Get ready to pay

Get ready to pay

Not too long ago, customers used to complain about slow and inconsistent rail intermodal service. They still do. But there is a big difference.

Intermodal used to be a throwaway service with poor quality offered by railroads as a way to generate some revenue and use excess cars, terminal and track capacity. Railroads could not charge enough to make much contribution to their fixed costs, or to cause operating departments to run consistent and on-time intermodal trains.

When intermodal was becoming established, trucking, aided by structurally low fixed costs, captured a lot of high-margin rail business. With excess flatcars and older terminals emptied of less-than-carload business and plenty of mainline track capacity available, railroads saw intermodal as a means of preserving as much competitive traffic as possible. Their logic was sound. Intermodal service quality wasn't near what trucks provided, but it was sufficiently low-priced (cheap, if you will) that it attracted a lot of volume.

Intermodal has changed in a relatively few years. There no longer is excess capacity, and shipper complaints about slow and inconsistent service now are driven by congestion, something unheard of when intermodal marketing executives virtually were begging customers to give their service a chance. Railroads now can charge intermodal rates that make a sufficient contribution to fixed cost to justify the capital investment in new capacity.

Intermodal continues to grow rapidly - it is the fastest-growing line of business the railroads have - because the price-service package is attractive to customers. On key lanes and for customers that pay premium rates, intermodal service quality is competitive with truck service. Well-managed customers such as UPS wouldn't pay premium rates if they didn't receive premium service.

For a number of years, double-stack intermodal container growth was driven by explosive growth in import traffic spurred by globalization that sent millions of containers through ports. The concentration of volume at ports gave railroads just what they needed - density - to schedule intermodal and operate it in efficient trainload service. Containers began to replace trailers in domestic movements, although more recently the once-declining trailer business has grown. Many international containers are transloaded at near-port facilities into 53-foot trailers that carry consolidated loads to regional distribution centers, and truck operators use intermodal to alleviate driver shortages and to balance equipment flows.

Almost all intermodal today is in unit trains, and, from a cost standpoint, it is just like coal and grain service, operating from a single origin to a single destination. Margins today are comparable to those of coal, grain and other profitable rail lines of business.

The truck-rail competitive landscape also is changing. The trucking industry faces cost increases that could drive some traffic back to the rails. Truckers were saved only by court order from hours-of-service regulations that would effectively reduce capacity and increase cost. Highway congestion affects service consistency and cost, and continuing driver shortage and retention issues and fuel prices are adding to trucker cost pressures. There is little to cheer truckers - except that they increasingly are saving driver hours and reducing fuel expenditures and exposure to congestion by becoming customers of the railroads.

Modal competition is not across the board. It is at the margin. Some shippers will shift between truck and intermodal service as the service-price dynamic makes intermodal more economic for them. Motor carriers still get about 90 percent of the intercity freight revenue pie, so a small shift to intermodal will equal a quantum increase in revenue for the railroads. If the stars are truly aligned for the railroads and intermodal, the business should become even more profitable as rising truck costs relieve the pressure to cut intermodal rates either to keep what intermodal has or to capture new traffic. In the best of all worlds, rails can increase revenue with virtually no increase in cost. It doesn't cost much to add a few platforms to an already-scheduled intermodal train.

Shippers increasingly are accepting - albeit grudgingly - higher rates for intermodal. Many don't have the option of switching to trucks because of motor-carrier capacity constraints. So they pay more. In the short run, they are paying higher rates and receiving poor service, but in the longer run, they will pay higher rates and should see better service as capacity increases.

This is the year that railroads actually can raise rates without losing traffic, increasing their rate of return - and their ability to invest in new capacity for what now is the driver of their growth.

Larry Kaufman, former intermodal editor of The Journal of Commerce, has worked in and written about railroads for nearly 40 years. He can be reached at