US intermodal poised for a rebound?

US intermodal poised for a rebound?

Trucks transitioning from automatic onboard recording devices (AOBRDs) to electronic logging devices (ELDs) could remove up to 40 percent of existing capacity, particularly in the long-haul sector, which could auger well for intermodal. Photo credit:

Fifty years ago, Led Zeppelin’s debut album opened with a track that contained the simple declaration, “Good times, bad times; you know I’ve had my share.” Despite the song’s popularity and the simplicity of its message, it is believed to have been played only once in concert, during the band’s 2007 reunion. Afterward, bassist John Paul Jones explained, “That’s the hardest riff I ever wrote, the hardest to play.”

This sentiment resonates with those of us in the United States intermodal industry, a sector that is relatively simple in concept, but incredibly complex in practice. As the Intermodal Association of North America’s (IANA) annual Intermodal Expo convenes in Long Beach, California, in mid-September, the industry is coming off a four-year period in which a series of good times and bad times were marked by historic year-to-year swings. The market is currently amid a down cycle after volumes and rates surged in late 2017 and early 2018, but there are opportunities for railroads to accelerate the potential rebound if they can take advantage.

Intermodal rail freight serves as a substitute product for truckload transportation, so the two markets frequently move in tandem. Both did well from the fourth quarter of 2017 through the second quarter of 2018, when trucking capacity tightened due to a federally mandated switch to electronic logging devices (ELDs) that went into effect Dec. 16, 2017. During this period, the allowable daily hours — and miles — that drivers could legally operate a truck were frequently less than the amount they were actually driving, and the new regulations reduced capacity by as much as 40 percent, according to estimates.

Post-ELD implementation, driver retention suffered, and carriers were forced to pay a higher rate per-mile to keep drivers revenue-neutral on a lower, but legal mileage base. Shipping rates increased accordingly. Although customers complained about the increased rates, carrier margins did not increase overall; the cost of higher driver compensation was simply passed through to customers.

According to the American Transportation Research Institute (ATRI) Annual Operational Costs of Trucking study, although fuel costs also increased slightly, driver wages and benefits rose much more sharply and created a rate floor mandated by the new driver reality.

The Council of Supply Chain Management Professionals’ 30th Annual State of Logistics Report, authored by management consulting firm A.T. Kearney, quantifies the impact of the increase in driver expenses on carriers. US business logistics costs rose 11.45 percent in 2018 to consume 8 percent of the nation’s $20.5 trillion gross domestic product (GDP), according to the report, which also notes that shippers struggled to secure capacity. Customers who had replaced asset-based carriers with third-party logistics providers (3PLs) and brokers in their bids found themselves with “paper” rates that were incapable of actually getting cargo moved.

Disadvantaged shippers committed to changing their ways, and they did, at least in the short term. By the beginning of 2019, however, cargo owners had returned to playing the spot market. Even though carriers stated that they could not afford to cut driver wages, low rates and plentiful truck capacity were suddenly available everywhere.

The ATRI analysis is based on costs accrued over time in a variable enterprise. However, small carriers — those in which the owner is probably also a driver — are often focused on the present. As a result, pricing is often on a hand-to-mouth cash basis. Some costs — tires or engine maintenance, for example — may be notional and thereby excluded from “short-term” costing. Some owners will reduce their expected earnings in order to maintain business. This “skeleton” cost model can be less than half of the ongoing costs.

This creates a dilemma for intermodal shippers in these markets. Although the cost per-mile of rail is frequently lower than that of trucking, it cannot compete with carriers utilizing marginal cash costs. Limits are more severe because most intermodal costs are cash, not accrued. Railroads get paid in cash, draymen get paid in cash, and even equipment procurement has a certain cash component. 

Mixed signals

While there are some positive omens for intermodal, shippers should keep the following in mind.

Rail service has improved significantly since earlier this year, when harsh winter weather and challenges related to railroads CSX Transportation and Union Pacific Railway converting to a precision scheduled railroading (PSR) model caused service levels to deteriorate. While customers might complain about poor truckload service from a specific carrier, when intermodal service suffers, shippers often condemn the mode universally, rather than individual providers.

Railroads may seek to replace the profits from reduced coal and grain volumes with intermodal price increases. Alternatively, they might seek margin-enhancing cost reduction strategies.

As market conditions continue to fluctuate, railroads need to develop more sophisticated pricing strategies by which intermodal can retain volumes during periods of high truck competition.

Railroads currently seem to employ a “rush to the bottom” procurement strategy with terminal operators, risking terminal and network disruption. They will need either to reach accommodations with these key vendors or to accelerate in-sourcing.

