July 4, 2011
transportation report | Transportation Infrastructure
Intermodal's future may lie not with what comes off the boats, but what comes off the roads.
For decades, international commerce has dictated the rules of engagement in the U.S. intermodal industry. Seagoing containerized imports were offloaded at U.S. ports of entry, transloaded onto railroads, and moved inland.
That business is hardly going away. However, the days when domestic intermodal operations were viewed strictly as a "bolt on" to international service that involved a prior or subsequent ocean freight movement are fast becoming history. Today, the four U.S. Class I railroads are putting greater emphasis than ever on the domestic market as they look for ways to fuel intermodal growth. In so doing, they will try to move beyond their comfort zone of near 2,000-mile hauls and muscle in on the short- to intermediate-distance markets dominated by truckload carriers.
To be sure, it isn't a zero sum game. Collectively, the trucking industry is the country's largest intermodal user and has for years relied on the service to cut its linehaul costs. UPS Inc., known to many as a ground carrier, is also the single biggest intermodal customer.
However, there are still many shippers who will not use intermodal service and depend exclusively on truck, a fact that railroads know all too well. For example, the Burlington Northern Santa Fe Railway (BNSF) estimates its customers use intermodal for only about one-quarter of their total transport needs.
The railroads believe U.S. businesses may be ready for a change, especially as trucking costs escalate, road congestion intensifies, and fears of a driver shortage persist. The rails maintain that the speed and reliability of their domestic intermodal service has now improved to the point where they can offer a compelling price-service solution on shorter stage lengths.
A wide-open opportunity
If rail industry estimates are accurate, there is plenty of incentive to focus on the domestic business. Omaha, Neb.-based Union Pacific Railroad Co. (UP) says 11 million truckloads are up for grabs in its service territory, while Fort Worth, Texas-based BNSF puts its potential market at 7 million. In 2010, BNSF handled between 2.25 million and 2.5 million domestic intermodal loads, while UP handles, on average, about 2 million a year.
Jacksonville, Fla.-based CSX told analysts recently that of the 14 million truckloads that normally move in the Eastern United States each year, about 5.1 million have already been converted to intermodal, leaving a potential market of somewhere around 9 million. CSX said it handles about 40 percent of the 5.1 million loads that have already been converted.
Senior rail executives recognize the potential bonanza that awaits them should they convince shippers that they can deliver on their intermodal service commitments and continue to do so at lower rates than truckload. "We have a unique opportunity, and the opportunity is huge," says Steve Branscum, BNSF's group vice president, consumer products marketing.
To capitalize on this opportunity, the rails are building out their intermodal networks. Norfolk Southern's "Crescent Corridor," a 2,500-mile joint public-private project linking New Jersey with Louisiana, is expected to divert 1 million trucks per year from 10 interstate highways when the work is completed in 2013. Executives for the Norfolk, Va.-based railroad were unavailable for comment.
Earlier this year, CSX opened an intermodal facility in the Northwest Ohio town of North Baltimore. The facility serves as the pivot of a hub-and-spoke operation where freight arriving from nationwide points is transferred to double-stack trains for delivery throughout the East. It enables shippers to bypass the notorious "choke point" of Chicago, and thus can reduce transit times by up to two days between West Coast ports and distribution centers in the Ohio Valley, CSX officials say.
"It is our gateway to the West," says Michael Rutherford, director of intermodal marketing for CSX Transportation.
Out west, UP has upgraded eight of its 10 primary corridors to enable intermodal to better compete with truckload, according to Matt Gloeb, the railroad's assistant vice president of domestic intermodal. The two remaining lanes, Los Angelesâ��Seattle and Los Angelesâ��Houston, are expected to reach service parity by year's end, Gloeb says.
UP has raised tunnel clearances at Donner Pass, 90 miles northeast of Sacramento, Calif., to accommodate double-stack container trains, according to spokesman Tom Lange. The railroad has built intermodal terminals in Chicago, San Antonio, Dallas, and Salt Lake City. It is also laying a second track on its Los Angelesâ��El Paso "Sunset Route"—a move that will double train capacity on the heavily used intermodal corridor by allowing two trains to operate over it at the same time, Lange says.
Hurdles to clear
But with the opportunity come challenges. To be "truck-competitive"—which railroads define as competing with a solo driver on short and long hauls—railroads have to ensure their own networks, as well as those of the draymen responsible for bringing goods to the intermodal ramp and then taking it off at destination, are synchronized to deliver what trucks already do: a flexible, reliable service, albeit at higher prices than intermodal.
