Getting from here to there

Ever since camels carried spices down the Silk Road a thousand years ago, the transportation and logistics (T&L) industry has continued to develop through a constant process of innovation and adaptation. As forces such as globalization, advancing technology and oil scarcity transform the marketplace in unprecedented ways, the T&L industry is more attuned than ever to the long-term challenges and opportunities ahead.

Last year, PwC published a series of reports forecasting 20-year trends in the T&L industry. Produced by PwC’s T&L industry practice, in close collaboration with the Supply Chain Management Institute at the European Business School, the T&L 2030 reports examine the themes of energy, infrastructure and emerging markets. Drawing on empirical research and a survey of 48 subject-area experts, the reports explore how supply chains will evolve in an energyconstrained, low-carbon world; how transport infrastructure will keep pace with growing demands for fast, efficient, reliable and environmentally sustainable transport solutions; and what new hubs, spokes and industry leaders will arise in emerging markets around the globe.

We asked four industry insiders, all PwC alumni, to weigh in on the conversation, providing insight on long-term trends shaping the future of T&L and revealing how their companies are gaining ground.

Scott Roper is staff vice president of taxation for Atlas Air Worldwide Holdings, Inc. The world’s largest Boeing 747-equipped air cargo carrier, Atlas Air and its associate entity, Polar Air Cargo Worldwide, serve customers ranging from the US military to the Irish band U2 by transporting items over oceans and across continents. Among the range of services Atlas provides, the most significant is “wet leasing,” also called ACMI (aircraft, crew, maintenance and insurance). ACMI customers enter into long-term contracts with Atlas, essentially outsourcing the whole of their air-cargo operations to the Purchase, New York-based company. An attorney and CPA, Roper worked as a tax manager at PwC from 1999 through 2003 in the firm’s Florham Park, New Jersey, office. He notes his early years working in public accounting at PwC were crucial to his later career. “You learn things working at a firm like PwC that you cannot learn anywhere else,” Roper says.

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You learn things working at a firm like PwC that you cannot learn anywhere else.
— Scott Roper

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Art Garcia is CFO of Ryder System, Inc. With 800 maintenance facilities in the US alone and regional headquarters in Canada, Mexico, England, Singapore and China, Ryder is one of the world’s largest providers of commercial transportation services. Like Atlas Air, Ryder offers a range of T&L services: Customers can simply lease trucks from the company, operating them with their own drivers and planning their own routes, or they can hire Ryder to manage their supplychain operations, from the acquisition of materials to the delivery of finished products. Garcia’s 13 years working with Coopers & Lybrand in the South Florida market led him to Miami-based Ryder, where he started as a senior manager in corporate accounting in 1997. “My positive experience in public accounting at Coopers & Lybrand definitely influenced my interest in working for a public company,” he recalls.

Named CFO last year, Garcia says he has, somewhat inadvertently, followed a family tradition; his father was a line supervisor with Ryder P.I.E., the company’s former for-hire trucking division.

Greg Hohm is vice president of internal audit and chief compliance officer with Horizon Lines. The Charlotte-based shipping company primarily serves what are known as the Jones Act trades, the routes between Hawaii, Alaska, Puerto Rico, Guam and the lower 48 states that are restricted by international treaty to US-flagged vessels. Most of Horizon’s fleet of 20 container ships are used to transport goods from continental ports to outlying states and territories; five vessels provide service between US and Asian ports. After college, Hohm spent five years in Coca- Cola Bottling Company Consolidated’s internal auditing department before entering the public accounting field. He joined PwC in 2008, after working for more than two years at another accounting firm. His experience serving regional middle-market companies at PwC helped lead him to his job with Horizon Lines. “Horizon was owned by private equity, which was kind of my niche working at PwC,” he says. “I like that entrepreneurial spirit.”

David Boor is vice president of tax and treasurer at CSX, one of the nation’s leading rail-based transportation providers, whose corporate roots stretch back 184 years to B&O Railroad. In addition to a 23-state, 21,000-mile rail network, and a fleet of more than 4,000 locomotives that carry over six million carloads of products and raw materials a year, CSX is distinguished by its strong record of environmental leadership. The Jacksonville-based company received the EPA’s Clean Air Excellence Award for inventing the auxiliary power unit (APU), a device that reduces fuel consumption and greenhouse gas emissions during engine idling. Boor joined CSX in 1987, but started his professional career in 1976 with Price Waterhouse’s Washington, D.C., practice. “The skills I developed at Price Waterhouse—everything from learning what stands behind reported numbers to understanding the importance of process integrity— have been invaluable,” Boor says.

