The skyrocketing price of fuel is transforming supply chains. One beneficiary of the trend is the intermodal service provider. And no trucking company has made more of a commitment to that sector than J.B. Hunt Transport Services Inc. Paul Bergant, chief marketing officer and president of intermodal, discusses how his company is coping with the various challenges that the industry faces, the quality of rail services today, and what issues lie ahead.

Q: How are you coping with higher fuel prices?

Bergant: J.B. Hunt Transport Services, our parent company, has been dealing with the tremendous run-up in fuel prices over the last several months as well, if not better, than most. Our traditional truckload division is having a difficult time, like most of its peers in the truckload industry. High fuel prices and the inability to recover anywhere close to a hundred percent of that cost, even with surcharges, has really taken its toll on profitability. The difference between Hunt and many of its traditional competitors is diversification. In intermodal, which is our largest division in terms of revenue, we've seen tremendous opportunity in terms of growth. Many of our customers are trying to deal with the high cost of fuel in their own right. Intermodal, which typically has a fuel surcharge of about half that of truck, has become a viable alternative. That business has continued to grow at double-digit numbers. Our dedicated contract services division, which is our second-largest division, is more like an annuity, where it's working off of longer-term contracts, and has provisions in place to protect against the ups and downs of the market for both our company and our customers. It has been able to maintain the same level of profitability. So, when you roll all that up into Transport Services, as a corporation we've been doing OK.

Q: Are you seeing a marked shift from truckload to intermodal as a result of higher fuel prices?

Bergant: Yes. That has been going on over the last two to three years. As truckload rates increased, intermodal service became more and more competitive. Since the recent tremendous growth in fuel cost, we have seen that shift surge and accelerate. Hunt has experienced overall growth in the mid-teens as an intermodal division, but in the eastern lanes it has been substantially better than that.

Q: How reliable is underlying rail service today?

Bergant: Lack of consistency has always been an issue with intermodal service. However, the railroads have continued to invest capital into their networks to the point that service is at an all-time high for the industry. That's especially true for the two railroads with which we do 95 percent of our business. Our use of the BNSF and Norfolk Southern continues to grow, in part based on their improving service levels. This improvement has allowed our customers to continue their quest for modal shifts to save money and secure capacity as needed.

Q: U.S. exporters reportedly are having trouble getting access to ocean containers at inland locations. Are they turning to domestic trailers, to get their goods to the coast?

Bergant: Over the last four to six months, we have seen what we call reverse transloading - picking up international business in the interior of the country, taking it to the coast, then having it transloaded into marine containers. The market for exporters' merchandise is so strong that the incremental cost is far overshadowed by their ability to sell those products overseas.

Q: Another way shippers are trying to control costs is by moving from less-than-truckload into truckload. Are you benefiting from that trend?

Bergant: Yes. What you're seeing is a fundamental change in the way supply chains are going to be managed in the future. Many people seem to think that when this economic downturn is over, it will be back to business as usual. But there are some fundamental changes going on. Coming out of this downturn, energy prices are going to be different than when we went in. I don't think anyone would suggest that we're ever going to see the day when fuel is anywhere close to what it used to cost, even two years ago. The continual modal adjustment by customers, who are trying to keep their costs in line as best they can, suggests they will look for any chance to move from LTL to truckload, and from truckload to intermodal. You're going to see the length of haul shorten. To the extent you can shorten the distance, you shorten the expense. People are looking at the whole manufacturing and warehousing cycle, trying to get more product in a load. You mentioned LTL to truckload, but it doesn't stop there. It continues to go on down the modes.

Q: How has the driver shortage affected J.B. Hunt?

Bergant: The truckload industry in general would pretty much speak with one voice. And that voice suggests that driver turnover is probably at the best levels that we've seen for many years, because many fleets including Hunt have reduced their tractor count. So drivers aren't necessarily jumping around as they typically would in the past. Today, turnover is controllable. And we're able to find drivers when we do have turnover. But there's one fundamental that has not changed, and that is the quality of drivers we're finding. It is not a job that most people strive to do. I don't want to paint all drivers with the same brush, but if the supply-demand situation came back into proper alignment because the economy turned around, the quality of drivers would still be something less than we would like, generally speaking. And you would probably start to see turnover jump up again. Right now we've got a temporary lull in that situation. When we see an uptick in the marketplace, we'll be back in the same old boat.

Q: There's also the challenge of having to pay drivers more to offset some of the disadvantages of the job, such as lengthy hauls and time away from home.

Bergant: As I mentioned earlier, the length of haul for most if not all carriers has continued to shrink. Drivers are making the same or less than they were two or three years ago, even though in many cases we've raised the mileage pay, because the miles have gone down. So wrap it up with all the other issues that you just mentioned and yes, it's still a difficult job, one that's not attractive. And even though it's a little better today, the fundamentals are still pointing in the wrong direction.

Q: How are you coping with the security issue today?

Bergant: One thing that Hunt has done is adopt trailer tracking in our over-the-road fleet. From a security standpoint, we know where our trailers are. We can "geofence" that trailer, put a perimeter around it so that if it ever moves, we know that. If someone dismantles the onboard computer in the tractor, many times they forget that the trailer might have a tracking device on it as well. That has also helped us immensely in terms of service, giving customers good information on the whereabouts of their loads.

Q: What is the biggest challenge out there right now, with regard to the need for infrastructure improvements?

Bergant: It all boils down to money and prioritization. Quite frankly, we are not real confident that the money spent to protect and build on that infrastructure is going to keep pace with the need for highway and infrastructure improvements. Railroads, on the other hand, even though they're looking for public/private partnerships to help pump capital into their infrastructure, are spending a substantial amount in their capital budgets. I think they're going to be able to keep up with the infrastructure requirements a little better than the highway system will. We're concerned that congestion continues to plague us. Even with this big run-up in energy costs, I still believe there are going to be motor vehicles on the road that far exceed our ability to handle them over time.

Q: How are we going to pay for improvements?

Bergant: That's a great question. I don't know. Does it matter? There's never going to be enough money. I hate to say it, but we seem to be living in a society where something has to break before it can come up to the top of the list to be fixed. Maybe the bridge has to fall, the traffic has to come to a dead stop, before we will actually turn our attention to it. It's a piecemeal approach, and I don't think we have put enough thought into a policy to try and understand it better.

Q: What new services are you putting into place at J.B. Hunt?

Bergant: In our dedicated contract services group, the final-mile delivery is a real opportunity. They have provided home deliveries for some time, and are trying to step up that piece of their business. Intermodal obviously has the opportunity to grow, with the length of haul continuing to come down to where it's effective, both in terms of service and cost. Our integrated carrier service, which includes our brokerage arm, continues to find ways to provide trailers for customers. We can also utilize other people's tractors and become the marketing arm for them. There are things out there that are going to help us continue to grow.

Q: What new developments are taking place on the technology side?

Bergant: We continue to enhance the basic technology that we have spent millions of dollars on through the '90s and into this century as well. We're fine-tuning the technology that we have to make our operation run more smoothly, and we're continuing to take cost out of the system by reducing empty miles. While nothing revolutionary is coming up, we're making further enhancements to some pretty good systems. That's what the goal is going to be.

RESOURCE LINK:

J.B. Hunt, www.jbhunt.com