Intermodal''s Market Challenge

Intermodal''s Market Challenge

Copyright 2004, Traffic World, Inc.

The best freight market in years is fetching top rates for intermodal marketing companies but also is testing their ability to "beg, borrow, or trade" intermodal equipment for their customers.

Demand for containers, trailers, intermodal chassis or flat cars is allowing railroads to boost rates to IMCs by up to 8 percent. IMCs, in turn, are finding it relatively easy to pass those rates down to their customers - retailers, 3PLs, and even other IMCs.

"By the end of the year, I wouldn''t be surprised if we saw the first double digit growth in intermodal volume since the first years that we began tracking it," said Tom Malloy, vice president of business development for the Intermodal Association of North America. Malloy said that it''s "extremely doable" for intermodal loads to climb past 13 million loads by the end of the year. Rail intermodal volume totaled 11.9 million loads in 2003, which was a 6.4 percent increase over 2002 volumes.

That growth is well above projections made by the American Trucking Associations last year that estimated intermodal volume growth would average 5.4 percent per year and revenue would grow 7.7 percent per year through 2009.

Those projections were partly based on the fact that the growth of intermodal transportation over the last five years has been constrained by real and perceived service issues with railroads. The problems were attributed to the difficulty in merging thousands of miles of track infrastructure and physical plant in the 1990s.

But now even the well-documented service issues on Union Pacific Railroad and CSX are not able keep business off the railroads because capacity is even tighter on the highways. Such a high-demand market has given Burlington Northern Santa Fe Railway the confidence to take its intermodal partner of 15 years, J.B. Hunt, to arbitration over revenue division - and analysts are confident that BNSF will be able to get a bigger share.

It''s a market that''s allowing Norfolk Southern, not traditionally known for its intermodal service, to grow by 13 percent in its mid-June year-to-date volumes over the same period last year. The railroad plans to stay on top of its already high service levels through a new freight allocation system designed to address service inconsistencies. More load information will be required from IMC customers so NS will be able to prioritize shipments on factors other than a first-in, first-out loading system.

"That program is still in very preliminary stages," said NS spokeswoman Susan Terpay. "We just started asking some of our customer to provide information to us. But it''s something we''re not ready to talk about yet." Terpay said the program probably won''t roll out until fall of 2005.

Meanwhile, with intermodal capacity so constrained, IMCs are working harder and smarter to take a piece of the estimated $8 billion up for grabs. "Because the transportation medium in this country is at or over capacity, it''s more difficult to do the routine procedures of getting a box, scheduling a pickup and arranging for delivery," said Larry Henry, vice president of Alliance Shippers.

"We have to work harder and smarter to meet our customers'' expectations," said Larry Henry, vice president of logistics for Alliance Shippers. "We have to take on more risk and control of transactions. We''re keeping equipment in our inventory longer than we normally would if the rail ramps were flush with empties."

Because it''s difficult - if not impossible - to get equipment at certain rail locations, Henry said, "when we get an empty box from an inbound delivery, we don''t arbitrarily release it to the railroad empty; we''ll hold on to it and have the carrier place it in a secure location, or we''ll lease space to store it ourselves. We''re spending extra dollars to assure our customers have a box."

Those extra dollars have helped Alliance, one of the country''s larger IMCs, to maintain an average on-time pickup performance of 98.9 percent and an average on-time delivery of 93.8 percent, through May of this year.

Large IMCs that deal with the trucking market have other alternatives available to them. After UP''s rail system got bogged down enough to require UPS to move its business from the railroad to the highway earlier this year, Landstar Systems, a nonasset based freight transportation provider, was able to pick up the slack. Landstar did roughly $900,000 worth of business with UPS in second quarter 2003, compared with $2.9 million in second quarter 2004, with a "fair amount" of that increase taken from UP.

"I wish the railroads all the luck in the world, but they''re capacity constrained, and I doubt they can fix it in the next 90-100 days," said Jim Handoush, president of Landstar Logistics. "We''re a source of capacity, and retailers and 3PLs are going to go to capacity providers - either nonasset based like us or those that own equipment - who can provide the service they want when they want it."

Handoush said Landstar would "go back to our customers" for rate increases to offset higher rates it''s forced to pay for service. "If we don''t, because we''re in the middle, we''re going to get squeezed," he said. "I think everyone realizes this. The key is educating our customers and keeping them informed of the marketplace."

Genco, a Pittsburgh, Pa.-based 3PL that is also involved in supply chain management, works with IMCs such as Landstar to take advantage of the strong intermodal market. "Equipment availability has been a factor for us in certain markets, and our IMCs have worked creatively to source equipment for us," said Barb Pitroski, Genco''s director of purchased transportation. "We''ve had to make changes as well, such as waiting an extra day to get a container. Where we have time to do that, we can take advantage of intermodal.

Pitroski said that Genco is overcoming some of the challenges of the current intermodal market through a proprietary technology that allows it to optimize customers'' freight requirements using a list of factors such as transit times and required delivery dates. "We use that technology to select the best combination of price and service, and intermodal is a growing part of that solution. But we need to maintain constant contact with our customers to make sure we''re balancing the needs of customers with capacity needs in the marketplace."

Intense demand for intermodal also is causing IMCs to seek out nontraditional partners as a means of securing scarce equipment. "We''re doing a lot more with the asset-based guys like Schneider (National) and (J.B.) Hunt and we''re doing more regional partnering," said T.S. Lee, rail division manager for Twin Modal, a Minneapolis-based IMC. "We didn''t even know that the smaller guys were even into intermodal, but the market is so hot that everyone''s trying to find more intermodal capacity, as well as trucking capacity. It''s beg, borrow, or trade."