Intermodal Roundtable: Switching to Pre-Pandemic Track

While intermodal volumes were viewed as strictly “average” in the months leading up to the pandemic, they subsequently tumbled in the following months. And even though market conditions are still less than ideal, there are now signals of intermodal optimism, as recent reports indicate that volumes are slowly working their way back to pre-pandemic levels, with domestic activity leading the way.

To help bring the current state of the nation’s intermodal network into clear view, Logistics Management (LM) is joined by some of the nation’s foremost experts in the market, including Larry Gross, principal at Gross Transportation Consulting; Tony Hatch, rail analyst and principal at ABH Consulting; and Brooks Bentz, supply chain consultant and LM contributing editor.

Logistics Management (LM): How would you define the current state of the intermodal market?

Larry Gross: Intermodal has thus far made a rapid recovery from the pandemic-related downturn. Volume bottomed out in mid-April, with the U.S. weekly intermodal volumes as reported by the Association of American Railroads (AAR) down 20% annually. Since then, activity has steadily increased. The most recent readings came in 33% higher than the trough and 5% ahead of prior year—a remarkable performance.

This recovery has been powered entirely by the domestic intermodal sector, that is, the movement of domestic containers and trailers, as opposed to the international sector, which comprises the movement of ISO (international) containers. In July, IANA data showed domestic movements up 11% over prior year, while intermodal moves were still down by almost 13%.

This degree of divergence is very unusual. I expect that, over time, the performance of these two sectors will converge. Normally, each sector accounts for about half of all intermodal activity. To be honest, I have been pleasantly surprised by the speed and intensity of the domestic rebound.

Tony Hatch: I agree that it has been surprisingly strong. At this point in time, it has resumed what I call the railways’ “lead dog” status, and is catching up to all of the massive gyrations that hurt the intermodal market and the national, continental and global economy—the supply disruption followed by the demand destruction. All of that is starting to recover, and with empty shelves, that’s an opportunity for now.

Brooks Bentz: Virtually everyone wants to know what the “new normal” will be once the current pandemic crisis passes. With things being particularly difficult to predict presently, it’s probably a safe bet that intermodal will do comparatively well.

At this time, intermodal pricing seems to be holding its own, despite low diesel prices, good capacity and pricing in over-the-road trucking. There’s reasonably good evidence that there will be a larger peak season this year, as companies seek to replenish inventory.

Looking at spot rates, intermodal is up over 44% from last year versus 22% for truckload spot rates. So, it looks like the balance of 2020 will be fairly strong. It’s simply too soon to have even a faint clue as to what will happen in view of the pandemic situation, not to mention the political environment. So, on balance 2021 is a black hole.

LM: How do things look for intermodal volumes for the remainder of 2020?

Hatch: Year-to-date volumes are still down in the mid-single digits, but the gap is narrowing fast.

Gross: As Yogi Berra reputedly said: “Forecasts are hard, particularly about the future.” That’s particularly the case at the moment, where any forecast requires enormous assumptions regarding the future course of the virus and political events in addition to the normal economic considerations. So, about the only guarantee for any outlook right now is that it’s going to be wrong.

With that caveat, I am looking for stabilization in activity, with perhaps some improvement on the international side. The big domestic increases will taper down and more normal seasonal activity will ensue from here. But I, by no means, preclude the possibility of backsliding, particularly if we see virus cases intensifying as cold weather approaches. We simply don’t have enough data to make a call one way or the other.

Bentz: With truck capacity tightening up and peak season, whatever that may mean for 2020, intermodal should fare reasonably well for the balance of the year and is likely to even see some surcharging going on. Whatever happens, it won’t be dull.

LM: While talk regarding the trade war has been relatively quiet of late, how is it currently influencing international, or ISO, intermodal activity?

Bentz: With respect to trade issues, the public face of the trade war is ugly and does not appear to be improving. Behind the facade, however, import cargo from China appears robust and represents a greater share than pre-pandemic. Rates have also risen, as liner companies have figured out that withholding capacity drives higher pricing.

