Four famous trucking CEOs tackle the issues surrounding fuel surcharges, freight volumes and the future
November 1, 2005
Motor carriers have made considerable gains at the bargaining table over the last couple of years. But are those gains now threatened by a slower economy, skyrocketing fuel prices and a return to pred...
Motor carriers have made considerable gains at the bargaining table over the last couple of years. But are those gains now threatened by a slower economy, skyrocketing fuel prices and a return to predatory pricing? Preventing your business from going in reverse was the key theme for the third annual executive forum, a highlight of the recent Ontario Trucking Association annual conference. Jim Thomson, president and CEO, Thomson Terminals, Stan Dunford, chairman and CEO, Contrans Income Fund, Dan Einwechter, chairman and CEO, Challenger Motor Freight, and Steve Russell, chairman and CEO, Celadon Trucking Services, provided hard-edged but earnest advice.
Q. How was 2005 from a financial performance standpoint and what do you expect to see next year?
Russell: This was a good year for us with profits up significantly over 2004. If you went back as far as 2001, our stock was at $3.25; our stock today is at $27. When you look at why, it was essentially because of our focusing on two things. In 2001, 55% of our business was automotive and almost 40% of it with Chrysler. Today, automotive is 8% with Chrysler 2%. The top 50 Celadon customers represent only 49% of our business with the largest single customer representing only 3%. What does that mean? Four years ago when we would say to our biggest customer we need a rate increase, what happened was that you didn’t own the customer, the customer owned you. If you are a 50-tractor fleet or a 200-tractor fleet or a 2,000 tractor fleet, it doesn’t matter. If too much of your business is with one guy you’re in trouble. In 2005 we have a balanced mix of customers, with no one customer so important that, frankly, we couldn’t walk away from the business.
The second thing that was critical was that if you went back four years ago our average driver turnover was 100%. The American Trucking Associations says the industry average is 125%. By this September we were at 70% turnover in the US, which meant that for our size of fleet we had to hire 1,200 fewer drivers than the industry average for a big fleet. The biggest factor in the driver change was that four years ago in our company the driver got no respect. We’ve really changed that.
With regard to 2006, our average driver is 46 years old. The average Wal-Mart driver is 53 and the average Teamsters driver is 57. Young people are not coming into this industry and the reality is that’s going to continue and because of the HoS it’s going to get worse. But the true test of a good businessman is to make a liability into an asset.
Einwechter: 2005 was good. From August on, we had record months. We started off slow like many did. Quebec was particularly slow because the resource-based activity was challenged. In that market in particular carriers were what I call negotiating with themselves. They got afraid about volumes and went out and cut rates. The net effect was that they had to run more miles to get the same revenue. They gave up a lot of the gains made over the last couple of years; it was very frustrating. We just stuck by our guns this past year on fuel surcharges, detention surcharges and rates and as a result I think next year will be a great year. You have to stick by your guns, know what your costs are, who your competition is, and what clients need, and charge accordingly for it. There are so many people who still question this. We’re so transactionally oriented in this business – we have traditionally been negotiating rates on a daily basis with either clients or load brokers – that we have a hard time doing long term planning. But you have to have the wherewithal to have a longer-term view.
I think there is still a cloud over 2006. The Canadian currency is overvalued and there are a lot of manufacturers that are basically not making any progress. They won’t be able to re-invest in their business or make long-term decisions.
Dunford: Last year, I think most of us felt we were making progress with our costs and explaining to our customers what they mean. We started charging detention fees and border crossing fees, etc. Everybody started out of the gate that way and it looked like there was light at the end of the tunnel for once. Then January came along and things got pretty slow for everybody and guess what happened? We have gone backwards. I have some real concerns about where our industry is going back to.
Thomson: 2005 was a great year. I’ve never seen so much change. The largest concern I have for 2006 is what we provide to the total economy and how that can be affected with the Asian flu. We are on the front lines. But what if we can’t deliver because 30% of workers in our industry are affected by the pandemic? We’ve already experienced SARS in Toronto. This is something for which we should have an action plan.
Q. Is the current fuel surcharge system generating sufficient revenue to recover costs? If not, how do you negotiate with customers to compensate for the rising price of fuel?
Einwechter: The bottom line is we never collect enough money to offset fuel prices. There is always a lag especially when prices change as dramatically as they have recently. I would rather not have any fuel surcharge – just put it in the base rate. Whether it’s 5% or 50%, it has to be reflected in the total revenue you get. At the end of the day it’s the money in the door versus the cost out the door and you have to make a profit. You have to have the nerve to tell clients that’s how it is. But unfortunately there is a lack of science in this industry at times. I know there are carriers out there who choose their fuel surcharge by finding out what their larger competitors charge and going two per cent less. Wow, isn’t that ever bright? No idea what their costs are, just do it for less. You have to move beyond that because it doesn’t help you and it doesn’t help the industry.
