UPS Freight’s Holmes provides insights on LTL market trends and conditions

At last week’s NASSTRAC Conference in Orlando, Fla., LM Group News Editor Jeff Berman caught up with Jack Holmes, president of UPS Freight, the less-than-truckload subsidiary of UPS. On June 30, Holmes will retire from UPS after a 37-year career with Big Brown that saw him rise from the overnight docks in Philadelphia to the executive suite in Richmond, Va.

As previously reported by LM, over the course of his distinguished career, Holmes served in several key roles, spearheaded the move into LTL by the world’s largest transportation company and is highly regarded in the freight industry for his leadership and talent.

Last week at NASSTRAC, Berman caught up with Holmes one last time to discuss industry issues and trends. A transcript of their conversation follows below.
 
Logistics Management (LM): What is the impact of high inventory levels on the LTL market?
Holmes: This is really more of an inventory issue than a core economy issue. People are trying to figure out how to handle this inventory situation and how to do it in the most sensible way possible. It has to clear itself out. It is going to continue for at least another two quarters, and hopefully by the end of that time we will be back to a more stable environment and dealing with the basics of the economy instead of inventory overhang.

LM: There are varying opinions on how long it will take to work inventories through the system, it seems. What is your take on that?
Holmes: If it takes two quarters, that takes us through the two ‘money making’ quarters for freight, before heading back to the softer areas. That means things could pick up by the middle or end of the first quarter next year. But from an annual standpoint, I think you will see things be fairly stable by that time.

LM: Looking at the spot market, there is a lot of availability in terms of capacity. How do you view the current spot market environment?
Holmes: On the macro side, there seems to be concern that the freight market is going the way it went in 2008. The differences, though, are profound. In 2008, you had YRC crippled, with FedEx and Con-way trying to drive them over the ledge with some incredible discounting and basically the market fell apart. Spot market quotes were incredible, and truckload carriers were trying to purge larger LTL shipments. All those dynamics were in play and you had a shipping community that came in mid-stream during contract negotiations asking for renegotiations on current rates. It was the worst of all worlds. Profitability for asset owners sank, and the 3PL group gained their entrance into LTL.

LM: What was behind that entrance?
Holmes: In the freight world, you typically had that customer base with customers with small margins that might have been long-time customers who you had incredible margins on. And the 3PL groups went after those and took your best customers. None of that is in play anymore.

LM: Looking back at the LTL market now, what helped it to recover?
Holmes: It was Con-way and FedEx. YRC at that time was moving down and they were one and two in the market. When the top two market leaders are selling price, the whole market kind of has to react that way. But when they saw profits plunder after doing that, with YRC still in business, they went back to a different way and that is what brought the market back with them.

LM: As a large user of intermodal, how well has service come back over the past several months?
Holmes: Intermodal service is fantastic. When the service issues were occurring, we were taking loads off the trains and putting them back on the road, because we had to do that even though it was more expensive. But we are now putting loads back on trains again. The intermodal providers deserve credit for things improving, while some of it also has to do with so much less coal moving around, too. Our intermodal spend has a direct relation with on-time service, which was fantastic during peak season, and continues to still be.

LM: What are your typical intermodal transit times?
Holmes: It is all for longer-haul, so it is about three-to-five days. But with the relationships better and the carriers performing at a higher level, they are coming to us with ideas for shorter routes, too, which we are listening to.

LM: While LTL pricing appears to be in a good place, what are some things industry stakeholders need to keep an eye on as it relates to pricing?
Holmes: Everyone is pretty stable, or disciplined, as far as pricing goes from a carrier perspective. In our industry, if someone is being aggressive on price, then the other carriers have to take a look at it and decide if they are going to sit on the sidelines and watch the revenue go somewhere else or are they going to react. While it is very disciplined right now, one carrier can change that. That part of it is unknown. On another note, shippers are seeing capacity and trying to work it like they did in 2008, with carriers being less receptive to those conversations. 3PLs are not able to get them much better deals like were used to in the past, because it was about lower prices, whereas now we have a disciplined approach to how we deal with 3PLs. There are 3PLs out there just trying to undercut rates and sell price and frankly we don’t want anything to do with that. And there might be other carriers out there that don’t have an effective sales force and do want to partner up, but that is not us. In the longer-term, the issue is with equipment orders, which is a big deal. There is a glut of used equipment out there, and drivers not coming into the market as quickly as they are leaving the market, and the market is going to start growing again. That is going to be a huge issue. The price for that one guy that owns a truck is going through the roof.

LM: Do you think about pricing more through the lens of contractual rates or revenue per loaded mile?
Holmes: The latter. That is where a lot of the discussion about dimensionalizers stems from for a more simple way of pricing freight. It is all going to happen, the question is who is going to be the first one to do it? For the first one, there is going to be some risk in doing that, because there are some big shippers still not ready and others using paper every day as part of their process. The parcel world is different because it is saying ‘we are going to change’ and because such big players were making those changes everybody had to change their process to fit those changes in. The changes we are making in the freight world are not the case, as we are making changes with paperless and receiver changes focused on helping the customer, and the customer would say this would help us absolutely but now we have one process for you and one process for all our other carriers and they would rather not have two processes.

LM: How far out is the LTL sector from turning to dimensional pricing?
Holmes: We are trying to take a measured approach and got aggressive with it last year. We are close to where we want to be at this point.