There’s a new intermodal rhythm humming along the roads and rail lines connecting manufacturers and retailers with ports and plants across the United States. The beat is being felt on factory floors where trailer makers are building domestic containers and in truck yards and rail yards where some of the largest motor carriers and railroads are planning expansion. And it resounds most loudly with shippers struggling to contain rising transportation costs, manage their inventory and secure capacity.
That drumbeat heralds what Hub Group’s Mark A. Yeager believes will be a “transformational year” for the intermodal industry in 2012, especially in the eastern United States.
“I don’t think interest in intermodal has ever been higher, either from a carrier or a shipper perspective,” said Yeager, vice chairman, president and CEO of the $2.8 billion intermodal operator and truck freight brokerage. “So many people are interested in developing intermodal capabilities, including over-the-road truckers who wouldn’t have touched it with a 10-foot pole a few years ago.”
Trucking is the key. The intermodal industry has long claimed the business was on the edge of a breakthrough year that would make the industry a critical part of shipper supply chains and not just a play to cut costs.
What may make 2012 different is that more trucking companies are making intermodal service part of their portfolio as they look to offer fully rounded logistics choices to shippers increasingly accustomed to the cost transparency of transportation management systems.
Trucking companies that once viewed intermodal rail as a hereditary enemy haven’t just declared a truce; they’ve also become some of the biggest promoters of moving freight off highways and onto tracks, serving as an access ramp to the rails for shippers. While battles between trucking and rail groups over highway funding and truck sizes and weights rage in Washington, intermodal partnerships and even freight network integration are more common nationwide.
Shippers, in turn, increasingly expect truckload carriers to offer intermodal options that provide consistent service at considerable savings. “For a 10 to 20 percent savings and sometimes more, it’s worth that extra day of transit,” Yeager said.
The confidence may be high, but overall intermodal traffic numbers for U.S. railroads haven’t recovered entirely from the sharp downturn between 2007 and 2009.
Intermodal containers and trailers carried by U.S. railroads fell nearly 20 percent from the high of 12.3 million loads in 2006 to just short of 9.9 million loads in 2009, according to the Association of American Railroads. The business has grown 20.4 percent since then, and the 11.3 million trailers and containers U.S. Class I carriers hauled in 2011 was 5.4 percent better than 2010.
Related: Eastern Promises.
That amounts to 609,280 more intermodal loads, according to AAR figures, and the totals might have been greater if the railroads weren’t so disciplined about pricing and capacity.
Union Pacific Railroad, the country’s largest intermodal carrier, said its intermodal volume actually declined 2 percent in 2011 from the year before, but average revenue per carload soared 14 percent. UP’s intermodal yield in the fourth quarter was 16 percent ahead of the year before.
The Intermodal Association of North America said average revenue per load for intermodal marketing companies grew at least 7.1 percent year-over-year in every month of 2011, including a 9.5 percent jump in December.
Working more closely with trucking companies, rather than competing directly on price for the same loads, has to help the yield.
Truckload giant Schneider National embraced intermodal in 2008, signing long-term agreements with Class I railroads CSX Transportation and BNSF Railway. Today, intermodal represents about a third of the transportation company’s $3.7 billion in annual revenue. Schneider last month renewed its multiyear agreement with CSX and expects its intermodal volume to increase 10 percent this year.
“Intermodal is going to grow” in 2012, President and CEO Christopher Lofgren said. “There are places where it’s absolutely the right way to move certain goods. The growth rates will be higher in the East than in the West but the market in total is going to grow, and it will grow as part of our business at Schneider National.”
Nationwide, several factors are fueling intermodal growth, including stronger domestic freight shipping demand, tight truckload capacity and rising rates, improved rail service, and billions of dollars in capital investment by the railroads.
Truckload carriers such as Schneider, U.S. Xpress Enterprises and Swift Transportation are becoming more intermodal than ever, following to varying degrees the route mapped by J.B. Hunt Transport Services since its historic agreement with the predecessor of BNSF Railway in 1989. At $728.8 million, intermodal traffic accounted for 60 percent of the carrier’s fourth quarter revenue.
A growing chunk of that money originates in the East, where J.B. Hunt partners with Norfolk Southern Railway. Eastern network loads jumped 35 percent year-over-year in the quarter, compared with a 9 percent increase in loads in the more mature transcontinental market. J.B. Hunt’s eastern intermodal volume has grown more than 30 percent on an annual basis over the last three quarters.
Eastern intermodal now represents a third of Hub’s business, and there’s plenty of room to expand, Yeager said. Intermodal volume represents less than 5 percent of the freight shipped in some of the heaviest lanes in the eastern U.S., he said.
