NASSTRAC Q&A with Derek Leathers, President and Chief Operating Officer of Werner Enterprises

Logistics Management Group News Editor Jeff Berman had an opportunity to interview Derek Leathers, President and Chief Operating Officer of Werner Enterprises, at this month’s NASSTRAC Shippers Conference and Transportation Expo in Orlando. They discussed various aspects of the truckload market, including prices, fuel, and regulations. A transcript of their conversation is below.

Logistics Management (LM): Looking at the economy, there appears to be some decent macroeconomic numbers in the form of industrial production, GDP, and improving retail sales numbers. How do those types of metrics match up with what you are seeing in the freight economy?
Derek Leathers: We are seeing very similar things on the freight side. Freight has been pretty strong this year, and I think some people have gotten lost in the fact that is not as strong as it was a year ago, even though it was a year that was very disrupted by bad weather. There have been times when it was every bit as strong and others when it was slightly softer compared to previous years. This year compares pretty favorably to all of those preceding years so we think the economy is seeing a little bit of lift, but there is some questionable jobs data going on and we follow that closely. Nearly 50 percent of our customer base is retail, and generally speaking retailers are doing pretty well right now and we are seeing some decent momentum there.

LM: How do you view the current capacity situation on the truckload side?
Leathers: My view is that capacity has stayed fairly flat after having decreased significantly during the recession. I think in its trough it was off somewhere between 16-to-19 percent, and right now it is off closer to 14-to-15 percent compared to its peak back in 2007. If you look at it, those trucks are going to be very hard to bring back on line-haul. It is much harder to drive a truck now than it was back then, and trucks are much more expensive now, too, and the returns in the industry are still pretty low. I think [carriers] will work to meet their customers’ needs and bring things like brokerage and intermodal to the table. But the idea of adding net trucks will be something people will be fairly cautious about, I think.

LM: What about the regulatory environment? The industry is up against a number of challenges, whether it is ELD, HOS or a new highway bill, as well as 2016 being an election year.
Leathers: It has been a tough several years on the regulatory front and dealing with things like CSA and HOS. We have had some temporary relief regarding the HOS restart, which has made a lot of sense, and I think ELD’s will be tough to delay, given how strong the government’s rhetoric has been towards safety. It is our position that we need trucks on the road all logged in electronically and legally at all times so we can then focus our efforts on other safety initiatives and get the playing field level across all carriers.

LM: What is your estimate in terms of a percentage-based improvement regarding the temporary suspension of the HOS restart?
Leathers: It is a sum of the edges sort of thing. We were pretty close to our conservative estimate of less than 2-to-3 percent, which includes the reset and some of the other changes that went into effect. When the reset kicked in, we thought it could end up impacting productivity by 1 percent or less, and it was likely in the low 1 percent range so it was not a material impact.

LM: What about the driver shortage?
Leathers: The driver shortage is very real. Enrollments are down 15 percent annually nationwide at driver schools, and fewer people are coming up to replace the retired drivers.  We have to keep working on lifestyle, pay, and equipment, and get them better trucks and home more often. We have done a pretty good job and feel out fleet is stable. Turnover is not creeping up and we feel pretty positive where we sit, but it is a storm that is not going away in the next two or three years; it is more of a five-to-ten year-type of issue.

LM: How do you view pricing in the truckload market at the moment?
Leathers: We are still in bid season. About two-thirds of our freight goes out to bid in the first half of the year, and some of that will be implemented in the third quarter. Customers have been generally receptive to the fact that we need to increase pay for drivers and that rates were kept somewhat artificially low during the recession and are now climbing back to where they need to be. At the end of the day in a tight capacity market, we are going to support the customers that support us.

LM: As a very retail-centric carrier, what has been the fallout of the West Coast port labor dispute? How bad was it and how much have things improved since the PMA and ILWU signed their tentative agreement?
Leathers: We have certainly seen freight flows start to pick up, and it has not been as bad as we thought it to be post-agreement. We thought we would see significant backlogs post-agreement and for the most part we have been able to chew through it a little better than we all initially predicted. We are still clawing through a lot of that freight that is sitting right now at cross-dock and trans-load facilities on the West Coast but it was not as disruptive as we though post-agreement, whereas pre-agreement it was extremely disruptive and wreaked havoc and was stressful. We are glad to be through it. You may see shippers shifting more imports through East Coast ports, but it won’t be a dramatic shift at the end of the day. But it is quite a bit quicker to move imports through West Coast ports, even though there are some East Coast ports that can be serviced economically, but habit is hard to break and there is not likely to be a wholesale change.

LM: How are lower fuel prices impacting business?
Leathers: It is obviously a benefit for our customers primarily through the fuel surcharge program. They are going to receive upwards of 90 percent of that benefit through a lower fuel surcharge. It helps them at a time when rates are going up, because their total spend is probably not increasing when you factor in fuel and so it does provide a bit of support to be able to be able to better support their carriers while not spending more. We think fuel will stay stable for the foreseeable future, meaning this year. We plan to stick with our fuel surcharge program, because we think it is the fairest mechanism to share in cost savings when fuel prices go down, and when it goes up shippers support our ability to operate, too.

LM: Shifting gears a bit, what is your opinion on railroad and intermodal service issues? Are things getting better on that front?
Leathers: Intermodal service is getting better, but it certainly has a long way to go to get back to where it once was. I think [the service issues] proved that capacity source is not as elastic as was once thought. A large storm last year literally took six plus months to get the network back in order, and the West Coast port issue will cause more network disruptions as that freight is all starting to flow. I think the bottom line on rail is that intermodal does not have unlimited capacity, and that is going to further constrain overall capacity in the marketplace.

LM: What are the prospects for a new federal surface transportation authorization in your opinion?
Leathers: There is a chance it could happen before a new President is elected, but I think we have a very long road ahead of us. We will keep pushing for it, and the industry would like to see a fuel tax-based approach, but that is very unpopular in Washington, even though it makes a lot of sense and is the easiest and cleanest way to get the money needed. It will be a tough road over the next year to get something done.