Economic growth was disappointing in 2011 and a strong rebound is unlikely in 2012, but North America’s railroads will continue to outperform the overall economy, especially in the intermodal sector.
“It’s because of the appeal of the rail industry as an alternative mode of transportation,” said Drew Glassman, assistant vice president of marketing at CSX’s intermodal group.
Rail carriers’ goal in 2012 is to match capacity with demand, bump prices up where possible and, most of all, convert more truckload freight to intermodal rail. Every North American Class I rail carrier has a strategy for converting traffic moving exclusively over the road to a combination of short-haul trucking and long-haul intermodal rail in the corridors they serve.
“It’s a win-win-win strategy,” said Steve Branscum, BNSF Railway’s group vice president of consumer products marketing. The railroads carry more freight, carriers achieve better utilization of their two costliest assets, their trucks and drivers, and customers get reliable service at a lower price than truckload motor carriers can offer, he explained.
The numbers speak for themselves. According to the Intermodal Association of North America, domestic container volume in the third quarter of 2011 increased 9 percent from the same quarter in 2010. It was the seventh consecutive quarter of year-over-year gains in domestic intermodal traffic, and the growth rate far surpassed the 2.5 increase in GDP.
Although the conversion of truckload freight to intermodal has been occurring for several years, railroads believe they are just scratching the surface of domestic intermodal’s potential. BNSF believes there are 7 million to 8 million loads a year moving by truck in its service corridors that could be diverted to intermodal, Branscum said. Union Pacific Railroad put the number on its network at 11 million units.
Converting customers from pure over-the-load to intermodal takes time and patience. “It’s not easy to change your supply chain,” Glassman said. But when the decision is made to convert at least some freight to intermodal, it is usually a permanent decision and is followed by additional conversions as the shipper becomes more comfortable with intermodal, he said.
Railroads are achieving the conversion by meeting with beneficial cargo owners and developing services that meet their needs based on transit time and cost, said Mike McClellan, Norfolk Southern Railway’s vice president of intermodal and automotive marketing. NS will move forward in 2012 with its biggest introduction to date of new domestic services, he said.
Railroads have more information available than ever to help them analyze truck, rail and combination truck-rail costs and transit times on numerous service lanes. “Railroads are becoming much more sophisticated in mining the data to find opportunities,” Branscum noted.
By deploying this strategy, BNSF has been able to develop in various corridors a matrix of truck costs, intermodal train departures, distances to rail ramps and other pertinent data on both ends of the move to put together the right package of transit times and costs to meet the needs of individual customers. These exercises could involve longer truck hauls on the front end to guarantee on-time delivery.
Branscum cited a case study involving a Midwest company that ships to Los Angeles. BNSF found that incorporating a longer truck haul from the shipper’s facility to Memphis, which has daily intermodal train departures, rather than going a shorter distance to St. Louis, which has train departures only three times a week, the transit time to Los Angeles was reduced to meet the shipper’s requirements and the cost still met the customer’s budget.
This strategy of mining service and cost data and sharing it with customers is a relatively new trend for railroads, which in the past relied on intermodal marketing companies for much of their freight. “This trend will stay and will continue to grow,” Glassman said.
Making intermodal work, though, requires collaboration throughout the supply chain because a number of parties touch the container as it moves along on its international or domestic journey.
Canadian National Railway has signed supply chain collaboration agreements with all of Canada’s major west and east coast ports, and has signed level-of-service agreements with marine terminal operators.
The efforts have paid off, with intermodal comprising CN’s largest business unit. International freight, much of which moves through the Port of Prince Rupert’s 4-year-old container terminal, accounts for 55 percent of CN’s intermodal business, with domestic North American freight being 45 percent of its intermodal business, said Mark Hallman, CN’s director of communications and public affairs.