Import cargo has been dislocated due to China trade issues. This traffic is the backbone of both international and domestic eastbound volume. Without it, the intermodal networks will deteriorate as train starts are reduced. Equipment investment has also been deferred due to US import tariffs on Chinese goods. Equipment expansion and replacement — especially for chassis — is necessary to support continued growth.

As trailer users convert to domestic containers, their inexperience may cause terminal and equipment disruptions throughout the network. It will be important to watch their learning curve.

Perhaps the greatest potential unknown, however, is whether railroads will begin to deal directly with major shippers such as retail giants Walmart and Amazon. Railroads’ commitment not to sell directly to shippers has been foundational to intermodal marketing for the past 40 years. Such a change, while seemingly simple, would set off a complex chain of events that could ultimately unravel the industry’s food chain.

A changing landscape

On Dec. 16, 2019, the two-year exemption granted to motor carriers using automatic onboard recording devices (AOBRDs) expires, meaning those devices must be replaced with ELDs. There are numerous differences between the devices, but the primary difference is that ELDs are much more intrusive and difficult to evade, which means the exemption two years ago only served to defer, not circumvent, the expected contraction in capacity.

Despite a lack of complete quantitative data, industry consensus is that a significant number of carriers still employ AOBRDs. Some place the number as high as 50 percent, and many of these operators are still violating hours-of-service regulations.

Within the truckload market, over 80 percent of the moves are less than 500 miles. The long-haul sector, which has a high proportion of owner-operators in small fleets, may be asymmetrically affected by the regulations. Depending on the percentage of the total US truck fleet currently using AOBRDs, the transition to ELDs could remove up to 40 percent of existing capacity. This could auger well for intermodal, as long-haul lanes will likely experience more acute driver shortages and rate increases than other truckload sectors.

Although press coverage of the looming driver shortage has diminished recently, the underlying issues remain. Bob Costello, chief economist for the American Trucking Association (ATA), says the driver shortage could reach an all-time high at the end of 2018. “If conditions don’t change substantively, our industry could be short just over 50,000 drivers in five years and 100,000 drivers in 2028,” Costello said in a recent ATA report. At the same time, truck driver employment is also at record levels, according to the US Census Bureau.

Trucking faces future economic challenges beyond the driver shortage, any or all of which could contribute to a resurgent competitive advantage for intermodal.

Leaving traditional economic and geopolitical factors aside for the moment, the price of diesel fuel is expected to increase by upwards of $0.20 to $0.50 per gallon due to the International Maritime Organization’s (IMO) 2020 low-sulfur fuel rules. The IMO has mandated that traditional heavy bunker fuel only be used on seagoing vessels with extensive exhaust-scrubbing devices. The alternatives to scrubbers are to switch from traditional bunker fuel to ultra-low sulfur diesel or an alternative fuel, such as liquefied natural gas (LNG).

The US Senate is once again considering mandating speed governors on commercial trucks, a move that would reduce the ability to maximize the number of miles a driver can cover within the federal hours of service by speeding. Data from the Federal Motor Carrier Safety Administration (FMCSA) highlighted an increase in speeding tickets after the ELD mandate went into effect. As such, a reduction in daily allowable mileage would likely drive another increase in driver pay.

Insurance costs are skyrocketing in the wake of “nuclear” court verdicts. Motor carrier Werner Enterprises, for example, was hit with an $89 million judgment last year stemming from a fatal accident in 2014. Underwriters are more cautious about granting higher liability limits. Insurance companies are also increasing the scope and frequency of carrier driver audits and refusing to cover drivers perceived as higher risk.

Carriers, especially smaller ones, are experiencing liquidity problems from reduced access to credit. While this is not as dire as the post-2008 “credit crunch,” it represents a dramatic turnaround from previously easy-to-obtain credit. Customers requiring extended payment terms can become an existential problem for carriers unable to access sufficient cash to maintain operations.

The nation’s deteriorating infrastructure requires immediate attention, not to mention a plan to fund it. Although it’s possible Congress will find another way, the most likely scenario is to raise fuel taxes. Efforts to combat climate change could also raise fuel costs.

Despite recent bad news, the long-term trends for intermodal have been positive for 40 years, and opportunities for growth are still immense. The top four challenges for trucking in ATRI’s industry concern index — the driver shortage, hours-of-service regulations, driver retention, and the ELD mandate — are all issues intermodal can overcome. Cooperation is certainly a huge part of the recipe for success, and it’s an ingredient we can control. 

Theodore Prince is chief operating officer and co-founder of Tiger Cool Express, a refrigerated intermodal provider. Contact him at