NASSTRAC Q&A with Jack Holmes, President of UPS Freight

Earlier this year, LM Group News Editor Jeff Berman caught up with UPS Freight President Jack Holmes at the National Shippers Strategic Transportation Council’s (NASSTRAC) Annual Conference and Exhibition. Berman and Holmes spoke about various aspects of the less-than-truckload sector (LTL), as well as related freight transportation news and trends. A transcript of their conversation is below.

Logistics Management (LM): In terms of the LTL pricing environment, how much have things changed since a few years back, when carriers were forced to chase more “low-hanging” fruit-type or less desirable and lower-priced freight?
Jack Holmes: Things are continuing to firm up is the way I would put it. I would say that the typical company in our space is having more success keeping rate hikes and negotiating rate hikes. From, say, 2007-to-2014, as a market, out price-per-hundredweight was pretty much flat. So certainly companies in that space need to improve revenue. And I think we have been more successful certainly than we were for that period of time.

LM: Is this strictly on the contractual side of things or on the spot side?
Holmes: I think it is both. We are doing a better job of keeping the GRIs. During that period of time, we would increase the GRI and “churn” a certain amount of our customer base that did not think they should be paying a 3.5 percent rate increase and that is when it would go to the resellers.

LM: A number of publicly-traded carriers rolled out multiple GRI in 2014, including Con-way Freight, FedEx Freight, ABF, and UPS Freight. Why do you think that was the case?
Holmes: I think it had a direct relationship with the lack of capacity. It is a direct relationship between how much capacity you have and what the rate increases are. There was a period of time from late summer to late fall last year when you would be hard-pressed to find and LTL carrier that had capacity. It was that good of a market, and with freight seasonality changing with a lot of it driven by reverse logistics, the seasonality side of it used to be that things would dry up in the first week of November and be that way for a while. On the LTL side, things stayed hectic through mid-December. Things like weather and port congestion also had an impact, too. We are certainly optimistic about the market now.

LM: Could increased LTL activity into mid-December possibly be viewed as the new normal?
Holmes: I think it could, and we even saw it a bit the year before, with things firming up this past year.

LM: Looking at fuel prices, how do you view what has been happening with prices mostly declining on a weekly basis?
Holmes: For shippers, the fuel surcharge is going to drop when prices decline, so they are getting a benefit to it. On another note, new tractors today are much more fuel-efficient than the older ones so our side of the balance sheet is greatly improved because of that through fleet telematics and planning tighter routes and getting better fuel efficiency. It is resulting in about a 5 percent improvement in miles per gallon, which some of is based against older trucks. The other thing that is prompting new equipment purchases is that new equipment comes with racking systems to protect freight. You might have a trailer that is serviceable and has some life left, but we will replace it anyway to better protect the freight.

LM: What is the current state of dimensional pricing in the LTL sector?
Holmes: I would not say it is widespread, but I would say it is becoming more accepted. The shippers’ reaction depends on who the shipper is, and, more importantly, what their product is. If someone is shipping heavy, dense freight, this is going to work well for them, but if they are shipping something really lightweight, they are going to pay more, but that is how it should be. There are people who still believe the classification system is the future, but I think certainly technology has allowed us to price out the space we have in our trailers and that is what is driving that.

LM: It is no secret that the over the road brokerage marketplace continues to grow at a rapid clip. How is that impacting the LTL marketplace?
Holmes: I would say about 20 percent of total LTL spend is controlled by 3PLs. If you look at that, as a group, it is 20 of your biggest customers as a group are really controlling 20 percent of the LTL spend. For us, we had to develop a strategy to add that and we have done that and executed to that over the past few years, with our own in-house management team who is directly charged with managing relationships with all of the brokers we deal with. There are some brokers, though, we have looked at and said that based on what our relationship is, this does not work for us?

LM: Why was that the case?
Holmes: It might be that we have ten percent of market share on the LTL side and might allow someone to use our UPS shield in their marketing materials and they give us 1 percent of their spend. That doesn’t make sense for us, coupled with them going out and selling their product against us with our own customers. We put them on notice and the issue for them is they want to position themselves as representing all the top carriers. It has been acceptable in the past and is not acceptable anymore.

LM: Some key economic indicators are strong while others are on the weak end or tend to fluctuate. How do you view the freight economy in comparison to some of those more mainstream economic metrics?
Holmes: Things are mostly in balance, with the freight economy more optimistic overall than anywhere else. And when you couple that with capacity and the driver shortage issues, it bodes well for freight companies, as they will have the opportunity to improve their operating ratios going forward. In 2007, tonnage started to drop faster than shipments did and the size of the shipments were dropping. When things started picking up in 2010, the size of the shipment got bigger and at a faster pace than the number of shipments, which was a good thing. Since then, though, things have been very choppy. For close to the last five years now, you can’t point at numbers and say ‘this is it.’ It is not always that definite.

LM: What do you think about intermodal? Have service levels improved?
Holmes: I would say it was unacceptable from the second quarter of 2013 through the third quarter of 2014, and, now, things have improved. All the railroads do a good job, and we are now looking at things more favorably than we did but with fertilizer and crops coming up soon and grains, too, among other things, it will get tighter. Intermodal used to be the jewel of the network for rails but now there are other factors. They have some real issues. If you think about it, companies like us and shippers directly see them as an alternative to this driver shortage issue, and they should be an alternative.