Intermodal’s Lure

Intermodal’s Lure

Intermodal, the movement of cargo domestically in containers via rail, is sensitive to fuel prices as shippers are drawn to its low fuel costs compared to over-the-road trucking. But the attraction of intermodal may be more durable, and this may boost its role in domestic transportation. Intermodal has a lot going for it but, to crassly acknowledge the end of the baseball and beginning of the basketball season, a grand slam is not a slam dunk.

Last year’s spike in fuel prices caused a predictable shift in long-haul freight from road to rail, “but then when fuel prices went down, we started to see a decline, but that was very short-lived,” said Larry Gross, senior consultant with the freight research and forecasting firm FTR Associates.
“We think that there is some conversion going on, or to put it more accurately, intermodal is holding more than its share of a shrinking pie. Even in the face of an extreme amount of overcapacity on the truck side, domestic intermodal is faring very well, and that is very impressive.”

The reasons may be less cyclical and more secular, or long term, in nature. Intermodal as a percent of long-haul domestic moves, defined as 550 miles or more, was less than 5 percent prior to 2000 and inched higher between 2000 and 2007, but not significantly. Since then, however, intermodal movements have been on the rise. FTR estimates intermodal’s share of the long-haul market share grew from 6.2 to 6.5 percent from the first to the second quarter after having a 5.5 percent share in 2007.

“It didn’t go anywhere for quite a while, but it really has made a nice move over the last couple of years,” Gross said. He and others believe more is at work than just a faddish phenomenon linked to the recession, which typically favors intermodal, and the lingering effects of the fuel price
spike.

Other forces have come into play: improved intermodal service, long-term concern for trucking capacity — not an issue right now, but it could be in the future — and environmental demands.

Typically, in a recession, there would be excess truck capacity, and “truckers would drop their rates and go in and poach intermodal traffic,” Gross said. “And, certainly, that is going on with trucking rates — rates are down — but nevertheless, intermodal is doing more than holding its own, which tells me that intermodal service is better than it’s ever been.”

There is support for this idea: Train speeds are way up, on-time performance has improved, and railroads are making significant intermodal investments, sending a message to shippers that rail interest in this type of freight isn’t ephemeral.

Other long-term forces are also likely to be at work. Driver shortages have stung shippers in the past, and a squeeze in truck capacity in an upturn has been the subject of widespread speculation. Road congestion is only increasing, and many believe the trend is toward higher fuel prices.

With risk management, flexibility and diversification watchwords in today’s supply chain lexicon, a long-term leaning toward intermodal may lurk inside the numbers. The environmental factor must also be considered.

“The low-carbon movement has gone from being something discussed at a cocktail party to something being meaningful in logistics,” whether because of shipper requirements or because of possible future regulation, said Tony Hatch, an independent rail analyst in New York.

Large truckers are increasingly seeing intermodal as a viable service offering and are hitting the pavement selling it, and this, too, is pushing up intermodal share.

All that said, it would appear intermodal has a bright future. But it’s not guaranteed. If shippers stick with intermodal despite low truck rates and available capacity, it might well be because of service. But such service, to some extent, will be a factor of low rail volumes. Currently, the rail network is not particularly stressed, and it may not be for a few more years. But what will happen to service when volumes pick up?

I think intermodal service is on a long-term upward trend as the rails make investments to serve intermodal and become ever more acclimated to service demands despite the lower profitability intermodal represents relative to sectors such as coal and agriculture.

Key challenges associated with intermodal have yet to be solved, however. Visibility as domestic container loads are handed off from truck to rail ramp to train is still a problem, and so is damage. The intermodal nature of the move is complex in terms of recordkeeping and freight payment, and those challenges aren’t going away.

In other words, the picture for domestic intermodal is positive, but the story isn’t over.

Peter Tirshwell is senior VP, strategy at The Journal of Commerce. Contact him at 973-848-7158, or at ptirshwell@joc.com.