Intermodal Roundtable: International gains, capex keep intermodal humming

During a year that has seen a drop off in overall freight output due to the stronger dollar and crimping export growth, intermodal transportation continues to thrive.

While in recent years intermodal expansion has been largely spurred on by increasing domestic growth, that’s not the case this year. What’s different in 2015 is the ongoing emergence of international intermodal, which continues to see volume gains following the resolution of the West Coast port labor dispute.

To help put the current state of the national’s rail intermodal network into better perspective for shippers, Logistics Management is joined by three of the nation’s foremost experts in the market for our 2015 Intermodal Roundtable. Our panelists this year include Tony Hatch, rail analyst and principal of ABH Consulting; Joni Casey, president and CEO of the Intermodal Association of North America; and Ed Hamberger, president and CEO of the Association of American Railroads.

Logistics Management (LM): How would you describe the current state of the intermodal market?
Joni Casey: The intermodal market continues to deliver solid growth, but with a differing mix. Strong import volumes have pushed international intermodal growth ahead of domestic container growth for the past six months following the resolution of the West Coast labor issues. This is the first time since the recession that this has been the case, and it’s more typical of intermodal freight patterns in the early 2000s. In the meantime, domestic container growth has slowed as trucking capacity has loosened, manufacturing has slowed, and fuel prices have fallen.

Tony Hatch: I’d call it dynamic and confusing. The intermodal market today is topsy-turvy as international intermodal is growing faster than domestic, despite an uncertain global economy. The reasons for the health of the former are related to the stronger dollar and improved consumer spending—partially fueled by the “gasoline dividend.” And the reasons for the relative sluggishness of domestic are tied to the dollar, but also the temporarily ample truck capacity along with the slowly improving rail service.

Ed Hamberger: Intermodal shipping has become a mainstay of today’s globalized world. However, it didn’t happen overnight. Since Congress established a balanced regulatory framework in 1980, freight railroads have spent more than $575 billion on their infrastructure and equipment. Through years of planning and investing, America’s railroads have built an intermodal network that connects the nation’s cities and towns to marketplaces around the world. What once was mainly a global gateway is now a critical domestic gateway too. Intermodal represents about 47 percent of total rail traffic in our country.

LM: How is the intermodal market shaping up on a year-to-date basis?
Hamberger: Intermodal shipping has become a mainstay of today’s globalized world, but that did not happen overnight. In 2014, about 13.5 million containers and trailers were transported in the U.S., and for the first 41 weeks of 2015, U.S. railroads reported a cumulative volume of 10.9 million intermodal units.

Casey: Through September (the latest IANA data) domestic container volume is up 5.1 percent and international volume up 3.9 percent.

Hatch: There will be a mild “peak,” and domestic intermodal should regain some momentum. However, we haven’t seen the full impact of fuel on consumer patterns nor a full recovery in housing, which stimulates furniture imports and also takes drivers away from the road.

LM: What are your expectations for the intermodal market through the end of 2015 and into 2016?
Hatch: Next year should show a return to normal patterns as rail service improves and the cyclical trends in housing, consumer spending, and autos play out along with the ongoing—if temporarily disguised—secular trends of the driver shortage.

Casey: Tony is right on. Overall, 2015 growth is expected to be in the range of 4 percent to 6 percent. The relative market shares of domestic and international are anticipated to level out to around 4 percent to 5 percent, and 5 percent to 6 percent respectively. We expect growth of 4 percent to 5 percent in 2016, with domestic volumes expected to improve as trucking regulations continue to tighten over-the-road capacity and intermodal service continues to improve.

LM: How are current economic indicators (GDP, retail sales, industrial production) making an impact on intermodal market operations?
Casey: While retail sales haven’t accelerated at the level that was anticipated, the share of spending on imports has grown at a higher rate, boosted by the strong dollar. Slower industrial production is one factor affecting domestic growth, as are lower fuel prices that contribute to a more competitive truckload market. Intermodal continues to gain share, just at a slower rate, and intermodal volumes continue to consistently grow at around twice the rate of GDP.

Hamberger: I agree with Joni. Intermodal continues to do well while results vary for other commodities. Railroads are confident that they will be able to handle the traffic that comes their way. Growth this year is 2.5 percent, compared to 4 perecnt to 5 percent in previous years. This reflects a sluggishness in the economic recovery as do the declines in non-intermodal carloads, which are down 4.4 percent this year.

