Q&A: Echo Global Logistics CEO Waggoner discusses market trends and conditions

Logistics Management Group News Editor Jeff Berman recently caught up with Doug Waggoner, CEO of Chicago-based 3PL Echo Global Logistics. Waggoner offered up insights on a whole host of topics, including: inflation; rates and capacity; and Peak Season prospects, among others. Their conversation follows below. 

LM: How would you assess the current state of the freight economy?

Doug Waggoner: We probably had one of our best quarters ever in Q2, with our Last Twelve Months (LTM) revenue as of 6/30/22 at $4.5 billion, and our LTM EBITDA was $204.4 million. While we don’t have Q3 in the books yet, I can tell you that it will be accelerated from these numbers. These numbers include the Pro-forma results for Roadtex, which is the tuck-in acquisition that we completed in Q2. However, we do see things decelerating. Demand has tapered off a little bit, and prices are coming down. I feel like we are firmly past the peak for this freight cycle and heading towards the down part of the cycle. What is interesting, though, is it feels like the retailers have a lot of inventory, and the industrial economy seems healthy except for the supply chain problems. A lot of the industrial companies I talk with cannot get their orders, because they cannot get the parts and the supplies they need to assemble their products. One place you are going to see that is with Class 8 trucks. If you ordered 50 trucks, there is a chance that maybe you are only going to get 25 or 10 of them. That is kind of an interesting problem, because what that tells you is should the market turn back up in the next few years, supply and capacity may be somewhat capped. The other thing is in 2024 there are going to be some tougher emissions standards, and some of the engine manufacturers don’t have a good solution for that yet. Between the emissions standards and just being able to get the supplies they need to make trucks, I think there is going to be a cap on the supply of equipment, which means trucking companies are going to have to run their trucks longer, and they are not going to be able to add capacity at such a time when demand picks up. That also kind of speaks to the fact that if you think of the kind of supply and demand dynamics of capacity, it is very sensitive.

LM: In what ways?

Waggoner: It does not take a lot of demand to create a tight market, and it does not take much of a decline in demand to create a loose market. We can switch sides pretty quickly, and I think that capped capacity on the Class 8 truck side will be a factor at some point in the future. It seems like trucking companies are able to provide all of the supply that is needed right now. Shippers are asking for lower prices, and contract rates are coming down. I think the worse may yet to come and shifts my thoughts towards the macroeconomy.

LM: What are you seeing on that side?

Waggoner: If you go back to 2008, when we started using quantitative easing (QE) for the first time, copying what Japan did with its economy, QE really helped us get out of that recession, but it never got turned off. The Fed was buying up securities and injecting cash into our economy from 2008 all the way up to 2018 or 2019. And then when you had all the federal stimulus associated with Covid pumped into the economy, there is a lot of cash sloshing around in our economy, which is really at the root of this inflation. The only way, I believe, for the Fed to fix that is to keep raising interest rates by probably a couple hundred more basis point yet, which will eventually force us, I think, into a pretty deep recession. The irony is we essentially have full employment right now. Normally in a recession, you have some level of unemployment, and, of course, the Fed’s mandate is to manage interest rates and employment. It only needs to think about one side of that equation right now and basically has the green light to keep raising the rates. But I do think as the Fed slows down the economy that it will start to affect employment. My personal belief and forecast is we could be heading into a prolonged recession.

LM: How do you view prospects for the 2022 Peak Season? Will things be somewhat more normal compared to the last two years?

Waggoner: I don’t think there is going to be much of a peak, because a lot of the consumer products are already in the warehouses, and their inventories are full. My prediction would be that there will not be much of a peak this year. In the last five years, consumer behavior has changed, with people buying more stuff online. That does not necessarily eliminate transportation demand, but it shifts it to other modes, lanes, and channels.

LM: With inflation still hovering around 40-year highs, how much of a challenge is that for your shipper customers and how are you helping them navigate those challenges?

