KNIGHT TRANSPORTATION: CEO maintains ‘hands-on’ approach to assure quality of growth

KEVIN KNIGHT

The Trucker News Services

12/15/2006

PHOENIX — Hollywood is famous for those acres of sprawling land they call movie studios.

Usually, you’ll find each studio has a closed front gate, usually characterized by ornamental ironwork, a guardhouse and swaying palm trees.

Within those studios, there are a collection of buildings and open spaces where they actually shoot the movie.

Most people called it “the back lot.”

Actors move from set to set, doing their best imitation of make believe.

A few hundred miles to the east in Arizona’s largest city, there’s another sprawling acreage of land with its own set of characteristics.

The front gate stands wide open, unmanned, extending its own nonverbal welcome to visitors.

Instead of palm trees, there are countless tractors and trailers.

There are a few buildings here and there, including one a few hundred feet inside the gate.

Kevin Knight, chairman and CEO of Knight Transportation and the man responsible for the place, calls what’s inside that building “the back office.”

But you won’t find any actors in this building nor others on the Knight lot, only real people who support a network of driving associates and employees at the company’s 27 service centers throughout the United States.

And Knight’s office is right in the middle of most of those 350 “back office” employees, close enough almost to communicate without a telephone or e-mail.

It’s a “just walk over and tell them what you need” sort of atmosphere and it’s by design.

“We’re a very hands-on bunch and always have been,” Knight said. “It’s very much an open architecture in our organization and I would say it’s by design. I like to be involved.”

Knight says the open architecture strategy has been a primary factor in the development of a strong and positive corporate culture.

“Very, very committed, very hard working and very intent on learning and improving is how I would describe our culture,” he said.

It’s that culture to which Knight also attributes much of the company success in the 16 years since he and his family founded it — success that saw the company post revenue of $499 million in 2005, up 21 percent from 2004, and a net income of $61.7 million, up 28.8 percent from 2004. (Comparable 2002 figures were $279.4 million revenue and $27.9 million net income.)

But rather than dwell on numbers, Knight likes to talk about the quality of the growth.

“I would call it fast, but I would also call it quality,” Knight said. “The development of our people far and away is what we do far superior to anybody in the truckload business. We not only develop them, but we keep them because they are shareholders. So they are owners, too. I would say that if you had to pick one thing [that has contributed to the growth], that would be our ability to select, develop and retain high quality people.”

Retention includes the driver pool, too, he emphasized.

“Our driver turnover is probably about 50 percent of the average of larger truckload carriers and 70 percent of the smaller TL carriers,” Knight said. “Our brand is national carrier, local service. Our tagline is “Your Hometown National Carrier.” We have 27 service centers spread throughout the U.S. and each one of them feels small, feels nimble and feels unbureaucratic. Our drivers know that we value them. They know where to get an answer. We keep them informed. Every one of those service centers has its own newspaper and leadership and so we keep a small feel, yet we’re a larger company. We have a lot of resources, we have a lot of reach and capabilities that others don’t have.

“When you look at the truckload business, I don’t think anybody can match us. When you say I’m looking for a national carrier that provides local-feeling service, that’s who we are and I think that helps us a lot in terms of driver retention.”

The company works hard to maintain that local feel, beginning with how the company trains its future managers.

“We start our managers at the bottom and they learn from those of us who’ve been here longer,” Knight said.

Each service center has its own group of managers, financial statements, trucks and driving associates.

“Those managers have their own driver development people, safety people and shop people,” he said, “so they have their own team. We give them a lot of support [from the back office], but it’s really up to them to make things happen every day.”

Making things happen no doubt comes easily for Knight, because he and his family learned the business from a well-known trucking family.

Right out of high school, Knight went to work for Jerry Moyes and his father Carl at Swift Transportation.

“The Knights and the Moyes were always good friends,” Knight said. “We grew up in the same small hometown and I had the opportunity to go to work for Jerry and his dad Carl, who was somewhat active. I grew up in a small town, Plain City, Utah, which we consider to be the trucking capital of the world because you have Swift and you have Knight and you have C.R. England and Pride Transport that have all come out of that small town.”

