Intermodal's Back on Track
After battling internal and external problems that threatened to derail the industry in 1997, intermodal came back full throttle, setting volume records last year.
By John P Quinn -- Logistics Management, 3/1/1999
By all accounts, 1998 was the year the intermodal industry got back on track, rectifying the service-related problems experienced in 1997 and restoring a significant measure of customer confidence.
According to the Association of American Railroads (AAR), intermodal shipments of trailers and containers in 1998 rose 0.9 percent to 8,772,663 units in the United States and 1,363,844 in Canada--cumulatively topping the 10-million mark for the first time. The industry's rebound was strongest toward the end of the year: The last week in October was the busiest on record, and intermodal traffic in December was up 2.5 percent in the United States and 8.4 percent in Canada over December 1997 figures.
Railroads worked hard to keep pace with intermodal growth and improve service last year. Even with intermodal traffic--including containerized imports--at an all-time high, railroads were able to handle shipments without suffering the serious congestion problems that developed around West Coast seaports the previous year, says AAR spokesman Tom White. "As we went into the heavy season at the end of the year, the intermodal congestion that occurred in '97 did not recur, according to customers and people at various port authorities throughout the country," he says.
Measurable Improvements
One reason the rail industry in 1998 was able to avoid most of the problems it experienced in 1997 was that carriers significantly increased their investments in infrastructure and labor, says White. "Railroads have been spending a lot of money to improve their ability to handle larger volumes," he observes. "There has been investment to improve track capacity, which has had a significant impact. We've had our fourth consecutive year of heavy locomotive purchases. At the same time, railroads have been dealing with problems with crew shortages by hiring more people, so that there were fewer loads held because of lack of crews," he explains.
Increased communication between carriers and their customers, including both shippers and intermodal marketing companies (IMCs), also played a major role in preventing service problems last year. The National Industrial Transportation League (NITL), which represents major shippers, initiated a series of dialogues on rail-service problems between customers, railroads, and ocean carriers. NITL's meetings were followed by additional outreach efforts by the AAR.
Those sessions produced the desired results, say industry observers. "I think the intermodal industry got the message loud and clear from its customers, and it took steps to improve service over the course of the last several months," says Joanne F. Casey, president of the Intermodal Association of North America (IANA). "And obviously headway has been made, because we've gotten through our peak season without any word of major service failures."
Larry Henry, vice president of logistics at Alliance Shippers, a major intermodal marketing company, agrees that intermodal service significantly improved last year. "By the end of '98 ... the service disruptions--in the West in particular--were coming back under control," he says. "Of course, the surge in business and the demand for equipment far surpassed anyone's wildest projections, so that tended to cloud the picture somewhat. But the bottom line was that the railroads were making the effort to restore service consistency and working conscientiously to do so, which was what meant the most to companies like ours."
Judging from the rate of growth many railroads and IMCs enjoyed in 1998, there was no question that the intermodal picture had improved by the end of the year. Phillip C. Yeager, chairman of Hub Group Inc., one of the country's largest IMCs, reports that his company's business increased between 7.0 and 8.0 percent in '98. Henry of Alliance Shippers, meanwhile, estimates his company's intermodal business growth at about 7.0 to 9.0 percent last year.
Some railroads did even better: Vaughan Short, vice president of the Intermodal Business Unit at Kansas City Southern, says his company saw 15.0-percent growth in its intermodal business in 1998. Right in the middle is truckload carrier J.B. Hunt Transportation, which relies heavily on intermodal service to handle its linehauls. According to Paul Bergant, executive vice president of marketing, Hunt experienced 11.0-percent growth in its intermodal business last year.
Trade Imbalance Blues
Although many carriers and IMCs surpassed the industry's overall growth record, 1998 still was a challenging year for the intermodal industry, says Steve Branscum, vice president of intermodal marketing at the Burlington Northern Santa Fe Railroad (BNSF). This was largely the result of the enormous trade imbalance between North America and Asia.
Branscum estimates that total growth of international intermodal shipments was only 2.0 to 3.0 percent. But the imbalance between rising import volumes--up about 20.0 percent--and the 15.0- to 16.0-percent drop in export business proved hard to handle. "That caused us operational problems. We were continually cycling empty railcars from the east end of our line--primarily Chicago--to the West Coast to pick up the glut of import business," he reports. "As the imbalance worsened, it required more cars to support the same amount of loads. That added costs and appreciable logistical problems to the system."
Another issue intermodal service providers had to contend with last year was recapturing business they lost to motor carriers during the height of their service problems in 1997. Though Branscum acknowledges that his company saw a certain amount of freight returning to the highways in '98, he believes that trend will not continue for a number of reasons. These include the railroads' demonstrated commitment to intermodal service, a driver shortage in the trucking industry, and what he refers to as "the compelling economics of intermodal--if the service is there."
