LTL Q&A with UPS Freight President Jack Holmes

LM Group News Editor Jeff Berman recently caught up with UPS Freight President Jack Holmes about a variety of topics, including pricing, market conditions, and regulations, among others. A transcript of the conversation is below.

Logistics Management (LM): Based on earnings results from publicly-traded LTL carriers, it looks like the market is in a good spot and has been for a while. What is your take of the market as we approach the home stretch of 2014?
Jack Holmes: I think market conditions are all relative in what things are being compared to. I would say we are recovering, because if you look at the results compared to where we were a few years ago, things look good. But if you look at things compared to when the market was really strong in 2005-2006, it would not be too much to be excited about. It is all about perspective. Our general outlook is that there appears to be a continuous improvement, with demand continuing to improve, and issues like the driver shortage are likely pushing some truckload freight towards LTL, and some of the issues with intermodal are probably pushing some freight towards truckload and then pushing some heavier freight shipments to LTL and we are getting the opportunity to move that type of freight more. I think over all on the LTL side that demand is improving and should continue to move in that direction going forward.

LM: How do you view the general economy as manufacturing and industrial production, which are both key drivers for the LTL market, are doing fairly well?
Holmes: We really focus on those IP numbers, which we think are as good of an indicator as we can have for our business. Those numbers projections through next year are not as aggressive as they have been the last couple of months, but they are still more aggressive than they have been in the past year, so I think we are going to see a period of stability at an improved level. That is a good thing. The LTL industry in years past used to be building to a peak in the early fall and then in November and December the tonnage levels used to fall down. I think you are seeing less of that now, and you are seeing more of a just-in-time mentality, as the reliability in LTL has improved, which is something shippers are taking advantage of and leveraging. I think we are seeing heavier freight levels moving past Thanksgiving, whereas in years past going back to 2004-2006, you did not see that significant drop-off. We are participating in some of this Peak Season buying that is going on right now.

LM: UPS Freight is starting to get more involved in density-based pricing, or dimensional pricing. How is that going so far and what in your opinion are the benefits of making that transition when compared to the traditional classification system in the LTL sector?
Holmes: If you go all the way back, there has always been an issue with the FAK (freight all kinds) and what we try to do as a company that owns assets is try and sell space on those assets. And that classification system was the best way that we figured out how to do it until this point. This dim weight approach is a much more accurate way to sell space on our vehicles, and that is what we are all looking to do. For us, we are not putting a line in the sand and telling customers that this is the only way they can do it. We are offering that option and it is certainly an option from our perspective that makes more sense, because it accurately puts together the price along with the space that is used, so we like that idea of it. But at some point in time and I don’t know when that time is, there is no doubt in my mind that this is how we will price freight in this industry as a whole. The question is: do carriers have the capability to do it? We are certainly one that does, and then are customers able to work through the impacts of it on their business and are they ready to accept it? That is what we are working towards.

LM: What is the UPS roadmap in regards to the dim weight approach in the coming months?
Holmes: By the end of 2014, all of our customers can choose to participate in this. The thing that is important for us is that for everything we want to do, we want to do it with the customer software that is out there. For us, it is WorldShip, which has always been a parcel platform to ship from. So for the LTL business, we want to be able to ship our freight off of that platform and be able to do density-based pricing off of it, too. Density-based pricing is going to be part of that platform and by the end of the year it will be part of the WorldShip process. Shippers will be able to go in and look at how they do it with their FAKs and can compared it to how the density-based pricing would work.

LM: What has the early feedback been from customers about this so far?
Holmes: If someone moves heavier, high-density shipments, then they are going to be charged less for the space that they use, and shippers moving bigger and lighter shipments are going to be charged more for the space they use. That is kind of what the FAK tried to do as well, but I think this way is more accurate. You are going to get a mixed group of opinions that will be based on what type of freight shippers move.

