For those in the rail intermodal business, 2012 served as a reminder that year-over-year changes are inevitable, but those changes, or the reasons for them, aren’t always obvious. Equipment trends are a prime example. For railroads, the use of domestic containers rather than trailers has many advantages, most of them related to the efficiencies of the double-stack train.
Consider net-to-tare ratio, a measurement of efficiency using the weight of the conveyance device against the weight of the paying freight. Let’s assume there are two 30,000-pound loads in two containers on a double-stack car weighing 10,000 pounds each — the double-stack “well” weighing about 25,000 pounds, and the one-and-a-third rail “truck” (there are four rail trucks on a three-well 53-foot well car) weighing 13,000 pounds. That’s 58,000 pounds of conveyance hauling 60,000 pounds of freight for a net-to-tare ratio of 1.034.
An intermodal trailer weighs about 13,500 pounds, is loaded on a 25,000-pound “spine” and uses the same 13,000 pounds of rail. In that case, there are 51,500 pounds of conveyance hauling 30,000 pounds of paying freight for a net-to-tare ratio of 0.583.
The double-stack car, then, is 77 percent more efficient than the spine car carrying a trailer.
This has a double impact on profitability. From a cost perspective, double-stack cars require less locomotive power to haul the same amount of paying freight. In terms of revenue density, a single pound of railcar hauls 77 percent more revenue than a trailer. Assuming similar cars (a 53-foot well car for containers vs. a 53-foot spine car for trailers), two revenue loads using double-stack in the same space can haul one trailer. A 6,000-foot trailer train hauls 100 units. A 6,000-foot double-stack train hauls 200 units, twice the revenue in the same space.
Importantly, there are terminal efficiencies as well. Basically, one can load or unload twice as many units per running foot of yard track using double-stack container technology when compared to trailers. This translates to half the switching, a significant part of terminal costs.
So it makes sense that conversion from trailer to container in rail intermodal would occur at a faster pace and that at some point trailers no longer would be a part of intermodal service or that a clear price differentiation would emerge, right? Not so.
The main reason this transition hasn’t occurred more quickly is that the container is a less-friendly customer conveyance than a trailer. The biggest issue is that the transition between rail and truck requires a chassis. The combined container and chassis unit weighs a lot more and therefore reaches legal weight capacity with less freight than an over-the-road or rail trailer.
In reality, it’s easy to purchase a 12,500-pound road trailer. Bulking up the top rails, bottom rails and rear doors and adding lift pads for intermodal service adds almost another 1,500 pounds. A steel 53-foot container weighs about 10,500 pounds, the 53-foot chassis can weigh 5,000 pounds and, depending on where the pin placement is and whether the rear axles slide (and how far), the most a container can legally carry is about 42,000 pounds.
Some would dispute that number and, yes, lightweight containers and chassis exist, but not enough to make weight capacity above 42,000 pounds on a consistent basis readily available.
The conclusion is that customers who are used to loading as much as 46,000 to 47,000 pounds on a unit have at least a 7.5 percent disadvantage when loading a container legally. On a cost basis, there’s no difference for a drayman to haul a trailer at 47,000 pounds or a container at 42,000 pounds. The 7.5 percent difference in terms of cost per hundredweight must be borne entirely by the rail line-haul. To price the differential when the rail portion equals 60 percent of total cost of the movement would mean a 12.5 percent line-haul discount if the rail assumes the entire cost of the differential.
The customer issue is also particularly important if we assume most of the growth in domestic intermodal will come from diversion from trucking. It’s tough enough to get a customer to consider a mode change without the customer having to institute a change in the shipment or packaging size to accommodate the change.
Because of these issues, there are two schools of thought on trailer vs. container usage among the four U.S. railroads. Union Pacific and CSX espouse the quickest conversion toward containers. CSX already has limited the number of intermodal terminals where it will handle trailers. BNSF Railway and Norfolk Southern will tell customers they expect to be handling more containers in five years than they handle today.
As long as their competitors handle trailers, UP and CSX will feel an obligation to handle some trailers. All four railroads still offer varying line-haul discounts in domestic container rates compared to trailer rates. A resolution to this issue is unlikely in the short term, so customers will have to consider trailers and containers, and railroads will have to provide cars, services and equipment for both.
Another intermodal controversy surrounds the minimum length of haul that yields consistent profits to railroads, customers and service providers. Based on reports from J.B. Hunt Transport Services and Hub Group, the two largest publicly traded service providers, new short-haul services east of the Mississippi are wildly successful in terms of shipment volume. Other, privately held third parties appear less excited about these possibilities, probably because of pricing differentials increasingly evident between the mega-providers and the smaller companies.
Less evident is the amount of profit that might be available to all parties from the short-haul moves. The railroads have been strangely quiet about this, saying only that there is a lot of potential. The laws of economics argue against profitability much below 900 miles in length of haul, particularly in the east, where the average dray represents about 25 percent of the total intermodal route between population points, twice as much as western railroads’ routes.
One of the unwritten economic laws of intermodal has been that dray miles can be no more than 25 percent of the rail miles in order to make a profitable intermodal move. Thus, a 2,000-mile rail haul can have 500 miles of total dray (average 250 miles at each end). This gives the service provider, the drayman and the railroad a shot at making money on the route. Above that ratio, the diseconomies of drayage take over, and we begin to get so far from the rail ramp that either empty miles or distance to the next shipment makes profitability unlikely.
When one applies that rule to an 800-mile rail haul, the dray possibilities begin to shrink to the point where it becomes difficult to find a one-way move and impossible to find a backhaul that meets the same definition. One of the difficulties with public rail intermodal statistics is they often don’t break out the difference between revenue loads and revenue empties. The rumor has been that the railroads are subsidizing the short-haul loads by publishing low backhaul rates or low/empty load rates in order to help providers with utilization until proper critical mass can be built. The lack of enthusiasm from the railroads indicates they would like to see more progress on that front, but little real visibility exists.
The rail intermodal business has been an engine of growth for the railroads, but some stronger leadership is needed as we move forward to determine how to proceed. Historically, the railroad market leadership style can be characterized as “conscious ignorance.” In other words, “We know what is going on but would prefer not to take a position.” If necessity has been the mother of invention in intermodal innovation over the years, then prosperity has become the father of ossification.