Knight learned the business from the bottom up.

“The first thing I did was work out in the yard,” he said. “Occasionally, we’d have loads that needed to be unloaded or trans loaded. The first job I did inside was in the safety and driver recruiting and working with the drivers. Swift had about 25 trucks and maybe five, six or seven owner-operators, but it wasn’t very big.”

He worked his way up in the Swift organization in various jobs, including dispatch and the development of new terminals and facilities.

By 1990, he was executive vice president Swift and president of Cooper Motor Lines, a division of Swift.

His brothers also had Swift connections.

Gary was executive vice president of Swift Transportation, Keith was vice president and manager of Southern California operations and Randy was a 25 percent shareholder of the company.

But in 1990, Swift was getting ready to go public, so the Knights decided to venture out on their own and start Knight Transportation.

Randy was chairman, Kevin was CEO, Gary was president and Keith executive vice president. Today, Kevin is chairman and CEO, Gary is vice chairman, Keith is chief operating officer and Randy is a director.

“Our family had invested an enormous amount of time in the Swift organization and Swift was in the process of going public, so we thought it was time to try it on our own,” Knight said. “We wanted to build a better trucking company, felt like we could and felt like we had the experience to do it. We wanted to build a highly profitable, high service, very close to our driving associates type of business. I wasn’t afraid of a little risk, but left a very good job and took on a considerable amount of debt to do it. We really never looked back and really expected to do well. We definitely expected to do well.”

Knight recalled his time spent with Moyes as an excellent experience.

“Jerry was very entrepreneurial and I was fortunate to spend a lot of time with Jerry and with his dad and brother and with Randy [the oldest of the four Knight brothers]. They [Jerry Moyes and Randy Knight] were older than Gary, Keith and I. I really learned what trucking was and the importance of having a good solid driver base, developing good people, watching costs, providing a good service for your customer and keeping your business productive.

“But probably most important was being with Swift in those early growth years. Being there prior to deregulation was a wonderful experience. But personally I learned the most the last five years I was with Swift because we were really in a growth mode. During the last five years was when things seemed to fall in place for me. It was tough to leave. It wasn’t the easiest decision.”

In 1991, the company reported $13 million in revenue for the first year of business. By 1993, Knight had 200 trucks in operation and in 1994 the company went public. In 1996, Knight opened terminals in Katy, Texas, and Indianapolis, and today, those terminals, or service centers, are considered the backbone of the firm’s success and a foundation for future growth.

In 1994, Knight added a refrigerated division.

It was the fulfillment of expectations, Knight said.

“We’re a growing company. Our shareholders expect growth. Our customers expect growth, our employees expect growth,” he said. “We have done a good job of building a dry van carrier in Knight Transportation and we felt we could do the same thing to the refrigerated industry. So a little over two years ago, we started Knight Refrigeration. We’re running a refrigerated carrier very much the same way we run our dry van carrier and at the same time providing our customers and employees and shareholders [with] more growth.”

Last year, the company added a brokerage company.

“So when our assets are sold out, we can still provide our brand of service both on the dry van and refrigerated side and that brokerage business creates opportunities for our people and our customers and our shareholders,” he said.

Knight wouldn’t label the addition of refrigerated and brokerage services as a major expansion.

“We’re very typical growers, so it isn’t a major expansion, it’s more of a continuum of what we’ve been doing since the day we opened the doors — like last year, when at the beginning of the year we determined that we felt comfortable opening six or seven additional service centers,” he said.

“So we opened two of those on the brokerage side, one of those on the refrigerated side and four of those on the dry van side.

“So at the end of the previous year, we started talking about what we view as potential openings with all our leadership in our three businesses and that’s what really determines where we go.”

In terms of the number of divisions, Knight feels comfortable with three.

“I think we have enough going right now with the three businesses,” he said. “We expect to grow each of the businesses each year. We’ll continue to fill up the U.S. and maybe northern Mexico and southern Canada over the next five to 10 years with additional services centers. We’ll end up with about 55 on the dry side [there are24 today]. We’ll end up with 15 on the refrigerated side [there are three today] and we’ll probably end up [with] brokerage services in each one of those markets, where we only have four open today. So the growth will be significant. Then our next frontier will be taking it to other parts of the world, the same thing we do here. I don’t know when that will happen, but it will happen someday.”

