Experts See Bright Spot in Domestic Intermodal

This story appears in the Sept. 7 print edition of Transport Topics.

Domestic intermodal continues to be a relatively strong performer and an attractive alternative for motor carriers today in weak freight markets, said an industry official and two analysts.

“We do think there is tremendous opportunity, even in the market today,” George Duggan, vice president of domestic intermodal for BNSF Railway, told Transport Topics on Sept. 2. “The biggest opportunity is in conversion of over-the-road service. We understand truckers’ needs. We try to come up with an innovative situation that works for them.”

BNSF’s domestic intermodal volume fell 12% in the first half of this year after increasing by about 3% from 2007 to 2008, when more than 2.2 million loads were carried.

In the first half of 2009, total domestic intermodal traffic at major railroads fell 8.2%, according to the Intermodal Association of North America, while international traffic slumped 24.4%.

“We are perhaps seeing some initial signs of [economic] im-provement,” said Larry Gross, president of Gross Transportation Consulting and a former intermodal industry executive. “The most likely scenario is for a slow upward climb. There is quite a long way to go to recover.”

The struggles for intermodal are part of a larger decline in rail traffic that has trailed 2008 levels all year.

Declining shipments of coal, the second-biggest freight group after intermodal, are a key factor, Gross said. That volume has been declining because utilities have reduced stockpiles, steel production has dropped and a cool summer in portions of the United States has reduced demand for electricity from coal-fired plants.

However, overall rail traffic has increased for six consecutive weeks since early July, following a similar pattern as past years.

Credit Suisse analyst Chris Ceraso said in an Aug. 31 note to investors the recent trend “suggests that the worst of the year-over-year declines are behind us.”

Dahlman Rose analyst Jason Seidl went farther, saying it was possible weekly rail traffic could top 2008 later this year.

“Railroad volume [in the second half] will look stronger than the first half,” he told TT. “Are we declaring victory against the economic malaise yet? No.”

Shipments could rise because of a strong, high-quality grain harvest, more export coal shipments to China and a rise in auto manufacturing that would boost steel production and shipments, he said.

“If we have that pickup on those items, we can start turning positive for a few weeks before the end of the year,” said Seidl, who noted that comparing rail traffic levels next year to 2009 levels needs to be kept in perspective because this year’s freight volumes have been so low.

Gross said he believes intermodal is gaining market share from over-the-road moves because intermodal prices remain lower than truck charges.

He was hesitant to generalize about how much lower truck rates have fallen relative to intermodal. Typically, he said, intermodal is 10% to 15% less expensive than truckload for longhaul service.

“The rate pressure on the motor carrier side is intense,” Gross said. When operating ratios are at 98, 99 or 100, that means the rate environment for motor carriers is very vicious. People are chasing freight — carriers are looking to cut rates and gain [market] share.”

Seidl disputed Gross’ view.

“Domestic intermodal growth will continue to be limited by truckload pricing,” Seidl said, because smaller fleets are pricing below cost to generate cash and stay in business.

“You are going to see railroads losing some business back to the highway, but that can’t last forever,” Seidl said. “The pricing for intermodal will continue on the negative side as long as the supply/demand equation remains out of balance.”

Seidl said that he expects the supply/demand situation will last at least into the first half of next year.

“The market has really experienced some downward price pressure, primarily from over-the-road this year,” Duggan said. “Nothing has changed recently. It has been pretty difficult for all the trucking companies. The challenges of fuel prices, the driver situation and highway congestion still make the long-term situation favorable for domestic intermodal.”

BNSF, which achieved 96% on-time service for domestic intermodal in July, has upgraded service this year by including container traffic on its expedited trains that formerly handled only trailers.

That change allows BNSF to boost its appeal for the domestic container business that is growing while trailers decline.

Charles McSwain, assistant vice president of regional development for CSX, said he saw other bright spots for rail traffic.

“We think there is going to be a resurgence in U.S. manufacturing,” he said as the economic recovery occurs, driven by greater demand for products such as aggregates for building projects and components for alternative energy, such as solar power.

Another positive sign, he said, was increased interest from companies in locating new plants on rail lines.