NASSTRAC Q&A with Mike Ducker, President and Chief Executive Officer of FedEx Freight

Logistics Management Group News Editor Jeff Berman had an opportunity to speak with FedEx Freight President and CEO Mike Ducker at this week's National Shippers Strategic Transportation Council (NASSTRAC) Annual Conference. Ducker provided Berman with insights and observations on various topics, including the current state of infrastructure, the need for Twin 33-foot trailers, safety, and the economy, among other topics. A transcript of the conversation is below. 

Logistics Management (LM): How do you view the possibility/chances of Twin 33's getting the green light to get on the nation's highways? What type of production and efficiency gains would Twin 33s bring to the LTL sector?

Mike Ducker: I told a Senate committee last week that given all the benefits of Twin 33s it is just a commonsense policy solution. Now, whether or not, with all the other priorities on the table today, we can press that one through remains to be seen. But I will say that we are going to continue to recommend it as part of a solution to some of our infrastructure problems. There was an argument on the other side last time that Twin 33s are unsafe, that is a myth. We have run them millions of miles in the state of Florida and did not have a single recorded accident so we believe them to be safer. There have been false statistics quoted that they were 11 percent less safe, but in fact these twin trailers are 3 percent more safe, and so that is according to a number of different studies. We have a broad coalition of stakeholders recognizing and seeing the value it brings. If the argument is safety, it is a red herring, because these are far safer. If the argument is something other than that, or if it is something economic, the economics are that in many of the simulation studies, there is an 18 percent capacity increase, with less trucks on the road creating less fuel used and less CO2 emissions, fewer vehicle accidents. And with e-commerce going the way it is if we don’t do something to increase productivity then you are just going to have more and more trucks on the road because the supply chain is changing.

LM: Once again, even though infrastructure is a hot national topic, funding remains an issue. How do you view this in terms of what the best funding options are i.e. increasing the federal gas tax, tolling, and public-private partnerships, among others?

Ducker: The current state of infrastructure is abysmal in many respects, because our interstate highway system is 60 years old and in desperate need of updating. There are studies projecting that by 2045, which is not that long away, that freight volume will increase on our nation’s roadways by about 45 percent. So at the end of the day you need short-term fixes and long-term sustainable sources of funding and policy to get this right in the world’s most resilient economy. Frankly, we think you need to have a variety of solutions, with some source of increased revenue that will allow you to collect money now and in the future for usage. We built the highway system back in the 1950s and there was a lot of federal funding that went into it and paid for by federal fuel taxes that have not been raised in some time. The first thing you have to consider is raising and indexing the fuel taxes, not for just an immediate impact but also for something sustainable over the course of time. Every billion dollars invested in highways creates about 25,000 jobs, that is pretty amazing, and a 5 percent increase would get you to about 80,000-120,000 new jobs by 2019. There are a number of projects that have already been identified by the DOT as huge choke points, which are ready to go. We think you can start there. Everybody has a clear picture of what is needed but how you get it funded is always the biggest question. The fuel tax increase and index is one part of it. Going back to Twin 33s, that is one place where you can increase productivity and capacity on the roads you already have. That legislation, as constructed today, asks for no increase in the federal weight limit, not at all. The wear and tear on the roads is less, as there are fewer trucks on the road.

LM: What are some other options?

Ducker: Congestion pricing is something that should be considered, because there are just certain areas, which have been identified by ATRI, where congestion alone has cost the trucking sector alone $50 billion per year. Those are huge dollars in terms of productivity and wait times, sitting in traffic, burning fuel, carbon emissions, late shipments. Tax reform is another huge issue that needs to be undertaken, and I think having corporations with lower corporate tax rates speeds investment. Capital investment in the economy is one of the things that is most closely correlated with GDP growth, so the more capital investment that you put into the economy, the greater opportunity to grow GDP. We also think there should be a territorial tax system. There are only two nations that tax like us, America and Chile. Repatriating some of that more than $2 trillion, or putting some tax structure on it, would increase capital investment across a broad spectrum, some of which would likely be used on infrastructure. PPP have a place but I don’t know that it can broadly move the needle, as it would impact a fairly small part of a large problem, but it should definitely be considered. It is not a be-all, end-all solution. It is part of the conversation and part of the solution and should be considered.

LM: How do you view the general state of the freight economy as it relates to the general economy and on a macroeconomic basis? It seems like there are some mixed signals out there, with job growth decent, as well as manufacturing, while there are some tailwinds from so-so consumer spending and trade pacts, specifically NAFTA

Ducker: It is no secret that freight has been trailing in a weak industrial economy has not been robust, however, we have done pretty well in that economy. Industrial production has been the one economic indicator that is most closely tied to sort of the health of the freight economy. That number has been lagging for quite some time, but this year that number is projected to improve, and should it you may see some improvement in the overall freight economy going forward. We had some less-than-forecasted volumes in December but some of those volumes started to come back in the January-February timeframe, but you cannot call it robust.

