Brokers face a more complex decision-making process when putting customers on the rails

 From left to right: Tom Sanderson, executive chairman, Transplace; David Menzel, President and COO, Echo Global Logistics; Rick LaGore, CEO, Intek Freight & Logistics; Evan Armstrong, President, Armstrong & Associates; George Abernathy, Chief Revenue Officer, FreightWaves

From left to right: Tom Sanderson, executive chairman, Transplace; David Menzel, President and COO, Echo Global Logistics; Rick LaGore, CEO, Intek Freight & Logistics; Evan Armstrong, President, Armstrong & Associates; George Abernathy, Chief Revenue Officer, FreightWaves

Brokerage companies and 3PLs that play in the intermodal segment face a variety of challenges, with the biggest one fairly obvious: do they put their customer's freight on the rails, or do they put it in the truckload space?

A panel at the Intermodal Association of North America annual exposition in Long Beach, California wrestled with that question. But one thing was made clear early on: given the tight capacity of the intermodal market, the idea that the rails can be some sort of dumping ground when truck capacity is not available is a formula today for problems.  As George Abernathy, the chief revenue officer of FreightWaves—and a former president of Transplace, which was represented on the panel by Tom Sanderson, its executive chairman—said, truck traffic that would be “overflow” generally was “handed off to intermodal.” “But that is not as available today,” he said.

And even if that’s attempted, Rick LaGore, the CEO of InTek Freight & Logistics, said if a shipper wanting to use intermodal had not booked some sort of dedicated rail capacity in the current market, they would be looking at spot rates that are up almost 50% year-on-year. However, he did note that the 12-month comparison numbers are starting to go down, only because freight markets began taking off right about this time last year, so the “comps” look better.

The question, though, is whether a shipper that traditionally has been dependent upon truckload movement can be flipped to moving business to intermodal if a broker seeks to do that. David Menzel, the president and COO of Echo Global Logistics (NASDAQ: ECHO), said that it is “tough to flip the switch” for companies with that sort of history of being 100% over the road, or close to it. And it can’t just be done for any company, he added. A company making the switch to intermodal needs to have the ability to be flexible on their delivery time, and if they do, “we can schedule that on the intermodal side.” Menzel said Echo has had some success converting small to midsize carriers to intermodal.

But LaGore said he has dealt with the aftermath of some conversions that did not go well. A broker might tell a shipper that they can convert a truckload shipper to rail and “save them a couple of hundred bucks,” but as the discussion on the panel made clear, a switch to the rails shouldn’t be pursued just for that small savings. Converting them later on to intermodal as a more strategic move becomes tougher because “they remember that,” and the problem often arises because the original broker didn’t truly understand all the ins-and-outs of intermodal. To make another conversion, they have to “get over that pain” and work with a broker who knows what they’re doing, LaGore said.

And it’s not all just one or the other, the panel made clear. With the recent problems on the rails, even with higher fuel prices and tight truck markets, some shippers are moving away from rail and back to trucks. But it’s never all a one-way street; other shippers are finding their way to the trains.

For example, LaGore said conversions earlier this year to rail from the road were a “fairly easy sale.” But in the last three months, as rail service stagnated or got worse while trucking rates stabilized—albeit at high levels—transitioning back to the road from the rails was “a little easier for us.”

Sanderson noted one area where intermodal has a clear advantage: international business, primarily into Mexico. He said it’s a small niche play but that it is Transplace’s fastest growing business. The miles traveled are long and getting across the border is a lot easier for a train than a number of trucks. “The economics are compelling,” Sanderson said.

The work of a broker in the intermodal business is far more complex than what that role must do to put a truck on the road. As Menzel said, “many brokers and third parties today don’t have the knowledge of all the moving parts.” It can become a particular problem when detention and demurrage charges pile up at a rate far greater than one might encounter in the trucking side of transport.  And with all those moving parts, it means a shipment is more likely to encounter accessorial charges, though several panelists said in order to keep long-term customers, the brokerage houses sometimes “eat” those charges and do not pass them on. “Customers like to receive them even less than we like to pass it on,” LaForge said.

Any discussion of brokerage inevitably turns to a question: as technology advances, what’s going to become of voice brokers, whether they’re booking intermodal or a straight truckload run? Evan Armstrong, the moderator of the panel and the president of consulting firm Armstrong & Associates, which specializes in work related to brokerage, said all the focus on apps and digital tools that pass the broker are overlooking the possible role of artificial intelligence. And a lot of that AI is already at existing brokerage houses and not in the hot startsups being funded by Silicon Valley.

Armstrong told of one AI developer that is working with mid-sized brokers—he did not identify it by name—that can read unformatted email truck lists and unformatted emails from shippers requesting trucks in certain lanes, and can do it to as much as 98% accuracy. It extracts that information, puts it into an API that can then be used by a program to match load orders with a carrier and can do so by drawing on both the history of the carrier and the history of the lane. The automation of that process, Armstrong said, is going to push more voice brokers not out of a job but into a customer service role.

“When you’re talking about (digital freight broker) Convoy and disruption, I say those aren’t the disruptors,” Armstrong said. “AI is going to be the disruptor because you can probably take our half your carrier sales costs in the next five years of freight brokerage.” The result, Armstrong said, will be margin compression, but a higher EBITDA out of the brokerage business.  

And there will be people in the transaction, Menzel said, declaring: “We won’t get to any time soon a complete automation where we don’t have the customer service element.” Menzel talked about Uber, and noted that when “you jump in the car, there’s a person there in the vehicle. Freight can’t talk back and say, hey, you’re going in the wrong direction.” The need and the ability to speak to somebody will remain, he said.

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