Gross: As previously noted, international intermodal activity is substantially down from 2019. U.S. imports were down 7.5% for 2020 through July, although the month of July itself had only a 2.2% year-over-year deficit, the smallest in some time. It’s not possible at this point to determine how much of this weakness is pandemic-related and how much is due to trade policies. In general, overseas sourcing is moving away from China toward other origin points. This has resulted in a general swing toward the East Coast and away from the West Coast.

However, during the recovery, the “need for speed” and flexibility on the part of importers has resulted in a resurgence of volume moving over the West Coast, and most notably, via the Los Angeles basin. The LA/Long Beach port complex accounted for 36% of all import TEUs arriving in the United States and Western Canada—the best month in terms of inbound share since December 2017.

Hatch: The trade war talk only seems quiet because it has been supplanted by even worse news—the pandemic. The January “Phase One” truce talks between the United States and China have helped agriculture exports. For intermodal, it served as a “cooling off” moment and pre-empted additional tariffs, but did nothing about the still existing more than $360 billion of tariffs on Chinese goods such as furniture and electronics, traditionally the top boxed imports into the ports of Los Angeles and Long Beach. The relations between the United States and China have certainly not gotten any better as of late.

LM: On the domestic side, are low truckload rates and low diesel prices still making an impact on domestic intermodal market share?

Gross: By our calculations, intermodal’s share of all U.S. dry van and reefer truckloads moving 500 miles or more was just 10.4% in the second quarter of 2020. Share has dropped for eight consecutive calendar quarters since the recent peak of 12.7% in the second quarter of 2018. This is unprecedented in modern intermodal history.

The share drop is not only due to the factors you mention in your question, but also to a great degree stems from precision scheduled railroad-related changes to the intermodal system. The railroads are generally targeting profitability over volume, and secondary terminals and lanes have been eliminated in order to simplify the intermodal product that is being offered to the market.

This has resulted in substantial orphaned volume that has returned to the highway, either because the intermodal network, as it currently exists, does not offer any service, or the service it does offer is not competitive in terms of its price and service versus available truckload alternatives.

Having said all that, I suspect that when the share number of the third quarter is calculated, we’ll find that the slide has at least stabilized and likely reversed. The import swing back to the West Coast is favorable to intermodal and all the current indications are that intermodal has recently been growing faster than truck.

Hatch: The trucking market has tightened considerably, which is a plus for intermodal. Low fuel prices affect the small spot side of the market, and, over time, rail service and available capacity outweigh the fluctuating price of diesel fuel.

The domestic market has been helped by improved railroad service, the end of precision scheduled railroading (PSR) lane cutbacks at a couple carriers (CSX and Union Pacific), the super-heated e-commerce market, and by West Coast port market share that translate into transloads.

Bentz: Domestically, intermodal market share seems to be OK, given the circumstances. I see competition intensifying. Class-8 truck orders are on the rise, reaching and exceeding replacement volumes, so clearly the expectation is that trucking volume will continue to improve.

However, there are some key questions that remain open. Will the pandemic-driven shift to more online shopping sustain and grow? Will alternative services (Uber Freight, Amazon) and smaller order sizes have a longer-term effect on truckload volumes and pricing? And how soon will autonomous vehicles arrive in meaningful numbers?

LM: How do you view the current levels of intermodal service? Are things where they need to be and moving in the right direction?

Hatch: For the big picture, rail service has ended its 2017-2019 rut and improved greatly. In the very short term, there’s congestion, as rails have had to deal with the unprecedented drop in volumes from April to early June. This was followed by the equally violent recovery in traffic and spot shortages of formerly furloughed crews. However, this too shall pass.

Bentz: In my recent conversations with intermodal marketing company leaders, the general feeling was that intermodal service was pretty good overall and that the withdrawal from some markets was not having a material adverse effect.

The fundamental problem with intermodal service remains that most lanes, even those with the best service, typically have one or two “sailings” per day, usually with evening cut-offs. Trucks can leave when they’re loaded without the constraints inherent in intermodal train service and terminal operations. For shippers who have the flexibility in service time, intermodal is still often a good alternative for at least a part of their volume, particularly if the economics are compelling.

