Werner’s Leathers provides insight into various industry topics

Logistics Management Group News Editor Jeff Berman recently had an opportunity to talk to Derek Leathers, president and chief executive officer of Werner Enterprises, about market conditions, the ongoing driver shortage, and pricing, among other topics. Below is a transcript of their conversation.

Logistics Management (LM): How do you view the current state of trucking market conditions?

Derek Leathers: This is the strongest market I have seen in my 27-year career, especially with the market this strong this early in the year. So when you think about the strength of the market, you have to think about seasonality, with January through March usually being a slower period, and it has been anything but that this year. It really…started around mid-year last year and has just continued to build. We saw virtually no drop-off at all from the fourth quarter to the first quarter, with freight activity remaining strong through the year this far. We are very bullish on what we are seeing and very excited.

LM: Why, in your opinion, are things going so well? What are some of the key drivers?

Leathers: There are all kinds of reasons. The combination of economic lift and just a stronger economy with capacity still being constrained, both through the combination of ELD (electronic logging devices), and the general driver shortage, as well as inventory levels coming in lower than they have in recent years. These things have caused steady demand, which we have not seen in a long, long time.

LM: Looking at capacity, there are reports signaling how tight things are in the form of high load-to-truck ratios for example. How are you seeing that imbalance play out in the truckload brokerage market and what are some of the key market fundamentals in play at the moment?

Leathers: It has lent itself to shippers going deeper in their routing guides, which means they are going to, more often than not, be bumping into the brokerage portion of their routing guide and utilizing brokers to cover lanes that may have been covered by asset-based carriers previously. I think there is some caution you have to apply in the load-to-truck ratio data out there, because the same load may be showing up in the same five or six brokerage [logs]. But the point is they are all still struggling to cover it so it is still an indicator that matters. Directionally, it just infers how strong demand is and how tight capacity is, but I am not sure there are nine loads for every one truck type of data that is out there. It is factually accurate as that is the same way it has always been measured. As an asset-backed broker, it gives us a better opportunity to utilize both our assets, as well as our brokerage-carrier network to bring efficiency to the customer. And we think in tight markets like this that asset-backed brokerage becomes much more attractive…..and you can see the benefits of having both assets and asset solutions coming from the same provider.

LM: What do you think has been the post-ELD effect in the market as of now?

Leathers: Around three years ago, we felt that the impact of ELD would impact industry capacity in the 3-5% range. We really still stand by that statement and we think that is the amount it has impacted things. I think what is lost in translation is that impact kind of came in three waves. There was the largest wave, I think, that took place before December 18, 2017, in which people wanted to be good clients and be good actors and do the right thing and obey the law and they made the conversion. The next wave is from December 18, 2017 to April 1, 2018, which is the second biggest wave, and cutting into the soft enforcement period and people making sure they were compliant by April 1. The third wave is from April 1 to right now. I see reports from all over, saying that 1.8% of trucks coming through scales are being stopped and out of service to as high as 8%, depending on the region of the country. I think it really is kind of dependent on the density of the scales and the weigh stations in certain parts of the country. Those that are not yet converted have a variety of options available, which include bypassing scales. That is something that has happened throughout the transportation industry, and a lot of people are out there doing that. But over time it becomes increasingly difficult to not ever be on a scale or not be pulled over. We are getting into the mid-90s now, if not higher than that, for ELD compliance. For the short time, there has been some pain involved, which we have been very transparent about in terms of production and some of the related impacts. Longer term, it is straining momentum in the form of shipper and consignee efficiencies, shining a light on detention, and the need to make sure drivers are properly compensated. We still believe it is a benefit to all players within the industry, and I emphasize that because it is often talked about that it benefits large carriers. But actually it is the carriers that have the least amount of leverage in terms of being compensated for delays.

LM: How so and in what ways?

Leathers: Shippers and consignees, small carriers and owner-operators, with ELD in place, are now able to ride the wave above of this detention-based focus and should actually be able to price properly, be paid properly, and get compensated when [plays] take place. The net effect should be based on shippers really understanding the value of the time, as opposed to mileage. The biggest thing ELD have brought to light in my opinion is that whether a truck is inside or outside of the dock, the minutes count the same. Those minutes are being managed efficiently now, but that has not always been the case. Now, exterior inefficiencies that affect the loading and unloading of truck drivers across America are given the same level of importance as interior inefficiencies affecting forklift drivers and warehouse workers, and that has been a long time coming. These things reflect the reality of freight….so nothing is able to be sub-priced below market or subsidized through activities outside of hours of service. It allows people to be paid fairly for the work they are doing, and I think that is a good thing for the job of the truck driver and a good thing for the industry.  

