Railroads, IMCs see long-term growth for both domestic and international intermodal.
Intermodal volumes totaled 8,257,612 units in the first half of 2015, 4.5 percent more than in the first half of 2014. That follows growth of 4.8 percent in 2014 when 16,276,892 units were handled, according to statistics from the Intermodal Association of North America (IANA), which will hold its Intermodal Expo in Ft. Lauderdale, Fla., Sept. 20-22.
(An intermodal unit is a trailer or container of any size.)
The pace of intermodal growth varies from quarter to quarter, with international cargo sometimes acting as pacesetter and other times domestic cargo growing faster.
For example, in the second quarter of 2015 IANA reported international intermodal increased 6.8 percent when compared to the second quarter of 2014, while second quarter domestic container and trailer volumes were up just 2.2 percent over the same 2014 period.
That was in contrast to the first quarter of 2015, when international intermodal volumes flagged and were actually 0.4 percent below those in the first quarter of 2014, and domestic intermodal volumes ran 4.5 percent ahead of the first quarter of 2014.
The second quarter surge in international volumes may have been “due to the release of pent-up demand accrued during the port disruptions” in the first quarter as the International Longshore and Warehouse Union negotiated a new contract with employers, or due to strengthening container imports, said IANA’s quarterly analysis of the intermodal industry.
But railroad and intermodal marketing company (IMC) executives and industry analysts say the intermodal industry is likely to continue to experience long-term growth.
“We still feel very good about the kind of secular growth period that we’ve been in for many years now particularly as it pertains to our domestic business, “said Bill Clement, vice president of intermodal for CSX Transportation. “We have no concern as we look out over the horizon here that that should change any.
“Obviously our business, like any business is dependent on the overall economy, but we’ve still had year after year of success converting freight that’s moving on the highway today. There’s a lot of freight moving on the highway today that continues to want to convert over to rail,” he added.
“We remain bullish on intermodal,” said Mark Yeager, a director of Hub Group, one of the nation’s leading IMCs, who stepped down as president and chief operating officer last month. “We do think that if you look at it over a three- to five-year horizon it’s going to outpace GDP and continue to move in a positive direction.”
Larry Gross, president of Gross Transportation Consulting and senior consultant at FTR, noted international intermodal cargo “is generally, more so than not, not truck competitive. If you’re going to get a Maersk ship docking at the Port of Los Angeles and you’re moving stack trains full of containers to Chicago—that’s not going to be susceptible to highway conversion. That’s a rail move.”
If factors such as labor issues and port congestion cause a permanent shift of cargo from West Coast to East Coast ports that could be detrimental to the intermodal business, because East Coast intermodal hauls are usually shorter and more subject to competition from trucking companies, Gross said.
However, he said “imports have been pretty strong because of the strong dollar and consumers feeling reasonably good. So that works to the international side’s benefit and overall it looks like things are pretty strong by historical standards.”
The fact that international intermodal was up 3.9 percent in the first half of the year, despite the downturn in the first quarter, tells Gross “no matter what is happening, at the end of the day, there’s still a decent amount of growth out there.”
One event yet to be felt by the intermodal industry is the opening of the expanded Panama Canal, scheduled for next spring. The new locks and other improvements at the canal will give steamship lines the ability to transit ships that are able to carry 13,000 to 14,000 TEUs through the waterway compared to the ships with maximum capacity of about 5,000 TEUs today.
That might result in more international intermodal cargo being routed through East and Gulf coast ports rather than over the West Coast. Gross doubts it will be a “seismic event,” but it continues a trend toward increased use of East Coast ports by importers of cargo from the Far East.
CSX’s Clement agrees, “We don’t see it so much as a watershed event” where the new locks on the Panama Canal open “and boom, freight’s going to shift to the East Coast. Obviously, it takes time. You have to take a longer, decade-after-decade view, that that capacity will be needed as the value proposition supports more moving through the canal. I think you would see what I would call a gentler shift of freight there.
“Economics are the long-term driver, and so freight that can handle the additional transit to the East Coast through the Panama Canal… I think you would see it seek out that solution over time,” he said.
“East Coast ports need to continue to get capacity in line with these larger vessels and the way we see it, it’s not a one-port solution,” Clement added. “We believe that the ports of New York, Norfolk, and Savannah—we really need to see them all provide the capacity so that when these large ships come, they can follow the rotations they follow today, which is largely to call each of these ports.”
Katie Farmer, group vice president of consumer products at BNSF (which includes intermodal and automotive freight), said her railroad believes investment in the Panama Canal is a positive step toward enhancing world trade.
“With that said, the U.S. West Coast still currently handles the majority share of Asian imports to the U.S. and we do not see this trend changing,” she said. “If you look at the facts the West Coast is still the fastest and most efficient gateway to the interior of the country. And our investment, the ports’ investments, all reflect that.
