US imports, truck rates propel intermodal rail volume, pricing

US imports, truck rates propel intermodal rail volume, pricing

US surface transportation rates are rising across the board.
Photo credit: Shutterstock

Intermodal rail is on a faster growth track as the economy expands, imports flow into the United States, and truck rates rise.

Total intermodal rail volume jumped 6.3 percent year over year in the third quarter, driven by an 8.2 percent increase in international volume and a 3.8 percent expansion in domestic intermodal freight, according to the Intermodal Association of North America (IANA).

Trailer-on-flatcar (TOFC) loads climbed 8.4 percent from the third quarter a year ago, said IANA, which released its Intermodal Market Trends & Statistics report Wednesday. “This quarter’s results show a continued recovery for all three intermodal segments, marking three consecutive quarters of growth, a first in six years,” said Joni Casey, president and CEO of IANA.

The growth in intermodal rail in the third quarter follows a surge in US imports. In August, US containerized imports rose 5.6 percent year over year, setting a new monthly record, according to the Global Port Tracker report from the National Retail Federation and Hackett Associates. Near-record imports are projected for October.

As volumes rise, so does intermodal pricing. “Pricing momentum finally appears to be accelerating,” Cass Information Systems said Tuesday. The Cass Intermodal Pricing Index rose 4 percent in September, the 12th consecutive monthly increase for the index, which includes base rates and fuel surcharges. Higher fuel costs helped boost the index, Cass said.

“In my career this is one of the quickest turnarounds I've seen from when we were in a very negative pricing environment to one in which there's a lot more demand and a lot less capacity,” David Yeager, CEO of intermodal marketing company Hub Group, told Wall Street analysts during an Oct. 26 earnings call. Hub’s intermodal revenue rose 2 percent in the quarter.

Hub’s intermodal volume is accelerating, rising 5 percent in the first weeks of October, Yeager said. “It's our goal to take advantage of this pricing environment quickly and expediently, particularly with those clients whose business does not have an adequate return,” he said during the earnings call, transcribed by Seeking Alpha. Hub is reviewing pricing for transactional and contractual customers and repricing business.

An increase in pricing was reflected in Union Pacific Railroad's third-quarter results as well. Intermodal volumes were flat year over year at UP in the quarter, but intermodal revenue rose 3 percent. "We do believe that the intermodal market, and possibly even conversion into boxcar off the highway is a big opportunity for us," Elizabeth F. Whited, executive vice president and chief marketing officer at UP, said in an Oct. 26 earnings call.

"If truck capacity remains tight and maybe even tightens with ELDs [electronic logging devices], certainly we would hope to see some opportunity to address pricing" in freight bids next spring, she said.

On the spot market, US intermodal rates hit three-year highs in October, according to InTek Freight & Logistics, rising 23.9 percent on average over the previous three months and 16.5 percent year over year. InTek Freight & Logistics’ west to east average domestic intermodal rate jumped 11.7 percent year over year in the week ending Oct. 23 and was up 8.3 percent from Aug. 21.

The recovery in intermodal demand rolled on in October, which the Association of American Railroads dubbed the "best month in history" for intermodal volumes. US weekly intermodal volume rose 3.7 percent year over year in the week ending Oct. 28, after hitting an all-time high in the week ending Oct. 21, rising 5.6 percent year over year to 291,046 containers and trailers. That followed a 5.5 percent increase the previous week, and a 10.8 percent surge in the week that ended Oct. 7.

The biggest drivers in intermodal growth appear to be sustained economic expansion and an increase in truck pricing as over-the-road capacity gets tighter. US real GDP rose 3 percent in the third quarter, according to the first estimate from the US Bureau of Economic Analysis, about half a percentage point higher than most economists expected.

The solid third quarter followed a 3.1 percent GDP gain in the second quarter. That made the two mid-year quarters of 2017 the best consecutive quarters of growth since 2014. Truckload pricing is accelerating, having increased for the past six months after 13 consecutive months of negative year-over-year comparisons, according to Cass Information Systems.

“The pricing environment for our truckload services strengthened throughout the 2017 third quarter,” Jim Gattoni, president and CEO of truckload carrier Landstar System, said Oct. 25. Tighter truckload capacity, especially following hurricanes Harvey and Irma in September, combined with stronger demand to push over-the-road pricing up more rapidly.

The immediate impact of the hurricanes, which snarled supply chains far from the US Gulf Coast and Southeast, had dissipated by late October, but truckload and less-than-truckload (LTL) demand remained elevated on a year-over-year basis, keeping pressure on capacity and pricing. The upcoming electronic logging mandate is expected to add to that pressure.

Online shopping may also be contributing to the growth in intermodal shipping. The 8.4 percent increase in TOFC shipments noted by IANA may in part be driven by a strong increase in 28-foot intermodal trailer volumes. Those 28-foot pups enable LTL carriers and shippers to build direct loads, eliminating intermediate handling, and moving smaller shipments to end consumers faster. 

"The growth in the movements of shorter trailers via intermodal can be regarded as a barometer of the increasing importance of e-commerce," Lawrence J. Gross, president of Gross Transportation Consulting, said in a recent commentary published by JOC.com.

Barring an economic downturn, shippers could be facing a prolonged period of higher truck and intermodal pricing. “Due to the strong freight demand, capacity constraints, a severe labor shortage, and the mandated introduction of ELDs, we believe that this pricing cycle will be strong in 2018 and will likely extend through 2019,” Yeager said.

Contact William B. Cassidy at bill.cassidy@ihsmarkit.com and follow him on Twitter: @wbcassidy_joc.