Intermodal rail shippers could see an uptick in rates not just because truckload pricing will rise, but also because the U.S. and Canadian railroads want to throttle back volume growth to keep favorable margins, a noted rail analyst said.
The railroads are under pressure from Wall Street to lower their operating ratios, a key measure of productivity, even further, said Jason Kuehn, associate partner at New York-based transportation consulting firm Oliver Wyman. That’s a challenge, as the carriers have to continue to add capacity to handle carload and intermodal growth, and to meet the roughly $12 billion federal mandate to install crash-avoidance technology, known as positive train control.
Additionally, the railroads are facing increased congestion, resulting from faster overall traffic growth and a jump in shipments tied to the domestic energy sector. Congestion in Chicago has improved since the brutal winter, but Kuehn thinks the region will be stressed through 2014.
“I don’t see that there is any miracle solution that is going to suddenly debottleneck Chicago,” he said last month during a conference call held by Stifel’s transportation and logistics research group.
Although intermodal volume growth has steadily increased in the last three years, the difference between traffic and revenue has narrowed, suggesting the “pricing environment might not be as rich as it used to,” Kuehn said. There hasn’t been a significant correlation between pricing and volume, which suggests that intermodal growth is driven more by contract and service levels than by rates, he said.
The U.S. and Canadian intermodal networks are operating very close to capacity, after intermodal volume rose 4 percent year-over-year in 2013 and at the same pace in 2012, Kuehn said. If intermodal traffic continues that pace of the growth, the railroads will need to invest about $200 million to $300 million annually to build at least two new terminals, giving them capacity to handle 700,000 more units a year. But if annual intermodal growth ramps up to 7 percent, or roughly double U.S. GDP, the industry will have to spend $360 million to $600 million a year to build three to four terminals. Those new terminals would add about 1.2 million units of annual capacity.
Railroads can gain more capacity by improving their existing terminals, too, said Curtis Spencer, president of Webster, Texas-based logistics consultancy IMS Worldwide. CSX Transportation and BNSF Railway have already boosted capacity at existing terminals by adding wide-span gantry cranes because better fluidity permits smaller facility footprints. Faster security checks and better coordination of truck drivers’ picking up and dropping off loads also improves fluidity, allowing railroads to improve management of existing capacity.
The rest of the year will be the critical period in which railroads gauge how high they can push intermodal contracts up in terms of truck pricing and determine how much intermodal volume they can handle without hurting their operating ratios. Intermodal traffic in April rocketed more than 10 percent year-over-year, according to Intermodal Association of North America statistics. The spurt was largely due to shippers accelerating imports through U.S. West Coast ports ahead of the expiration of the current International Longshore and Warehouse Union contract.
Getting a handle on how intermodal contracts are priced is tricky, as the terms differ depending on the shipper and are kept confidential. But pricing is clearly on the rise, according to various indices that measure both contract and spot pricing. The average revenue per intermodal load in April rose 6 percent to $2,814, after increasing 6.9 percent in March, according to IANA statistics. The average revenue per highway load jumped 18.9 percent in the same period to $1,655. All-in domestic intermodal pricing in April reached its highest level in the Cass Intermodal Index since 2005, the year when the index began. Rates in April rose 1.4 percent year-over-year and 1 percent from March, according to the index, which includes data from Cass clients, whose freight invoices totaled more than $23 billion in 2013.