Q&A with Werner President and COO Derek Leathers

Logistics Management Group News Editor Jeff Berman recently spoke with Derek Leathers, president and chief operating officer of Werner Enterprises about industry trends, the economy, and the regulatory landscape. Below is a transcript of their conversation.

Logistics Management (LM): What are you seeing in the economy that is better or worse compared to this time a year ago?
Derek Leathers: Year-over-year, although there may be some small and incremental gains in the economy, there are more of them now than a year ago. Same-store sales are a little better as is data on overall growth. There is not a silver bullet or any one thing that speaks to all of it really.

LM: What about the freight economy?
Leathers: The freight economy is better than that, because the supply side story is playing out, with fewer trucks available and more people getting out of trucking and companies getting bought and liquidated, too. One of the untold stories, I think in all of this is seeing carriers with 50-to-700 trucks getting bought. And the companies making these purchases are saying they are buying these types of companies for the drivers and customers, while liquidating the equipment. It is the same thing as a company going out of business ultimately, which has a net effect on capacity.

LM: How so?
Leathers: We think capacity is still leaving and in our world we see it as a tighter and tighter freight economy. It is certainly tighter this year than a year ago and without any type of emotional event. Two years ago [in 2010] we had the early surge with an inventory re-build, and a year ago we had the “storm effect” with such a terrible winter, which led to a tremendous amount of supply chain disruptions. And in 2012 there was no inventory re-build and there was not a harsh winter; this was coupled with a tight capacity market, which is just tight on its own.

LM: What else are you seeing on the capacity front?
Leathers: There is a whole baby boomer population of small truck owners with fleets ranging from ten-to-100 trucks that have been struggling and are at that age where they are open to liquidating their fleets. They benefit from used truck prices being so high so there has never been a better time for them to close up shop than now. They could hang around for the next several years but in many cases they need to buy another round of equipment or capitalize on the very high used truck values and get out while it is good. We think that is happening more than people realize.

LM: When looking at some of the more positive economic data like manufacturing and exports, how do those things factor into your freight mix, in terms of what you are seeing when it comes to customer activity?
Leathers: More than 50 percent of our business is retail-based so what we do is largely tied to the end consumer. We do business in manufacturing and we do have a freight forwarding business. The export numbers may be a bit oversold politically, though, as it is a small base that being looked at as growing tremendously but it is not what we do as a core in this country, and is reflected as a fairly small percentage of GDP. What we need more than that are consumers that become confident in making purchases to spin the economic needle, and I think that is what is happening. One of the most overrated pieces of data is consumer confidence data. The consumer has been beat up so bad that it is hard to say when they will regain confidence, but they have been spending a bit more lately.

LM: As we are close to mid-year, are you seeing any signs or indications that there will be a true Peak Season this year or is it too early to tell?
Leathers: It is hard to say for sure, but I think we would be feeling it already if there was a real pull forward or an inventory re-build happening. We don’t have the pent-up demand carryover from the first quarter to the second quarter like we did last year, and this feels like a normal second quarter, with things pretty good but not great either. This would lead one to believe, if you couple it with supply leaving and demand increasing, we should be staring at a somewhat robust second and third quarter. But it is still too early to say for certain.

LM: There is a lot of talk about the next transportation bill, with the last one expiring nearly three years ago and on its tenth extension. What is your take on this situation, which seems to be stuck in neutral, especially when it comes to transportation policy?
Leathers: We are frustrated like everyone else. It does not matter if you are a large company or a large shipper or carrier. We are universally frustrated by the lack of movement in Washington, but at the same time I understand some of the objections being made and I can understand some of the objections towards unfunded spending, too. What we don’t understand is that there is an industry that has said openly “we are willing to support higher fuel taxes if you just tell us you are going to spend that money on roads and infrastructure that affects our industry.” I think that should be 99 percent of the battle. We don’t want to be re-tolled on roads already built with no incremental benefit to the infrastructure we are using. That is a fair request and pretty simple. Regardless of political party, what I find interesting is if you want to create jobs and improve competitiveness and answer an industry’s call that they are willing to fund improvements themselves through higher fuel taxes, I have a hard time believing that we should not be focusing on this lack of progress regarding a new bill. It could put thousands of people to work and provide an economic advantage if done right and help the motor public be safe, because we are going to have more infrastructure and investment in highway corridors. It needs to get done. China is outspending us 5-1 on critical freight corridors and infrastructure, and that impacts us economically and from a competitive perspective, too.

LM: What is your take on fuel prices at the moment?
Leathers: Our single biggest concern with fuel is what it does to the consumer more so than our operating costs. Higher prices impact consumer behavior, which is a big drain on the economy. We are making big strides with our carbon footprint and being efficient with our fuel surcharge program. What concerns me most is when a family of four spends $70 to fill up their station wagon, which is much more than they are used to spending.

LM: There has been a lot of talk abut increasing truck productivity through longer trailers and bigger trucks. What needs to happen to see bigger trucks that are safe and increase capacity?
Leathers: In our business, about 17 percent of the freight we haul weighs out today. So I don’t have a customer base clamoring for this or a business case to make for heavier vehicles, because in 83 percent of the cases I would be hauling around a heavier trailer to serve my existing customer base. We have enough to gain with existing weights and dimensions with truckload that we ought to be focusing more on cube optimization, because the industry is so fragile now economically that if we were to turn around as ask the industry to invest in new trailer equipment, the money is not likely there. The U.S. truck fleet has never been older in its history and we need to focus our investment dollars on that. We need to find a way to make that investment healthier, considering that the average trailer ratio of 3-1, with the average cost of a trailer and a truck in order to put one truck on the road, you are talking about an investment in excess of $185,000 to have one truck running.  That needs to be addressed before we go out and buy new trailers.