Waggoner: I think in transportation that the inflation already occurred in 2021, when the market was very tight, in terms of capacity. What we are actually seeing now is that prices are coming down, which is actually a little bit of a relief. So, from a shippers’ standpoint, the price of their products is probably going up from their suppliers, but the transportation costs are coming down. It is a little bit of an offset. That said, I do think if you take out the volatility of the freight cycle and look at the next trough compared to the last trough, we know that the last peak was much higher than the previous peak for pricing. I do think the floor on pricing has been reset simply because, for the truckers, the prices for tires, tractors and trailers and labor—when capacity was tight and it was tough to find drivers—some companies gave multiple pay increases to drivers in a single year. So, even though prices are coming down, I think the floor for those prices will be much higher than in past loose markets or recessions at the bottom of the cycle.

LM: While Echo does not have its own fleets, the recent decline in diesel prices has been noticeable. How do you think shippers and providers can better work together to deal with run-ups in prices should this happen again, in terms of lessons learned?

Waggoner: To start, we don’t have a lot of points in our history to refer to, in which Russia is attacking an innocent country, disrupting energy markets. I do think the last couple of years in general has been a good lesson for our industry, when you think about how do we work together between the buyers of transportation and the suppliers of transportation to take some of the volatility out. There is always going to be price volatility, because it is somewhat of a commodity market. Are there different types of relationships, agreements, or contracts that we can have in which nobody is getting gouged at different parts of the cycle, which is what happens today. I think that takes cooperation between shippers and transportation providers, and it takes trust. But, for everybody’s benefit, we need to figure out a better way to navigate these cyclical prices, because in 2022 it was very sharp on basis transportation capacity and on fuel prices. Fortunately, prices are dropping now, but it seems like all the different players in the market either get benefitted or hurt in different parts of the cycle.

LM: Shifting gears to the last, or final, mile market, how do you view its ongoing emergence, given the ongoing increase in the segment’s profile, as well as importance?

Waggoner: It is becoming more important, because all of the B2C retail shippers now have omnichannel shipping strategies. They may have a brick-and-mortar store and also an online store. If you go to The Home Depot to buy a grill, there may be a few on display, but the real selection is on its website, and that is where it will send you to buy it. When you think about that, most retailers have less stock in the store and more variety online, which requires having a final mile solution to bring goods to your house. And everybody now needs to compete with Amazon, with all of the retailers out there trying to figure out how to build a supply chain to consumers’ doorsteps that is competitive with Amazon. That is something everyone is focused on. Now, one of the problems with final mile is…it is very fragmented. Not a lot of companies have ubiquitous coverage for home delivery for the contiguous 48 states. And they are having to cobble together solutions that combine FedEx, UPS, and regional parcel companies or a different company for different types of commodities. It is an area of opportunity—and I know there are a lot of start-ups in this space putting together Uber-like models, with agents that make deliveries for them. But because it is so regionalized most retailers need to have different solutions in different parts of the country. It is one thing to be deliver to warehouses in 50 states but to deliver to all the homes in 50 states is a much more daunting task. There is really not a robust infrastructure for doing that so companies need to cobble it together, and they are doing it so they can compete with Amazon. While it is now old news, the surge in consumer demand we saw from Covid has somewhat evaporated and is another factor within the freight markets.

LM: Looking at 2022 on a year-to-date basis, how have things played out so far for Echo?

Waggoner: I think 2022 will have exceeded our wildest expectations. The first half of the year was really strong, and we see it softening a little bit now. The fourth quarter may be a little down, but I think it will be a solid year, with a concern that 2023 may be a little tougher.

LM: How do you view the outlook at U.S. ports, with imports still high and, in some cases, being diverted from West to East Coast ports, as well as the ongoing port labor situation, with the PMA and ILWU still working without a new contract in place?

Waggoner: Things were so concentrated in Los Angeles and Long Beach with that area historically generating a lot of freight, but when you take a portion of that away and start distributing that across East and Southeast ports, it is a little bit less noticeable. But I know it is happening, because I talk to shippers about it, and they say the number of ships backed up in San Pedro Bay has dramatically declined, with ships being processed more quickly now. For container rates, at the peak in 2021, it was $40,000 to bring a container from China to the West Coast and now you can do it for $10,000. For port labor, I have to think that much like the potential railroad strike, which was averted, this country cannot handle much more in the way of supply chain disruptions. I would hope that the federal government would intervene and the two sides come together and get a deal done and prevent a work stoppage.