Shippers reluctant to jump into intermodal rail transport have a major incentive to test the waters: relatively low intermodal rates with few signs on the horizon for aggressive hikes.
The feeble intermodal pricing gains this year are largely due to weak surface freight growth, both for truckload and intermodal volumes, and competitive truck pricing. Although intermodal pricing is difficult to gauge — railroads and intermodal marketing companies are loath to provide details — the two following indices suggest intermodal rates gains have been lackluster:
- The overall U.S. intermodal index inched up 0.5 percent year-over-year in the week ending May 27, according to data on all-inclusive 53-foot door-to-door spot pricing quoted by railroads and provided by third-party logistics provider IDS Transportation Services. But the averaged four main directional indices year-to-date were down 4.6 percent from the same period last year. The slight uptick in pricing “was not as much a function of an upward trend, but because the rates have been trending down and been fairly low in the beginning weeks of May,” IDS Executive Vice President Rick LaGore said.
- Intermodal pricing ticked up 0.2 percent year-over-year in April, after rising 1.7 percent in March, according to the Cass Intermodal Price Index. The index includes all costs covered by an intermodal move, including linehaul, fuel costs and accessorial charges. Truckload linehaul rates, by comparison, rose 2 percent year-over-year in April, following a 2.2 percent increase in March and 3.4 percent expansion in February, according to the Cass Truckload Linehaul Index.
“From an aggregate perspective, we haven’t seen as much traction on pricing as we had hoped to. The highway market isn’t exhibiting a lot of pricing discipline,” said Mark Yeager, president and chief operating officer at intermodal marketing company Hub Group. “We are seeing slightly positive gains for pricing in the low, single-digits.”
In some cases, Hub Group walked away from intermodal business because the pricing shippers wanted was “simply not compensatory,” the Chicago-based company told investors in a first quarter earnings call. Intermodal pricing was particularly competitive in the eastern U.S. and transcontinental markets, especially on the westbound leg of the latter, Hub said.
The slight intermodal pricing increases partly reflect a deceleration in volume growth seen in 2011 and 2012, said Derek Leathers, president and chief operating officer at truckload motor carrier Werner Enterprises. The railroads aren’t pushing as aggressively for intermodal pricing gains because they want to get growth in volume back to the previous high pace, he said.
Canadian and U.S. traffic growth on a year-over-year basis accelerated to 4.5 percent in the first quarter, up from a 4 percent gain in the fourth quarter, according to the Intermodal Association of North American. But several intermodal executives warned that second quarter volume gains likely will be disappointing.
Total surface freight growth has been unspectacular in recent months as shipments of larger seasonal items such as lawn chairs and grills haven't taken off as expected, said John Larkin, managing director and head of transportation capital research at Stifel Nicolaus. Cooler-than-usual weather in much of the country may have played a part, but consumers have other reasons to shy away from big purchases, including fears of federal sequestration cuts and mixed economic signals. The housing recovery has picked up and several consumer confidence indices suggest a brighter outlook, while manufacturing production growth has slowed and weekly jobless claims surprisingly rose by 10,000 in the third full week of May.
Just as transloading growth has made it harder to discern whether an intermodal load is domestic or international in nature, the process also reduces the unit count. Contents of three standard 40-foot ocean containers can generally fit into two 53-foot domestic trailers. Increased truckload utilization through the reduction of empty miles and better loading, driven party through more shipper and carrier collaboration, also has reduced shippers need for train and truck capacity.
The lack of truckload rate increases also has dampened intermodal pricing. Truckload rates on average will rise 2 to 4 percent this year, while intermodal pricing will increase 1.5 to 2 percent, Leathers said. But as cost pressures, including aging fleet and increased federal regulation, squeeze the industry further, carriers will have to hold or raise rates. That eventual crunch on the trucking industry to raise rates leads Leathers to expect intermodal rates to rise 2 to 4 percent next year largely as a result. Truckload carriers also are expanding their intermodal operations, bringing more competition to the market, said Ron Sucik, president of RSE Consulting.
Federal regulation that is expected to cut into the number of hours truck drivers can operate weekly could be the tipping point for the industry and spur them to hike rates, said Yeager, vice chair of the Intermodal Transportation Institute’s board of directors. He expects the tighter hours-of service rules, set to take effect July 1, will spur shippers to shift some truckload volume to the rails and already has had a psychological effect in that shippers are more concerned about tightening capacity.
International Paper, for example, is highly aware of the threat of tightening truck capacity and is looking to expand it’s intermodal transportation share currently in the single digits, Shanon Wiley, manager of rail operations, said at the North American Rail Shippers Association's Annual Meeting in Baltimore this week. "I think the writing is on the wall," he said. "We as a company and probably other shippers are going to have to look more at intermodal."
Analysts estimate the HOS rules will cut truck productivity by 3 to 7 percent. A second wave of enforcement of the tougher rules and the resulting squeeze on capacity likely will come when all drivers are forced to have electronic onboard recorders. The Federal Motor Carrier Safety Administration is expected to create an EOBR rule by the end of the year and then give the industry two to three years to comply.
Despite the threat to securing transportation for their freight, many shippers “are taking a wait-and-see approach,” said Bill Matheson, president of intermodal services for Schneider National. The ITI board member said shippers, however, are looking to build capacity release valves, such as making sure they are driver friendly and reducing turn times. Shippers that do so can position themselves at the front of the line when truck capacity gets tight, but it’s unclear how much their effort will do to blunt anticipated productivity cuts.
For the future of intermodal pricing, the major bellwether will be in the weeks ahead, when the peak shipping season shifts into high gear, said Ken Miller, vice president of intermodal operations at J.B. Hunt Transport Services. Whether the season starts in August or July, intermodal pricing will reflect not only the health of U.S. economy but also how well the trucking industry is adjusting to the new HOS rules.