NEW YORK — Driver retention across the trucking industry has become a lot easier with rates falling and some independent drivers headed toward the safety of employee status, but Heartland Express executives used the occasion of an industry conference to boast about their financially driven program to keep drivers in the fold.
At the UBS Global Industrial and Transportation Conference here, CEO Mike Gerdin and Vice President of Finance Josh Helmich were frank about the weakness in the freight market. Operationally, Gerdin said, “we’re taking pretty much everything we can get our hands on.”
Heartland (NASDAQ: HTLD) was rejecting 10,000 to 20,000 loads per week at the height of the strong freight market that entered a downturn a year ago, he said. That number is now closer to 1,000.
The impact on drivers at Heartland from that market is enormous, but about half of them are being supported by the company’s pay protection program.
Helmich said the 2-year-old program works as a “supplement to a minimum level on the low end.” A driver covered by it is guaranteed pay of at least $900 and up to $1,200 per week. The level of supplement would be impacted by such things as whether a driver is normally home at night or on the road for several days.
“In the old days, they would have maybe taken home a check for $300,” Helmich said of the impact of a weak market. But it doesn’t cover just periods of soft rates; Helmich cited a driver who might be facing a big drop in pay because of a breakdown. “If the driver is there and available to run freight, we don’t want them to be penalized,” he said.
Heartland made two significant acquisitions last year: Smith Transport and the truckload operations of CFI and Drivers from those two companies are not under the pay protection program yet, Helmich said.
To get those drivers into the program, “you really have to get the finances in place that will allow you to run a program like that,” he said. And with Gerdin saying separately that the integration of the two companies might take three years from when they were acquired last year, inclusion still appears to be a ways off.
Helmich discussed a few numbers connected to the pay protection program. The first year of the program, 2021, saw about a 15% improvement in retention, he said, but the freight market was strong at that time. “It certainly requires higher investment dollars right now than in the past.”
Driver pay is now down about 5% to 10% from “the good times,” Helmich said.
Replying to a question from interviewer Tom Wadewitz, the head transportation analyst at UBS, Helmich said the cost of the program might result in a reduction of 1 percentage point in Heartland’s operating ratio. In the first quarter, that consolidated rate was 91.4%, weaker than where it traditionally has been.
But that was the impact of the Smith and CFI results, as Heartland reported that the OR for those two acquisitions were in “the upper 90s” during the quarter, while legacy Heartland and the Millis Transfer segment, acquired in 2019, were in “the low 80s,” according to the company’s earnings release for the quarter.
The acquired companies continue to operate under the brand names that they came into Heartland with, Gerdin said. That also has been a boost to retention, he added.
Drivers can be strongly loyal to a brand, according to Gerdin. “We’ve had past acquisitions where those organizations were folded in with Heartland, and even if it’s three years down the road, you’ll see some loss of drivers because of that,” he said. “That operating brand, the sticker on the door is very important to them.” Maintaining the four current brands has helped retention by allowing that identity to remain, he added.
In the wide-ranging discussion, Gerdin and Helmich touched on several other points:
The acquisition of the truckload operations of CFI had a key component: Mexico. CFI was “one of the pioneer carriers that started off in Mexico,” Gerdin said. With industrial suppliers increasingly focused on nearshoring, the value of a trucking company that knows the Mexican market is high. “It’s not a little presence they have,” Gerdin said. “It’s a big presence, and it’s what they’ve specialized in for the last 20 years.”
While so many other truckload companies have talked about the importance of building up their dedicated divisions, that is not a Heartland goal, according to Gerdin. Stressing that the company stays away from the spot market, Gerdin said Heartland is in “the best part of the market, which is irregular truckload. It’s the most difficult part but it’s the best part. When you add in brokerages and all these other things, most of that stuff operates in the 90s [OR],” Gerdin said. “So it drags down our operating ratio.” Some companies are focused on top-line revenue, and chase expansions to increase revenue, he said, “But we’re about the bottom line, so that’s where we’re going to stay until it doesn’t work anymore.” Heartland’s focus on the bottom line rather than the top line drew concern last year in a report from Barclays.
Whereas leaders of some other transportation companies speaking at the UBS conference have been mildly optimistic about the state of the freight market, Gerdin was not. “April was bad,” he said. “April was probably going to be the worst month of the year.” There has been minor improvement in May and June, Gerdin said, but he did not take that as the basis to predict when an upturn might begin. Weak freight markets tend to run a year to a year and a half, he said, but the end of them can’t always be predicted. “Sometimes it takes a hurricane, or sometimes it takes a railroad shutting down and all of a sudden, here we go,” Gerdin said. “Nobody knows when that event is going to happen, or a series of events, but then we’re off to the races.”
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