Logistics Management’s Jeff Berman recently caught up with UPS Freight President Rich McArdle on a wide variety of topics, including LTL pricing, regulations, and what needs to happen to improve transportation infrastructure. A transcript of their conversation follows below.
Logistics Management: How do you view the general state of the freight economy as it relates to the general economy and on a macroeconomic basis?
Rich McArdle: The beginning point for that question is that it is all about trade, as it relates to uncertainty over trade policy. What we feel from a macro perspective, whether it is our freight business or small package business, we will have a better idea by the end of this quarter about some clean direction between the U.S. and China on trade policy. The forecasts have gotten softer for things like exports and GDP across major economies, and it largely goes back to the uncertainty over trade policy.
LM: What about things from a freight perspective?
McArdle: Beyond trade, as things relate to freight and freight hauling, things look really good for continued growth in the manufacturing and construction sectors. The first quarter may end up being a little softer than a year ago, but we are expecting some growth.
LM: How do you view the current state of the LTL market, as it relates to volumes, capacity, and other things?
McArdle: There is some variability in terms of how the year has started off. When the weather was fraught a few weeks back, it was unprecedented for many LTL carriers, in our case having to close operations in Minnesota, Wisconsin, Chicago, and other places. And the recent news regarding New England Motor Freight (NEMF) created some variability in regards to how things would settle. Putting variability aside, things are somewhat stable. We do see the growth in the industry where we thought it would be. We are not in a concerned position; we see the growth and we see some stability.
LM: Regarding NEMF, a lot of carriers, especially their direct competitors, want to secure NEMF’s capacity, which accounted for around 1% of the LTL market, but industry people say that is easier said than done, due to tight capacity and there not being enough drivers. That said, how would you describe that situation, as it relates to securing that capacity?
McArdle: In the Northeast corridor, it has a much bigger impact where they ship. The LTL sector is made up of many carriers and many shippers that are customers and dual-source with a variety of LTL carriers. I think what we are all seeing is a bump certainly with shippers coming to us now, as they lost that option with NEMF. There is also the opportunity for business we never had to look into. We are not alone in that space; our competitors are doing the same thing. Those carriers that have capacity in the Northeast are going to have an opportunity to absorb the capacity that NEMF can no longer carry.
LM: How do you view the current state of LTL pricing and rates?
McArdle: Like last year, things are stable. LTL general rate increases (GRI) also came a little earlier this year than last year, with everyone seeming to be landing in that same space, in terms of published rate increases. Things are stable and consistent to what we thought based off what the market did last year and what we think it will do this year.
LM: How far out is the LTL sector from turning to dimensional pricing?
McArdle: The general belief is that it is still several years away from any type of widespread adoption. It is not because carriers don’t want it. There have been significant investments we have made, as well as many in the industry have, for dimensional machines. Those investments are laying the foundation for the transition to dimensional pricing to happen sooner than later but it is hard to say exactly when. Carriers are doing things to incentivize customers to go to dimensional pricing and density-based rating. We are moving in that direction, and we know the industry is moving in that direction.
LM: What are some of the things that have you optimistic about 2019, not just from a pricing perspective but also from a freight matching perspective, too?
McArdle: I think there is a general sentiment, as it relates to pricing, that shippers with the right freight, or freight that matches up well with an LTL carrier’s network, are more likely to get a better rate, whereas shippers’ freight that does not match up well may need to be renegotiated rate-wise. That interaction will continue this year as well. As carriers like UPS Freight look deeper and deeper into how freight is flowing through our network, where the opportunities are, and where the capacity is and is not, we are also thinking about it in terms of how dynamic it is. We are looking at our data a little bit deeper and closer, and that is one of the things all of the [LTL] carriers are doing. This is managed through where the opportunities are. This is not the approach for one region; it is for the entire country.
LM: How do you view the possibility, or chances, of Twin 33-foot trailers 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?
McArdle: As for where this is going, there are still headwinds we are facing, for this issue, within the industry. When you break the industry down between LTL and truckload, those headwinds vanish, given the [arguments] on both sides. There are headwinds outside the industry, with the railroads, for example, being very concerned about Twin 33s. About a year ago, Michael Ducker (former CEO of FedEx Freight) and I both supported Twin 33s in a Wall Street Journal opinion editorial, and we will continue to make this one of the things we push for in making it a very easy way to reduce some of the congestion on the roads without adding safety concerns. Adding five feet to trailers brings more stability. There is a 10-mile per hour difference when you are on the road. So if you are in a car passing a twin-33 versus a twin-28, with a 10-mile per hour differential, it takes less than one second, 0.7 seconds, to do so. We are going to continue to push for it, and we need more than the 20 states that allow it right now. We are looking for a nationwide network solution, and are continuing, for now, on a patchwork solution, which is state by state by state.