Hatch: Indeed, the strong U.S. dollar is helping imports and hurting exports. An interest rate increase is not a sure thing at this point, but wouldn’t be devastating. Most trends supporting intermodal’s growth rate are long term and secular.

LM: There were some obvious service issues earlier in the year. Have the issues that the sector dealt with following last winter been resolved?
Hatch: Service needs improving, of course. It needs to see a recovery first to around 2013 levels, then service must get back on long-term improvement trend lines. Service improvement always tends to reach one particular level and then the bar is raised—but with that comes opportunity.

Casey: We’re certainly seeing service slowly improving, but not yet back to 2013 levels as Tony mentioned. The issues from last winter were exacerbated during the first quarter of this year by the disruptions caused by the port issue. On the other hand, slowing overall rail volume—carload volume is down almost 5 percent year-to-date—opens more capacity, power, and crews to intermodal.

Hamberger: Let me add that no one can predict what Mother Nature is going to dish at any moment, but the freight rail industry makes weather preparedness a priority. Winter operation planning is extremely important for all railroads across the country’s rail network for all goods they move, including intermodal. Each railroad has comprehensive plans in place to react to extreme weather events, and these plans are constantly monitored and adjusted throughout the year.

LM: What is the impact of regulations—such as positive train control (PTC) on the rail side and hours-of-service and electronic logging devices on the trucking side—on overall intermodal throughput?
Hatch: Federal regulations and rules will have an impact. The freight transportation analyst firm FTR believes that driver regulation could pull 5 percent or more out of the driver capacity pool, exacerbating that secular problem. PTC and electronically controlled pneumatic brakes are only minor annoyances to intermodal and rail. However, in the long term, PTC will probably have some benefits for the rail network, but full rail re-regulation would likely be devastating to intermodal growth prospects and drain most capital expenditures away.

Casey: It’s hard to judge what the impact of PTC is on intermodal, but anything that touches the rail network could ultimately trigger downstream effects on specific services. However, trucking regulations continue to be a long-term constraint on productivity that will facilitate domestic intermodal growth.

Positive Train Control Video - Association of American Railroads

Hamberger: Currently, balanced regulations provide the opportunity for railroads to continue to maintain and further modernize the 140,000-mile rail system. Rail intermodal service is also beneficial to freight railroads’ competitors—like trucks and cargo ships. Right now, railroads are helping to solve an acute driver shortage within the trucking industry. As the crisis in the trucking industry grows, railroads’ past investments and productivity improvements are helping to alleviate some of the burden.

I’ll add that while competition between freight transportation modes is still alive and well, these mutually beneficial partnerships have allowed U.S. businesses to grow and produce more intermodal traffic than ever before. To follow up on Tony’s point, re-regulation is a constant threat that would prevent railroads from making the massive private investments necessary to meet our nation’s growing freight transportation needs.

LM: What will the intermodal market look like five years from now?
Casey: Intermodal should continue to see solid growth over the coming years assuming that the economy continues to grow, even at a modest pace. The mix of domestic versus international loads will be subject to the same basic factors that we have seen in the past—price of fuel, value of dollar, level of imports, and the impact of regulatory activities. The biggest risks to this growth scenario are trade restrictions, rail re-regulation, and changes to truck size and weight rules.

Hamberger: America has the best and most expansive rail intermodal network in the world. Domestic intermodal shipments account for approximately half of all rail intermodal traffic. This affordable service is a competitive alternative for journeys short as a few hundred miles, providing businesses with more shipping options for their freight.
The Federal Highway Administration expects that freight shipments will increase by 45 percent between 2012 and 2040. In the meantime, railroads will continue to focus on getting better at what they do best—moving freight more quickly, efficiently and cost-effectively than ever before, helping their customers win too.

Hatch: Joni and Ed are both correct. Railroad and rail intermodal will continue to be very bright, long-term solutions as long as the benefits of a well-maintained, privately financed network competes with a significantly underfunded highway network and as long as carbon and other emissions reduction is considered important. In other words, if railroads execute, the intermodal story in five years will be a very exalted one.