LTL Q&A with UPS Freight President Jack Holmes
June 25, 2012
Last week, LM Group News Editor Jeff Berman conducted an on-stage interview with Jack Holmes, president of UPS Freight, the less-than-truckload (LTL) subsidiary of UPS at the 10th annual eyefortransport 3PL Summit, which was held in Chicago. Holmes provided an in-depth look at the LTL sector and how LTL’s and shippers should—and could—work well together, among other topics. A full transcript of the conversation between Berman and Holmes is below.
Logistics Management (LM): What is the current state of the LTL market in your opinion? How do things look compared to a year ago and also on a year-to-date basis?
Holmes: It would be bad form to complain after the last few years and what we have been through as it took a lot of years off the lives of LTL industry executives. It is a lot better than it was and not as good as we want it to be. The pace of improvement year-over-year is certainly slowing, with overall industry growth close to 4 percent for shipments and tonnage year-over-year in the first quarter, and it appears that same number is closer to 2 percent in the second quarter. Revenues are up, with much of that attributed to the price of fuel in the first quarter. And as fuel has dropped [in recent weeks], we are seeing the revenue-per-hundredweight improvement year-over-year drop with it. Things are better but certainly nowhere close to pre-recession levels for shipments and tonnage. In fact, about this time last year revenue-per-hundredweight for the industry was less than it was in 2007. If you think about another industry that can make a similar claim beyond housing, you would have a hard time coming up with another one that was attracting less price than it was five years previous. As an industry, we are not in a great spot but it is getting a little better.
LM: How are things going for UPS Freight, now that we are nearly at the mid-point of the year?
Holmes: We are doing well. If you don’t know the story, UPS made a decision to go into the LTL business when we bought Overnite Express and a western carrier called Motor Cargo based in Richmond, Virginia and Salt Lake City, Utah, respectively, and what we did then was we saw an opportunity to put some of the customer-facing technology that we use on parcel side—with the reliability UPS is known for—to fill a gap that we saw in the LTL industry that we felt we could fill very nicely. The other big part of it was to leverage parcel relationships for freight and vice-versa. Typically, two-thirds of parcel shippers also move freight, so we had an opportunity right there for our sales force to engage. That was really the idea behind it. When UPS Freight was established, we brought some engineers over from the parcel side and we also brought people in from Con-way and FedEx and a lot of people from YRC a few years back that specialized in trade show and expedited—things we thought we needed a different view on. The result is 40 percent market share and we are unveiling new technologies and tools like our recent pickup and notification system for customers to let them know when we are coming to get a shipment. We are the only company that does that and are very happy with the progress we have made with technology and reliability.
LM: In what ways does UPS Freight collaborate with 3PLs? What are the dynamics of that relationship and how do they effectively collaborate to best serve shippers?
Holmes: Probably the best way to answer that is to provide a little perspective. Five years ago, we knew who we were doing business with but perhaps not exactly why. If you look at the carrier-3PL relationship in the past tense, I think it was kind of like the carriers looking at 3PLs and saying “they have freight.” It was almost like LTLs were treating them just like a shipper. They had revenue, we wanted the revenue, and let’s move the revenue. When we started looking closely at 3PLs about two years ago, I put a team together to research the states and put a strategy together. When we looked at it we said there was about 15 percent market share which the 3PLs controlled and we said “do we wanted to be a market leader in 100 percent of the market or do we want to be a market leader in 85 percent of the market?” The answer is obviously 100 percent of the market so how do you do that? Some of the things we have done are to identify that all 3PLs are not the same. There are some basic re-seller models and some client-specific models. What we feel comfortable with and whom we partner with and what makes the most sense in that space are things we consider. I think in that industry we kind of use each other. Carriers use 3PLs almost like revenue spigots in that if they are short on revenue, they implement more aggressive pricing to bump up the revenues. Some may chase it and some might not, as rates can change on a frequent basis with TMS systems and customers counter that change, which is OK sometimes. On the flip side, 3PLs—at least those with the re-seller model—tend to look at the carriers as if they all pretty much do the same thing. And there is not a large regard for technology because in some cases there is proprietary technology or something off of the shelf that differentiates you from your competitors. As we went through this we had to figure out what was going to be our strategy. It became clear that we had to be a discerning carrier. We are going to do business with partners and wake up and try to make us a stronger company each and every day and that commitment follows from that we will do the same for them. As we have gone through that in the last year or so, we have divorced ourselves from about 100 or so 3PL relationships, where we asked them to remove UPS from their programs, marketing collateral and instead focus our efforts on the carriers