NASSTRAC Notes: Q&A with Doug Duncan, president and CEO of FedEx Freight

Jeff Berman, Group News Editor -- Logistics Management, 4/28/2008

ORLANDO, Fla.—Logistics Management/RBI Supply Chain Group News Editor Jeff Berman caught up with Douglas G. Duncan, president and CEO of FedEx Freight, earlier today at the National Shippers Strategic Council (NASSTRAC) annual conference to discuss some of the main topics having an impact on both shippers and carriers.

LM: At NASSTRAC last year, we talked about the challenging economic climate. Things are very much the same today, and they may be worse given the current situation with diesel prices and low consumer spending. That said, based on current events, what the biggest concerns shippers are telling you they have?

Duncan: I think the biggest issue for customers [shippers] right now is the run-up in fuel expenses. It is because these supply chains do a marvelous job of predicting expenses and having an expense like fuel seems to defy all logic and makes it very tough from a business planning perspective. It is true for us and even more true for the supply chains that we serve. If we had a more predictable cost methodology so that we know what are dealing with [regarding fuel increases], I think we could all do a better job of addressing it. But when you have spikes in fuel that seem to come out of nowhere, it is hard for us and our customer, trying to mitigate how to deal with those expenses.

LM: It seems that Peak Season patterns have changed over the last two years. With the current state of the economy, is it becoming less common for carriers to start moving more freight earlier in the year—ahead of “traditional” Peak Season time?

Duncan: Peak seasons are still there. Patterns have been maintained the same, but whether peaks and valleys have calmed down, it is too early to tell. I think businesses were reacting to certain specifics [when moving freight earlier than normal] in 2007 and 2006, because previous problems at West Coast ports created lots of problems for importers and because of that they were importing freight earlier to spread things out. Importers are moving freight to more ports around the country, with more and more Asian shipments coming through the East Coast. Also, the economy has not been as strong as hoped. This all has its impact, but I am not ready to write off the normal Peak Seasons. I think they still exist.

LM: As expected, infrastructure is picking up more steam. In the past you have said, the U.S needs a true plan to address its infrastructure needs—or an actual surface transportation policy. What do you think the current status is in regards to that right now?

Duncan: We certainly have funding issues. By my estimate the spending we have made on highways over the last ten years has hardly been enough to cover the costs of the existing system. We have been serving our present infrastructure for 10-to-20 years without investing very little back into it. It is like we mortgaged the house already and before we build a new house we need to pay off the mortgage we have on the old house. This puts us in a difficult funding position. I just don’t think it is smart to get into a funding debate until we know what is required to meet the future needs of our transportation system. Once we know what type of infrastructure investment is required, then I think we can have a very good debate on how to fund it. Until I know what that investment is going to be, I am not willing to take anything off of the table as a possibility for financing.

LM: What about the talk of infrastructure banks that have been proposed by Barack Obama and Chris Dodd?

Duncan: I cannot speak specifically to their proposals, but the rhetoric and research on this topic is starting to resonate. That tells us that we are starting to make a difference. We need to find solutions and treat it as an important issue. It is our job to make the case for infrastructure and to explain to Congress and the rest of the government how important it is for the notion of commerce in this country and for our economic viability. We are making progress, just not as fast as we want.

LM: Last July, FedEx Freight announced it was lowering its fuel surcharge expense by 25 percent from 19.7 percent to 14.8 percent. How is that going so far?

Duncan: Our customers are definitely taking advantage of it. We think it was a great decision, but you have to understand that up to half of our business is comprised of contracts with very large customers that have individually negotiated fuel surcharges. And there are smaller customers that don’t negotiate fuel surcharges. They need a break on fuel and are getting it to a certain extent.

LM: With fuel prices being what they are, what do you think about the recently-announced Corporate Average Fuel Economy (CAFE) standards the DOT recently proposed for passenger cars and light trucks? Where do Class 8 trucks fit into this equation?

Duncan: First of all, we need to burn less fossil fuels in this country. There are lots of ways we can do that and to also make our trucks more energy efficient. We can make better use of hybrid technologies and do lots of things along those lines. The way to push the elephant into the room, though, is to set some goals we have to reach. And CAFE standards for Class 8 trucks gives us the incentive and focus to make those investments to go forward and do them together and not as individual companies. It worked well for passenger cars and I see no reason why we should not make the effort for commercial vehicles. When the EPA came out with their new requirements for diesel engines, there were a lot of people that said it could not be done…but things are going well with the 2004 and 2007 engines. And I have no reason to believe we won’t beat the 2010 EPA compliance by working with engine manufacturers. CAFE standards will be the same way. This pushes the truck companies, truck manufacturers, fuel distributors, and engine manufacturers to find a way to work together to find the solutions required to improve our fuel efficiency and reduce the fossil fuels we need to burn. I just think it is the right way to go about it.