A Trailer-Full Of Troubles

Schneider's CEO talks about pricey fuel, security, and hanging on to drivers

It's darn hard work being a long-haul truck driver. You're on the highway for up to 11 hours at a stretch, not to mention putting in another three hours a day loading or unloading goods. And you'd better opt for a generous calling plan from your mobile-phone carrier: It could be weeks before you get back home again. Little wonder most drivers don't last a year.

To hear Christopher B. Lofgren tell it, it's not all that easy being a long-haul trucking employer, either. Lofgren, 46, is president and chief executive of Schneider National Inc. Everyone of his top three expenses -- wages, fuel, and equipment -- costs more today than just a few months ago, with additional increases ahead.

The only relief is that he has been able to pass much of that burden along to Schneider's customers. Many of those clients are giants used to dictating their terms, including Wal-Mart Stores (WMT ), Procter & Gamble (PG ), and Detroit's Big Three carmakers. But with the entire trucking industry running at capacity, they have almost no one else to turn to.

Besides, Schneider has size on its side. The Green Bay (Wis.) carrier is No. 1 in the so-called truckload sector -- outfits that haul a full trailer of goods in a single shipment -- with 48,000 trailers, 15,500 drivers, 14,000 rigs, and $3.2 billion in annual revenue.

Lofgren, a Spokane (Wash.) native with a doctorate in industrial and systems engineering from the Georgia Institute of Technology, came to Schneider from Symantec Corp. (SYMC ) in 1994. He moved up to the top job in 2002, succeeding Donald Schneider, the son of the company's founder, to become the first outsider to run the family-owned operation. Recently, Lofgren talked with Senior Correspondent Michael Arndt. An edited transcript follows.

What are the big issues facing you today?

We've all seen what's happening with fuel. This year fuel is up 30 cents a gallon, and we're up 60 cents a gallon year-over-year. But while it's up significantly, it's recoverable. Everyone in the industry today has a fuel surcharge. But you don't recover 100%. What defines your ability to recover your fuel costs is how many empty miles you run. If you're driving between dropping off one load and picking up another, you don't get to bill those miles.

So you can pass most of your fuel costs on, but somebody has to foot the bill, and it's the people you're hauling goods for?

Exactly. And in the end it's going to show up in the price of goods that people purchase, because that's the end of the supply chain. Fuel is an inflationary mechanism even if there isn't a petroleum product in the thing we are purchasing.

That's just one of the increases you've had to swallow. What others are there?

Starting in 2007 diesel engines will have to meet tighter EPA emissions standards. These standards were tightened beginning in 2003, and it drove a lot of cost into the industry -- roughly $15,000 over the six-year life of a vehicle. The purchase price increased by $4,500 because the engine became more complex. There was a mileage inefficiency -- I'd say average miles per gallon dropped 3% to 5%. And then there are increased maintenance costs. Heat in the engine is much higher because you're reburning a portion of the exhaust in order to lower emissions -- and heat tends to break things down.

Do you expect a similar hit in 2007?

Absolutely. We think the 2007 engines will cost an additional $8,000 apiece. Before the 2003 engine came out, we went to the EPA and said their cost estimates were way, way off. They said: You don't know what you're talking about. They said it would be about $800. In any business, if you were off 15 to 20 times your projections, you probably wouldn't have that job very long.

And labor? Back in February Schneider raised pay by $3,000 per year, or 5.5%, to attract and retain drivers. Has it worked?

This is a real problem for everybody in the industry. The industry average for annual turnover in the long-haul market is over 100%. We've always done better than that. Since we increased wages, we netted up 400 drivers to our workforce this year. We're a little ahead of plan. And we have seen a 15% increase in our retention rate.

The issue is, what are you going to have to pay labor to attract the capacity you need to execute the flow of goods? There's probably another 15% to 20% increase that we're going to have to pay in order to make people hang in there, make this a profession that's a little less nomadic. As in any industry, you get pressure from customers who aren't wildly enthusiastic about you coming and saying it's now going to cost more. But you've got to have drivers.

Last year new federal regulations went into effect on the number of hours a driver can put in. Operators can now drive 11 hours a day instead of 10, but the trade-off is that they must have longer breaks in between. Has that affected small companies disproportionately?

No. I think everybody suffered equally. When we changed the hours of service, it caused a productivity hit of between 3% and 5%. But this might be one of those cases where something that creates a real difficulty turns out to make an industry better. In the past, the shippers, the people receiving the goods, and in some cases the truckload carriers themselves used the driver as a shock absorber for inefficiency. With the new regulations, that's no longer possible.

What would often happen is drivers would show up and the goods wouldn't be ready to load onto the trucks, so the driver sits for two or three hours waiting. Their driving time would start after that, so any time they spent sitting, their time clock wasn't running. What the regulation said was: We're going to start this clock immediately when you show up for work, and we're going to let it run up to 14 hours a day total, or 11 hours a day of driving. Whichever one of those comes first, you're done when you hit it, and you can't do any more.

What it did was expose waste in the system, all those hours drivers were sitting around waiting. When we look back 10 years from now, this will have instigated a fundamental change in performance and productivity.

Can you describe a typical driver for Schneider?

It's almost a complete microcosm of the nation. We have people with PhDs driving for us. We have people who just have GEDs. We have farmers looking for a new opportunity, burned-out office workers tired of looking at the same four walls, displaced man-ufacturing employees, and construction workers tired of on-again, off-again schedules.

Did new security procedures slow border crossings after September 11?

Immediately afterward, crossing borders in Canada was much more inefficient. Now, with preclearing of loads electronically, that has improved. But there are concerns. Some people want to go to a model of 100% inspection. If we did that, the cost would be phenomenal. If we were to add one hour of waiting time to each border crossing to Canada, that would mean about $750 million to the truckload industry.

We're more challenged on the time crossing borders in Mexico. It could be an hour, but it could be a day. That's waste. Clearly there are issues around security and immigration law. But one of the things we've got to figure out is how to make that border crossing much more efficient.

The latest economic data suggest we've hit a soft spot. Are you seeing that as well?

We've seen a flattening of volume. Clearly the automotive industry is being challenged. And then there are things going on with the consumer. Higher fuel prices are being felt across all industries. I think a lot of people are taking a wait-and-see approach. And by its nature, wait and see creates an economic response. Still, I think the economy looks pretty strong. We still feel that business is good.

What do you do in your free time? I imagine that, being in Green Bay, you go to all the Packers home games.

I don't have season tickets. I've worked in Green Bay only a little over 10 years, and the waiting list is 30 years. I like to work, and I work a lot. I like to golf. And I love to salt-water fly fish. I manage to get to Florida or the Bahamas once or twice a year. My father taught me very young how to fly fish. It's a skill you can always work on.

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