The North American intermodal business is developing a split personality.
Once growing uniformly across a range of different lines of domestic and international traffic, the business of putting containerized cargo onto trains for long-distance transport is branching into different directions.
Railroads and their customers are increasingly confident that demand will grow solidly this year for trains to carry more of the large 48- and 53-foot domestic containers and trailers, as long-haul intermodal efficiencies take market share from trucking.
However, industry officials are less optimistic about import-dominated international traffic, in which railroads transport 45-, 40- and 20-foot boxes from coastal ports to destinations deep in the heartland. Until shell-shocked U.S. consumers start spending heavily again to lift import demand, they say, the international side of intermodal will be difficult to predict.
In the weeks leading up to the Chinese New Year, which began Feb. 14, ocean container shipments surged while domestic box moves kept their steady, surer pace.
FTR Associates said rail-truck combination loads in the fourth quarter took an all-time high share of 13.3 percent of long-haul containerized surface moves. FTR Senior Consultant Lawrence Gross said that was driven by a jump in intermodal moves of international equipment, while domestic equipment loadings were stable.
|As 2010 gets under way, “I think volumes are going to continue to strengthen going into the spring,” Gross said.
He noted ocean container traffic coming into the North American intermodal system has picked up enough to produce “spot shortages of eastbound capacity,” and ship lines have raised freight rates.
Other industry sources say some of that was late-year restocking by retailers ahead of Christmas sales, after they had driven down inventories earlier in the year.
Gross said some of the import container volume this year “has to do with shippers trying to get in under the wire before the Chinese New Year shutdown,” rather than underlying demand. “It will be instructive to see what happens after that.”
The split outlook — of slow but reliable domestic box growth versus an unsteady trend in oceanborne intermodal traffic — is shaping business plans for key players and will determine how long major infrastructure programs take to pay off.
For instance, deep inside the mountains of West Virginia, in five tunnels near the borders with Virginia on one side and Kentucky on the other, Norfolk Southern Railway is completing an audacious intermodal project aimed squarely at the import market.
For nearly three years, NS has been deepening Appalachian tunnels and making other upgrades to restructure a long rail corridor for commodity traffic into a high-speed shortcut for double-stack container trains from Virginia’s docks around Norfolk into the Midwest. The costly construction will be completed by August and will allow NS to offer ship lines a faster route from the Atlantic coast to big distribution hubs in Columbus, Ohio, and Chicago.
Yet the long-planned Heartland Corridor will open when international container traffic is likely to remain weak, a limping casualty of the Great Recession’s damage to U.S. consumer appetites and global trade flows.
“We are not looking for the Heartland Corridor to give us an immediate boost in traffic volumes” because import box demand is slow to recover, James A. Squires, NS’s chief financial officer, told a BB&T Capital Markets conference this month.
Although Heartland was conceived when cross-country, international box traffic was growing briskly, and was launched when ship lines frustrated by congestion and high rail pricing along the West Coast were starting to move more loads through the Panama Canal to land in the East, the project’s target market slowed sharply even before the 2008 credit crisis and then plunged afterward.
NS saw its domestic intermodal business grow 5 percent in the fourth quarter and even faster in December, and that momentum “is expected to continue in 2010,” Squires said.
But the railroad’s international business was down 30 percent last year and down 22 percent in the final three months. Squires estimated “it will take most of 2010 for this market to show any appreciable recovery.”
The Heartland Corridor is one of three major rail improvement plans that NS and rival CSX Transportation are pursuing to reshape their eastern U.S. networks for eventual demand growth.
NS also is planning a Crescent Corridor of new intermodal terminals and line upgrades from New Orleans and Memphis, Tenn., in the Southeast, to New York. CSX is developing a National Gateway route that runs north-south along part of the Eastern Seaboard and then turns westward across Pennsylvania and Ohio.
Heartland is the first of these three corridors to be completed, but given the current marketplace NS is trying to keep focused on the future.
“Over the long term, it will be a very efficient route,” Squires said, “and we would expect it to catalyze growth in international intermodal.”
Meanwhile, load-handling middleman firm Pacer International looks for domestic intermodal business this year to help it rebound after a painful restructuring in 2009.
Pacer revamped its operations to shed some non-core business and cut costs, and eventually renegotiated a low-priced train space contract with Union Pacific Railroad that was clouding its long-term outlook.
Other intermodal service providers, led by J.B. Hunt Transport Services and Hub Group, kept adding share. They took some of it from all-truck moves, or modal competition, but analysts said some also came out of Pacer’s business.
“It is a very strong personal goal of mine, and the sales organization, to grow Pacer’s share of the market in 2010,” said Adriene Bailey, Pacer’s chief commercial officer.