“And then when you look at where ocean carriers are going, the most efficient container vessels that will serve North America in the future are the vessels that can handle as much as 18,000 TEUs. Those are going to continue to call the West Coast, they’re not going to go through the canal to the East Coast,” Farmer said. “We still believe that the West Coast is the most efficient, most effective, it’s the fastest way to the interior to serve the big markets, like Kansas City, Chicago, and Dallas-Fort Worth.”
BNSF handles about 5 million intermodal units annually, with the business about half international and half domestic, Farmer said.
The railroad will spend about $6 billion on capital improvements in 2015, some of which is aimed at intermodal, and others which will improve traffic for all sorts of trains.
Rail Superhighway. BNSF’s investments include new locomotives and extensive improvements in its “northern corridor,” which the railroad said will transform it into a “rail superhighway.”
The improvements in 2014 included adding 55 miles of new double track in western North Dakota, 10 new rail sidings and 11 new siding extensions and 72 miles of centralized traffic control.
These types of infrastructure improvements help BNSF operate longer trains at faster speeds. Double tracks and sidings make it possible for trains to pass each other in opposite directions or for faster trains to overtake slower ones moving in the same direction.
Intermodal trains generally travel much faster than others. For example, statistics that BNSF sends to the American Association of Railroads—which publishes average train speeds for the six major U.S. railroads—show BNSF’s intermodal trains in July had average speed of 31.4 mph compared to 20.2 mph for coal trains. And Farmer said BNSF is going to add a new service in its northern corridor that will have an expedited service from Chicago to the Pacific Northwest that will feature trains averaging 60 mph.
Longer sidings and centralized traffic control also allow BNSF to get more capacity out of its system.
Longer sidings not only make it possible to operate longer trains, but for trains to reach higher speeds when they return to the main tracks.
Centralized traffic control allows the railroads to get more capacity out of their systems by speeding operations. For example, a dispatcher can remotely control signals and switch trains onto crossovers or sidings without trains coming to a stop, communicating with the dispatcher by radio to get permission and having a crew member exit the train and manually throw a switch.
In addition to improvements the railroad is making, Farmer said creation of the Northwest Seaport Alliance by the ports of Seattle and Tacoma “is a good step toward streamlining communication and strategies” and BNSF is participating in the alliance.
In the south on its “transcon” route from the ports of Los Angeles and Long Beach, BNSF is constructing an additional nine miles of a second mainline track between Vaughn and Carnero, N.M., so that “by the end of this year we will have 99.7 percent of our transcon route from Chicago to Southern California double tracked,” Farmer said, allowing BNSF to run an additional 10 trains a day on one of its most congested segments.
BNSF is also seeking to build a large new intermodal terminal close to the ports of Los Angeles and Long Beach, the Southern California Intermodal Gateway (SCIG).
Farmer said BNSF believes the SCIG will provide relief from highway traffic and reduce pollution. A company website estimates its location—four miles from the port compared to 24 miles where many containers are trucked today—“will eliminate more than 1.5 million truck trips from the 710 Freeway each year.”
But while the City of Los Angeles has supported the project, it is being opposed by the City of Long Beach and environmental groups in court.
While it is an eastern railroad, Clement said his railroad benefits from intermodal cargo moving through West Coast ports, noting CSX completes the move for many container moves that originate at West Coast ports. If cargo comes through East Coast ports, CSX usually won’t get an intermodal move from it since most of that cargo is destined for points close to East Coast ports, short distances at which it is more difficult for rail to compete with trucks.
CSX is in the process of completing its National Gateway initiative, having begun to enlarge the Virginia Avenue tunnel in Washington, D.C., so that it can accommodate double-stack trains.
When completed in two years, he said the railroad will have double-stack capability from Chicago and the Ohio Valley into the Mid-Atlantic markets, including Baltimore. It comes on the heels of a project to create double-stack clearance into New England.
“That leaves the bulk of our network double-stack cleared—there’s one obstruction that we are not really sure what we will do with over time, which is in Baltimore, and we continue to seek a solution for that also,” Clement said.
He said the company’s new intermodal terminal in Northwest Ohio has been a big success, giving CSX the ability to “connect to a lot more, actually several hundred more OD (origin destination) pairs. We built that facility with aspirations to eventually grow it to 650,000 units, more toward the end of this decade than today. But we found ourselves quickly, two or three years in, that we needed to expand the facility and we just completed a $40-plus million-dollar expansion that took the capacity from 650,000 up to about 1 million units. So we’ve had a lot of success there. It’s allowed us to convert more freight from the highway to the rail, because we can connect more of these markets.”
As a case in point, Clement pointed to new CSX terminals in Louisville, Ky., and Valley Field, Quebec, just south of Montreal.
The Montreal terminal handles both cross-border freight and cargo originating overseas, including freight from New York and Philadelphia.
