US intermodal rail regains pricing edge against trucking

US intermodal rail regains pricing edge against trucking

Despite dwindling volumes, a small rebound in truckload rates since May has opened up some savings through spot intermodal unavailable one year ago at this time. Photo credit: Wikicommons.

Although intermodal volumes dropped nearly 4.6 percent year over year in the third quarter, data shows there’s a glimmer of hope for shippers who can save more money on rail than earlier this year.

Spot intermodal rates are now about 10 to 15 cents per mile cheaper than truck, according to an unweighted average of 115 competitive lanes, due to a rebound in the truck market. By comparison, spot intermodal rates were more expensive than truck in these lanes in October 2018 and identical to truck as late as May 2019.

Contract intermodal rates, which represents a vast majority of container movements, are also widening from about a 12.5 percent savings earlier this year to 15 percent, according to the proprietary JOC Domestic Intermodal Savings Index (ISI).

Both spot and contract intermodal savings remain less than historical norms, but a small seasonal bump in truckload spot rates has presented pricing opportunities for rail shippers.

It’s an opening for railroads to grow business despite limping through this year after hitting an all-time volume record of 19 million loads in 2018. The Class I railroads moved nearly 4.8 million containers and trailers in the third quarter, down from 5 million in the year-ago period, according to the Association of American Railroads (AAR). Every US railroad finished the summer with less volume than a year ago for the second consecutive quarter. Intermodal volume fell 3.6 percent in the first nine months of 2019 versus a year ago, according to AAR. Domestic intermodal volume was down 8.1 percent, while international volume fell 1.9 percent on a year-over-year basis between June and August, according to the Intermodal Association of North America (IANA).

AAR data shows faster intermodal train speeds and lower rail dwell times than a year ago, but a shipper survey from Cowen Inc. revealed lower grades on rail service on a sequential and year-over-year basis.

Railroads, for now, will have to hope the AAR service metrics continue to head in a positive direction and the pricing gap with truck begins to widen.

It’s more about trucking than intermodal

Shippers can start to find some intermodal savings once again because truckload spot rates are growing while rail rates remain stagnant. 

While truckload spot rates are more than 10 percent lower than a year ago, the picture is less bleak than it was in May. The divergence shows in an analysis of 115 modal competitive lanes.

The unweighted average all-in shipper spot rate was $1.59 per mile in both modes in April and May 2019.  Since then, the unweighted truckload rate has climbed to $1.75 per mile while the intermodal rate slipped to $1.57 per mile (through September). While both rates are lower than September 2018, the upward trajectory of truckload rates since May versus a stagnant spot intermodal market has created an opening for shippers. 

The JOC Spot ISI during this period has risen to approximately 113 on a rolling three-month average.

The Los Angeles to Chicago lane, one of the busiest in the United States, is a prime example of the shift.

In April and May, the rolling 12-month JOC Spot ISI value was 100 — rates on the two modes were identical. The JOC Contract ISI and conversations with intermodal marketing companies reveal the contract value was also around 100 in January when shippers signed annual service contracts. 

By the end of last month, the rolling 12-month spot ISI was 109.5 (for a 9.5 percent intermodal savings) and the three-month contract ISI was 112.5 (a 12.5 percent intermodal savings). An increase of approximately 10 cents per mile in spot truckload rates drove the shift during this period.

What does it mean for 2020?

There is a pricing opportunity for the rails if truckload spot rates continue to climb in the fourth quarter. 

The JOC Spot ISI three-month average of 113 is close to the historical norm of 114 to 115 (14 to 15 percent intermodal savings), but the Contract ISI will be a definitive number given how little spot volume is tendered to the rails, based on anecdotal evidence. The three-month average of roughly 114.5 means the Contract ISI and Spot ISI are very close, and the Contract ISI is also quite low compared with an index value of approximately 125 one year ago. 

As shippers calculate 2020 transportation budgets, there are a few key questions to consider. One, how much savings are necessary to place freight on the rails, and is 13 to 15 percent enough? Two, if there is very little to no gap between spot and contract intermodal rates, why would a shipper lock into a 12-month agreement with volume commitments? Finally, to what extent do Class I railroads pay attention to truck rates when pricing their services in a competitive manner?

Contact Ari Ashe at ari.ashe@ihsmarkit.com and follow him on Twitter: @arijashe.