we do business with to provide them with what UPS offers. We have an incredible amount of data through our technology and accessing that data will give our partner 3PLs a better chance of winning business against others. We are looking at other solutions besides just pure LTL. We have a ground freight pricing product that dips into the lightweight minimums that are really in the small package market, which is appealing because small package has been a tough segment to get involved with for 3PLs generally. There are also intermodal, truckload, and dedicated offerings, too. These are things we do a lot of and do very well. The issue is more of what the future is going to look like, and the future for us is that we are going to do business with a lot less 3PLs than we do right now, but for the 3PLs we do business with we will consider them—and want them to consider us—as having each other’s back in business and we will do everything we can to get them business, rather than their competitors. That is really our strategy, and the thing you have to think about—as a 3PL—is that capacity is going to change at some point, and there are going to be a 100 different factors that drive that. There is still some capacity right now, but when that does change you are going to have some carriers that probably felt like they were commoditized turn it around, and there will be partnerships in which both parties continue to treat each other like partners. In the long-term, I would encourage you to think where you are going to be in that, and when your customer comes to you are requests specific technology because it is something that gives them a leg up in their business—and if you are doing business with a non-premium carrier—then you are going to be in a bit of a trick box there. There are also other things like sustainability solutions, and intermodal usage, which we are using a lot for our LTL services, which are all going to difference makers. But they are not right now, because customers are too concerned about bottom lines, profits, and getting though the next board meeting; this will turn around at some point and will be part of the decision-making process more so than it is right now.
LM: On a somewhat related note, are 3PLS and freight brokerages viewed as “competitors” by LTL carriers, with their mostly generic and transactional business that is often driven by technology i.e. a TMS more than rates? The spot market also seems to play into this, too.
Holmes: I think so, but in a lot of cases it is because of how the industry is approaching capacity. The way we as an industry manage capacity is to try and sell into it, and when you have excess capacity you are driving prices down and forcing 3PLs to be aggressive with price and to use TMS systems to find the cheapest price. Carriers won’t make big swings in rates. We still have carriers that will offer a 90 percent discount and then six weeks later will turn around and try to implement a 25 percent rate increase on top of it because they filled the capacity and now want to add more so they start jacking up rates. It is like a lever used to control revenue and to move volume into those fixed assets. As an industry, we have to do a better job of controlling how we approach capacity, as opposed to always selling into it. It is going to be an interesting time going forward. It is not a question of if capacity changes, it is going to be a question of when it does.
LM: Are you paying more attention to the economy or regulatory matters like CSA and HOS, or both equally?
Holmes: It is certainly more the economy, more specifically what impact the economy is having on our customers. [Shippers] have spent a lot of time in the past few years since 2008, really, challenging their distribution networks. In general, there has been a move towards away from smaller, frequent shipments to larger, less frequent shipments. It has gone from parcel through LTL and into truckload, and you see the big explosion in the intermodal markets as well, especially with fuel driving a lot of that. It really is just being hyper-sensitive to what customers are looking at. Things like Mexico as a sourcing origin, port strategies and deconsolidation and doing things as close to ports as possible, and understanding what customers are looking at and how to reduce their fuel spend and total spend and get more visibility into the supply chain are the things really where our focus has been.
LM: In your opinion does CSA pose more of threat at this point for shippers and carriers than Hours-of-Service?
Holmes: I think CSA is more concerning as there is still some smoke and mirrors there when trying to figure out what the scores are really going to mean and how they will be enforced. There are not a lot of answers yet. But it will have an impact on carriers paying the lowest wages with minimal benefits; they will have a tough time. One of two things will happen to them: 1-they will go away; or 2-they will have to improve their compensation packages which is going to certainly [factor] into their pricing. HOS for our business will not have a big impact as things stand right now. There will be some challenges for carriers on the refrigerated side, and I think the bigger issue is what happens next. There is some talk of continuing down this road on HOS and…for our customers the big concern is they have distribution networks set up throughout the country to get the maximum one-day reach and HOS changes the radius that we can deliver one way and shortens it up. Now, there are a lot of customers that have distribution centers in the wrong places, and the ripple effect could be huge in worsening ways and there is no getting around it, with factors like speed limits and the number of hours you can work. It is a real concern but we will have to see how it plays out.