Another strong growth market for CSX is where it has terminals in Jacksonville, Winter Haven and Tampa and where it partners with Florida East Coast Railway to serve Miami.
“It’s getting more and more difficult for truckers to serve Florida because there is not an enormous amount of freight coming out of Florida, and therefore the efficiency advantage of rail positions us well to compete there over the longer term,” he said.
Last May, BNSF, together with Ferromex, introduced a new intermodal service between Chicago and Silao, Mexico, in the Bajio region, which BNSF said is one of the fastest growing manufacturing regions.
Gross said the average length of an intermodal haul has come down about 40 miles in the last five years to around 1,420 miles.
But he also notes one of the fastest growing areas for intermodal is ultra-short hauls such as the services from Savannah to Atlanta and Greer, S.C., the latter to support BMW’s auto assembly plant. Florida East Coast Railway is highly successful at moving intermodal freight over its 351-mile network.
“Is rail competitive over shorter hauls? The answer is, it depends on the amount of freight that wants to convert from the highway over to the rail,” Clement said. “If we can get 10 loads that want to move 300 miles, we’re not going to be able to move it; but if we can get 300 loads and run a whole train, we’re going to be able to make the economics work.”
Not only did international intermodal outpace domestic intermodal in the second quarter, Gross said, FTR estimates there was no increase in conversion from highway to rail during the period.
He attributed that to a number of headwinds: looser truck capacity largely because Congress last December rolled back the 34-hour “restart” provisions in the federal hours-of-service regulations that went into place in July 2013. That change, he figured, added about “3 percent to 4 percent capacity and made the difference between a ‘very tight’ and just ‘tight’” market.
Gross also said “people are not going to get forced to use intermodal, intermodal has to earn it… and intermodal service has been a little bit spotty.”
And the reduction in fuel prices reduced intermodal’s advantage a bit.
In addition, he noted “the economic recovery is changing its complexion from industrial to consumer-led growth, including services that do not generate demand for freight transportation.”
Last year, despite service issues, domestic intermodal container volumes were up 5.7 percent (domestic trailers were up 2.9 percent) and in the first half of this year domestic container volumes were up 5.6 percent and trailer volumes down 2.8 percent.
“We don’t think this year’s going to be as robust from a volume perspective as last year,” Hub Group’s Yeager said.
Because of service problems that began in mid-2014 and low oil prices, “for the first time that I can remember, there are some that are actually converting from rail to truck,” he said.
“We’ve got bottlenecks throughout the country,” Yeager said. “It isn’t like in 2004 when we saw significant growth off of the West Coast and those corridors got bottlenecked. There are certain corridors on each of the major rails that have been most severely affected, but it isn’t geographically specific.”
He said the actual speed of intermodal trains is less important to Hub than whether its containers are getting on the train and on-time performance.
“We count the number of what we call LOGs—left on ground,” Yeager explained. “Those have been running high. They’re coming down but those have been running very high. That indicates that there isn’t adequate space on the trains or there aren’t enough trains to service a given market.
“The thing we worry most about is on-time performance. Because that is what our customers care about. And the rails have had some real on-time performance challenges for the last year and so we’ve had to work with our estimated transits so we can hit our customers’ expectations,” he said. “That takes a lot of labor and, unfortunately, it also lengthens the estimated transit and that makes some freight unlikely to move intermodal. If you have to add a day or two to your schedule there is some freight that’s probably going to convert back to over-the-road.”
But Yeager said the industry did see service improve in the second quarter and into July.
“If the rails can get the service issues corrected, despite inexpensive oil, I think you’ll see that trend reverse and you’ll see intermodal get back into the mid-single digit kind of growth numbers that we’ve seen for the last five years,” he said.
“We think given the inherent cost advantage of intermodal vs. truck and the challenges that truck faces you’re likely to see solid growth out of the domestic intermodal product,” Yeager added.
Yeager noted fixing capacity is complicated, but said one thing he would like to see railroads do is add more trains and “that does not seem to be the preferred method right now.”
Long term, Gross said domestic intermodal could benefit from capacity shortages, but he emphasized that a number of regulatory reforms could delay this from happening.
In addition to the possibility that the federal government’s 34-hour restart regulation moratorium for truckers could be made permanent, Gross said both the U.S. House of Representatives and Senate versions of the highway reauthorization bill included provisions that would allow twin 33-foot trailers, up from 28-foot trailers today.
That could have a major impact on the less-than-truckload segment and make LTL on flatcar less attractive to companies like FedEx and UPS. (However, he estimates LTL represents only a small single-digit percentage of the overall intermodal market.)
Another proposal for a pilot program to allow drivers to begin operating big rigs at 18 years of age could attract new entrants to the industry, Gross said, since by the time someone is 21, he or she often has entered a different career path.
This article was published in the September 2015 issue of American Shipper.