Q&A: Werner’s Leathers shares insights on industry issues

With so many things impacting the supply chain, logistics, and freight transportation landscapes on a daily basis, it can sometimes be hard to read the tea leaves in terms of what is happening in the trenches from one person. But Derek Leathers, incoming President & Chief Operating Officer of Werner Enterprises, may be an exception. At last week’s NASSTRAC Logistics Conference & Expo in Orlando, Fla., LM Group News Editor Jeff Berman had an opportunity to speak with Leathers about myriad industry-related topics, including energy prices, modal shifts, and government regulation, among others. Below is a transcript of their conversation.

LM-What is your take on what is happening with diesel prices? Does it seem similar to what was happening in 2008?
Leathers-It seems to be a little bit out in front of us from our perspective. The underlying supply is still there. You look at reserves here in the U.S, and there does not seem to be a supply-related reason for fuel to be as expensive as it is today. Given that, prices never seem to go down during the summer driving season so we are not looking for any relief in the summer. But I do feel as though it is currently probably at a fairly high mark relative to the underlying supply and demand. We are going to prepare for the potential for worse and continue to work to use less of it. We cannot control the price, but we can control how much we burn.

LM-What are some of the ways to control how much fuel you burn?
Leathers-Putting skirts on the trailers, using wide-based tires, and making any miles-per-gallon improvements we can make—anything we can do to burn less fuel. Another thing is having our drivers focus on a better miles-per-gallon culture and making MPG matter.

LM-Is Werner doing anything along the lines of developing a hybrid fleet or using natural gas as a resource?
Leathers-Right now, the technology has not really developed in our mind to meet our needs. We are a long-haul carrier, but even our regional network average length of haul is 300+ miles. LNG fleets really need to be in more metropolitan areas today rather than for long-haul. The current economics behind it are tough for it to work.

LM-What is your take on CSA 2010 since it went live late last year?
Leathers-From the beginning, we were saying that we felt some folks were over exaggerating the impact. Our number for how much available driver capacity CSA 2010 would impact was 3-to-5 percent, and it is trending toward the lower end of that in terms of what is happening with our fleet and what it has done to capacity constriction. The bigger impact, which is less talked about, is the driver diligence now around not wanting to move equipment or saving equipment, which is not wanting to move it at all if it going to be a point on the record. This has to do with stopping loads from being able to move to a truck stop to get a tire repaired and things like that…which is causing disruptions. We think the government has been fairly responsive in fixing some of the really broken parts of it, and we hope they will continue to listen as we ask for ongoing improvements related to CSA. But when you couple CSA with HOS and EOBR usage you now are back up to a double-digit capacity impact.

LM-What are the biggest challenges when it comes to EOBRs being required for commercial carriers?
Leathers-The big negative when carriers first implement it is I don’t think carriers systemically cheat. I think carriers try to operate legally. Drivers can certainly work the edges, and with EOBRs they can’t. They have to re-learn how to re-drive and re-plan and re-deliver the same loads slightly differently. I don’t know that it is more or less safe this way, but it has to be more consistent. We think you are going to see a negative 1-to-2 percent miles per truck when you implement EOBR, which is a lot for us, and within about a year you might get that back. Eventually, it could be a net positive for us because we can plan all our trucks with full visibility in terms of how many hours each one of them has left all of the time. It is a negative on the front end and will be a capacity constrictor for a while. But we also think those fleets that are implementing them now are in a little better environment now than when we were doing it. In 1998, we were the only carrier doing it, so drivers could leave us and not deal with it, but now wherever they go they are going to deal with it. It is not going to cause drivers to migrate with the exception of Werner, as we have seen an uptick in our application count as drivers would rather go somewhere where they have been doing EOBR for 13 years rather than go with someone who is learning it right now.

LM-What about the proposed changes in drivers Hours-of-Service rules to reduce daily driving time from 11 hours to ten hours?
Leathers-The problem with that is that even the folks that say it is no big deal and the change will only impact 4-to-5 percent of fleet productivity need to realize that 4-to-5 percent is a huge deal for an industry with very thin margins and margin for error and 99 percent on-time expectation. Taking away that hour is a big deal and it has a negative effect. We don’t think there is safety data to prove it at all, and all of the safety data would say otherwise. We are against it and are prepared for it if it happens. But we hope it does not get implemented.

