Intermodal has long served as the backup capacity option for truckload customers needing seasonal or surge capacity. When one or one hundred loads needed to be covered, intermodal somehow found the required containers or trailers. Service was typically a day or two slower but the freight still moved.
The window of opportunity for intermodal conversion is wide open. Driver shortages, ELDs and other trucking headwinds should have the industry celebrating the capture of significant new market share. Why hasn’t that happened? How will that reality impact shippers and receivers this fall and into 2019? The migration of mainstream truck traffic to TOFC service (trailer on flat car)–BNSF trailer volume increased +23% in 2Q–strong domestic container growth and deteriorating velocity has consumed excess network capacity. There simply will not be enough trucks or containers across all modes and routes to meet customer needs.
Attending the IANA Intermodal Expo last week, I hoped to discover an industry positioned to deliver new solutions. What I found was frustration with current rail performance and capacity but few answers to transform the service provided to customers. The lack of rail visibility and engagement was palpable. BNSF was the lone class one railroad to have a booth on the exhibit floor.
Faced with pressure from activists and the impact of the Hunter Harrison era at CSX (NASDAQ: CSX), railroads have shifted their focus away from customers. The Union Pacific announcement (NYSE: UNP) that it is embarking on a similar “precision scheduled railroad” journey has shareholders rejoicing but customers wondering if they will relive the CSX service debacle of earlier this year. This new focus on share price and operating ratios has eroded transit quality, resulting in inconsistent service and inadequate capacity that is priced at premium levels. Intermodal volume is growing because customers don’t have an alternative. That customer experience never ends well. The intermodal industry needs to alter its course before long-term damage is done to its image and the experience customers face.
The solution begins with consistent rail service. Intermodal services generally have been running at a disappointing 70% to 90% of their scheduled times, while trucks have consistently been running usually more than 90% of their schedule. Achieving better service will enhance network velocity and connectivity among railroads, drayage carriers, service providers and their customers. During the Hub Group’s second quarter analyst call it was mentioned that rail service had deteriorated by seven tenths of a full day. That is a big deal and there is little hope of short-term improvement. The result? Terminal congestion and poor utilization of chassis, containers and drayage capacity. This situation should improve as CSX refocuses its intermodal strategy. But that won’t occur until the 2018 fall season is behind us. Its recent announcements to terminate hundreds of interchanges with the Union Pacific and BNSF will result in further deterioration.
Transit measurement and performance have been longstanding disconnects between railroads and their intermodal customers. Operating KPIs that are shared during quarterly financial calls include train speed and length, terminal dwell, active locomotives and cars on line. All of these metrics measure the asset efficiency of the railroad but are at best secondarily tied to on-time service for their customers. When service is communicated, it is qualified by large incremental time blocks to published schedules (i.e. schedule +12 hours was 85% on time). Even the best performing lanes fail to meet highway service standards that have long resided in the mid to high nineties. Until railroads cease measuring service with a calendar, customer frustration will remain. The premium service provided to UPS and other top intermodal customers show what can be accomplished, but the gap between that and the larger less-than-premium customers has been widening.
What can shippers do?
Work with the asset intermodal service providers: The key names here are J.B. Hunt (NASDAQ: JBHT), Hub Group, Schneider National (NYSE: SNDR), XPO (NYSE: XPO) and Knight–Swift (NYSE: KNX). These companies are posting record results due to stable rail pricing and their ownership / management of chassis, containers and drayage. Get to know their network flows, backhaul needs and available capacity.
Secure access to all four major US class one railroads: Each intermodal service provider has dedicated service contracts with individual railroads. Developing relationships with the right combination of service providers will provide the greatest access to total network capacity. This strategy also protects you from natural or man-made service disruptions that can occur on a single railroad. The recent tunnel collapse in Oregon and ongoing wildfires in California are current examples.
Establish a non-asset service partner: Non-asset service providers will provide access to the 80,000 EMP/UMAX container network and can help you identify and secure spot capacity. This option may be more expensive but it can provide a critical source of container capacity.
Develop a multi-modal strategy: Panelists at the Intermodal Expo this week highlighted the value of securing committed versus spot capacity. Customers that made year-round volume commitments have negotiated much smaller price increases than those securing capacity in the spot market. This strategy will continue to pay dividends into 2019.
Examine your carrier interface: Becoming a shipper of choice was a common term heard during the IANA Expo. Customers can enhance their positioning for incremental capacity by working more effectively with their intermodal service providers. The traditional practice that prioritizes highway loads over intermodal for loading and unloading needs to be reexamined. Expanding shipping and receiving hours or providing additional dock capacity may make sense. Service providers and drayage carriers are keenly aware of the operating efficiencies at individual shippers and receivers. The deployment of ELDs provides a data footprint of customer behavior that is beginning to emerge. Positive positioning in this space is a good investment across all modes.
Modal flexibility will be critical to achieving supply chain efficiency in the fourth quarter and beyond. Intermodal is starting to lose its backup option for some because of its issues, but it remains an important capacity option for customers with the right plan.
Brian Bowers is an industry veteran and a consultant on intermodal issues. He is also a member of the FreightWaves Advisory Board.