The Hub Group expects intermodal rail service to keep improving throughout the year but doesn’t expect a return to mid-2013 service levels until at least 2016.
Still, the company is emboldened by the sharpest price gains for its domestic intermodal services in three years. The positive pricing outlook helped dull the pain of equipment imbalances and rail service delays caused by West Coast port congestion that exacerbated already below-par rail service in the first quarter, David Yeager, CEO and chairman, told investors Thursday evening. Hub heavily uses the networks of Union Pacific Railroad and Norfolk Southern Railway.
Poor rail service cost the second-largest U.S. domestic intermodal marketing company volume, pulled down its container utilization, racked up storage costs and forced the company to spend more on container repositioning. But service is improving and Hub has been able to deliver on-time performance in the mid-90s, Yeager said during the company’s first quarter earnings call.
“We feel like we've got a lot of positive volume momentum and through April so far our volumes are running well,” Yeager said, according to a transcript of the earnings call provided by Seeking Alpha. “So we feel that that's kind of moving in the right direction and based on the awards that we've seen in the bids thus far we feel like we're on target to hit our forecast of 3 percent to 7 percent volume growth for the year.”
Despite the service challenges, the company has able to grow its intermodal volume in the first three months of the year by 1 percent compared to the same period a year ago. Without the port congestion, Hub estimates intermodal volume in the first quarter would have been up 3 percent compared to the same period a year ago.
The total traffic gain was minimal but still an improvement from the 4 percent volume decline Hub reported for the fourth quarter. Reduced fuel surcharges on the intermodal business pulled down the segment’s revenue 1.5 percent year-over-year to $643 million.
Hub profit in the same period fell 17 percent to nearly 10.3 million as revenue slipped 1.5 percent to $836 million. Hub blamed a 1 percent revenue decline at Unyson Logistics, it third-party logistics arm, on some customers taking their operations in-house. Revenue from Hub’s truck brokerage business rose 6 percent to $89 million in the same period. Subsidiary Mode Transportation saw its revenue rise 2 percent to $214 million.
Not only is the company optimistic about intermodal volume growth ramping up this year, but it’s also confident it will be able to secure higher intermodal rates. Hub has wrapped up about 30 percent of its customers bids.
“The good news is that the price increase this quarter was the best we've seen in three years,” Terri Pizzuto, executive vice president, chief financial officer and treasurer, told investors. Kevin Sterling, senior vice president of BB&T Capital Markets, estimated Hub was able to increase prices on average by 3 percent, according to a research note.
Although most shippers are sold on intermodal rail’s long-term advantage, Yeager noted that the fall in diesel prices has narrowed the cost advantage of rail transport compared to over-the-road trucking for some moves, particularly shorter hauls. There are still “significant savings” in using intermodal instead of over-the-road trucking, though, he said.
“The real question is can they live with the service and right now with the service issues that we're seeing it's probably preventing some people from converting business from over the road to intermodal, but almost any time we've seen a conversion back from intermodal to over the road, it's been much more service-driven than price-driven,” Yeager said.