Analysis: Signs point to capacity crunch in domestic containers

Analysis: Signs point to capacity crunch in domestic containers

Buried in the generally favorable intermodal numbers for September from the Intermodal Association of North America was an attention-getter: revenue moves occurring in domestic containers came in only 0.7 percent ahead of the prior year. The gain pales in comparison with more than 12 percent growth for trailer-on-flat-car (TOFC) 53-foot trailers and reported American Trucking Associations truck tonnage gains of 7.2 percent for the month.

With preliminary estimates for third-quarter GDP growth of 3 percent, third-quarter domestic container growth of 3.8 percent does not feel very impressive. Although this could suggest bumping into a capacity limit, at first glance, this seems incorrect. Domestic container volume was down 6 percent in September from August. 

 

 

Gross Transportation Consulting has recently developed an analysis that looks at activity per working day, and this sheds some light on what happened in September if the fleet had sufficient capacity to handle the August volume. The analysis looks at weekend and holiday timing effects. It turns out that August had 22.6 workdays and September only 20.8, a difference of 8 percent. Domestic container volume for August was 684,000 revenue moves, yielding 30,294 revenue moves per working day. Spreading September’s domestic container volume of 40,000 revenue moves over 20.8 working days gets a volume per working day of 30,766, an increase of 472 moves per day (about 1.6 percent). In fact, looking at the last 12 months, September’s activity level is just about even with the peak achieved in November 2016.

Yet things did not feel very tight last year during peak. A prime suspect for what has changed is equipment velocity, which has definitely slowed. Based on Surface Transportation Board service statistics, most recently, intermodal trains were operating at an average speed 3.4 percent below that achieved this time last year. Assuming that the average container spends about one-third of its life on the rail, this would translate into a loss of productivity of at least 1.2 percent or more for the fleet.

Add to this the additional time consumed grounding today’s monster 12,000-foot intermodal trains once they do arrive at the terminal. Additionally, September equipment productivity was likely adversely impacted by hurricane-related disruptions. These will not persist, so at least some improvement appears likely for October. The total impact in September was likely a reduction in asset velocity of 3 percent.

Meanwhile, there has been limited investment in new equipment this year. Although Gross Transportation Consulting has not yet performed its annual fleet survey (conducted at year-end in conjunction with Drayage.com), based on channel checks, it does not think the fleet has grown by more than 1.5 to 2 percent since the end of last year.

Based on this “back-of-the-envelope” analysis, the capacity of the domestic container fleet was slightly lower this year than during the peak month of November last year. The question then becomes how big the capacity surplus was last November and whether the industry has now run out of cushion during the 2017 peak season. It will be unclear until October’s data are received in a few weeks, but it certainly is possible. Recent channel checks with various intermodal providers indicate that during October they were “fully booked.”

Regarding the balance of 2017 and early 2018, from the robust growth figures, 53-foot TOFC appears to be operating as a safety valve, and this is expected that to continue for the immediate future. There is very limited ability to add near-term domestic container capacity. Most domestic containers are sourced from China, so even if orders were placed in late summer, the new boxes would not arrive in time for the autumn peak.

Additionally, the ships are already full of holiday freight, so the ability to transport the new boxes would be questionable in any event.

But the railroads may well improve their speeds over the road and in the terminal, boosting equipment productivity. The hurricane disruptions present in September will not be in the October figures. Perhaps the surplus in units from the beginning of the year was, in fact, larger than the September performance would infer.

The bottom line is that if the industry is not actually bumping into the ceiling, then it is perilously close to doing so. It appears very possible that in the near term, domestic container fleet capacity will be exerting a downward effect on domestic intermodal numbers, and some potential volume could be left on the highway.

On the other hand, very tight conditions are giving intermodal providers the leverage they need to raise rates, and the evidence is coming in that they are making use of the opportunity.

Finally, intermodal providers will need to invest in expanding the fleet in early 2018 in order to properly position intermodal for the market demand that will stem from electronic logging device implementation and tight truck capacity.

Lawrence J. Gross is president of Gross Transportation Consulting in Mahwah, New Jersey. A veteran with 34 years in the transportation business, he covers freight transportation, concentrating on the intermodal and trucking sectors from a transportation and equipment perspective. Contact him at ljgross@optonline.net and follow him on Twitter: @intermodalist.