What we heard from Roper, Garcia, Hohm and Boor is consistent with the results of PwC’s 2011 Global CEO Survey, in which T&L executives reported that while they are mindful of challenges such as energy costs, climate change and the need to expand into emerging markets, they are optimistic about the industry’s future. Here’s what these alumni had to say about how the T&L industry will be different in 20 years, and what their companies are doing to prepare.

Fueling the fleet

Our alumni agree that rising and volatile oil prices, combined with the need to mitigate environmental risks associated with carbon emissions, will drive the T&L industry to find new solutions. This shift is already occurring, with freight carriers adopting cleaner fuels and more efficient propulsion systems, vessel designs and logistical strategies. But Roper, Garcia, Hohm and Boor emphasize that these changes will occur primarily as they align with the priority of creating value for the customer, or as the public is willing to pay for them through regulatory mandates.

Ryder, for example, has added hybrid-engine trucks to its fleet, and in 2010 was selected by the San Bernardino Associated Governments (SANBAG) board to provide the first heavy-duty natural gas truck rental and leasing operation. Ryder will use $19.3 million in state and federal American Recovery and Reinvestment Act of 2009 funding secured by SANBAG to implement the project. As part of the project, Ryder ordered more than 200 ultra low-emission, heavy-duty trucks powered by natural gas. The fleet will use both liquefied and compressed natural gas to serve customers through short-term rentals, longterm leases, or Ryder’s logistics solutions offerings.

To support the fleet, Ryder is constructing new natural gas refueling stations and specially equipped maintenance facilities in Southern California. The natural gas trucks significantly reduce emissions and operating costs, but because the upfront cost of a natural gas-powered truck is at least 50% more than a standard truck, Garcia says government support helps make this new alternative more viable today. “At the current modest production levels, the cost of these units is just too high to generate broad customer acceptance in the marketplace, whether you are talking about purchasing or the incremental expense that a company such as Ryder would need to pass through to a lease, rental or logistics customer,” he says.

Eventually, Garcia predicts the cost of these new vehicle technologies will come down and oil prices may rise to the point that alternative fuel-powered vehicles will become more cost-competitive. In addition, Ryder focuses on a wide range of less dramatic methods to help customers gain efficiency and insulate themselves from fluctuating pump prices. “You try to mitigate it as much as you can by being more efficient in the maintenance and calibration of your equipment, as well as education, training and technologies that help modify wasteful and inefficient driving practices,” Garcia explains.

Hohm describes similar forces at play at Horizon Lines. New energy sources such as hydrogen and hightech wind sails may lessen the shipping industry’s dependence on carbon, he conjectures. Meanwhile, investments in mega-size vessels are already on the rise in some segments of the industry, allowing shippers to move more goods with less energy. Simple practices—such as “slow steaming,” lightening up on the throttle to improve fuel efficiency, and “scamping,” removing barnacles from ships’ hulls to improve aerodynamics—are also becoming more widespread. And new low-sulfur fuels bring the promise of lower greenhouse gas emissions.

But at present, the benefits of these technologies and practices are limited. For instance, for a Jones Act carrier such as Horizon, whose service niche Hohm describes as “delivering the basic necessities of life” to isolated islands such as Hawaii, slow steaming is of limited practicality. “If a restaurant wants salad on the plate on Friday night,” Hohm says, “well, you have to be there on time with the lettuce.” So, like Ryder, Horizon looks for ways to incrementally boost fuel efficiency without adding significant cost. A big area of focus is ensuring ontime departures. “That gives us an opportunity to slow down our vessels if possible,” Hohm says.

