November 16, 2012

Intermodal struggles to crack short-haul market

Taking share in the under-500 mile category will be an uphill climb.

By Mark B. Solomon

The nation's intermodal sector is like the 400-pound behemoth who vowed to lose 200 pounds and now tips the scales at 210: Few thought it could be done, the progress has been remarkable, but those last 10 pounds will be the hardest.

The "last 10 pounds" for the intermodal world is short-haul service, defined as 500 miles or less. Historically the exclusive province of motor carriers, short distances are seen as "high-hanging fruit" for railroads and intermodal marketing companies. Yet they could also be the most lucrative fruit of all as most freight in the United States moves under 500 miles.

But it's not an easy nut to crack. While intermodal has made great strides to deliver a cost-effective service in the 750- to 1,000-mile range, repeating those achievements at even shorter stage lengths will be a struggle, experts say. An intermodal move—which typically involves the line-haul and a dray at both ends—is nowhere near as flexible as tendering the goods to a regional trucker for a direct point-to-point move, especially for distances between 300 and 500 miles. "At 400 miles, an intermodal move is very difficult," said an executive of an intermodal marketing company whose loads for shipper customers usually ride about 1,000 miles.

While intermodal may be in shipping's secular sweet spot in terms of its current cost, fuel, and environmental advantages over trucking, even its biggest proponents admit that it can only shrink stage lengths so far before those advantages diminish.

Mark Davis, a partner at Cleveland Research Co. and a staunch believer in intermodal, said 550 miles is realistically the shortest distance at which intermodal can be cost- and service-competitive with regional truckload services. "Then again, they said intermodal could not hit 800 miles and be competitive, and they are," Davis said earlier this week at the joint annual meeting of the National Industrial Transportation League and the Intermodal Association of North America in Anaheim, Calif.

Even without the short haul market, intermodal still has room to grow, according to Davis. Of the 525 million truckloads hauled by big rigs, or "Class 8" trucks, about 45 million are still potentially convertible to intermodal service, according to Cleveland Research Data. Davis said intermodal's greatest opportunity lies in the 750-mile distance.

FEC'S SUCCESS
Not everyone, however, is skeptical of intermodal's ability to make inroads in the short-haul market. "You can make money in short-haul intermodal," said James R. Hertwig, president and CEO of Florida East Coast Railway (FEC), a Jacksonville, Fla.-based regional railroad that operates 351 miles of track from Jacksonville to Miami. Hertwig said that intermodal accounts for 78 percent of FEC's total traffic. Of that intermodal total, 42 percent moves under 350 miles, and it is profitable, Hertwig told a breakfast meeting at the joint conference in Anaheim.

FEC is a prototype of a successful short-haul intermodal model. It is the dominant railroad in Florida, has a relatively small geographic network, and supports a consumer market of 19 million people (12 million of them from central Florida down to the Keys).

In other words, FEC has traffic density, and like almost everything in transportation, traffic density holds the key to a profitable short-haul intermodal venture. Get the freight, scale the capacity, and the money will roll in. Or so the concept goes. But unlike FEC, the rest of the country only has a select group of city-pairs, such as Savannah-Atlanta, where volumes are robust enough for short-haul intermodal to work.

Also holding back the model, Hertwig said, is the shipping community's perception that intermodal is too unreliable and involves too many "hand-offs" of the freight. Indeed, it is believed that reliable intermodal service at 800 miles or shorter can only be consistently accomplished by one railroad and can't involve interlining. Though truckload services are more expensive than intermodal, shippers know their freight will remain in one pair of hands until it reaches its destination. "The key [to successful short-haul intermodal] is to provide truck-like service," Hertwig said.

In addition, the drayage portion must be priced effectively and have near flawless pick-up and delivery performance in order for intermodal to provide a value offering that is superior to over-the-road trucking, analysts have said. As a result, short-haul intermodal stands a better chance of success if the pickup or delivery is at a port location where there is virtually no drayage involved.

SHIPPERS INTERESTED BUT SKEPTICAL
In the past few years, shippers have been making greater use of intermodal. For example, Fernando Cortes, senior vice president of Dallas-based Dr. Pepper Snapple Group, said that in the past five years, his company has tripled its use of intermodal at distances of 500 miles and longer.

Many shippers would like to use even more intermodal, especially as federal government regulations designed to make the highways safer make it harder and more expensive to find drivers and increased road congestion threatens their time-to-market commitments.

However, Rick Smith, vice president, transportation of Hoffman Estates, Ill.-based retailer Sears Holdings Corp., is still hesitant to switch to intermodal for short haul. Smith told the gathering in Anaheim that railroads would be hard-pressed to hit high service standards for 500- to 800-mile lengths of haul. "It will be difficult to meet, and it will be the next big hurdle," Smith said.

Smith said concerns about the interchange of traffic and the cost and reliability of dray are the reasons that the performance of short-haul intermodal lags behind Sears' expectations.

More articles by Mark B. Solomon

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