“There’s a tremendous opportunity for us to continue to grow volume through modal conversion in the East,” Yeager said. “It’s probably a bigger opportunity than the (eastern rail) system will ever be capable of handling. Truck is still going to be the dominant mode, but intermodal will continue to take share.”
There’s plenty of reason for skepticism about the potential in the East. It’s still North America’s most densely populated region, after all, and the economics that tear away intermodal cost benefits over short distances haven’t changed. But the unit-cost savings that grow over longer distances are growing more intriguing to many shippers, particularly as they try to manage their supply chains as efficient networks rather than a collection of point-to-point delivery lanes.
Auto parts retailer Pep Boys, for example, has made predictable, controlled use of intermodal one of the pillars of a revamped supply chain that included more efficient use of the $2 billion company’s dedicated fleet and cross-docking.
Joshua Dolan, director of global logistics and customs compliance, said some 40 percent of Pep Boys’ non-dedicated fleet freight miles now flow on the rail network. The retailer uses U.S. Xpress Enterprises as its primary partner in what it calls its Expedited Rail operation, a trailer-on-flatcar service focused on shipments of more than 1,000 miles, primarily between the West Coast and the East. It uses Schneider National’s container-on-flatcar service for less time-sensitive freight.
“We’ve been a big embracer of intermodal” since 2009, Dolan said, when Pep Boys joined the Environmental Protection Agency’s SmartWay program, which required the company to determine what percentage of its mileage was in some form of intermodal. Working with its trucking partners, Pep Boys built up its volume.
“Our concern about rail was always on the service side, that if it did not work out we would have a dramatic upsurge in expenses and a degradation of service,” Dolan said. But intermodal rail service has proved reliable and more predictable than the over-the-road truckload market in a post-recession era of tight truck capacity.
“We started slowly, taking it a step at a time, and within nine months everything we were shipping over 1,000 miles was going by Expedited Rail,” Dolan said. “We’re enjoying the same transit times as truckload cross-country with Expedited Rail.”
The intermodal transition also served as a relief valve for truckload capacity, helping the retailer better manage inbound inventory. “For the most part, we’re insulated from the capacity crunch most retailers face in the buildup before the holidays, because of the mode utilization and the partnerships” with U.S. Xpress and Schneider National, Dolan said.
Shifting a share of its freight from road to rail “allowed us to mitigate some of the spikes in demand in areas where there have been capacity shortages, whether because of seasonal adjustments or just shifts in volume. It’s been a good way to maintain consistent capacity and consistent service,” he said.
Even FedEx Freight, which for a long time dismissed the idea of putting shipments on rail, is building that business. It doesn’t hurt that rival UPS is said to be the largest single customer of the railroads, but William Logue, president of the FedEx less-than-truckload unit, says predictable service and compelling cost benefits for long-haul lanes make it an attractive line-haul operation.
FedEx Freight is shipping about 10 percent of its economy-priced volume by intermodal, up from 2 percent before the $4.4 billion carrier redesigned its LTL network last year based around priority and economy freight service offerings. “We’ve given the rail carriers very specific requirements when it comes to transit times,” Logue said. “If they can meet the transit time of the economy offering, we’ll use them. But we’re not going to change our transit times.”
The company doesn’t claim to have the equivalent of what many in the industry call “UPS trains” — the trains that move with rapid priority through rail networks — but by putting 53-foot trailers on rail, FedEx Freight can bring the base line-haul cost of its economy service down. “In priority freight, it’s really difficult to use rail, because it goes so fast. With economy, having that extra day or two gives you more ability to consolidate.”
Others say improving service consistency is helping bring the distance for intermodal down, which will be critical for growth in the future. “For most people, the target will be 700 miles, but 500 to 550 is something you can look at,” said Steve Van Kirk, Schneider’s vice president of intermodal commercial management. That puts most intermodal transit times in the range of “truckload plus one day,” he said. Truckload carriers are targeting an average length of haul of 400 to 600 miles as they pursue more profitable shorter-haul regional freight.
“If you get truckload transit time plus one day, that’s something customers will say is a good value. The price points are very attractive,” Van Kirk said.
For shippers, the most attractive intermodal service is one that doesn’t seem any different from trucking. Schneider’s goal is to make intermodal service “truly seem like trucking service,” Van Kirk said. “Our goal is to make the operational details of going on a truck or train irrelevant and almost invisible.” Schneider’s business isn’t truly operating trucks or fleets of intermodal containers, but moving freight by the most efficient means possible. “That’s what shippers pay us to do,” Van Kirk said.