Many short- to intermediate-distance segments are located in what are known as "secondary markets" that lie outside of the railroads' primary corridors. It is in these lanes that the rails' intermodal efforts have been hurt by a lack of significant traffic density and a less-robust infrastructure relative to their primary corridors.
David Howland, vice president of land transport services for third-party logistics giant APL Logistics, says intermodal service in the secondary markets—he cites the Ohio Valleyâ��Kansas City corridor as an example—still needs work and will require significant investment by industry, government, and private sources to get up to speed. Howland adds, however, that the railroads are doing a better job than ever before in meeting their intermodal commitments.
Gloeb of UP says the railroad is committed to the secondary markets and is addressing the concerns over service inconsistency. "The 11 million highway conversion truckload opportunities [for] Union Pacific include secondary markets that we are targeting," he says. Rutherford of CSX says its new Northwest Ohio hub will serve as a critical conduit to its secondary corridors.
As rails set their sights on shorter distances, they also face cost hurdles. The revenue generated from the 1,500-mile and longer hauls that have been intermodal's bread and butter can more than offset the expense of building and maintaining large intermodal terminals that flank major corridors. However, as the length of haul diminishes, there will be inherently less revenue to pay for the system, thus shrinking that movement's profitability, according to Thomas L. Finkbiner, senior chairman of the Intermodal Transportation Institute at the University of Denver.
The same cost pressures apply on the dray portion of the move, which Finkbiner says must remain under one-quarter of the total length of haul for it to be profitable. At a 2,000-mile stage length, the dray network can extend up to 250 miles at either end and still create enough revenue and traffic cushion for a profitable move. As the distance of the rail line-haul contracts, however, so does the cushion that protects the profitability of the dray portion of the move, Finkbiner says.
Despite those concerns, Finkbiner says intermodal will continue to attract domestic shippers as truck rates climb due to rising costs. He adds that intermodal can gain greater share of traffic moving about 750 miles should diesel fuel prices remain at current levels—about $3.95 a gallon in mid-June—or go higher. Should diesel prices spike to the $6 a gallon range, intermodal can be competitive at distances as short as 550 miles, he says. "But it's not likely to be a straight-line penetration, and [future gains] are largely dependent on issues beyond the rails' control," he says.
Charles W. Clowdis Jr., managing director, transportation advisory services for the consultancy IHS Global Insight, says intermodal's improving reliability and transit times will gain it new converts whether oil prices rise, fall, or remain static. "Even if oil prices decline from these levels, users who try intermodal will stick with it, at least for some of their freight," Clowdis says.
Another challenge for the railroads is educating truck shippers on the benefits of domestic intermodal, and convincing them the rails can deliver on their service commitments.
It hasn't been easy. "A lot of customers keep freight on the highway because they don't think there's an intermodal solution," says Branscum of BNSF.
Gloeb of UP adds that the reluctance of shippers to convert to intermodal is largely due to "an issue of confidence" in the quality of rail service.
The past has a lot to do with that. For years, shippers complained about inconsistent and unreliable rail service, a reality that hampered intermodal growth despite what is conceptually a solid value proposition. While rail executives tout the service improvements, they also admit prior missteps are not easily forgotten by big shippers. "The greatest challenge is history," says Rutherford of CSX.
Rates on the rise?
As intermodal gains traction, it's a safe bet users will be paying more for the service than they have for several years. Intermodal rates in 2011 are projected to rise between 3 and 8 percent over year-ago levels, with the high end being significantly above the increases expected to come from the truckload carriers.
At a recent industry conference sponsored by New York City investment firm Wolfe Trahan, a panel of executives from companies that tender much of the intermodal freight to the railroads—Hub Group Inc., Schneider National Inc., J.B. Hunt Transport Services Inc., and Pacer International Inc.—predicted rate increases of between 3 and 5 percent, with Schneider saying rates could go higher than that, according to a post-meeting report published by the firm.
However, Branscum says the increases, if any, will just narrow the existing rate gap between intermodal and more-costly truckload service. "If intermodal was already discounted at 15 to 20 percent compared with over-the-road, then the increases might reduce the discount to 5 to 10 percent," he says.
