No peak? Good!

No peak? Good!

A lot of words have been uttered and printed about the lack of a peak shipping season in late 2006. I'll opine that it probably was one of the better things that happened to the railroads and other participants in the intermodal supply chain.

The evidence is strong that retailers and other freight importers took matters into their own hands and ordered shipments to be moved earlier in the year, largely accounting for the lack of a seasonal peak. Their hope clearly was to avoid having their goods caught in the traditional peak-season congestion - and the service failures that went with it.

Helping the supply chain function more efficiently was not their primary goal, but this may be one of those situations where everyone ends up satisfied. We didn't hear any of the sob stories that Santa Claus wouldn't make it to Wal-Mart because he was stuck in a container on a West Coast dock, or that some retailers were forced to use expensive airfreight to avoid running out of merchandise. In fact, 2006 was the second consecutive year of smooth intermodal operations.

Some analysts have speculated that the lack of a peak will show up in fourth-quarter and full-year earnings reports due out this month. The earnings reports may be somewhat better than some expect.

Railroads perform best when they handle large volumes moving repeatedly over long distances and do not have to deal with large swings in volume. That pretty much defines the intermodal business.

Fourth-quarter rail earnings may be lower than those of earlier quarters, but the ratio of operating expenses to revenue may be surprisingly good. For those who take a longer view than quarter-to-quarter, it should be remembered that earnings exceeded expectations in the first three quarters when volume grew more sharply, no doubt because customers accelerated shipments.

We are talking of a slowing rate of growth, not an actual decline in business. Intermodal volume still was higher in the fourth quarter of 2006 than in the 2005 fourth quarter.

Putting intermodal traffic in perspective, 2006 was the fifth consecutive record year, and the 18th of the last 20, in which intermodal set a record. Intermodal growth largely kept pace with the overall growth in the economy. The data suggest strongly that the shift to intermodal continues, impelled largely by continued growth in imports.

Intermodal now accounts for anywhere from 40 percent to more than 50 percent of total volume, depending on the railroad. The smoothing of traffic flows has benefited customers and railroads. For the carriers, internal performance measurements show steady improvements.

System average train speed - a proxy for velocity, the rate at which assets are utilized - climbed as the year progressed. Similarly, the average time that cars spend in railyards waiting to be dispatched in trains has trended downward, while the average number of cars on line has been steady to lower. Cars on line is a measurement of system fluidity, and a steady or lower number, especially when volume is climbing, is a measure of the railroad's ability to handle the business it has.

Terminal dwell time is not as meaningful a measure of intermodal performance because intermodal, like coal and grain, is a trainload business in which cars do not sit in en-route yards. The dwell time measurement is an accurate snapshot of a decreasing part of a railroad's business.

Dwell time, average speed and cars on line are measurements that securities analysts quite properly use as indicators that a railroad is making money and, if so, whether it is making enough to recommend that investors own the stock.

There is anecdotal evidence from customers that intermodal service has improved. In past years, some customers have announced that they were taking their traffic off the railroads and putting it back on the highway. Others have stated that intermodal performance was inconsistent and that they could not risk putting their freight on trains even though intermodal rates were lower than competing truck rates. That kind of announcement was not heard in 2006.

More recently, the few consistent critics of overall rail service have been those with specific agendas. These include utilities and other bulk commodity shippers who seek legislation that would roll back some of the freedoms railroads gained from regulation 26 years ago.