Pacer already has a strong business in hauling automobile parts in containers, and Bailey said, “The automotive sector is looking very strong, at least for the first half of the year.” Other domestic customers generally look for their freight shipment levels this year to be “flat to slightly up,” she said.
Pacer’s international customers look for “a bounce off of the bottom of 2009,” she said, but not back up to the volume levels of 2008 and 2007. She described their outlook as “cautiously optimistic, with some modest growth.”
And despite some reports that truck pricing for box loads may have bottomed, Bailey said, “Price competition is still fairly robust” for intermodal.
She said Pacer has a multipronged growth plan that includes “adding new customers, continuing our success at retention of the existing customer base (and) convincing customers in our portfolio to migrate more off truck.”
But Bailey also said Pacer would build share by “going out in the marketplace with head-to-head kind of competition with the rest of the intermodal service providers out there.”
Hunt and Hub won’t give up share easily, although both companies are seeing their profit margins shrink despite cutting costs amid the fierce price wars.
As one of the nation’s major truckload fleet operators, Hunt can approach the box-hauling market from either business line. But it has successfully focused on building its domestic intermodal service into the biggest of its service offerings, while steadily trimming its truck fleet.
In Hunt’s fourth-quarter earnings report, President and CEO Kirk Thompson said the company during 2009 “expanded and solidified our intermodal services network in the East,” while working “toward right-sizing and stabilizing our truck segment.”
Hunt’s intermodal offering starts 2010 with more than 40,000 containers, nearly all jumbo 53-footers. The truck unit owns fewer than 2,900 tractors, though it can also call in owner-operators for more capacity.
Those separated markets intersect across the intermodal industry, as cutthroat pricing continues in a truck industry desperate for loads, and those low trucking rates woo some long-haul shippers who might otherwise put their traffic on trains. Hunt said the truck unit’s “profitability is hindered by freight rates that are insufficient to produce acceptable financial results.”
Hunt posted a 15 percent year-over-year intermodal volume gain in the final quarter of 2009, but because of weak freight pricing and reduced fuel surcharges, its intermodal revenue rose just 1 percent.
Thompson believes the time has come to stiffen rates across its business lines. “Obtaining acceptable pricing must be the most critical priority for 2010,” he said.
At Hub Group, largely a domestic intermodal provider, officials said intermodal pricing fell 5 percent in the fourth quarter while volume grew 6 percent. Hub, too, has been cutting costs, but the rate environment is tightening its margins like those of other intermodal service firms.
Chairman and CEO David Yeager emphasized, however, that Hub is building market share and converting customers to intermodal from all-truck moves. “While 2009 was a challenging year due to the economy,” he said, “we are starting 2010 with positive momentum.”
FTR’s Gross said some big players such as Hunt and Hub “are reporting volume increases that far outpace the industry as a whole.” He said they are probably gaining share at the expense of smaller intermodal marketing companies.
But Gross said in the domestic box market, of shipper choices between truck-only hauls and rail-truck combinations, “I think things are lining up in favor of intermodal.”
Part of that is because surplus capacity could shrink as some truckers go bankrupt, as bankers decide to quit carrying stressed trucking borrowers.
On the horizon is the risk of potential policy changes that could tilt the balance. Truckers seek federal approval to run bigger trucks on highways. In addition, the potential tightening of driver work-hour rules could shrink the pool of available drivers or force trucking firms to hire more to move the same loads.
The year that just ended saw big shifts in railroad intermodal strategies. BNSF Railway has long been the rail industry’s intermodal volume leader, but last year, UP won a large part of Hub’s traffic that had run on BNSF. Through its Pacer renegotiation, UP was also able to get out from under the prior contract’s below-market pricing for domestic loads.
UP also completed some important construction projects, such as its double-stack container route over the Donner Pass in the Sierra Mountains, to cut transit times and make its service more competitive.
BNSF has not been idle either, periodically trimming transit times on a number of lanes and making further improvements to its network of container hubs.
Still, from Hunt to Hub to Pacer, intermodal players say recent momentum has been in the East, where service and infrastructure improvements by NS and CSX are making it easier for marketers to sell rail-truck moves to shippers.
And since the East has been much more of a truck market, with its relatively short distances between major cities compared to days’ of driving between some major markets out West, intermodal has room to grow as railroads improve their average train speeds and service reliability.
The railroads are so serious about that reliability that when the second blizzard in a week struck the mid-Atlantic region Feb. 10, NS stopped taking coal trains into weather-socked Baltimore to keep the tracks open for a higher-priority intermodal train.
Pacer’s Bailey said service-focused rail partnership is helping sell rail-truck combination moves to potential customers. “The rail service reliability is at extremely high levels in the rail networks right now,” she said, “and that also contributes to shippers committing to and moving their freight in that intermodal mode.”
Contact John D. Boyd at firstname.lastname@example.org.