Roper of Atlas Air echoes Garcia and Hohm. To meet the increasing demand for efficiency and cost savings, the company is presently awaiting delivery of 12 of Boeing’s new 747-8 freighters. “The new aircraft have significantly more cargo capacity than the prior version of the 747, as well as longer range and better fuel efficiency,” Roper says. As long as the global economy keeps growing and customers continue to value the unparalleled speed and go-anywhere power that jet engines provide, rising oil costs probably won’t put a dent in the air-freight industry’s high level of fuel consumption, which makes these innovations in fuel efficiency even more important.

Boor, who represents rail transportation, cites the significant contribution that rail transportation makes to meeting the multiple objectives facing logistical needs. As one of the most efficient forms of transportation with the ability to move a ton of freight 500 miles on a single gallon of diesel fuel, trains represent not only an opportunity to mitigate increasing energy costs in transportation but also reduce related transportation emissions.

Improving infrastructure, creating new opportunities

Another trend on the 20-year horizon: Existing modes of transport will become more attractive to new and different markets. These changes will result, in part, from infrastructure improvements, driven by the need to address the cost and impact of fossil fuel consumption. In particular, two of the more traditional modes of transport, rail and shipping, stand to benefit the most as better infrastructure and other developments shift their relative competitive advantages.

Given the qualities inherent in its steel-track infrastructure, rail has historically appealed mainly to customers whose primary service requirements are to move heavy loads between fixed points at a reasonable speed and low cost. “About 60% of CSX’s revenue base comes from transporting large, bulk commodities such as coal,” Boor notes. Customers needing just-in-time delivery have historically favored trucking solutions because of their extensive, tax-funded road system and dispersed fleets of vehicles. But new investments in infrastructure and technology could enable rail operators to improve their service offerings, attracting new segments of the freight market. And public subsidies, driven by goals to reduce carbon emissions, could hasten such outlays, Boor says.

CSX recently completed one such major upgrade. The National Gateway Project, a partnership with seven regional jurisdictions—Maryland, Virginia, North Carolina, Pennsylvania, Ohio, West Virginia, and the District of Columbia—is transforming an older, less efficient rail corridor into what Boor describes as “a modern highway system for rail.” With public partners joining to share the costs, CSX is raising tunnel and bridge clearances to create room for double-stack trains to move down the tracks, and adding or lengthening turnouts to aid passing. The result: faster, more precise delivery times and lower per-volume costs.

“The National Gateway Project even created a state-ofthe- art terminal for the trans-loading of containers off of the railroad system and onto trucks for localized delivery,” Boor says—essentially, a better model for providing customers with intermodal service solutions.

Boor isn’t the only one anticipating that new infrastructure investments will reapportion the freight pie. Hohm sees similar possibilities at hand in the shipping industry. “As road congestion increases, you may see some cargo move to what’s called ‘short sea’ or ‘coastwise’ shipping routes,” Hohm explains. “For example, Interstate 95, going up and down the East Coast, is very congested. At some point, as fuel prices go up, it may become worthwhile to make the needed investments to move that cargo up and down the coastwise lanes—going from Boston down to New York, to Baltimore, and so on.”

Moving into new markets

Roper, Garcia, Hohm and Boor agree that globally, the growth of emerging economies will be a powerful force in shaping the T&L industry of tomorrow.

“Long-term growth in air-freight demand will be driven by significant population and economic growth in China, India and certain countries in Africa,” Roper forecasts. “Asia, and China in particular, is already Atlas’s biggest market, hands down.” And, as China makes a historic transition from being the world’s biggest manufacturing economy to being the world’s biggest consuming economy, “opportunities to expand our service offerings in China will continue to grow,” he says. Growth patterns in the global economy will affect not just the size of the T&L industry, but also its shape. As wages in China rise, manufacturing will shift to other growing economies, such as Vietnam and Argentina. “We see opportunities to transport product from other countries into the United States and elsewhere around the world,” Roper says.

In the airline industry, strict international agreements limit the type of flying US carriers can perform in most foreign markets, including intra-Asian markets. But this could change as more countries adopt so-called “open skies” agreements. “If open skies becomes the norm,” Roper says, “that would create opportunities for all air freight companies to engage in new types of services— flying, for example, from China to another country in Asia without any connection to a US flight.” And if present restrictions persist, plentiful opportunities will still arise for US T&L providers to invest in or partner with foreign companies to meet rising demand in countries such as China, Brazil, Russia and India.

