The Hub Group said U.S. intermodal rail service deteriorated further in the fourth quarter from the prior quarter, but it’s now seeing improvement and service could start approaching levels last seen in mid-2013, before last year’s harsh winter, as soon as this summer.
The second-largest U.S. intermodal marketing company warned, however, that it does not expect full restoration of service levels this year, even though it expects significant improvement in the second half. Despite the persistent service issues, Hub expects intermodal volume to rise 3 to 7 percent this year and that it will succeed in securing higher rates from shippers, just as it has for the past eight quarters.
“Like the rest of the industry we continued to be challenged with rail services issue throughout the fourth quarter,” Hub CEO David Yeager told investors on Thursday during a fourth-quarter earnings call, in which the company reported a 1 percent drop in profit to roughly $16.4 million. “The service challenges created significant inefficiencies through our intermodal network.”
Hub said overall U.S. intermodal service hit a low in November and began recovering the following month. The company doesn’t forecast sizable improvements to its equipment utilization until the second half of this year, coinciding with its expectations for a sizeable uptick in overall intermodal rail service levels.
The poor rail service pulled down Hub’s intermodal volume by 4 percent in the last three months of the year compared to the same period in 2013. Intermodal revenue in the same period slipped 1 percent to $465 million in the same period. Intermodal business accounted for half of the company total revenue, with the rest coming from truck brokerage and third-party logistics.
Hub saw the sharpest decline in intermodal traffic in the eastern lanes served by CSX Transportation and Norfolk Southern Railway, with volume falling 8 percent year-over-year. Transcontinental volume decreased 6 percent while western volume inched up 1 percent.
Hub was forced to pay higher drayage costs to maintain its on-time performance at 90 percent, as the railroads were only delivering one in four loads on-time, said Mark Yeager, president and chief operating officer. The company also had to shell out more to secure drayage capacity, as slightly less than half of southern California drivers balked at becoming company drivers through Hub’s new model.
The company converted its owner-operator model into one solely relying on company drivers because of litigation fears over alleged misclassification of drivers’ employment status. The shortage of drayage capacity serving the Los Angeles-Long Beach port complex was so dire that Hub flew 60 drivers out to the region in February. Those drivers, who the company incurred extra costs for putting them up in hotels, flew back in November.
The impact of poor rail service can been seen in the dramatic decrease in Hub’s equipment utilization in the fourth quarter. The time it takes for hub to deploy a domestic container and then get it back to use again for another load was 15.6 days in the last three months of the year, 1.6 days longer than in the fourth quarter of 2013. That metric, called equipment utilization, 1 day longer at 14.5 days in 2014 compared to 2013.
The company’s addition of satellite tracking devices to its 53-foot containers is aimed at helping boost utilization, but Hub said it doesn’t expect to see significant improvement until more devices are deployed. The company put trackers on about 8 percent of its 28,300-strong container fleet in 2014 and expects to have 80 percent of its fleet deployed with the devices by the end of year. The remaining devices will go online in early 2016. The company plans to add another 1,000 containers to its fleet this year.