Will domestic intermodal contract pricing hold?

Will domestic intermodal contract pricing hold?

While domestic intermodal providers such as J.B. Hunt and Hub Group say contract rates were up high single digits, other providers argue there was lost business in the first quarter because pricing was too aggressive given the truckload market. Photo credit: Shutterstock.com.

Shippers paid more for domestic intermodal service in the early 2019 contract season, but some logistics providers indicate the strength of pricing isn’t as rosy as portrayed.

Although BNSF Railway, CSX Transportation, and Norfolk Southern Railway provided optimistic rate outlooks in quarterly financials and earnings calls with analysts, some intermodal marketing companies (IMCs) say they lost business to truckload due to overly aggressive pricing by railroads in January and February.

IMCs, independent sales agents of intermodal service, were directed to charge shippers high single-digit rate increases this winter, but some shippers resisted as truckload capacity became more abundant and rates continued to fall. Railroads confirmed the high single-digit narrative in earnings calls, but this comes as truckload spot rates plummeted more than 20 percent year over year in April, according to DAT Solutions and Truckstop.com.

International container business is largely unaffected by the annual fluctuations because railroads negotiate with ocean carriers, which may or may not appear in quotes, and converting a 20- or 40-foot container to a 53-foot trailer isn’t as seamless as domestic boxes.

The strong domestic intermodal pricing strategy comes from a mixture of quarterly earnings, analyst calls, and conversations with IMCs, many of whom spoke on the condition of anonymity. BNSF reported first-quarter intermodal volume — international and domestic combined — fell 6 percent, but revenue rose 8 percent thanks to a 14 percent increase in revenue per container/trailer on flatcar. NS intermodal volume only grew 2 percent, but revenue per unit rose 4 percent to boost top-line results. Revenue per intermodal car was flat for CSX and Union Pacific, but IMCs indicate both are pushing hard on rates as part of their precision scheduled railroading operating model.

Alan Shaw, NS executive vice president, said that intermodal rates have risen for six consecutive quarters.

“We're pleased with the progress of rate increases that we're seeing as we're going through bid season right now,” he said on an Apr. 24 earnings call.

CSX CEO Jim Foote declined to comment specifically on intermodal, but he emphasized that shippers will pay a premium for best-in-class service. Merchandise represents more than 62 percent of CSX’s revenue, while intermodal is only 15 percent.

“We’re going to consistently get price increases. It’s just plain and simple. We don’t view it as this versus that segment of the business. We don’t view any of our business as a commodity that’s just out there trading around based upon who has got the lowest price in town,” Foote said on an Apr. 15 earnings call.

IMCs have differing views

Pricing can differ somewhat between asset-owning IMCs, which have their own containers, and non-asset-based IMCs.

J.B. Hunt Transportation Services, which owns its containers, said intermodal contract rates were up high single digits in the first third of bids, “less than high-single digits” in the second wave of bids, but wouldn’t comment on rates for the final group of shippers.

“The East Coast railroads know that they need to be market relevant and I think that they will understand what’s going on in the truck market and they will make sure that their providers are market relevant in accordance with that,” Terrence Matthews, J.B. Hunt executive vice president of intermodal, said on an April 15 call.

Hub Group CEO Dave Yeager agreed intermodal contract rates are up in the high single-digit range, as did Schneider National CEO Mark Rourke.

“It's still high single-digits and we're now up over 50 percent of our overall bid business for the year,” Yeager said on an April 30 earnings call. “We'll see how it unfolds, but I would say minimally we expect mid-single digit increases for the year.”

However, this is a very different narrative from what non-asset IMCs told JOC.com.

Rick LaGore, CEO of InTek Frieght and Logistics, said railroads pushed too aggressively on contract rates this winter, seemingly unaware or unconcerned with the softening truckload market, making his job harder.

“The railroads were asking for 6, 8, even 10 percent contract increases and we were telling them, ‘No, we can’t win any business this way,’” he told JOC.com. “We lost some business in the beginning of this year because railroads wouldn’t budget on the rates, saying, ‘This is the way it’s going to be.’ At this point, I think the rails would love to have an opportunity at this freight once again, but it’s too late. It’s gone.”

He said one railroad has softened its stance since January but declined to specify which one.

Three other non-asset-based IMCs confirmed LaGore’s experience was consistent with their own in January and February.

One told JOC.com that it rarely competes directly against J.B. Hunt anymore, focusing instead on retaining current customers or finding new opportunities in markets where the Lowell, Arkansas-based giant doesn’t have a strong presence.

The question is how long J.B. Hunt, Schneider, and Hub can fend off the pricing concerns of their non-asset competitors. If domestic intermodal volume continues to recede, as it did in the first quarter, eventually pricing will catch up. As transportation economist Donald Broughton notes, “volume leads pricing,” so unless domestic intermodal volume can rebound quickly, it will become difficult to stem the tide of conversion back to truckload.

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