Echoing Roper, Hohm predicts: “In 20 years, there will be more diversity in the locations where goods are manufactured and moved to.” Several factors will affect precisely where that growth occurs, he adds, but the end result will likely be more regionalized supply chains that make the industry more efficient overall by shortening the distance from Point A to Point B. “You may see more manufacturing in Mexico and more in Africa,” Hohm says, “or another regional location that allows speed of service to large consuming economies such as the US.”

Another factor affecting the shape of future supply chains will be the relative abilities of different emerging economies to provide political, legal and physical infrastructure adequate to the needs of industry. “Let’s say you want to source more goods out of a particular country in Central America,” Hohm says. “It will be important for that country to not only build its transport infrastructure, but also demonstrate political stability. The countries that are willing to take those steps will become the strong emerging markets of the future,” he says.

Transforming through technology

In the future, the T&L industry will not only be bigger, more globalized, more energy efficient, and more ecologically sustainable; it will also be, simply, better. All four of the T&L leaders we spoke with say technological and operational innovations will provide everhigher levels and broader arenas of customer service.

Garcia says Ryder is already deploying a tool, called RydeSmart, which provides on-board telematics to monitor the performance of individual vehicles and drivers. “It tells you things like: How is the driver doing? Is he driving too fast? Is he idling too long? Is he following the proper route? It can help manage costs and also driver behavior,” Garcia says. Other technologies monitor things such as the temperature of refrigerated cars, so drivers get an alert if cargo is in danger of spoilage; these onboard diagnostic systems can even proactively alert Ryder’s maintenance shops of work that needs to be performed on specific functions and areas of a vehicle.

As these technologies continue to improve and gain wider use, so will other resources Ryder provides customers, Garcia says. These include more flexible contracts, tailored to the needs of each client, and expertise in increasingly complex regulatory requirements regarding issues such as emissions reporting and taxes. Garcia believes that as trucking becomes a more knowledge-intensive field, demand will grow for outsourced services of the type his company provides.

Boor lists several technologies that are already making a difference in CSX emissions and safety, including ultra-low emissions switch locomotives for use within the rail yard, roadside sensors that can detect when bearings or other elements need repair, and Railex containers that feature fresh-air exchange, temperature control and GPS tracking for perishable goods moving from coast to coast. Back in 2008, Congress passed the Rail Safety Improvement Act. It requires the deployment of positive train control (PTC) technology by 2015. PTC would reduce the potential for train-to-train collisions and unauthorized incursions into work zones, among other features.

Looking forward, Boor is enthusiastic about the possibilities of alternative energy technologies, including biodiesel and hybrid engines, to further lower costs and improve environmental performance in the rail industry. “You may see the development of energy storage systems, where excess power generated could be stored in a battery. Additionally, power from braking systems could go to battery storage, and that battery power could be tapped to amplify or supplement acceleration,” Boor describes.

Enhancements to rail networks will also continue, Boor says. “You’ll see a more open, streamlined system. You’ll see greater focus on connectivity between rails and ports, as ports look for ways to embrace rail solutions in a very effective and efficient manner, and also to position themselves to be able to receive larger and larger vessels.” Improvements to integrated transportation networks will also enable railroads to better partner with the trucking industry. “And as that happens, we’ll find joint solutions to use railroads for what they can do best, and to use trucks to do what they can do best,” he says.

Driving full speed ahead

The industry doesn’t have all the answers yet. But one thing is clear: Industry leaders see the future as a time of expanding opportunities. Tomorrow’s T&L providers will transport goods more efficiently, more effectively, and perhaps above all, more flexibly and cooperatively— providing individualized solutions that balance speed, cost, ecological impact and other factors that customers value. New energy sources and systems, new service-enhancing and performance-monitoring technologies, and new intermodal and public partnerships will all be part of the changing future.

Overall, the four industry leaders we spoke with are optimistic about the road ahead, noting that just as there are new challenges to address, there are new forces propelling the industry forward. As Boor sums it up: “The wind is at our back.”

• Keyword Vol. 6
• Message from Bob Moritz
• Ready for takeoff
• Re-routed
• Transportation and logistics on the move
• A tale of two airlines
• Getting from here to there
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