LM: Shifting gears to transportation infrastructure, there continue to be the same challenges, especially when it comes to funding and a viable plan, or model, to move forward. What, in your opinion, needs to happen to move things along on this front?
McArdle: At a high level, the Highway Trust Fund (HTF) is really the bridge to the future in how we how we have to ensure we fund and pay for infrastructure. We absolutely agree it should be a user fee or user go type of system. Something immediate has to be done as to how we fund the HTF, as just last year the HTF spent $55.2 billion and only collected $43.4 billion, leaving $11.8 billion coming out of the U.S. general fund. That means that the general fund is not doing the things it is supposed to be doing, because it is bailing out the HTF. Those numbers are only going to get bigger as time goes on. Over the last ten years, the HTF has borrowed $144 billion from the general fund. The key thing is the most immediate, as it costs a penny on the dollar to administer and won’t add a dime to the deficit and shores up the HTF and stops drawing down from the general fund. We need to raise the federal gasoline tax and make that happen right now.
LM: What about other possible funding sources, aside from raising the gas tax?
McArdle: We are not opposed to the vehicle miles tax (VMT), but it is not ready for prime time. You would need to register about 280 million vehicle, with around half of them U.S. taxpayers. A foundation needs to be built for this, and it needs to be tested and looked at…as there are privacy issues that need to be addressed. And they need to test the evasion rates, as people will look for ways to avoid it or get around it. The next highway bill needs to have a placeholder for VMT and the HTF needs to be indexed, otherwise future generations will be facing the same situation.
LM: Looking at cross-border freight, USMCA, or the new NAFTA, still has a bit to go before becoming official. Do you think it represents an improvement over NAFTA and what are the potential impacts for UPS Freight, in terms of its cross-border business?
McArdle: One of the differences is that USMCA addresses e-commerce and digital concerns that were not around back in the 1990s. It is a more modern Customs policy, which is so important. We view this as a positive. It is not the physical crossing the border that is the barrier, as much as it is the paperwork and the Customs processing. In this day and age, when data can be harnessed and transferred and evaluated, long before goods can ever get to the border, it is very exciting where this new policy can go. We think it is going to take some costs and complexity out of the freight between the U.S., Mexico, and Canada so we view this as a positive.
LM: What, in your opinion, has the tax reform legislation done to help UPS Freight and, by extension, the LTL and trucking sector, in general?
McArdle: What we have seen is that it has created an opportunity to growth within the U.S. economy, and we are seeing an economy that continues to move forward. It is helping all companies, not just UPS, with free cash flow. Businesses of all sizes are able to reinvest in themselves and create opportunities. It has been a positive for us and our customers.
LM: The current state of trucking regulations is not as “hectic” as it has been in the past, it seems. That said, which ones are you keeping a close eye on?
McArdle: We were supportive of ELD. We would like to see truck size and weight move beyond a patchwork approach, with a nationwide twin-33s effort. UPS Freight is working with the ATA on an effort to lower the CDL from 21 years old to 18 years old. There are 48 states that allow a CDL at the age of 18, but cannot drive over the state line. There is a program out there targeting veterans that have been trained to operate this type of equipment to have under 21 year old drivers move interstate commerce. We are at the table and hope to see some language from the House and Senate to help support a younger interstate driving age. But it is not just a change in the age. There is a tremendous amount of training that comes with it, as well as miles traveled and travel times monitored. This could help to alleviate the driver shortage situation and create opportunities for younger men and women.
LM: How does UPS Freight view the last-mile logistics sector? Does the company plan to expand its presence within that space?
McArdle: We certainly see the trajectory continuing with more demand coming from consumers for more and more products outside of the normal parcel size to be delivered to them. We are focused on growing our B2B business, but, at the same time, have invested in our existing network and our assets and do provide those last mile services and will continue to do that. We are doing it more quietly than others are right now, but we agree that is where the industry is going. UPS has the ability to develop or has solutions that both our small parcel-type customers and LTL customers are using.
LM: Can you touch upon how UPS Freight leverages intermodal and how it views that market?
McArdle: We still have a strong relationship with all the large Class I railroads and service has gotten better. They want to hear what our challenges are, and they want to work with us and want to provide strong service. They are key partner for UPS small package and UPS Freight.