US Intermodal Growth May Slow This Year

Mark Szakonyi, April 29, 2014, Journal of Commerce

Some shippers this winter couldn’t deal with tightening truck capacity by shifting loads to intermodal trains even if they wanted to.


Intermodal service delays, caused by the severe weather and an uptick in freight demand, forced some railroads to turn away cargo. In a case of supply chain reverse engineering, poor rail service in the first 10 to 11 weeks of this year spurred shippers to shift about 150,000 carloads and intermodal loads from the rails to truck, Thomas Albrecht, managing director of BB&T Capital Market’s transportation group, said in an April 3 research note. The shift represented 1 percent or less of for-hire dry van loads.


“If any of you tried intermodal in the first quarter, I am so sorry,” Sam Niness, assistant vice president and general manager of Thoroughbred Direct Intermodal Services, a subsidiary of Norfolk Southern Railway, said at a transportation conference this month.


The delays appeared to have slowed North American intermodal traffic growth to 2.6 percent in the first quarter, according to preliminary Intermodal Association of North America statistics. Domestic traffic rose 4.1 percent in the same period, while international volume inched up 1 percent. Comparatively, total intermodal traffic rose 7 percent year-over-year in the fourth quarter, with domestic and international volume expanding 8 percent and 5.9 percent, respectively.


Now, with some railroads saying intermodal service delays will end in May and with truck capacity tightening and expected to get tighter, two major questions loom for the intermodal industry: How much freight will shift to the rails and how much more will it cost?


The conventional wisdom is that shippers will increasingly move more highway loads onto the rails as over-the-road truck capacity tightens, and, as a result, become more costly. But there are plenty of signs that the intermodal shift could slow in the coming year, in part because there isn’t as much express unit train capacity as the railroads profess, said Tom Finkbiner, a noted intermodal analyst.


“What happened this winter, I think, set (the intermodal shift) back a bit,” he said. “No one expected rail service to deteriorate as much as it did, and the service hasn’t bounced back as quickly as the weather has improved.”


Intermodal capacity is limited by the rail network itself and the amount of drayage capacity available to take the loads the so-called last or first mile, which on some lanes can be more than a hundred miles.


Drayage rates on average are rising faster than truckload rates, as new hours of service rules hit port truckers hard, Finkbiner said. Drayage capacity imploded this winter, adding to the delays at intermodal terminals, particularly in Chicago, as well as coastal ports, he added.


The growing shortage of container chassis also hampers the intermodal industry’s growth potential, Noel Perry, managing director and senior consultant for research firm FTR Associates, said in an April report.


Unlike the truck and rail carload market, the intermodal market “has fully recovered from the Great Recession, currently standing at 111 percent of its pre-recession peak. It has its own capacity challenges regardless of trucking conditions,” Perry said. “I conclude that intermodal is at least as capacity bound as trucking.”


To gain more intermodal capacity, each railroad would have to simultaneously triple-track more lines and work with each other better for interchanging cargo, Finkbiner said. Both steps would cost the railroads much more money, and to gain better interchange processing, each carrier would have to sub-optimize their network for the “greater good of the through train.” He doubts the industry will take on either measure, much less both.


What’s more likely is that spot domestic intermodal pricing will scale up in the coming months, following increases in truck pricing. Intermodal pricing has risen moderately in the last year, largely because intermodal marketing companies are fighting for market share and must keep their rates competitive with those of trucking. The Cass Intermodal Price Index rose 1.4 percent in February year-over-year, after rising 1.7 percent a month earlier. The index, which includes data from Cass clients whose freight invoices totaled more than $23 billion in 2013, is more weighted toward contracts than spot pricing but includes both.


“Although we expect the pricing dynamic in intermodal to remain competitive and see line-haul rates remaining relatively flat in the near term, we do believe that intermodal pricing could improve modestly in 2014 if truckload capacity continues to be squeezed,” investment research firm Avondale Partners said in a report on the Cass index.


That seems to be reflected in the steady rise of all-inclusive 53-foot door-to-door spot pricing quoted by railroads and provided by third-party logistics provider IDS. Rates rose for the 11th straight week in the week of March 31, pushing an index of 36 U.S. intermodal lanes up 6.7 percent from the start of 2014 and up 7.3 percent year-over-year.


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