Q&A: Doug Waggoner, CEO of Echo Global Logistics

LM Group News Editor recently spoke with Doug Waggoner, CEO of Echo Global Logistics, a non-asset based freight brokerage company and a provider of technology-enabled transportation and supply chain management services about how 2014 ended up in the freight transportation and logistics sectors and various related topics. A transcript of the conversation between Berman and Waggoner is below.

Logistics Management (LM): Let’s start by talking about the freight market in terms of how 2014 ended and what you expect in 2015?
Doug Waggoner: October was kind of flat and we did not see the traditional Peak Season, which we have not really seen for eight years or so.  What is really interesting is how strong the market stayed basically right up through Christmas. Normally, you see freight levels die off a little bit in the middle of December, but with different shipping patterns and people carrying less inventory and more e-commerce business, it really felt like volumes in the freight economy were very strong in the fourth quarter. In general we think 2014 was a good year, and 2015 will be a good year, too.

LM: With the lack of a true Peak Season for the last several years, is it fair to say that could be the new normal now? What are some the drivers for the lack of a true Peak Season, lack of shipping patterns or something else?
Waggoner: I think the change it is a change in consumer consumption with more people buying things online and not going to stores. That means more freight is moving in the form of small parcels to your doorstep, rather than via truckload to a big box distribution center or LTL from the DC to a store. Back in the old days, people loaded up with inventory prior to the holidays and that came as truckload or LTL that created a Peak Season in October into November. And now with so much e-commerce purchasing by consumers, it has flattened out the peak to a large degree.

LM:Let’s shift to the regulatory environment. What do you think about the 1-year suspension of the HOS 34-restart rule?
Waggoner: Because we don’t operate a fleet, we don’t feel that as directly but I think any relief it gives us in terms of capacity will be offset by a more robust economy. And the fact that oil has just collapsed is a huge tax break for consumers and provides more disposable income, leading them to spend more. I think you will see a nice pop in consumer spending, and that will drive more freight volumes, likely offsetting the relief we got in capacity based on that legislative action. When the HOS rule was first changed, I would say the impact was [mixed] because it varied carrier by carrier, as some carriers were already running their networks in a way where it was a factor, and others say it might have taken 3 or 4 percent of their capacity away and they had to make adjustments around that. I don’t think it felt that impactful when it first came to be, and I don’t think the adjustments will be either, especially when you have a rising tide.

LM: How do you view the current capacity environment? It seemed like things got ‘less worse” as 2014 moved along in some respects.
Waggoner: Things did get less worse as the year moved along but still remained relatively tight compared to the last several years. It was kind of in sync with the economy recovering and volumes picking up.

LM: It seems like the economy is in a better place at the beginning of the year than it has been in recent years. Is it fair to say things will continue along these lines in terms of freight growth or is it to early too tell?
Waggoner: I believe things will continue to tighten, as this is the function of a good macroeconomic environment. Shippers are taking various things into consideration as far as how they negotiate their rates. They are looking for security in their rates and also are willing to give up some flexibility for carriers and brokers since it is a zero sum game. It is a fairly stable environment but things are likely to continue to tighten.

LM: The brokerage market is really filled with several big players like Echo, CHRW, TQL and others. There is overlap with carrier bases, and the brokerage market is strong for various reasons. Does it stand to reason that the TL brokerage market will only gain in strength as time goes on at this point?
Waggoner: It is really the function of a tight capacity market, because what happens is for a small shipper the number of carriers they have relationships with is limited based on their ability to maintain relationships with different parties and they have a limited sized Rolodex. When they cannot find capacity at a price they view as fair, they will turn to a broker with access to tens of thousands of carriers in their Rolodex. Another part of the equation is that large truckload shippers that deal directly with asset-based carriers will supplement their asset-based carriers with brokers because their asset-based carriers will tighten up in a tight market and they cannot supply all the capacity they need. And we have a lot of customers that think of brokers as a carrier as we can provide a higher quantity of capacity, and we have a large amount of capacity based on the number of carriers we work with.  With the vast number of for-hire carriers in the market, it really takes a broker and technology to reach out and connect with carriers to find out where the empty trucks are and scale and volume is also needed to do that. A tight market really is favorable to brokers and you are seeing that.

LM: Many companies like Echo and its competitors are very active on the M&A front and growing through expansion. Is this a lasting trend or is it simply based on need at a given time?
Waggoner: There are a lot of dynamics that have come into place simultaneously related to M&A. There are a lot of private equity funds that have uninvested capital and are looking for places to put that money to work simultaneously. And the banks are willing to give it out in large quantities so for a private equity player sitting on a mound of cash is looking for things to buy. In that regard, it is a seller’s market because there are lots of buyers out there. At the same time, for smaller 3PL’s, there is some recognition that you need to go big or go home, as size matters, scale counts, technology is important and capital is needed for technology and working capital is needed for cash flow. There is a growing awareness for small 3PLs that it is probably best for them to be part of something bigger, and there is some motivation on their part. Between having motivated buyers and motivated sellers, it creates a larger market.

LM:Looking at intermodal, volumes were very strong this year in light of well-documented railroad service issues. How do you view the current intermodal market in terms of truck-rail collaboration? Is there room for further collaboration in the future?
Waggoner: We find that the rails are very interested in the intermodal business, especially when it comes to a company like Echo, because we are not an asset-based intermodal company. We are not selling to big box retailers that really are the large users of intermodal. Instead, we are really using intermodal as an alternative to truckload, so in our target audience it tends to be smaller shippers. If we are talking to a smaller shipper truckload, we would like to give them am intermodal option and explain it might take a couple of more days but we can save them $800 dollars on the move if they are willing to put their freight on rail. That is the type of freight conversion to rail that the railroads love. We find that the rails are very willing to work with us on that, and we love being able to give our clients an alternative to truckload, given the shortage of truckload capacity, so in that case it is a win-win.  We saw our truckload volumes head up in 2014, too, despite fuel prices heading down. Intermodal is definitely going to continue to grow and will be highly correlated to truckload capacity, as well as the price of oil.