LM: The inventory-to-sales ratio is trending down in recent months. Do you feel like a true inventory reduction is in effect?

Ducker: We have been dealing with that for some time, when you look back at the West Coast port strike and other issues. If you have a lower I/S ratio, it can be seen as a net positive, but I think it is too early to tell. It bears watching if you are a company like FedEx, one that covers the whole country with speed. When the inventory is down, it means the pull economy, or the demand economy, is requiring the speed and reliability that a company like ours provides.

LM: In regards to the spot market, how do you view it as a part of your business?

Ducker: We definitely participate in it and use different 3PL providers and our own systems to manage capacity, especially on backhaul lanes or lanes that require extra capacity.

LM: How do you view the intermodal market, given your exposure to that segment these days?

Ducker: We use a lot of rail transportation and participate in the intermodal market. Most of our traffic moves on our trucks, but we use intermodal and rail a lot in our Economy product. Also, we cooperate with our freight forwarding entity, FedEx Trade Networks, for ocean cargo and cleared to final destination to the U.S.

LM: How do you view the current state of NAFTA as well as what may happen with it going forward, as that is somewhat undefined at the moment?

Ducker: What we talk about at FedEx is that we are strong proponents of trade, and we think it is one of the things that has clearly made the country great, and we think we should take a leadership position on trade. And we say at FedEx that ‘every FedEx job is a trade job, given the size and scope of our global operations in all the nations where we do business. We are strong proponents of trade, and over the course of the last few months we are starting to see Commerce Secretary work on different trade initiatives. We would see NAFTA being one of those, as it is very important to the country and represents some of our largest trading partners. There are a lot of impacts, and we strongly support NAFTA and hopefully we can update it. NAFTA is more than 20 years old, and it would seem reasonable that we should update it, especially given the technological advances that are occurring today in this somewhat digital economy. There is a lot that can be done to update it and improve it, as it is a very important relationship.

LM: Looking at LTL pricing, demand is kind of flattish or been at a certain level for a while. What are the biggest LTL pricing issues you are seeing from an industry stakeholder perspective?

Ducker: We see it as pretty rational right now in terms of the pricing environment and the increases that are coming in the market are staying. There is still capacity available on the truckload side, but we still see a pretty rational pricing environment out there. I think in large part the future of how pricing goes depends largely on GDP and IP growth and what we see out of the economy over the next several quarters. If those things head up, it portends well for the industry. There are some positive trends at the moment, which is good.

LM: Do you view pricing more through contractual rates of revenue per loaded mile or hundredweight? 

Ducker: We look at a number of different things like revenue per hundredweight, and revenue per shipment, and we pay careful attention to contractual rates. We have seen our contract rate increases holding pretty well, as well as retention rates. That is something we look at very closely. But, make no mistake, it is a competitive market, with a lot of players in the space. We feel good about our focus on small and medium customers, on the yield increases we are seeing in today’s market and in the rationality of the pricing we are seeing, too.

LM: How far out is the LTL sector from turning to dimensional pricing? 

Ducker: I think it is coming pretty quickly. If you think about the industry in general terms, what we sell at FedEx is space and pace. You look at loaded weight on your trailer every day and getting as much weight on your trailer that is moving on a route is definitely good for the OR and the bottom line. I think dimensional pricing is one of the areas that is going to become more important. We have 83 dimensioners deployed and moving forward you are going to see that as an industry trend. One of the things that it does is give you a much more complete and accurate picture of costing, and that informs pricing. You will see more of it in the future; it is important for the industry.

LM: On the most recent FedEx earnings call, you mentioned how FedEx Freight has heavily invested in myriad safety initiatives. Can you please provide some detail on that?

Ducker: Those are things like collision warning, collision mitigation, road stability, lane departure, full-on telematics with cameras that give a view of the road ahead. All of those systems for us, we say all the time that safety is our number one priority, and we have advanced capital spending over the last two years to get as much safety equipment into our vehicles as possible, not only to protect our employees with these rampant advancements in safety systems but also to the public. We believe it is the right thing to do and the right thing for our industry. The faster we can get adoptions of those systems across the industry, the better off we will all be. I think a lot of times big trucks get a bad name in terms of accidents. Before our drivers get behind the wheel they have had 100-200 hours of training. They are among the best drivers in the world. More of the accidents occurring in the country are vehicular accidents and not trucks, due to distracted driving. Our trucks are also speed-limited at 65 MPH, and we have done that for a number of years.