Intermodal is equally important on the southern border. Kansas City Southern, with its subsidiary KCS de Mexico, offers intermodal service from Mexico’s Pacific and Atlantic coasts across the border and deep into the U.S. Midwest. KCS registered a 17.6 percent increase in intermodal volumes in the first 10 months of 2011, said Doniele Carlson, assistant vice president of corporate communications and community affairs.
“A key strategy for KCS is to convert truckload freight moved between the U.S. and Mexico to rail,” Carlson said. KCS increased its cross-border intermodal volume about 60 percent in 2010’s third quarter and anticipates continued growth given the fuel and price pressures facing motor carriers. KCS’s security solutions for cross-border intermodal — from full-time agents and canine units to guards on trains in high-risk areas — are attracting new business, she said.
Because intermodal trains can carry 250 or more containers, the value proposition in terms of cost is obvious, but pricing must be attractive enough to offset longer transit times. For that reason, rail intermodal has traditionally been limited to long hauls.
The distances are decreasing, however, as intermodal becomes more efficient and is able to generate freight density in specific corridors. Railroads are selling intermodal according to the formula that measures the distance a single-driver truck can cover in one day in a particular lane, plus one additional day, McClellan said.
Railroads, especially CSX and NS in the East, have been improving intermodal efficiency by investing millions of dollars in double-stack corridors along their networks. CSX’s National Gateway and NS’s Heartland, Crescent and Patriot corridors are shortening routes, increasing double-stack capacity and improving transit times to make intermodal rail more competitive with truckload in high-density lanes. Some projects, such as the National Gateway and Heartland Corridor from East Coast ports, offer opportunities for international as well as domestic intermodal freight.
Intermodal’s attractiveness also is enhanced by the modern and efficient rail facilities and intermodal logistics centers that act as freight destinations and as facilitators for hub-and-spoke transportation options.
McClellan said 2012 will be a “transformational year” for Norfolk Southern as the railroad opens major facilities in New York, Tennessee, along the Pennsylvania-Maryland border and in Alabama.
CSX’s new Northwest Ohio terminal operates on a hub-and-spoke model that allows for the movement of domestic freight on lower-volume corridors. Trains are reassembled at the hub to create more density to various destinations. The Northwest Ohio hub also allows international intermodal containers moving through West Coast ports to bypass the congested Chicago area on interline moves to Ohio Valley distribution centers. “It’s a double benefit,” Glassman said.
North America’s railroads, unlike steamship lines, have exerted pricing discipline despite 2010 cargo volumes falling far short of expectations. The railroads certainly didn’t slash their rates the way ocean carriers did, and in many instances the railroads increased freight rates and fuel surcharges.
UP, for example, reported a 6 percent drop in intermodal volume in the third quarter of 2011, but its average revenue per intermodal shipment increased 15 percent. Spokesman Tom Lange said 70 to 75 percent of UP’s business operates under contract, either multiyear contracts or contracts that run a year or less. Tariffs cover the remaining 25 to 30 percent.
All of the U.S. railroads, but more so the western railroads, since the 1990s had been operating under long-term contracts with steamship lines that were less than compensatory when intermodal volumes surged in the last decade. Those legacy contracts began to expire several years ago, and the railroads renegotiated the agreements to reflect the higher intermodal rates such traffic now commands.
UP still had $2 billion worth of business in contracts negotiated as far back as the 1990s, and about 4 percent of that legacy business was to be repriced in 2011, Chief Financial Officer Robert Knight told analysts in late 2010.
North America’s railroads also have been successful in serving market sectors that generate two-directional hauls. Canadian Pacific, for example, is increasing its presence in the energy sector, with services at the Bakken Oil Shale Formation in North Dakota, Montana and Saskatchewan, the Alberta industrial heartland in Canada, and the Marcellus Formation that stretches from West Virginia to New York state.
CP spokesman Mike LoVecchio noted these routes generate two-directional moves, with fracking sand, cement and pipe hauled to the sites and energy products moving outbound.