder Haslam founded the Pilot Corp. in 1958 with a single gas station in Gate City, Va. He credits his sons with expanding the chain from mostly gas stations and convenience stores to a "travel center" concept featuring fast-food service, convenience stores, plentiful truck parking and showers.