Dunford: There’s a lot of guys making what little profit they are off the fuel surcharge and they shouldn’t be. And the reason they shouldn’t be is they are living under a false hope in the same way we were living under a false hope when we had a 60-cent dollar. Everybody is expecting someone to say the ideal surcharge rate is a certain percent. There is no such thing as the ideal rate. The bottom line to all of this is that it’s a pure cost. Do you understand it? Do you have a handle on it? Do you know how to explain it to the shipper and help him explain it to his superiors? We are really poor as an industry at understanding how to explain those costs to a guy who has just been told if he can’t reduce his freight costs by x within a year he has to look for another job. That’s what’s missing in this industry and it all comes from understanding costs and being adamant about getting a return for the dollars invested in the business. You start charging somebody 28% of their freight bill for fuel, and that wakes a lot of people up. And when you wake people up they are going to start asking questions and you better have the answers. If I were a shipper I would have no problem with keeping you whole, but here’s the criteria: Explain to me how you are getting the best fuel mileage of any trucking company in the industry; how you are running the most modern equipment, and tell me what portion of your fuel costs is idling. If you weren’t the best in the industry, I would be deducting and deducting off that surcharge and doing so rightfully. As fuel gets more expensive, it makes people think and start asking questions and we are going to have to get even better at what we do to continue collecting the surcharge.
Thomson: Fuel is only a 16% to 24% component of your pricing. You have to take a look at the whole model because you have to have money for company drivers and support services and owner/operators, etc. We should have an IT surcharge, for example. You probably have more people working in your IT department now than you do in your safety department. You have to take all of the components, not just fuel. It has to go beyond the fuel surcharge.
Russell: We put in a system for our company trucks about 2 1/2 years ago to govern them at 68 mph. If the driver idles more than 36% of the time, when the truck goes for its next fill-up, the speed goes down to 65 mph. If a Celadon truck idles 4 hours a day it costs us $4,000 per truck per year. If the driver is only going 65 mph, he’s doing 30-35 miles per day less than the guy going 68 mph and that’s costing him personally $3,000 to $3,500 in lower pay. We have 12% of our drivers who have pets, which means they always idle. That pet is costing Celadon $4,000 a year and that driver $3,500 a year. What’s also amazing to me is that our average rate per mile is (US) $1.44 on a 1,000 mile haul. Our average fuel charge last week was about 36 per cent. Customers are really then paying about $1.08 per mile. Who would believe that customers would pay that? It shows the impact of the capacity issue and it shows that if we are ever lucky enough to see fuel pricing come down substantially, we have a great opportunity to offset some of that with rate increases.
Q. How do you maintain freight volumes without cutting rates?
Thomson: If you’re not the biggest you have to be the fastest to adapt to changes in the market. We’ve had to ourselves over the past year. We had to look across our whole business and say let’s go back to what we started our business with. We started with niche markets but we totally moved away from how we had started our business. We were in this mindset that it’s a commodity play. So last year we started to get out of the commodity plays and we leveraged our strengths and provided client-specific training to our employees and put sizzle back into their jobs. My advice: Demonstrate your on-time performance. Demonstrate your load integrity management. Emphasize your quality designations. Highlight your equipment strengths to differentiate your firm. Know your numbers. How can we afford to have people running around in the city, when you pay the driver $24/hour, the truck costs you $12/hour and you’re prepared to work for $38? Provide technology to your clients and emphasize it. Give them real time and Web access. If you give the customer a solution, you are going to become a valuable part of his supply chain. If we live by price-cutting we will most certainly die by price-cutting. Under-performing assets, employees and clients must be continually changed out.
Russell: In the United States there are 10 major airlines. They are selling to an unsophisticated buyer. The reality is the truckload industry and the thousands of fleets that are part of it are selling to sophisticated buyers. The airlines are going broke because they can’t pass on the fuel surcharge and essentially trucking companies are passing on the fuel surcharge at varying degrees. Why? Because there are empty seats at the back of those planes and not enough drivers to keep the seats of trucks warm. That needs to be recognized by everyone in the trucking business because if you recognize that you see the difference between being able to recover that fuel surcharge and ending up like an airline.
Einwechter: Manage your costs and know what they are. Give a high level of service and in the face of adversity make sure you have the right people on the street selling your product so you have more opportunities coming through the door. One of the things we have done is stagger our rate agreements. We’ve seen in this industry time and again how you can end up over a barrel with clients. When freight is low in January you start negotiating with yourself. So what should be the exception for rates for a slow week or two in January, ends up becoming the norm till June or July with some clients. We have tried very hard not to have our contracts renewed at that time of the year. It allows us not only to avoid having too many contracts renewed at the same time, but also greater control of our destiny. Volume is vanity; profit is virtue.
Dunford: In our organization we have a couple of sayings. One, if as an owner/operator you are not making a profit, you can’t stay. I don’t want you losing your truck working for me so you have to learn how to make money. The other side of that involves the customer. If I can’t make a profit with the customer, he can’t stay either.