LM: How far away is the LTL sector from viewing this type of pricing as a wholesale change?
Holmes: It depends on how quickly other carriers develop their own technology to do this, and it will depend on how long this continues to be an option. You can kind of see a couple of carriers saying ‘this is the only way we will price freight for you,’ and it will then be up to the shippers to determine whether that is satisfactory or if they choose to, go to carriers that are maybe less technology-based and try to hang on to FAK pricing. I think there is going to be a period of transition and that period of transition is going to be years more than months, but it behooves everyone that we accurately sell space for our equipment. There is no doubt in my mind that the industry as a whole will end up in the same spot. It is just a question of when. For me, that ‘when’ is more than a few years out into the future.

LM: That aside, how do you view the current rate environment? A number of LTL’s announced general rate increases in recent weeks, with most of them to take effect in the coming months.
Holmes: There are carriers that have announced their second GRI in the calendar year, which we have not seen in a long, long time. That by itself will tell you that some companies are feeling very bullish about the pricing environment right now, but for us it was more important that our customers gain an understanding for budget purposes to understand what the rate increase is going to look like, which is why we announced our GRI when we did [in late October]. Frankly, our strategy is pretty simple. We have such a base of small, middle-market customers that utilize our parcel business that also like to utilize our freight business, which has always been the backbone of our strategy. Our rate increase, we believe, will come out as pretty conservative compared to some of the competitors and will take effect later than some of our competitors, too. We believe that the middle market customers should be very pleased with our approach to the rate increases and hopefully utilize our services, which has been our strategy all along. The timing of the rate increase and the amount of it will put us in a favorable light with those customers we are looking to attract.

LM: What is your take on the role 3PLs and brokerages are playing in the LTL sector these days? Also, the spot market has been vibrant as well.
Holmes: In the past, we have discussed how 3PLs need to take a fresh look at their strategy going forward. It is my belief that the asset-based carriers on the LTL side certainly enabled 3PLs to go in and effectively compete in this space. We did that by having too much capacity and needing freight, and the relationship simply became one in which 3PLs have freight and we need it so let’s go get it from them and we would compete on price to do that. It was less of a partnership and more of a transactional relationship. We are in a different spot now as there are less assets, and I think the typical freight company would tell you they have plenty of freight, and now the relationship with 3PLs becomes [different] in that atmosphere. We have been fortunate to have been ahead of the curve, because we have some really good partnerships with 3PLs that understand what we are trying to do. We are not trying to just price our way into their share of the market. We are trying to identify opportunities where partnering with that specific 3PL makes sense for us, and more importantly we have continued to kind of challenge ourselves with the relationships we have with 3PLs and have “fired” a lot of them, because they did not care about us. Instead, they just cared about getting space. UPS, as a company, means something. If you are able to market UPS as part of your portfolio of partners, then you have to be considerate of what we are trying to do as a business and know, in turn, that we are trying to help you become a successful business. There is probably 20 percent of 3PLs out there that don’t put enough weight in the companies they are doing business with and treat them just like any other company out there. Those are the companies we will choose not to do business with. They may have revenue out there but that can go to someone else, as we will choose not to participate. As a whole, 3PLs really need to figure out if they are going to partner with companies and if they do that, a company like us is going to demand that if you are out there you need to help us as a company every day while helping yourselves or they are going to treat them like a transactional partner and come and go as they choose and we won’t be part of the program if that is how they choose to do it.

LM: With UPS Freight very active on the intermodal side, how have the railroad service issues impacted how you view or use intermodal? Are things improving?
Holmes: We are obviously partners with the four major U.S. Class I railroads and some of the smaller ones as well and have been for many years as the longest partner they have had in the intermodal space, and we value those partnerships tremendously. Having said that, we have really been disappointed in the intermodal service, and we continue to be disappointed as the railroads continue to try and get their feet back under them. Unfortunately, at the end of the day, there is a customer that gets stuck in the middle of that, and we have taken work off of the railroads, because our customers have had to deal with rail service issues, and we will continue to do that wherever necessary. Intermodal still, though, makes more sense than it ever has. With the driver shortage that is out there and such a concern in regards to sustainability and shippers being more concerned than ever about carbon footprint, intermodal is such a big part of the solution. But unfortunately the service has just not matched up to what is needed. I know there is a lot going on with the railroads and grain shippers and legislators asking questions about service issues for moving grain. For me, the shame of it is that this could have been the greatest period of intermodal growth the railroads have ever seen. The only thing missing has been the reliability part of it. It can still be turned around and corrected, and we want to be with railroads as a good partner with them when it does happen, but it has not happened yet. Even with the current challenges, our sales team sells intermodal like crazy or at least we have up until this year as we have dealt with these service issues. We sell carbon footprint reduction as a big part of the platform. We have a lot of people that want to use intermodal; we just need better service.

