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The rails are still kind of a mess, but Hub and Norfolk Southern are bullish on intermodal

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The crossroads that intermodal transport finds itself in was evident in the discussions of two separate companies during their earnings conference calls this week, one from a company that uses the rails to move intermodal traffic and another that operates those tracks.

David Yeager, the CEO of intermodal-heavy logistics company Hub Group, said on its earnings call the company was facing “substandard rail service, especially in our Eastern network.” And when intermodal companies talk about eastern traffic, they’re generally talking about Norfolk Southern.

Norfolk Southern’s quarterly report spelled out in numbers just how challenged the railroad was in the first quarter. Its network velocity dropped to 19 miles per hour, compared to 22.7 mph in the fourth quarter of 2017 and 20.5 in the first quarter. Its terminal dwell time was 29 hours in the first quarter, compared to 24.3 and 26.8. That is a significant deterioration and would certainly help to justify Yeager’s “substandard” characterization.

Yet on both calls, the prospects for intermodal were reported as strong. For example, Yeager, said the company’s “western rail partner,” likely Union Pacific, has been able to produce “gradual on-time improvement.”

Second, for all the concerns about rail service, the business reported by Hub—a logistics company which specializes in intermodal–was solid.  According to CFO Terri Pizzuto, intermodal revenue was up 14% for the quarter, with a 6% increase in loads. Local volume in the west and the east, despite the difference in rail performance in those sectors, both rose 4%.

But more importantly, Yeager said that pricing negotiations are approximately one-third completed. “We’re looking at mid-single digit increases that are continuing to rise from our perspective right now due to demand,” Yeager said.

Meanwhile, at Norfolk Southern, despite the poor performance metrics, the company overall was doing well. Its first quarter operating ratio was 69.3%. That was a record for the first quarter, as was its income from railway operations of $835 million.

That’s not all. Norfolk Southern’s intermodal units for the quarter were 671,700, compared to a little more than 600,000 in the corresponding quarter of 2017. The company cited “tightness in the truck market” as one reason for record intermodal revenue of $678 million, up 19% from the first quarter of 2017. “Increased fuel surcharge revenue, positive mix associated with growth in domestic and premium business, and stronger pricing improved intermodal revenue per unit by 10% year-over-year,” the company said.

 “With regard to our intermodal segment, capacity constraints in the trucking industry and our customer-focused initiatives are driving growth,” Norfolk Southern chief marketing officer Allan Shaw said during the earnings call. “Further, the steady emergence of e-commerce will continue to create organic growth opportunities with several of our existing customers. With these factors forecasted to continue for the near-term, we expect our volumes and prices to improve, with growth in both volume and revenue expected throughout the year.”

Yeager, who raised the issue of rail service in the Hub call, spoke optimistically about the chance for a turnaround at Norfolk Southern. “Norfolk Southern will improve in the second half,” he said. “They’re doing an awful lot to change the service. But there’s not just a light switch. You can add locomotives, you’ll add crews, you add chassis, but it takes time. That’s why we’re are looking toward the second half of the year.”

As to pricing, Yeager added to his earlier comments about being only a third of the way through current price negotiations. Mid-single digit increases may have been what HUB mostly has negotiated, but Yeager said “we have not…really found a ceiling on price increases.” Some customers have been as high as 15%, he adsded.

Norfolk Southern’s Shaw was less specific about the level of price increases the railroad has seen, saying only that “pricing will improve as the year progresses, and due to the structure of our contracts, we believe it’s going to provide lift as we enter into 2019.” Later on the call he said the price growth has been more positive for Norfolk Southern in areas where trucking is the competition.

Helping to drive the optimism about the intermodal business is the continued rise in fuel prices. Donald Maltby, HUB’s chief operating officer, said on the conference call that the shipping cost “divide” between truck and intermodal “is anywhere from 24% to 30%. So, that spread is nice and that will continue to spread higher once the fuel keeps going up,” he added.

Or as HUB’s Yeager said: “Intermodal always is, already is, extremely attractive. Increases in fuel just makes it more so.”

One interesting aspect from this week’s run of earnings calls were different views expressed on the impact of ELDs. On the intermodal side, which would benefit from tightening truck capacity as a result of drivers abandoning the business because of the ELD mandate, there was agreement.

HUB’s Yeager: After noting that some exemptions, like those on agricultural products, means the full impact can’t be measured, he said that when the loopholes disappear, “we’re going to continue to see an impact of ELDs in shrinking the overall truckload capacity.”

Norfolk Southern’s Shaw: “With ELDs tightening capacity, every time we take a look at it, it appears as if the impact of ELDs is greater and greater. It is making the intermodal product more and more competitive.

Meanwhile, earlier in the week, Landstar CEO James Gattoni, operating a network of associated independent owner operators that would feel the impact of drivers giving up on the business due to the ELD mandate, didn’t see much to worry about. “As expected, the ELD mandate had an insignificant impact on BCO productivity in the 2018 first quarter,” he said on his earnings call. “We had a record number of third-party broker carriers haul freight on our behalf during the 2018 first quarter.”


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John Kingston

John has an almost 40-year career covering commodities, most of the time at S&P Global Platts. He created the Dated Brent benchmark, now the world’s most important crude oil marker. He was Director of Oil, Director of News, the editor in chief of Platts Oilgram News and the “talking head” for Platts on numerous media outlets, including CNBC, Fox Business and Canada’s BNN. He covered metals before joining Platts and then spent a year running Platts’ metals business as well. He was awarded the International Association of Energy Economics Award for Excellence in Written Journalism in 2015. In 2010, he won two Corporate Achievement Awards from McGraw-Hill, an extremely rare accomplishment, one for steering coverage of the BP Deepwater Horizon disaster and the other for the launch of a public affairs television show, Platts Energy Week.