It's not often that the CEOs of some of the continent's largest and most profitable trucking companies agree to come together and share their secrets to success. Yet that's exactly what happened at Ontario Trucking Association's second annual exec...
It’s not often that the CEOs of some of the continent’s largest and most profitable trucking companies agree to come together and share their secrets to success. Yet that’s exactly what happened at Ontario Trucking Association’s second annual executive forum. James Staley of Roadway Group, Rick Gaetz of Vitran Corp., Russell Gerdin of Heartland Express and Stan Dunford of Contrans Income Fund, provided some out-of-the-box thinking and hard-edged advice on the industry’s most pressing issues.
Q. There has been much discussion about a shortage of capacity. How do you see the issue unfolding and what are the differences between TL and LTL?
Staley: We need to first define what we mean by capacity. In the past we’ve talked about capacity in terms of plant and equipment. There is still ample plant and equipment in the US and it’s the same thing in Canada. But it’s being greatly affected by the shortage of drivers. We have everything we need except the drivers to deliver the goods and that’s a problem. The other thing that is unusual in the US transportation sector that affects capacity in the LTL arena is that we have much less reliable intermodal transportation, which in the past had been a good way to boost capacity. Now, service requirements and performance requirements make that a much less appealing capacity outlet for us.
Gaetz: The LTL sector has always had the best success recruiting and keeping drivers. Because of quality of life issues and, to a degree, better pay. But in the US in particular there are still a lot of unionized drivers in the LTL industry and the average Teamsters driver is 57 years old. So assume they are going to work another 7-8 years at best, on average. There is going to be just a huge amount of drivers coming out of what is perceived to be one of the more attractive sectors for drivers to work in. If we think what’s going on now is tough, give it another five years and we are not going to know what hit us.
Beyond the dynamics of plant and equipment and the obvious issue of human resources, I think we will continue to see a handful of players consolidating the business and, unfortunately, a few players exiting the business. There’s no question there will always be room for good little companies, but it continues to get tougher to be a smaller player. We’ve seen the demise of little companies here and in the US. A lot of companies are under- insured and they are harder to capitalize to take the company to the next level.
Gerdin: Consider what LTL is paying for drivers, and yet they are still saying it’s tough to get drivers. So can you imagine the mountain TL carriers have to climb to handle our capacity issue? In the past 10 months, Heartland has raised its rates 25% to TL drivers on the East Coast. As recently as October 1, we raised our pay by 7 cents a mile, and we were starting at the top. We are now paying 50 cents a mile for all drivers on the East Coast. You know what that did? We gained 17 drivers. Think I’m happy? It cost the company $3 million for that. As you handle this question of capacity, you better be thinking not what you are going to pay to get drivers, but what you have to pay to keep drivers. This issue of capacity is not going to go away. We have a long ways to go to handle this issue and you will not get it done by just getting up to where the wages are now.
Dunford: I think this is something that has taken 35 years to take place and it’s not going to be corrected just with money over the next couple of years. It’s going to take several years to fix this problem. I think that’s going to help companies with strong balance sheets who know how to manage their businesses properly, get the increases that they need and understand their costs. One of the biggest problems that our industry has when it comes to rate increases is that we don’t do a very good job of educating the customer about our business. In the past maybe we never had a customer who really wanted to know, because we were dealing with traffic managers who didn’t think there was a capacity issue and a reason to understand the business. But the conversations I’m having with the presidents of companies show these guys are concerned about the ability to ship their products, and they want to talk longer term now. So we have to get them into our offices and get them to understand that, for example, how a manufacturer makes money and how we make money are totally different. How many times have you gone into a meeting with a customer and he’s asked “if I give you another 25% more freight how much lower can I expect the rate to go?” Now that’s a guy who doesn’t understand how we make money in the trucking business. We are going to have to change the way we do business. It’s an opportunity, not a problem, if you are intelligent enough to not give in to the normal shipper who tells you he has 700 carriers that can take your place.