LM: How, if at all, do the current West Coast port congestion issues and the unresolved labor situation affect your daily operations?
Holmes: I cannot say it has a dramatic impact on us, but I can say that it impacts us. We have a lot of customers that do their sourcing offshore come through the ports and then we take control of it and largely handle the warehousing and distribution work for them, as well as the managed transportation part, too. When you do that, you want reliability attached to it, and when you have issues at the port, you lose that. It is certainly going to put a bit of a monkey wrench in it for us, but on a bigger side there are customers challenging themselves in terms of it is the right model to use, and depending on if they have been through it before unfortunately some will move to a different mode or some will consider different sourcing but all that goes into the formula as to whether their sourcing is in the right area and the right model is built for that or if they will have to change the model and do something differently like moving to Mexico and doing distribution into and out of there.

LM: Federal regulations never take a break in the trucking industry. Which ones are top of mind for UPS Freight?
Holmes: I am on the National Freight Advisory Council for Department of Transportation Secretary Foxx, and there has been a lot of learning there. One of them is that I got some insight into what works and what does not work in Washington. And one of them was that I was not predisposed into thinking that we did not have talented people working in D.C., but I have been thoroughly impressed with the talent of the people working in DOT, Commerce, and Highway Transportation. It has been a real eye opener to see how many dedicated people there are working on solutions. That is the positive part, but one of the things I find a little concerning is that there seems to be people in different departments working on the same things and there seems to be a lot of redundancy in their efforts. The concern is if you sat down all of the stakeholders that have something to do with national transportation and put out an edict to get things done, part of that would be the group to improve or keep current highways, ports, railroads, roads, and airports that would all be in the room. And on the other side of the room would be the people that regulate that part of the business. So the issue is when everybody leaves the room the regulators don’t have a lot standing in their way to get things done. The builders have a lot in the way, with the main thing being funding, so while everyone left the room at the same time the regulators have been able to do a lot in regards to regulations, and the builders have not been able to get funding. So, all you are really seeing now is a lot of regulations and not a lot on the other side of the business. That is where the concern comes from the trucking and transportation community. It just seems like for our business, a business which has been deregulated twice, that we dealing with just an inordinate amount of regulations but we are not getting anything to benefit us. On a positive note, for CSA, the FMCSA has taken the right approach, and the relationship has been very constructive. They have taken feedback and seem to hear us so that is a good one to look at. For hours-of-service, I look at that differently. The data that was used in the beginning was flawed. I know it has been referred to as one of the most comprehensive data [collection] ever to draw conclusions from. I don’t see it that way at all. Looking at trucking companies under review and using them as the basis for making a decision would be the same as going into all the U.S. high schools and taking the D students or less and asking them about their study habits and then drawing conclusions for the typical student. That is what has been done with HOS. ATRI on the other hand surveyed the entire trucking community and had so much more data come drive different conclusions than what FMCSA came up with. It is a real concern. The HOS changes have not done anything but create more congestion and more issues. What I would like to see is a way to improve things where intermodal meets highway or port meets highway or something else to improve the flow of traffic in this country. I don’t believe this is a possibility on the funding side, so for us, it would be to improve productivity in the form of twin 33-foot trailers (from 28-feet now), which we believe are as safe or safer than the current configuration and will take 15 percent of vehicles off highways. There is nothing there on the safety side that regulators will be able to sink their teeth into to make things any more dangerous. And on the compliance and environmental side, I don’t know how you could do anything but enthusiastically support the idea of reducing the carbon footprint level with this configuration. This is a slam dunk from an environmental perspective and gives us a chance to mitigate some of the recent regulations and try to do something to try and lower the cost to transport goods in this country for our customers.