LM: Looking at the ongoing driver shortage situation, Werner is very active on that front. Can you please highlight what the company is up to?

Leathers: One of the key things we have done is acquire two driver school networks over the last five years. We now operate the largest driver school network in America in terms of the number of graduates. We are a big believer in being a “school of choice” and want our trainees to have the ability to choose where they go to work, and we hire about 40% of the graduates of these schools, with roughly 60% going on to pursue careers in the industry. We are OK with that, and we hire more drivers out of our schools than any other company. 

LM: Data from the American Trucking Associations points to a steep shortfall or a projected decline in what is needed for driver numbers compared to the number of actual drivers. What needs to happen to improve this outlook?

Leathers: There is a lot of rhetoric out there saying that if carriers want to stop the driver shortage then they need to pay their drivers more. That is misguided for a few different reasons. One is that more than 56% of driver shortages predicted over the next ten years are directly tied to driver retirements. You cannot pay people enough to not retire. They have earned and deserve the retirement that is coming, and it is time for them to pursue the next stage of their lives. More than half of the entire shortage is driven by retirements. As they age out of the driving population, we need to find ways to increase enrollments [at driver schools] and interest in this field. That is done through pay, which has increased significantly over the last three years. By the end of 2018, we will have increased our pay across our network by more than $60 million annually. And we have also spent more than $1 billion over the same three-year period investing back into the fleet for trucks, trailers, terminals, and technology. We are extremely committed to giving our drivers the best equipment on the road to drive, the best terminals to do their work in, and to pay a wage that is competitive not just with other driving jobs but with construction and other fields. That is why you now see premier driving opportunities that are more often than not over $50,000, and, in some cases depending on the area of the country, can be in excess of $60,000. These are good-paying jobs you can build a family around with good equipment. The last leg of the stool for us is a better family life for our drivers. 73% of our drivers get home at least weekly, and we are working towards 50% of our fleet getting home multiple times per week, if not daily, by the end of 2019. We are working aggressively towards that goal and are well on our way to achieving it.

LM: The current rate environment is a situation in which shippers are dealing with a lack of pricing power like in the past. What is the current state of pricing power for truckload carriers?

Werner: Industry-wide, there are a couple of things related to shippers as it related to price. Across the industry, pricing in the first quarter increased annually roughly in the 8% range. While that is a large number, it essentially puts it back on par, or slightly ahead, of where pricing was back in 2013 and 2014. Carriers are getting back to where they were, with a little bit of progress. That is evident when looking at the publicly traded truckload group, whose margins have only improved by 1-2% at a time when rates improved by 8%. That is because carriers need that equity to pay drivers, invest in fleets, and invest in infrastructure that supports our shippers. One thing carriers have done, which they said they were going to do was to return rates to levels that are needed to reinvest into their drivers, with a vast majority of these rate increases going to the drivers. As we go forward, rate pressure will continue throughout 2018 and into 2019, as more reinvestment is needed. The question will become “are we going to ride this rollercoaster again if this cycle turns?” Hopefully not, only because by doing so you ensure another shock to the system sometime in the future…of rapidly increasing rates as soon as carriers are able to do so. It would be better and more stable for everyone involved if we can maintain reinvestment levels so drivers are getting the training they need and are treated better and fairly over time and carriers have better and longer relationships with shippers, but time will tell if it plays out that way.

LM: How do you view the last-mile market? It really continues to gain industry traction, especially over the last 12-to-18 months.

Leathers: We certainly expected it to grow and believed it was going to be a big part of the future, as people want more and more goods delivered to their home with the click of a button or a mouse versus going to brick and mortar stores to get it. We recognized that need and realized our customers wanted us to provide a solution for last-mile delivery, and we have been building that out over the last couple of years. We launched Werner Final Mile about six months ago, and it is on schedule and we are excited about the prospects and the customer interest. We believe we built the technology and the capability out in a way that will fulfill our customers’ needs. I don’t believe e-commerce is a threat to trucking as a whole, as you still have to move freight to regional distribution centers, and we are happy to haul it there. We are also happy to use our network of capabilities to provide that solution to our customers. We are excited about it and think it is here to stay and is something that will increasingly be in front of us over time.

LM: Are you planning to work with any large logistics players on the last-mile front as a Reuters report recently speculated?

Leathers: We won’t comment on any individual customer or speculation of that type. What I can tell you, though, is that our product is being built so that it is mode-agnostic and is available to and utilized by integrators, direct shippers, 3PLs, and anybody looking to solve issues related to last-mile capabilities. Our focus is on the big and heavy aspects of last-mile…that is really where our focus and the intent of our roll out will be.