Even motor carriers that depend on intermodal service to handle linehauls felt the pinch. Says Bergant of J.B. Hunt: "We are a trucking company, but about 40 percent of our van division's revenue is derived from intermodal, so we can see both sides of the issue. We did see a shift from rail to highway in some specialized areas over the past year, wherein the price-service tradeoff no longer tipped in favor of rail." But if rail service continues to improve, he believes, his company will be able to regain business lost to other motor carriers.
Although railroads and IMCs made great service improvements last year, they won't be resting on their laurels. Industry executives say they will continue to invest in capital equipment, infrastructure, and labor, even though they expect intermodal growth in 1999 to drop slightly compared to last year's peak levels.
BNSF, for example, last year embarked on its largest locomotive-purchase program ever, and this year's locomotive purchases are expected to match last year's program. "Our expectation is that this will alleviate our service problems," Branscum says.
Other carriers plan to add more trailers and containers. Kansas City Southern, for example, has purchased more than 500 53-foot containers for use throughout its system. Yeager of Hub Group Inc. notes that Union Pacific, which experienced more severe service problems than any other railroad, has announced plans to add 5,500 48- and 53-foot units.
If intermodal growth slows significantly, however, that strategy could cause some interesting changes, Henry suggests. "There are some early signs that the industry will swing back into a surplus equipment environment, unless imports continue to transload from containers to domestic vehicles at the port of entry," he says. "But it's premature to say whether that will remain a pattern throughout the year."
Another factor leading carriers to increase capacity this year is continuing growth in international traffic resulting from the North American Free Trade Agreement (NAFTA). That is the primary driver behind the substantial investments that Kansas City Southern has on the drawing board.
According to Short of Kansas City Southern, that railroad soon will open a new intermodal connection to Mexico, and its Tex Mex Railroad subsidiary is constructing a new deramping facility in Laredo to accommodate shipments that move by truck to maquiladoras near the border and to cities in northern Mexico. The company also has formed an alliance with the Canadian National and Illinois Central railroads that will enable Kansas City Southern to offer customers intermodal through service in all three NAFTA countries.
Shippers can expect to see more service improvements, too, carriers say. "One of the things that is going to change this industry in general in the next two to three years is that railroad-shipper relationships will be better managed and scheduled," Branscum predicts. "Today, there really is no system to manage what freight comes off the highways to the rail network. We are going to put a reservation system in this year that will help us manage the flow of freight better," he says.
Far-Reaching Changes
Shippers, carriers, and intermodal marketing companies all have learned some lessons during the last couple of years. Although some problems remain, the industry as a whole is likely to be stronger, better managed, and more competitive than ever.
But change may reach even deeper than that, suggests one industry observer. "After a difficult period a year ago, the intermodal industry is getting back into shape, but I think it's coming back in a different form," says Gerhardt Muller, associate professor of transportation and logistics at the United States Merchant Marine Academy in Kings Point, N.Y., and author of the book Intermodal Freight Transportation.
Muller sees intermodal marketing companies moving beyond their traditional role as a simple transportation intermediary, arranging rail transportation of trailers on behalf of shipper clients. Although they will continue to perform that core function, they are responding to economic and industry conditions by adopting a total logistics-management concept, with transportation forming just one component of their service mix, he observes.
"I think the IMCs are becoming more and more third-party, value-added [service] providers. Many of them actually [handle] all of the logistics-management and distribution functions for shippers," Muller says. "Some of them are becoming increasingly involved in ocean transportation, which was not ordinarily the case five years ago."
Muller further predicts that the IMCs' search for new business opportunities will lead them toward one of the fastest-growing segments of the logistics industry: "reverse logistics," the management of product and packaging returns, repairs, and recycling.
"More and more people in the industry are talking about this, especially in terms of recycling implications," he says. "This represents an entirely new type of business opportunity ... because it's not predictable or uniform in nature. You can't get your arms around it the way you can with traditional source-to-customer transportation systems," Muller says. "In short, [it's] a problem that can be a real opportunity for the right intermodal players."
Free-lance writer John Paul Quinn reports on a broad range of business topics for journals in the United States and Europe.
Intermodal Traffic:On the Up and Up
Major railroads set another record for intermodal volume in 1998, with the total number of containers and trailers slightly surpassing the previous record set in 1997.
Intermodal units originated
1997 8,698,308
1998 8,772,663
Source: Association of American Railroads
Container Traffic Climbs, Trailer Volumes Drop
Container traffic has grown steadily in recent years, while intermodal trailer traffic has dropped off somewhat.
Containers (millions) Trailers (millions)
1994 4.37 3.75
1995 4.44 3.49
1996 4.84 3.30
1997 5.24 3.45
1998 5.42 3.35
Source: Association of American Railroads
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