Increasing trucking costs and a looming capacity crunch in the motor carrier industry are leading to a relentless shift of freight from over-the-road trucking to intermodal rail, according to transportation experts who addressed The Journal of Commerce’s Inland Port Logistics Conference Tuesday in Oak Brook, Ill.
The shift to intermodal rail is being driven by a need to slash transportation costs. Transportation is by far the largest component in the cost of shipping imported merchandise from Asia to inland destinations, accounting for 50 percent of total logistics costs.
A proliferation of new distribution facilities near inland population centers is hastening the shift to intermodal rail. Retailers, importers and third-party logistics providers are building large warehouses near railheads that are located at inland hubs such as Chicago, Dallas, Kansas City and Atlanta.
These importers slash their transportation costs hundreds of thousands of dollars a year by shifting over-the-road shipments to intermodal rail, and reducing the “final mile” drayage costs by locating their warehouses closer to the destination markets, said Michael P. Murphy, chief development officer at CenterPoint Properties.
Transportation accounts for half of the total cost of moving a container from Shanghai to an inland destination such as Chicago. Inventory carrying costs comprise 21.8 percent of the delivered price. Other costs such as labor, services, and rent each account for 9.5 percent or less of the delivered cost, Murphy said.
Diversion of over-the-road trucking to rail has kept international and domestic intermodal volumes growing each year, even during the recession of 2008-09, with future growth expected to be even more impressive. If U.S. truckload capacity is reduced by only 5 percent, this will result in a 29 percent increase in intermodal volume, Murphy said.
High diesel prices are making trucking less competitive with rail. Regulations including hours-of-service limitations and new safety rules are shrinking the driver pool, forcing motor carriers to pay higher wages to retain existing drivers and attract new drivers. If this scenario continues to play out, shippers should “prepare for the day when you cannot get a truck,” Murphy said.
Meanwhile, railroads have spent $15 billion during the past five years on capital expansion efforts, said Ron Sucik, principal, RSE Consulting. Unlike the past economic slowdown in 2002, when the railroads slashed investments and then faced a capacity shortage when the economy recovered, the railroads continued expanding their capacity during the 2008-09 recession, Sucik said.
Western railroads have identified as many as 11 million loads they believe could be shifted from over-the-road trucking to intermodal, and eastern railroads have identified 9 million loads, Sucik said.