LM: Not that long ago, the LTL sector was not doing very well because of the recession. During that period, many LTL carriers traded strong pricing for volume/market share, which proved to not be a successful strategy overall. Now, that LTL carriers are keenly focused on yield management, what are some of the lessons learned from that period?
Holmes: We were one of the two carriers that came out best during this five-year stretch. One of the things I know we do very well is we know what our cost to serve is, and if you know that then you should be able to come up with pricing that makes sense for you. Our focus was not to try and sell into capacity. It was to try and rationalize capacity that was there and in a lot of cases take the extra capacity out rather than try and sell into it. That made it a little tougher for us, with customers coming in saying someone else has a rate 10 percent better and asking us what we are going to do about it. It was on a case-by-case basis, but those were the typical discussions we were having in 2008 and 2009, because other carriers were trying to sell into their capacity. Capacity is what drives all the conversation in LTL and when there is excess capacity people will try and sell into it and when they do that it is going to cause rates to be volatile. Rates will go down initially and people turn around and try to jack it back up as soon as they get their capacity filled back up. There were a few carriers that lost visibility of their costs and downsize networks because they lost a lot of volume and they made so many changes they lost sight of what it really cost them to move freight from here to there. That is a scary proposition when you don’t know how much it is costing you to move your customer’s goods. You cannot make the right pricing decisions in this case. We are past that for the most part, and it feels like the typical LTL company has a better understanding of what is happening in their own networks now and is probably making more rational decisions than they have in the past.
LM: Even with things turning around, some Wall Street analysts maintain LTL pricing is still not where it needs to be in orders for carrier to meet their cost of capital to support operating costs. That said, how does this impact LTL-shipper relationships when discussing pricing, given the assumption that LTLs will continue to have some type of pricing power going forward when thinking about capacity and the economy?
Holmes: On the capital expenditures front, it depends on the company and what its model is. If you are going quarter to quarter and meeting analyst expectations or if you just don’t have a lot of capital to work with to reinvest in the business, then, yes, you need a good quarter to justify whether to make an investment into your fleet or something else. That is not the way do it; we have a long-term look at this industry to make the investments we need to make, and there is not going to be a lot out there to influence us not to make a decision that we know is going to be beneficial three or five years out. As far as the industry and pricing goes, from our perspective we have taken a prudent approach to take the volatility out of it and it will be interesting to see how that is perceived in the industry going forward.
LM: Going back to intermodal, we are hearing more about it and the relationship between intermodal and length of haul. Given the fact that shorter transit times are generally associated with LTL, can you provide some examples of LTL-intermodal dynamics and how it works?
Holmes: For a 3PL audience, you need to separate out length of haul of our business in regards to sustainability and technology. I don’t know that it will matter a whole lot for a shipment going from Chicago to Milwaukee, because if it is picked up in the afternoon it generally will be there by the next morning. I don’t know if the shipper or consignee will necessarily have a lot of time to track the shipment or do things like that. For the long haul, that is where the benefit is, with a shipment moving 3-to-5 days. People want shipment visibility and certain details that one may not worry about on the short-haul side. Intermodal is a bigger play in the long-haul business. We meet with each of railroads quarterly, and they are trying to find solutions in shorter markets so particularly the East Coast railroads are trying to find a solution for what is typically 2 business days. Our focus has been to utilize them for 4-to-5 days at a time, and when you pick up freight on a Wednesday, Thursday, or Friday, it will move on rail. Intermodal is a very attractive play, and it makes sense from a cost perspective. From a sustainability perspective, your carbon footprint improves from the time a shipment gets on a train. It is a conversation working in the railroads’ favor, because people want to hear about it now. They are not making a decision based on it now, but in the next couple of years it is going to be a major criteria for how freight is moved, in terms of carbon footprint, sustainability, and adjusting corporate responsibility management.
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