With United States-bound imports seeing still seeing major declines, due to the ongoing COVID-19, or coronavirus, pandemic, the subsequent impact it has had on intermodal transportation has been apparent. And, now, with some states focusing on re-opening their respective economies, things are expected to be generally chaotic and scattered, as it relates to what may happen next. Logistics Management Group News Editor Jeff Berman recently spoke with Larry Gross, president of Gross Transportation Consulting, to talk about the current state of intermodal and its myriad moving parts. A transcript of their conversation is below.
Logistics Management (LM): As we have now been in this unusual COVID-19 world for a number of weeks, it is fair to say things are far from normal. With that as a backdrop, how would you describe, or explain, the current state of intermodal?
Larry Gross: Intermodal has been severely affected by the pandemic. We are in what I will call chapter two of the story. Intermodal really got affected even before all of the shutdowns began, because of the heavy import/export orientation for intermodal, which accounts for, perhaps, 60% of total intermodal activity, when you include trans loading, as well as the movement of ISO [international] containers. And that was affected even back in March pretty dramatically by the disruptions that were occurring due to the virus in China. We had an extended Lunar New Year holiday shutdown in China, as China was dealing with the initial outbreak of the virus in Wuhan, and that dramatically affected the international cargo that was arriving here. So, now we are into chapter two, in which China has begun to recover, and its production has come back, but it is running smack into a weak demand situation here in the U.S. because of the pandemic. March was, I guess, “the door opener,” in terms of the downturn. And, to put some numbers to it, March international intermodal volume was down about 19% for rail movements of ISO containers. Domestic containers and trailers were stronger and down a much more moderate 4.8%, but there is no question things have deteriorated since then. We see the weekly AAR (Association of American Railroad) numbers that are put out, and overall U.S. intermodal volume is down somewhere in the vicinity of 14% annually. If there is a glimmer of good news, it is that volume has come up in the last couple of weeks. It got down to as low as 20% in the early part of April and has moderated very slightly, so there are at least some signs the bottom has been reached on this, but it is a little early to say.
LM: The Intermodal Quarterly Report, which was recently issued by the Intermodal Association of North America (IANA), noted that volume declines are expected to continue and increase in the second quarter while domestic volumes could surge back in the third quarter, coupled with international volumes possibly continuing to see declines for the remainder of the year, too, reflecting the low demand for imports and the impact of tariffs, most of which still remain in place. Are you in agreement with this assessment? What factors could change it?
Gross: I agree with IANA, in that the second quarter is going to be considerably weaker than the first quarter. The trillion-dollar question, I guess, is: what is the shape of this downturn going to be? That is always a difficult task for a forecaster. With the COVID-19 situation, the difficulties in forecasting are multiplied, because you have a few different questions that need to be answered that are going to determine what the path is going to look like.
The first question is a medical one: what is the virus going to do, and is there going to be a continued rise in new cases or a rebound in new cases? If so, the economy will be dramatically negatively affected by that.
Next is a political question: how quickly will the governors re-open the states and in what manner and how successful will they be in that?
The third question is a social question: even if the governor in my state re-opens restaurants, am I as a customer going to be comfortable going into a restaurant? So, it may not matter much if a political re-opening occurs. Everybody needs to be comfortable with the new normal, and only then and only then can we deal with the economic impacts of all of this. I am not a member of the “snap back” crew, in terms of forecasting a real quick rebound from this extremely sharp downturn we are currently experiencing. I am of a more cautious outlook that says the path back is going to be a bit more of a struggle. I would say that my outlook in regard to the third quarter is quite cautious. I am optimistic that we will start to see some improvement from where we are in the second quarter, but I don’t anticipate that it is going to be a very rapid recovery. I would like nothing more than to be proved wrong on this.
And the other piece of puzzle here is: what is going to happen with capacity? The reason for that is capacity is also going to head down, and even a relatively modest rebound could conceivably bump into a capacity situation where too much capacity has been removed from the system. We might see things tighten up, even though volume is relatively weak.
LM: This is a bit of a multi-part question. With various states taking steps to reopen their economies, what impact does that have on intermodal? And taking that a step further, what might the 2020 Peak Season look like or is it too early to tell?
Gross: I think that any ability to forecast in this current situation is just a shot in the dark. There are so many levels of uncertainty to this situation that it behooves people to be extremely flexible right now. The range of outcomes is extremely broad. We could go from a continuation of the current downturn and virtually no Peak Season or, and while it is possible it is not my first choice, in terms of where I think things could be going, you could see a very tight capacity situation in the third quarter, if you see only a modest uptick and enough truck and intermodal capacity comes out of the system. That would be a completely different sort of feeling for [shippers]. I think people need to have contingency plans in place for this very broad array of outcomes.
LM: Shifting to a more general theme, what do you think some of the biggest shifts in freight transportation and supply chain could be in a post-COVID-19 world?
Gross: I think this is going to end up being one of those seminal events like 9/11 that is going to reverberate for many years to come. And I think a major theme that is going to come out of all this is one that I call “The Great Dispersal,” and that is that from both an international and domestic sense we are going to see population, freight, sourcing and other things become more dispersed than it ever has been. We can certainly see that is underway in terms of international sourcing, because folks are trying to decouple from China, and that is going to be a very long and bumpy process, but one that I feel is as inevitable as the tectonic plates shifting on the earth’s crust. We are going to see folks trying to get other sources away from China, things are going to be much more dispersed to Southeast Asia and India…even near-shoring, on-shoring, and Mexico. Volumes are going to be coming from a much broader array of sources than has previously been the case, when we had this tremendous concentration on China. This type of thing takes years for it to occur, but it will only become evident, in retrospect, that this was a turning point. This plus the tariffs and all of the other disruptions that have occurred are factored into that.