And right now, Knight has plans to be around for that “someday.”

“I probably won’t walk out of this building,” he said when asked when he thought he would finally decide to retire.

“That doesn’t mean someone else might not lead this company, but I would still be … [in] an important role,” he continued. “But if I did [decide to retire], you know I would want to make sure that our people were still committed and understood the importance … [of being] hard working and … were committed to continuing to learn and grow. I think when people talk about us and say ‘you guys are wonderful, you guys are the greatest,’ we should never feel that way. So I would probably say to our people, ‘don’t ever forget where we came from and don’t ever think you’re as great maybe as other people are telling you, because if you do you’ll quit learning, you’ll quit changing, you’ll quit adapting and I think that’s the key to our success. We are very much a different company today than what we were five or 10 years ago because we’ve continued to learn and change and because that’s what the economics, the market and the industry has required in order for us to stay where we are.”

And at least for the foreseeable future, Kevin Knight plans to stay right where he is: on that big lot, inside the back office, working hand-in-hand with his driving associates and employees and continuing to focus on commitment, learning, about changing and ingraining in them his motivation for coming to work each day.

“I want to win and to be the best provider of transportation services that we can be and I expect us to be the best,” he said. “If you’re a customer, you expect us to be the best, if you’re an employee, we expect you to view us as the best and if you’re a shareholder, we expect the same things. We really can’t change the market. Sometimes the market is very strong, sometimes it’s not so strong, but we can be the best we can be in that market and that’s effectively what we try to do every day.”

Kevin Knight discusses issues facing trucking industry

On the driver shortage:

“I think first and foremost, the key to the long-term success of continuing to develop quality driving associates is to continue to have significant cooperation from the shipper and consignee community in terms of flow. We need to do this, especially with the new Hours of Service challenges. We have to make sure the load is ready when it needs to be loaded and when we have an appointment time, [that] it’s ready to be unloaded. I think the shipping community is going to have to think more about what the trucker — us [companies] and our drivers — need to accomplish in a day and maybe to introduce more flexibility so we can get loaded when it works and unloaded when it works.

“I think the greatest opportunity for productivity enhancement that we have is for the shipping community to not only take into consideration what they are trying to get done and what their customers are trying to get done, but also how does it work for the trucker. I really believe we’re going to need to see more emphasis put on loading and unloading in a.m. hours instead of unloading in a.m. hours and reloading in p.m. hours. I think we’ve got to figure out how to tighten that band where the typical work day may start 4, 5, 6 or 7 o’clock in the morning. We have to figure out how to get most of the unloading and loading done in the first four or five hours of the day. So if any of the shipping community is reading this article, I hope that’s the message they would get out of it: how can we get most of that work done in the first of the drivers’ available hours so that then the driver can use the balance to be able to run safely and productively for the rest of that time period. We need to really work hard to eliminate the time between when a driving associate gets empty and when they get reloaded. We’re really going to have figure out how to do a better job there, because today it really isn’t so much taking into consideration what the trucker needs to accomplish, it’s really more taking into consideration what this shipper and consignee need to accomplish in their day.”

On retention efforts for driving associates at Knight Transportation:

“First off, from the very beginning, we make sure our drivers understand how important they are to us. We value our driving associates. We believe in over communicating. So it’s really important for us to make sure our driving associates feel an important part of whichever of those 27 teams [at the company’s service centers] they end up with. We have leadership at every one of those locations because things happen every day that our drivers need answers to and we’ve made sure it’s very easy for our drivers to get answers. We push the authority out into the field. In other words, one of our driving associates doesn’t have to ask me certain things because basically, the decisions are made locally. Now policy is developed here, but again that policy is developed on what we learn from our divisions.

