US domestic intermodal weakest since Great Recession

US domestic intermodal weakest since Great Recession

US domestic intermodal volume was down 6% year over year during the first half of 2019 and down 7.7% in the second quarter. Photo credit: Shutterstock.com.

What a difference a year makes. Last year at this time, intermodal volume was up strongly, and the concern was the autumn peak and intermodal ability to meet the looming demand. Not this year. 

Domestic intermodal volume was down 6 percent year over year during the first half of 2019 and down 7.7 percent in the second quarter. US domestic intermodal longhaul market share has now declined for four quarters in a row for the first time since before the Great Recession — from 7.1 percent in Q2 2018 to just 6.5 percent in Q2 2019. 

The intermodal sector is always a tale of two markets — international and domestic. These markets, approximately equal in size, often diverge in performance because they are quite distinct and influenced by different exterior forces. That is certainly the case today. The international segment, comprising the movement of ISO 20’s, 40’s, and 45-foot containers, was up 0.6 percent for the first half of the year vs. 2018, with the second quarter coming in virtually unchanged from the prior year. Certainly nothing to crow about, but also far better than the performance of the domestic sector, which is where the current problems lie.

While softer market conditions are certainly contributing to the problem, that’s not even half the story. It’s true that demand growth has certainly slowed from last year, but headlines describing a “trucking apocalypse” and a “freight recession” are far off the mark, to say the least. Forecast firm Transport Futures estimates that the number of longhaul (500 miles or more) dry van and reefer loads grew 2.4 percent year over year in the second quarter. While slower than the 3.2 percent growth achieved in Q2 2018, it’s hardly an apocalypse. The main difference is that the supply of trucks and drivers has expanded in the interim and this added capacity is putting downward pressure on rates.

So, how can we explain a drop in domestic intermodal loads of 7.7 percent occurring even while truckloads were growing 2.4 percent? Some of the differential might simply be termed “a return to normal.” Intermodal benefited from the ultra-tight truck conditions last year.  

Gross Transportation Consulting utilizes Intermodal Association of North America (IANA) ETSO intermodal data and Transport Futures trucking data to determine quarterly intermodal market share. Intermodal share generated by movements of domestic intermodal equipment (domestic containers and trailers) moved up 0.3 percent from 6.8 percent to 7.1 percent from Q4 2018 to Q1 2019 as the electronic logging device (ELD) mandate kicked in. That elevated market share was maintained in Q2. But then, as trucking conditions began to normalize, some of that opportunistic volume inevitably migrated back to the highway. This could explain why share might have slipped back to pre-ELD levels. But domestic intermodal market share has now declined to just 6.5 percent in the most recent quarter, considerably lower than it was prior to the ELD mandate.

There are several possible explanations, each probably holding a grain or two of truth. We can probably eliminate one potential issue — service. While still problematic, intermodal service is generally certainly no worse than last year. Moreover, recent quarterly financial reports by big publicly traded intermodal carriers have highlighted greatly improved levels of rail on-time performance.

Pricing, PSR key factors

Pricing appears to be one contributor. The railroads have been reluctant to follow the softening prices in the longhaul market. Pricing discipline is a good thing, but when you represent less than 7 percent of a market your ability to affect overall pricing is very limited. The railroads’ current focus is on profitability, not volume. Load counts may be down, but railroad financial performance did not suffer in the second quarter. Indeed, many reporting railroads achieved record financial results.

Restructuring related to precision scheduled railroading (PSR) is also likely contributing to the downturn. Routes and services are being eliminated and terminals shuttered in the name of simplification and operational streamlining. In the long run, this may well boost intermodal quality and lead to share gains, but in the short run, some volume has literally been told to “hit the road” as the intermodal network has pared back on direct connections between secondary terminals.

Ground zero for the problem is the rail-owned domestic container fleet. These units comprise about a third of the US dry domestic container fleet, with the other two-thirds being owned by private intermodal fleets such as J.B. Hunt, Hub Group, Schneider, UPS, and so forth. Revenue movements in private domestic boxes were down 2.7 percent year over year in the second quarter, while volume in rail boxes declined by a stunning 14.4 percent. The rail boxes, just one-third of the fleet, accounted for over 70 percent of the lost domestic container volume.

We could be seeing a share shift away from the rail box fleet and their small intermodal marketing company (IMC) and trucker customers and towards the asset-owning integrated intermodal carriers. A possible contributor is the changes that are being made in the name of PSR with wholesale reductions of steel-wheel transfer options across Chicago. Integrated carriers that provide their own drayage capabilities are better positioned than small players to provide the necessary rubber-tire crosstowns while minimizing the cost and disruption to the user. 

Alternatively, private users may have been somewhat more effective at gaining rate modifications from the railroads than the small IMCs. Or perhaps the intricate system that has ensured the smooth flow of rail boxes between railroads is having difficulty accommodating all the changes that are occurring in rapid succession.

Share shift between private and rail providers would account for the growth disparity but that wouldn’t account for the overall loss of domestic intermodal market share. Intermodal cannot expect to be rescued by the market. Freight growth generally slows toward the end of an economic expansion as the focus shifts from goods to services and that appears likely going forward, particularly given the multiple economic headwinds that are being generated by the trade wars, rising economic uncertainty, and dwindling industrial investment.

Intermodal volume should imminently begin to ramp up seasonally towards autumn peak. But that should not be mistaken for a bounce-back. At the moment, we are simply looking for stabilization in the intermodal market with volumes beginning to once again move in parallel with longhaul truck trends. It is unlikely, however, that we will see intermodal gains in the second half of the year that would be sufficient to offset the losses experienced thus far.

Larry Gross is president and founder of Gross Transportation Consulting. Contact him at lgross@intermodalindepth.com.