Watch Now

7 themes that defined US freight rail in 2021

Many of these issues will persist into 2022

2021 was a whirlwind year for the North American freight rail industry. (Photos: Jim Allen/FreightWaves & Shutterstock)

While 2020 was a roller coaster year for all modes of freight transportation because of how the COVID-19 pandemic upended day-to-day life in North America, 2021 had its share of ups and downs as well. The year started off with queues of ocean vessels waiting to dock at U.S. coastal ports … and ended with queues of ocean vessels waiting to dock at U.S. coastal ports.

Here are seven themes that dominated the freight rail industry in 2021, some of which were direct results of the COVID-19 pandemic and supply chain congestion:

Mergers and acquisitions remained relevant

One of the arguments for an acquisition of Kansas City Southern (NYSE: KSU) by a fellow Class I railroad is that North American manufacturers will be looking for more nearshoring opportunities after seeing how the COVID-19 pandemic disrupted efforts to import goods from far-flung origins. By having a Canadian railway acquire KCS, customers would have single-line access between Canada, the U.S. and Mexico. 

Canadian Pacific (NYSE: CP) is now awaiting federal approval to acquire KCS after rival CN (NYSE: CNI) also sought, and failed, to merge with KCS. CN encountered a roadblock in the form of the Surface Transportation Board’s rejection of CN’s proposed voting trust, which would’ve been used in the process of acquiring KCS. 

Meanwhile, U.S. Eastern carrier CSX (NASDAQ: CSX) is seeking to acquire New England short line Pan Am Railways in a bid to solidify its position up and down the East Coast. 

Both proposed acquisitions are pending before the STB.

All aboard: Amtrak renews calls for more passenger rail service

The infrastructure package (see below) signed into law by President Joe Biden calls for renewed efforts to invest in existing and potentially new intercity passenger rail routes and infrastructure. This is significant because Amtrak runs on track owned by the freight railroads, including in densely populated areas such as the Northeast corridor and around Chicago.

One area where Amtrak has been seeking to restore service is in the U.S. Gulf Coast region. Amtrak seeks to reestablish service between Mobile, Alabama, and New Orleans, but CSX, Norfolk Southern (NYSE: NSC) and the Port of Mobile have concerns about how the service might affect freight rail operations. Indeed, the debate over Amtrak service between Mobile and New Orleans also has a regional flavor, with state officials from neighboring Mississippi in favor of establishing service soon while Alabama has reservations.

Amtrak is seeking approval from the STB to restore Gulf Coast service, and the issue is pending. 

Jostling over the jab

Concerns over COVID-19 still dominate the nation’s headlines, especially as the omicron variant makes its way through North America. Ever since the start of the pandemic, there have been debates about how and to what extent the U.S. government should intervene. One controversial intervention is mandating the COVID-19 vaccine among certain groups of adults. Federal vaccine mandates, including one aimed at government contractors, are being debated in the courts.

Union Pacific (NYSE: UNP), BNSF (NYSE: BRK.B) and NS are government contractors, and so leaders from those companies have said their employees need to comply with the vaccine mandate should the courts determine that the mandate applies to them. But the unions are arguing that any vaccine mandate needs to be negotiated per federal law under the labor contract negotiations, which are ongoing.

Shortages slow the supply chain

As the number of ocean vessels waiting to dock at the West Coast ports grew, so too did the number of containers needing to be delivered to inland destinations. But the congestion that started at the ports and reverberated throughout the supply chain to inland rail terminals hasn’t been attributable to one single cause. 

Labor shortages at warehouses and distribution centers and a lack of chassis availability all contributed to slower network velocity and dwell time throughout much of 2021. The Class I railroads also encountered labor shortages, although the railroads said they have been seeking to match human resources and crews with network capacity needs.

Some Class I railroads deployed strategies such as higher spot pricing to ensure that their contractual customers had the ability to access capacity on the rail network, as seen in the SONAR chart below.

The Class I rails kept intermodal spot rates elevated on the outbound LA lanes as part of an effort to protect capacity for shippers with contracts. (FreightWaves SONAR) To learn more about FreightWaves SONAR, click here.

“A recovering economy fueled by e-commerce spending helped spur a surge in imports across U.S. ports throughout the year,” TRAC Intermodal President and CEO Daniel Walsh told FreightWaves. “The challenge was how to process and move this cargo through the ports, given the enormous volumes, port congestion with full and empty containers cluttering yards and warehouses, and a labor force still dealing with the effects of a pandemic. 

He continued, “At times the challenges seemed insurmountable, but our people never, ever gave up. They turned up every day whatever the conditions, remained focused on service and quality and used all their knowledge and expertise to keep goods moving through the supply chain.”

US rail volumes rise and fall

For the first half of 2021, U.S. intermodal rail volumes were higher year-over-year as consumer activity was brisk both online and at brick-and-mortar stores. Intermodal volumes were also higher year-over-year because of the volume trough that occurred at the start of the COVID-19 pandemic in the spring of 2020.

But as the rail network became more congested in the summer, the year-over-year gain for intermodal volumes started to shrink until 2020’s traffic was higher than 2021 levels. However, in recent weeks, domestic intermodal traffic has started to align more with year-ago levels as network congestion has eased (although, international intermodal volumes remain lower than year-ago levels).

This chart shows domestic intermodal volume falling as much as about 10% below year-ago levels in the middle of the year due to congestion, but rising to in line with year-ago levels as the congestion was partially alleviated. (FreightWaves SONAR)

As shippers and the railroads negotiate their contracts, the ongoing need for intermodal service could support pricing in 2022. 

“Shippers with intermodal contracts last repriced in early 2021 should expect a steep increase in rates when those contracts renew in 2022,” said FreightWaves market expert Mike Baudendistel.

Domestic intermodal contract rates rose throughout 2021.  (FreightWaes SONAR)

Meanwhile, U.S. carloads have been trending higher for most of 2021, compared with 2020 levels, although 2021 volumes are largely lower than 2019 carloads. 

A comparison of U.S. carloads for the years 2019, 2020 and 2021 year-to-date using data from the Association of American Railroads. (FreightWaves SONAR)

White House, Congress pass major infrastructure deal

The $1.3 trillion infrastructure bill signed into law in November gives a little something to multiple freight rail stakeholders, from the railroads to the unions. The bill includes funding for infrastructure projects that could benefit short line railroads as well as connections to the Class I railroads, requirements charging the railroads to inform local and state officials when trains carrying hazardous materials move through their communities, and a call to study safety issues and longer trains. Amtrak also received $66 billion to replace aging infrastructure and equipment as well as work with the states to develop potential intercity lines.

Buzz at the board

Last but not least, the STB is continuing to make progress on some long-standing proceedings, such as reciprocal switching, as well as examining some newer issues, such as whether it should collect additional data on the first mile and last mile. These examinations will continue in 2022. 

The board has also been responding to ongoing issues affecting the supply chain, such as asking the Class I railroads for their take on the supply chain disruptions and responding to Biden’s executive order from July on ensuring competition on the railroads.

On top of all these issues, STB will also be issuing decisions on proposed mergers. 

Subscribe to FreightWaves’ e-newsletters and get the latest insights on freight right in your inbox.

Click here for more FreightWaves articles by Joanna Marsh.

Joanna Marsh

Joanna is a Washington, DC-based writer covering the freight railroad industry. She has worked for Argus Media as a contributing reporter for Argus Rail Business and as a market reporter for Argus Coal Daily.