Gross: The intermodal sector typically has a difficult time digesting large increases in volume, and that seems to be the case this time as well. There have been many reports of congestion in Southern California for instance.

From a solid data-driven standpoint, the only available information regards average intermodal train speeds as reported by the railroads to the STB. This is only marginally useful because it doesn’t deal with train annulments nor terminal operations and delays. It does, however, provide some indication of underlying trends.

Intermodal trains were running very fast by historical standards during the first half of 2020. The question was how much of the improvement was due to PSR changes and how much was simply a function of low volume and plenty of space on the network. Recent evidence tends to say it was the latter. Train speeds have come down rapidly in recent weeks and some railroads have retreated to the point where their speed is no better than the average they have achieved over the past five years.

LM: Is pricing where it needs to be for intermodal in light of the major capital expenditure outlays that continue to be made by the carriers?

Gross: With the current emphasis on margins and profitability, I believe that the sector should provide adequate profits to support the level of investment required to maintain and even grow the business, if the railroads are so inclined.

Bentz: This has been a continuing question since the inception of intermodal, back when it was called “Piggyback” and before it got respectable. In the good old days, volume was king, as carriers tried to build critical mass.

The railroads have gotten more sophisticated, more selective and taken a bit of a different tack more recently in shedding lower-margin volume in favor of improving profitability. As Larry has said, this is not a growth strategy, but it’s a strategy. Additionally, nobody has figured out how to tap the shorter-haul markets, where much of the freight is.

LM: How do you think the intermodal market will look over the next three years to five years?

Bentz: The biggest impact will come from the influx of autonomous vehicles and the way in which the underlying rail carriers respond. It will be an interesting ride.

Shippers would be well advised to include intermodal services in their RFPs for procuring freight capacity, with an eye toward using dynamic routing and scheduling so they can tender loads alternatively to over-the-road or intermodal as opportunity and circumstances permit.

Hatch: It’s very hard to say at this point in time. Trade is critical for rails. Will we see a return to normalcy in international trade policies or a return to stability that’s so important to foreign direct investment in Mexico and elsewhere? How will technology evolve in all modes? Will the Pandemic really be in our rear view mirrors by the beginning of 2021? What will the lasting changes be? Will we dialogue with China for all of the legitimate issues and put trade deficits back in the locker where it belongs?

The opportunities—trade/nearshoring/modal share—are there. Will the rails take advantage of them? Will geopolitics and environmental concerns favor intermodal or provide further artificial constraints? I would bet on a good five-year period for rail and intermodal, but nothing these days is a sure thing.

Gross: If the railroads continue down the current pathway of PSR, I expect to see the eventual termination of trailer-on-flat-car services, with only containers being transported, as is already the case in Canada and Mexico. The focus will continue to be on running large point-to-point trains between major population centers. Secondary services and lanes will continue to be de-emphasized.

The pandemic is accelerating changes that were already underway and is triggering new changes as well. In general, post-pandemic there will be a “great dispersal” in terms of where freight is coming from, where it’s going to and when it moves. Importers will diversify away from China and toward other origins, both overseas and in North America.

Imports will flow toward the United States from overseas via the shortest route, which from many origins such as Southeast Asia and India, may well be via the Suez Canal into the East Coast rather than across the Pacific. This will result in a shift of traffic from west to east. Nearshoring into Mexico will create more north-south opportunities now that the United States-Mexico-Canada Agreement (USMCA) has been ratified.

The shift from brick-and-mortar stores to e-commerce has been greatly accelerated. This will have supply chain consequences, including dispersal of inventory and potentially tighter service requirements with greater participation by parcel carriers, which operate on different schedules than truckload. Population will become more dispersed with shifts away from large urban downtowns toward suburban locations and secondary cities.

These changes will not be quick, but they will be powerful and evident over time. Many of these changes fly in the face of the operationally driven changes that PSR is bringing to the intermodal sector. However, it will be interesting to watch how the industry responds over the next five years.