Another issue that could affect intermodal rates is the availability of the containers in which most domestic intermodal traffic moves. Faced with a global shortage of ocean containers, steamship lines arriving at a U.S. port of entry may want to transload inbound freight into domestic containers rather than have the international boxes moved "intact" to inland points. That could put additional pressure on an already-tight domestic container market, some analysts contend.
However, the four companies participating in the Wolfe Trahan conference say they are adding thousands of containers between now and the start of the peak holiday shipping season. And UP, which controls about 60 percent of the domestic container fleet, added 14,000 containers in June 2010 to container pooling arrangements it has with CSX and Norfolk Southern. As of now, UP has access to 63,000 containers, according to Gloeb.[subhead] BRIGHT PROSPECTS While there are many variables that could disrupt the railroads' plans to capture domestic intermodal share, what is clear is that a growing number of shippers are interested in at least exploring what the rails have to offer. Howland of APL Logistics, whose company is booking an increasing volume of domestic intermodal freight, says customers using intermodal for 15 to 20 percent of their traffic are looking to boost that ratio as high as 50 percent. Some shippers, Howland says, are looking at intermodal to move as much as 70 percent of their merchandise traffic. "We are seeing a very aggressive stance on the part of our shippers to using intermodal," he says.
The Container Store took a leap of faith last year when it switched some of its outbound distribution from over-the-road truck to intermodal. It's still early, but, so far, its faith seems to have been rewarded.
In 2009, the Coppell, Texas-based retailer of storage and organization products began using Burlington Northern Santa Fe Railway and its intermodal partner, J.B. Hunt Transport Services Inc., for inbound movements from West Coast ports to its lone DC, an 825,000-square-foot facility also located in Coppell. In 2010, Container Store decided to expand the relationship to some of its outbound movements as part of a "continuous moves" operation aimed at grouping multiple one-way hauls into round trips. It started with a pilot program covering two stores in Northern California.
Today, the operation serves 13 of Container Store's 49 stores, and the network is set to expand as the retailer adds stores in cities like Indianapolis later in the year. (An additional three stores are served through an intermodal relationship with Union Pacific Railroad Co. and trucker NFI Inc.)
Container Store's typical intermodal length of haul is about 1,330 miles, though Indianapolis will be served at an 875-mile stage length, while Chicago, an existing market, is served at 900 miles.
Container Store expects to save $300,000 in transportation costs this year through the switch to intermodal, said Tom Sangalli, the company's logistics and transportation director. That number may fluctuate depending on network expansion and volume growth, he added.
The program was not without its risks. At a window of plus or minus 15 minutes, Container Store's store delivery schedules are among the strictest in retailing. "I've worked in retail for 20 years, and these are the tightest windows I've ever seen," said Sangalli.
Because the delivery schedules could not be changed, Sangalli's biggest concern when making the switch became the reliability of J.B. Hunt's draymen, the truckers responsible for bringing goods from intermodal ramps to the stores. Since the draymen had other customers to serve and other deliveries to make, the Container Store wouldn't have full control over the drayage operations' routing and scheduling. "We couldn't be sure if we would be first on the list, or second or third on the list," said Sangalli.
After some initial hiccups, Hunt and Container Store worked out a plan where Container Store's deliveries would essentially be given "seniority" status. This eventually resulted in the same drivers making the same deliveries to the same stores. While deliveries vary depending on the individual store, a store receives, on average, three truckloads per week.
Sangalli acknowledges that Container Store's network is well suited for domestic intermodal. Its retail outlets are located in densely populated urban and suburban areas that have robust rail connections. In addition, the distances between its DC and its stores are long enough to make intermodal work. By contrast, many retailers have multiple regional distribution facilities located within 200 to 300 miles of stores, distances more cost-effectively served by truck.
Still, Sangalli said intermodal could work well even for those retailers with greater network density than the Container Store has. "It comes down to attention to detail, and paying close attention to the performance of a specific market's draymen," he said.
That's not to say the Container Store is going wholly over to intermodal, however. Sangalli said it would be impossible to switch the retailer's entire outbound network to intermodal service. Container Store has 10 stores in Texas, all of which, given their proximity to the DC, must be served by truck. Its New York City facility has complex delivery requirements that are more suitable for direct delivery by truck than through a rail-dray network, Sangalli said.
Regardless, Sangalli said that intermodal has become a permanent part of the company's outbound distribution strategy and that he will continue to expand its role even at non-traditional distances. "If intermodal works, we will use it and not let distance be a determining factor," he said.