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Commentary: Is Intermodal Rail Stalling?

FreightWaves

FreightWaves features Market Voices – a forum for voices with unique knowledge of numerous transportation/logistics/supply chain sectors, as well as other critical expertise.

As a transportation mode choice, where is intermodal rail heading? 

Author's note – this is not a financial analysis to help determine whether to buy or sell railroad stock.  This is about the evolving role of rail intermodal service in a market that is dominated by trucks, whose share of volume dwarfs rail.

Over several decades the premise was that railroad intermodal trailer on flat cars (TOFC) and containers mostly on doublestacked well cars (COFC) would grow in volume and therefore reduce highway truck congestion. 

Data courtesy of IANA and TTX. From materials presented in registered forum August 2019.

Yes, rail intermodal has grown – and at a pace mostly above the growth rate of the nation's gross domestic product. 

But the commercial message sent by the railroads has largely focused upon the financial earnings and the success of railroad company yield management using their so-called precision scheduled railroading (PSR) business model.

As one example, CSX (NYSE: CSX) proudly states that "CSX has more pricing power [now]...particularly in intermodal truck-rail business..." according to Wall Street Journal business editor Paul Page (October 2018). 

However, on a volume and market share basis, changes in CSX's origin-destination intermodal services have resulted in weakness in CSX's second-quarter intermodal volume.  The company reported a 10 percent drop year-over-year in intermodal volume. CSX also reported an 11 percent drop in intermodal revenue for the quarter.

Beyond this one eastern railroad, mid-August 2019 U.S. rail total carload and intermodal volumes were down 3.5 percent year-to-date to 16.6 million units. Of that, U.S. carloads fell 3.2 percent to 8.1 million, while U.S. intermodal units dropped 3.7 percent to 8.5 million.

Not everyone is negative about rail intermodal.  In the eastern states, Norfolk Southern (NYSE: NSC) executives remain optimistic. They stated in mid-July that Norfolk Southern's rail intermodal could see demand grow in certain service lanes during the second half of this year.

"We've got the most powerful intermodal franchise in the east, which is married to the consumption part of the U.S. economy and the economy continues to move in the direction of the consumer, and the consumer-related economic indicators are still relatively strong. We've got a diverse merchandise franchise, which offers many opportunities for growth in the second half of the year," NSC chief marketing officer Alan Shaw said during his company's second quarter earnings call on July 24.

The Norfolk Southern logic is that some of their intermodal customers (channel partners) support that second half intermodal market outlook.

Financially, as Wall Street Journal reporter Lauren Silva Laughlin wrote on August 23rd, PSR execution so far has been good for shareholders of North America's freight railroads including Canadian National, Canadian Pacific, CSX, Kansas City Southern, Norfolk Southern and Union Pacific.

Yet, here is the market share and growth ‘rub.'

Financials aside, unit volume is not growing at the rate once expected in intermodal trailers/containers.

Data courtesy of IANA and TTX from materials presented in registered forum August 2019.

The U.S. rail freight sector remains at about 10 percent or less of total surface freight by mode by shipper payments billed versus trucking and other freight modes.

The rail industry position is that rail pricing and rail freight dependability have improved greatly since the passage of the 1980 Staggers Act (which deregulated the U.S. railroad industry). There is no question of that improvement based upon the statistical evidence.

But as the old saying is, "what have you done lately?" 

The American Association of Railroads is correct that "intermodal rail has benefited rail customers with competitive rates and unmatched efficiency of scale." True, average rail rates have fallen 46 percent since 1981 — allowing most rail shippers to move nearly twice as much freight for the same price paid more than 30 years ago. However, recently railroad prices have been increasing. Some prices are increasing much faster than nominal inflation.  

Meanwhile, the hope of diverting millions of trucks annually from the congested eastern interstates and primary U.S. highways isn't quite playing out as once expected. 

Why? In large part because the average distance that most of the trucks moving between markets in the eastern states are in the 250 to 500-mile range – and are not ripe for rail conversion.

No American railroad has achieved a sustainable high margin profit intermodal service over such short distances. Moreover, the PSR model with its long trains doesn't match that geographic opportunity.

Further, the railroads still lack a rapid load-on/load-off rail car platform to capture the dominant roadway traffic we call semi-trailers. Flats, tankers and similar big rig semis just don't fit onto the very low cost per operated mile doublestacked well rail cars. 

Statistically, the movement of trailers on rail flat cars is a disappearing market segment.

A recent conference sponsored by the Intermodal Association of North America (IANA) and TTX Company gave the industry an interesting profile of where intermodal is this year. The patterns they revealed were these:

Trailer on Flat Car continues to decline as a rail intermodal service:

  • Four of the past 11 years back to 2009 saw declines in TOFC volume.
  • Two of those years saw volume drops of more than 20 percent.
  • Only two years provided a relatively high 10 percent to 11 percent increase in year-over-year growth.
  • The period 2011 to 2015 witnessed a low 1.6 percent to 2.9 percent increase, spaced between 5.3 percent and 9.7 percent declines.
  • What used to be ~3 million TOFC units more than a decade ago is now trending to ~ 1.2 million annually.

No one disputes this trailer pattern. Yet most of the traffic units out on the highways remain the semis.

Rail management doesn't have a mechanical engineering solution to grab this market. Does anyone dispute this?

In contrast, stackable containers are the dominant domestic intermodal service.

The cost per mile to move a 53-footer on a stack container car is about 40 percent to just 60 percent per mile moved of a similar trailer or container chassis moved on the road. That's the internal railroading business cost. That's not the price charged. 

The railroads have been clearly documenting in their periodic investor reports that they are using pricing leverage to increase their intermodal margin. They are getting greater earnings before interest, tax, depreciation and amortization (EBITDA) by not growing volume under the PSR model. Instead, they are increasing their prices against trucking prices in strategic lanes.

What happened to the railroads' plan to grow by taking domestic share? 

  • Domestic rail container units used to grow at a respectable 9.6 percent to as much as 14.7 percent year- over-year pace between 2009 and 2013.
  • After 2013 this growth rate dropped to about a 4.5 percent average. 
  • 2017 was up by only 2.7 percent over 2016.
  • So far in 2019 the rate is down about 6 percent.  

Because of the huge trucking base share, rail intermodal must gain at near double-digit pace to take highway share. 

International intermodal container movement patterns are a bit different:

International intermodal units have been growing year-over-year at a more stable range of about 4.5 percent to nearly 7 percent year-over-year until the trade dispute started. Now it's dropped to a mere 1.4 percent pace to-date in 2019. 

The future is at best unclear. This railroader's interpretation is that, based upon the current evidence, far less intermodal highway to railway shifting will occur than was formerly expected unless something in the railroad intermodal business model changes. Or truck capacity drops. 

Driver shortages for trucking will likely continue. This will include shortages of drivers in the short-haul lanes and the drayage markets. Railroads don't have a solution to combat either the short-haul or the drayage shortages. 

Acknowledgements: 

The following are credited with interesting facts and observations. However, they might disagree with some of my data interpretation:

  • Melissa Peralta – Senior Economist – TTX Company
  • Peter Wolf and John Woodcock as recent IANA speakers
  • Technical observations shared by experts like Larry Gross and FTR's Eric Starks.

As always, contrary business opinions are welcome.

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