LM-Given Werner’s presence in truckload, intermodal, and logistics, what are you seeing along the lines of modal shifts by shippers at a time when fuel prices and a slow recovery are prevalent?
Leathers-Some folks will be trading down anyway they can over the next couple of years.  Air shipments will become expedited truckload, and expedited truckload will become standard truckload, and LTL will become truckload, and standard truckload will go intermodal more and more wherever possible. There will absolutely be trading down. Our job as suppliers is to try to make the trade down free of a service impact wherever possible. I am more optimistic than some that we can help our customers migrate truckload freight to intermodal and not negatively impact their service as long as we give them the visibility to where their freight is all the time.

LM-A year ago at this time a significant inventory re-build was occurring. Was it significant in the sense that there was such a major volume increase over a tough 2009? How does a large player like Werner view inventory build-up and inventory management?
Leathers-2010 was the first time there was an uptick in inventory in some time as well as new store growth. We have been tracking same-store sales layered over inventory build as well as new store openings. So when you put the three together at a lot of the discount retailers in particular, it comes to around +15 percent for freight. And people tend to look at it in silos, with inventory build as X and same store sales layered over inventory as Y. But you need to put it together to see how much more tonnage is going to move with a retailer. The discount retailers in particular are doing very well in this economy. 

LM-Now that we are closer to mid-year, do you think this year’s Peak Season will be more traditional compared to last year, when most of the peak activity occurred around August?
Leathers-Generally speaking, peak has become less of a peak and more of a hill, because customers are different now and there are more things like gift card purchases happening, which do not translate into real freight until January. The buying behavior of consumers is different than it used to be. We have seen a more muted peak even back in 2004, 2005, and 2006 when things were strong. Peak was still more muted a decade prior to that. We don’t anticipate a return to true Peak Season as we once had because of all the e-commerce and deliver to your home type of behavior from consumers, coupled with how product packaging is getting smaller and smaller.

LM-What are some of the common refrains you are hearing from your customers in terms of things they want, need, and expect from you as a carrier or logistics service provider?
Leathers-I think the biggest thing they are expecting out of their carriers is fairness. They want to be treated fairly and as they treated their providers during the downturn. The problem with the disconnect is the number of shippers that sort of want to reinvent—or have a different perception—from reality of how they treated their carriers. The definition of ‘I stood by my carriers’ has become a pretty low bar to get over. So with the real customers that collaborated with us during the downturn and that we are continuing to collaborate with now, we are doing everything we can to keep their costs to a minimum.

LM-At this conference in 2009, you made a comment along the lines of “shippers are taking advantage of the rate environment now, and carriers will return the favor down the road.” It seems like that time is here now. How have things changed since then?
Leathers-Certainly, the carrier community now is in a position to improve their yield. We have actually spent a lot of time making sure we don’t exercise that kind of approach. There are a lot of hurt feelings in the industry, and our job is to be bigger than that and really do what is appropriate to reinvest in our business. That may still feel like a big number at times to a shipper, but my commitment to our shippers and our customers is that we are going to ask for what we need to invest in our business to support them. That is ultimately the dilemma we have now.

LM-What is your take on what is happening with intermodal right now. Domestic intermodal specifically seems to be booming again, given the run-up with diesel prices and rail service remains relatively strong.
Leathers-We got into the intermodal game only in recent years. It is a small overall part of our service mix, but we are very bullish on intermodal. We think there is going to be a lot of growth in that area, and we also think the demise of the truck is greatly exaggerated. At the end of the day even with intermodal growing 4-to-5 times as fast as trucking, trucking will still have 70 percent of market share when you fast-forward ten years from now. We think it is a “both” answer; you need intermodal and you need truck. We want to provide both to our customers and don’t want them to leave the building to go buy it, and that is where our focus is.

For related articles, please click here.