“Our compensation programs are very dynamic. Our competitors don’t understand them, and that’s good, but our driving associates do. I think in some of the articles you see, sometimes people try to show it as though Knight Transportation is a lower payer, but I would tell you we’re the highest payer there is in terms of real compensation when you take not only our tiered compensation program, the stock options that we issue our driving associates and everything else that comes with the package. If you take a driving associate that’s worked for Knight Transportation for the past 10 or 12 years versus a driving associate that’s worked for somebody else, there’s no question ours make more money. Not only [in] their earnings, but also their stock option programs they participate in.”

On the current Hours of Service rules:

“You know, I think the current rule is rock solid with the exception of one significant error — and it’s nothing other than an error that I hope eventually gets corrected — and that’s the sleeper berth provision where a driver can’t go into the sleeper berth and stop the 14-hour clock unless they are in there are at least eight hours. That isn’t the way that provision should work. It’s probably as a result of overreacting to those that don’t really understand our business. The way it should work is that you should have to go in for at least two hours, because what we know is that a nice two-hour nap is very refreshing and very helpful in terms of one of our driving associates getting the rest they need. But anything over two hours should count in my opinion toward the 10-hour break. We have many of our drivers who just don’t sleep for eight hours. They just don’t. They’ll sleep for five or six, but after they get loaded or eat supper or lunch, they want to rest, because number one their schedule allows it. But it really puts them in a situation where they are compromising: ‘do I run all the miles that I can or do I do I get this rest.’ So the rule puts them in a difficult situation. So I believe the HOS are rock solid with that exception and if we could get that provision changed I think we’re right where we need to be as soon as the Electronic On-board Recording [rule] is introduced, and we support that to make sure that our driving associates are getting the rest they need. I’m happy for the most part, but definitely disappointed in that [sleeper berth] provision.

On speed limiters:

“You know, I’m probably not a proponent of mandating speed on trucks other than I know they shouldn’t go faster than 75 mph because 75 mph is the fastest speed limit is in the U.S. To me, that’s where it ought to be limited. From my standpoint, it should be limited from the manufacturer because trucks are different. We do have to live to a higher standard as far as safety. And I think that would send a strong message to the motorists who we share the highways with that we’re not going to build a truck that goes faster than the law anywhere. But from there, I think it should be on a company-by-company specific basis. I definitely think slower is safer and more economical and I think there’s a median there where we should be. I personally think truck speeds should be around 65 mph and that’s my own honest opinion. Our trucks are governed an average of 65 mph depending on the application of the truck and then owner-operators are 5 mph faster than that.”

On the current highway infrastructure:

“First off, it’s very, very congested and so I would be highly supportive of a strong nationwide bypass effort in conjunction with the interstates. I think many of our interstates are adequate where we don’t run into congestion. But where we run into congestion, things aren’t adequate. I think it’s going to take a lot of money to fix that infrastructure. I believe it should be collected in the form of fuel tax. If I knew that every dollar that we spent in fuel tax was going to go to the roads — which I believe is what the program is supposed to do whether it’s federal or state — then I would be supportive of additional fuel taxes in order to accomplish what we need to accomplish from an infrastructure standpoint. I do believe we are behind as far as infrastructure and I believe significant focus needs to be put into that and I believe the right way to do it [is that] you reward people who choose to be more economical in terms of the selection of vehicle they drive. It should be a fuel tax. It can be collected at the pump [so] there’s no way to beat the system [and] you don’t have people dodging tolls and a lot of people won’t pay tolls. It’s very difficult to administer tolls and pass those charges on the way they should be passed on.”

On the burden tolls place on the industry:

“There’s no question that tolls are a burden. It’s just a layer of complication that’s very difficult for truckload carriers to understand the costs, to control the costs and to price in the service. So tolls are not a good thing for the truckload industry. I hope I’ve been clear in my comments that no question everybody, including ourselves, needs to step up to address the problem [of congested roads], but doing it via tolls doesn’t make it equal so that everybody pays their fare share. I think that’s a very archaic way of approaching the problem and one the industry will never support. But I do think the industry and the American public could support a higher fuel tax. I believe they would make that decision for better roads and less length in commutes, less delays in traffic, and it’s going to get us cleaner air in conjunction with everything we are already doing so I think that’s what we should do.”