Intermodal shippers face rocky peak season

Mark Szakonyi, July 14, 2014, JOC.com

 

Six months after the most disruptive winter for North American supply chain interests in recent memory, the upcoming summer-fall period is shaping up as the intermodal peak season of shipper discontent.

 

The makings are there for a perfect storm of rail delays in the summer-fall peak season, although analysts doubt shippers will see anything on the scale of the 2004 meltdown, when a surge in import volumes overran deployed capacity. Still, with ocean carrier slow-steaming, drayage truck shortages and potential labor actions, any intermodal delays will only increase the pressure on supply chains that already have little padding.

 

“What you have is a lack of surge capacity in the system and the railroads are running flat out,” said Larry Gross, a senior consultant at research firm FTR Associates. “If there is a backlog, you can’t run any harder than you are, and more volume just further chokes the system.”

 

Railroads in western North America already got a taste of potential peak-season trouble when shippers accelerated imports through U.S. West Coast ports ahead of the July 1 expiration of the International Longshore and Warehouse Union’s contract. BNSF Railway and Union Pacific Railroad have been accused of being caught flat-footed, with some terminal operators complaining the carriers were running two days late in providing locomotives and railcars to on-dock facilities at the Los Angeles-Long Beach port complex.

 

Union Pacific, however, told JOC.com that the railroad does not have a crew or equipment shortage, nor has it experienced delays at the ports. BNSF did not respond to requests for comment.

 

Cargo diversions from the U.S. West Coast, meanwhile, are testing the Canadian intermodal network. Canadian National Railway on July 7 issued equipment allocations to ocean carrier customers through Port Metro Vancouver and the Port of Prince Rupert to deal with a surge of U.S-bound cargo.

 

“If the surge prior to the end of the ILWU contract is any indication of how traffic could be handled (during peak season), we could see some trouble,” said Ron Sucik, president of RSE Consulting. “It would take a perfect summer with no flooding and derailments for them to run like they would hope.”

 

Intermodal volume in June jumped 6.7 percent year-over-year to 269,346 units, the highest for any month in history, according to the Association of American Railroads. Domestic intermodal gains are driving much of that growth, fueled by expanding manufacturing production and shippers who are increasingly turning to the rails as trucking capacity tightens. Domestic intermodal traffic rose 6.9 percent year-over-year in the second quarter, compared to a 4.1 percent gain in the first quarter, according to preliminary Intermodal Association of North American statistics. International intermodal volume rocketed 9.6 percent in the second quarter, a marked improved from the 1.1 percent increase seen in the first three months of 2014. Total intermodal volume expanded 8.2 percent in the second quarter, after inching up 2.6 percent in the prior quarter.

 

Surging intermodal volumes aren’t the only reason for mounting delays, however. A restocking of coal after the harsh winter, healthy grain exports and the domestic energy boom are making it difficult for the railroads to dig out from cargo backlogged during the winter. U.S. carload traffic was up 6.3 percent in June compared to the same period last year, according to AAR data.

 

The railroads’ challenges in keeping up with the cargo growth don’t stem from a shortage of track capacity, but from a lack of locomotives and crews, Sucik said.

 

In fact, railroads’ equipment limitations, including their inability to reposition containers, is restraining intermodal growth, said Craig Dickman, CEO of Breakthrough Fuel, a consulting company that helps shippers reduce their energy costs by shifting highway loads to the rails. The 7.5 percent jump in intermodal trailer volume in the first quarter, as measured by IANA, reflected shippers’ inability to secure containers. The lesser trailer growth of 4.3 percent in the second quarter suggests some of those equipment shortages have eased.

 

Shippers “are cautious on service and hopeful that some of the extended seasonal challenges will be worked out,” said Dickman, whose company assists more than 30 shippers, including Procter & Gamble, Unilever and Kraft Foods. “But I haven’t seen anyone slow down on intermodal.”

 

If transit times stretch too far, however, shippers will look to shift higher-priority loads back to trucking, he said. After convincing many shippers and third-party logistics providers that intermodal reliability had improved substantially, the railroads risk losing some of those perceived gains if service deteriorates further.

 

Those service issues exploded during the brutal winter, but had been building since the third quarter of 2013, when average intermodal train velocity started to slow, Gross said. Shippers prize reliability over train speeds as long as railroads accurately inform customers when their goods will be delivered. But as a barometer of overall rail performance, slower train velocities generally point to poorer overall service.

 

And the widespread opinion among intermodal shippers and analysts is that intermodal service is subpar, at best, and average industry train velocity has shown few signs of improving. The average intermodal train speed in the week ending July 5 was 28.3 mph, the slowest since 2006, with the exception being a single week in 2008, Gross said. The industry average includes all Canadian and U.S.-based Class I railroads except Canadian Pacific Railway.

 

The Class I railroads have previously said that performance is improving and have pointed to the addition of new locomotives and crews. Carriers contacted by JOC.com declined to comment on service issues, citing their quiet period ahead of the release of second quarter earnings.

 

BNSF, accused by some as the major railroad with the worst intermodal service, has been plagued by congestion on its northern corridor due to export grain traffic and activity tied to the nearby Bakken shale basin. Grain carload shippers’ frustration with service hit a boiling point earlier this year, spurring the U.S. Surface Transportation Board in June to require BNSF and CP to explain how they would solve cargo backlogs and give weekly status reports on their grain service. The healthy export grain season could simmer down by the throes of the intermodal peak season, giving the western railroads some much-needed relief, Gross said.

 

It’s not just grain shippers that are tired of rail delays. Sen. Rob Portman, R-Ohio, and Carl Levin, D-Michigan, are urging the U.S. Surface Transportation Board, the nation’s rail regulatory agency, to work with the carriers to fix service delays that are costing automobile shippers millions of dollars in storage fees and having to shift shipments to more costly trucking transport. The poor rail service has also caused vehicle shortages at some dealerships, said the co-chairs of the Senate Auto Caucus.

 

To some extent, railroads are at the mercy of drayage operations. Many drayage operators’ inability to serve intermodal terminals in Chicago during the winter drove many of the backlogs. The spaghetti mess of freight and passenger rail lines in Chicago didn’t help — it can take up two days to move a rail load across the nation’s largest freight hub even during warm weather.

 

Drayage drivers are “at a premium and it is possible that ramps, particularly in Chicago, could worsen, especially if the few available drivers are tied up running ‘hot’ boxes across Chicago on rubber tires,” said John Larkin, managing director of the transportation and logistics group at financial analyst Stifel.

 

Rather than periods of surges and dips in containerized imports, Hackett Associates, co-author of the monthly Global Port Tracker report with the National Retail Federation, expects inbound shipments to build throughout the summer and into the fall. That suggests railroads will see a similar scenario. Import traffic at major North American container ports will hit a record 1.5 million containers by the end of the month, the July Port Tracker, released this week, forecast.

 

July’s expected 4.3 percent year-over-year gain in volume will be followed by increases of 1.6 percent in August, 1 percent in September, 3.8 percent in October and 3.6 percent in November, according to Port Tracker forecasts. Those projections bode well for retailers’ busiest season of the year — as long as the shipments get delivered on time.

 

 

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