U.S. and Canadian intermodal growth accelerated in the first quarter at a 4.5 percent year-over-year clip, helping three publicly traded U.S.-based major railroads — CSX Transportation, Union Pacific Railroad and Kansas City Southern Railway— boost profit growth despite weak coal and grain traffic. The fourth U.S.-based publicly traded railroad, Norfolk Southern Railway, won’t report its first quarter earnings until Tuesday but will likely finish in the black.
Domestic intermodal traffic rose 6.2 percent in the first quarter, outpacing international intermodal volume growth by 3 percentage points, according to preliminary data from the Intermodal Association of North America. Total intermodal growth in last quarter outpaced traffic gains in the fourth quarter, 2 percent, and for full-year 2012, 4 percent.
Like it did last year, domestic intermodal growth will stay strong in 2013, IANA President and CEO Joni Casey said. That’s a result of shippers experiencing tight truck capacity and expecting conditions to worsen when new federal hours-of-service rules take effect July 1. More shippers trying out the service to cut transportation costs and a modest U.S. housing market recovery will also boost domestic intermodal traffic, she added. International intermodal volume, however, isn’t expected to be as robust, because U.S. consumer demand for imports is still moderate and export growth has slowed.
As capacity tightens in the second half of the year because of HOS rules, intermodal rates will likely increase as a result, said Larry Gross, a senior consultant at FTR Associates. He said intermodal pricing gains “have been minimal of late” and “probably in the low single-digit range.” The railroads last quarter, like in past years, exercised their pricing power, allowing them, with the help of more efficient operations, to boost earnings on moderate volume growth.
Intermodal growth, along with the surge of carload traffic tied to the domestic energy boom, has helped the industry overcome steep coal and agriculture declines. The five U.S.-based railroads in the first quarter saw coal traffic fall 7.9 percent year-over-year, and grain volume dropped 15.9 percent in the same period, according to the Association of American Railroads.
And while many U.S. railroad executives told investors during first quarter earnings calls that they expect coal traffic to rise slightly or stay flat this year, the industry cash cow is unlikely to ever regain its standing. Stricter federal environmental emissions regulations make it unlikely that utilities will halt their march away from coal generation toward national gas power, even if prices of the latter have doubled in the last year.
NS and KSX led the U.S. Class I industry in intermodal growth in the first quarter, with both seeing a 9.1 percent gain in traffic. NS got a boost through the launch of 34 services earlier this year on its Crescent Corridor, its 2,500-mile network connecting the mid-Atlantic and the Gulf Coast, has already delivered volume growth, Michael McClellan, vice president of intermodal and automotive marketing, said in late March.
KCS, the smallest of the North American major railroads, was aided by a growing of near-sourcing in Mexico, contributing a 9 percent increase in intermodal cross-border traffic. The railroad says 2013 will be a transition year to an anticipated intermodal volume surge caused by the 2014 opening of Audi, Honda, Mazda and Nissan plants on its Mexican network.
“The finished vehicle production at those plants alone will represent about 35 percent increase in auto production in Mexico,” Patrick Ottensmeyer, executive vice president of sales and marketing, told investors Friday.
Of the Mexican auto plants KCS currently serves, the railroad has 25 percent to 80 percent of the business of each plant, he said. Ottensmeyer isn’t sure how much business KCS will get from the new plants, “but if you look at our network, we are very well positioned to serve these plants and move vehicles to the population centers in the eastern half of the country.” The railroad is also gaining intermodal growth through its services to the Port of Lazardo Cardenas, the second-fastest growing container port in North America in 2011. APM Terminals is expected to open a $300 million terminal at the port, part of a more than $900 million eventual investment. In addition, Hutchison Port Holdings is adding five cranes at its terminal this year.
Among U.S.-based major railroads, BNSF Railway experienced the second-largest intermodal growth, with a 5.8 percent traffic gain in the first three months of 2013. BNSF, a privately held company that won’t provide limited financial information until May, hauls the most intermodal units annually, followed by UP, NS, CSX and KCS. BNSF said its domestic volume is at an all-time high and it sees a potential market of several million annual truckloads prime for rail conversion.
The railroad’s long-delayed $250 million intermodal terminal near Kansas City will help it boost intermodal volume further when the Gardner, Kan., project opens in the third quarter. The 1,000-acre complex will also include a $500 million logistics park with a potential for more than 7 million square feet of industrial space.
UP international intermodal volume grew 8 percent, while domestic traffic was flat, pushing the railroad’s volume for both sides of the business up 4 percent year-over-year. Shippers’ fear of an East Coast port strike and efforts to import goods ahead of Chinese manufacturing slowdown — as a result of Chinese New Year celebrations — delivered more international intermodal volume to the railroad’s network, Stifel Nicolaus analyst John Larkin wrote in a research note.
“Our sense was that the company could have grown domestic intermodal shipments faster, if not for a disciplined approach to pricing, which resulted in a 4 percent year-over-year increase in average revenue per unit,” Larkin wrote.
Eric Butler, UP’s executive vice president of marketing and sales, told investors on Thursday that the railroad sees a potential domestic intermodal market of 10 million annual loads and another 3 million loads tied to the Mexico market. The railroad is betting its $400 million intermodal terminal in Santa Teresa, Mexico, will “make a dent” in that potential Mexican market when it opens in 2015.
CSX intermodal volume expanded 2.5 percent year-over-year in the first quarter, as domestic intermodal traffic rose 5 percent and international volume was flat. CSX expects total intermodal volume growth will stay at a similar pace for the rest of the year. The hundreds of millions of dollars CSX has spent in recent years to expand its intermodal terminal network and build a state-of-the-art hub in northwest Ohio should help the railroad hit that pace of growth.
“As we said, intermodal is a profitable business to us. It is on par with most of our merchandise market, and we want to grow as much as we possibly can. So we are excited about the opportunity. We are excited by the 9 million loads, and we are going to continue to grow that market at a faster rate than the overall economy,” Fredrik Eliasson, chief financial officer and executive vice president, told investors Wednesday.
This story was revised with updated Norfolk Southern Railway intermodal volume statistics.