Q. A study conducted in Canada shows we are going to need an infusion equaling 80% of the existing driver force between now and 2008 just to keep up with economic growth and natural attrition. To attract the necessary amount of people to the industry, what kind of percentage increase in driver wages are we looking at?
Gerdin: I will put a number on it. I believe that to get a decent workforce coming in to replace the ones retiring we are all looking at $65,000 for the average driver. Now we sure can’t go out there and give increases of 12 and 15 cents a mile tomorrow, but until we get to that $65,000 we are going to have a capacity shortage.
Dunford: I’m not sure what’s necessary in terms of dollars. My philosophy has always been that you can pay the drivers and owner/operators whatever you want but you must go and get it from the customer first. Well, that has put the brakes on a lot of increases for a lot of years. I changed that philosophy this year. For the first time in my career we’ve put out two price increases to drivers and owner/operators without getting it first from the customers. But I don’t think we should get hung up on the rate of pay because it is only one part of the equation. There’s a lot to be said for creating an environment where people can have fun. People don’t have fun working in businesses that have financial problems. If people are having fun and we pay them fairly we can create a situation where driving a truck isn’t a job of last resort.
Staley: We employ close to 40,000 Teamsters in US and Canada and have a labor contract that takes us to 2008 so we know what our wage and benefits costs will be and so does the shipping public. But there are still pressures in terms of bringing people on. Under previous benefit plans, probably the worst possible thing was done in terms of giving employees in the US the ability to retire after 30 years of service, regardless of age with full health care benefits. It decimated the health and welfare plans and created an incentive for people to leave the industry. There are also provisions in the pension plan that prevent people who retired from the industry from coming back in on a part-time basis, which further exacerbates the driver shortage. In recognition of what’s happening within the benefit plans, which is a huge cost difference we have versus the non-union carriers, some drastic action has been taken on the health and welfare side. That’s going to keep people in the workforce longer but it’s not going to keep them younger and we still face this problem of people leaving the industry.
Q. If you look at the past 10 years, typically the operating ratio for both TL and LTL has hovered around 0.95. What’s your sense of what operating ratios will be a decade from now?
Gaetz: None of us would be happy with making four or five percent on our investments. In a very basic sense, that’s the fundamental driver: What are you prepared to live with and what are you prepared to reinvest in your business? I think we are going to see in the next decade a doubling occurring in the transportation sector but it’s in balance. Is a 10% or 11% return a fair margin? Many people would say it’s still not enough. It’s not a question of trying to take advantage of the environment we are in at the expense of customers; it’s about charging a fair price for the investment you have in your business. The fact there are more public companies in the US has generally helped that marketplace to be more responsible in terms of what a fair return is. It’s a little tougher here in Canada but the challenge is the same. This is an opportunity to right the ship.
Staley: I think the shipping public is now certainly realizing the value of good, reliable, responsive transportation. It has always been a source of frustration in the industry that our services were taken for granted. We see that the shipper now does have the wherewithal and the willingness to pay for that type of service. We look at an operating ratio around the 0.90 mark as certainly being achievable.
Dunford: This (current) opportunity in pricing is going to enhance the stability of the good companies; it’s not going to be a windfall for poor operators. I don’t want anybody to think that a poor operator is going to get an opportunity because of the capacity issue to all of a sudden make a lot of money while still running a poor business.
Gerdin: An operating ratio of 0.95 is ridiculous – you’re just working. Operating ratios should all be in the 80s someplace. I don’t know that the opportunity going forward, however, is any greater than the opportunity that has been with us since the beginning. The key is not how many trucks you have, it’s what you make with each and every one of them which in turn determines your operating ratio. You just have to use common sense in the trucking business. And common sense is don’t give that shipper another truck until you get something for it, because nobody cares how many trucks you have. Operating ratio is you. If you let your sales force tell you they got this great account and you should go out and buy new trucks for them, you have that thing in reverse. Find out what you are going to get for that load and what that will mean to your operating ratio.