October 3, 2019
transportation report | Intermodal

Clear track ahead or challenges around the bend?

Clear track ahead or challenges around the bend?

Intermodal service providers are finding that last year's stellar performance is a tough act to follow, as they face down challenges ranging from China tariffs to aging infrastructure to softening demand.

By Gary Frantz

Intermodal transportation has evolved and matured in the four decades since Dave Yeager's mom and dad started The Hub Group as the industry's first professional intermodal marketing company (IMC). Yet in those 40-plus years, he's never seen a year like 2018. "It was a phenomenal year as a service provider, because capacity was so very tight," recalls Yeager, who as a freshly minted college grad back in 1975 took his first full-time job in operations with the then 20-employee company. Today, he's Hub's chairman and chief executive officer. "Pricing ... [went] up to levels that I haven't seen in my career."

As with other transportation modes, intermodal's 2018 performance, while certainly rewarding for service providers, is proving to be a tough act to follow as the industry enters the final quarter of 2019. "We are expecting the remainder of the year to be more of a traditional peak season, more like 2017, which was a good peak, but not as hectic as 2018. That was ... an anomaly," says Yeager, whose Oak Brook, Illinois, company fields a fleet of 38,000 GPS tracking-enabled containers and 5,000 trucks, has more than 5,000 employees, and generates some $4 billion in annual revenue.

An informal poll of industry executives, coming off a banner 2018, finds them generally upbeat about the current year, although challenges persist. Among the issues that have affected or continue to affect the market: the impact of China tariffs and whipsawing trade policies, soft demand, ample long-haul truck capacity, inventory pull-downs, insufficient infrastructure, rail-network adjustments and congestion at major rail hubs, and, earlier this year, severe Midwest weather that flooded roads and rail lines and delayed freight for days.

"Most of the issues that impacted [domestic intermodal] volumes were one-of-a-kind occurrences," says Joni Casey, president and chief executive officer of the Intermodal Association of North America (IANA), commenting on the second quarter. More recently, IANA reported that while total intermodal moves for July declined by 2.1%, the month's results were the best since April—all of which faced tough comparisons against 2018's record performance from the same period last year. Casey sees volumes for the remainder of the year dependent on economic factors, highway capacity, and trade-policy decisions.

None of this, however, has deterred Atlanta-headquartered UPS, the nation's largest intermodal shipper, from continuing to leverage intermodal across North America as "an important piece of our highly integrated network," says Ken Buenker, the UPS transportation manager responsible for rail movements.

Buenker doesn't see any significant areas of intermodal capacity he's concerned about at this point. "One of the obligations of being a good customer is to communicate with providers, so they understand trends relevant to our business," he says. "Historically, we have worked with rail providers to ensure we are aligned ... We don't expect the railroads to anticipate our needs; we utilize our modeling and planning tools to provide insight to near and midterm volume plans."

What are the biggest challenges for intermodal rail operators? Says Buenker: "Consistent network performance, effective mitigation of service interruptions, and managing [market variability] to minimize [negative] influence on our service."

INVESTING IN OPERATIONS

Overall, the surface transportation market remains highly competitive, notes Tom Williams, group vice president, consumer products for Fort Worth, Texas-based Burlington Northern Santa Fe Railway (BNSF), one of 10 North American Class I railroads. "A lot of capacity came into the truck market last year, and demand has moderated," Williams says. "That has had an obvious impact on over-the-road price competitiveness."

That hasn't stopped market players from investing in physical infrastructure improvements, streamlining operations through "precision scheduled railroading" (PSR) techniques (essentially, running trains on rigid pre-set schedules instead of holding them until all their cars are full), and upgrading management systems with technologies such as GPS tracking-enabled containers, automated gate systems, autonomous container movement equipment, and new mobile apps for truck drivers that shine a bright light on the drayage "black hole."

"For example, this year we opened a new intermodal ramp in Barstow to augment [intermodal] capacity ... in Southern California," Williams notes, adding that the railroad has invested more than $65 billion in its network since 2000. As with most Class I railroads, domestic intermodal "remains one of our largest growth opportunities," he says.

To remain competitive, the BNSF "must continue to be a technology leader by exploring and adopting emerging technologies," Williams added, noting that the railroad already is benefiting from the Rail-Pass app (which allows truckers to submit cargo information prior to arrival) and automated gate systems to speed up the movement of rail containers and trailers. It's also pilot-testing automated horizontal container-movement technology in Kansas and a battery-electric road locomotive in Southern California. BNSF Railway has 42,000 employees, 32,500 miles of track in 28 states, and more than 8,000 locomotives.

Among the most closely watched—and talked about—initiatives in the intermodal rail market has been the rollout of PSR and concerns over how the new operating philosophy would impact capacity and service. "I was always a bit of a skeptic in the past" about PSR, admits Hub Group's Yeager, who counts Union Pacific (UP) and Norfolk Southern (NS) among his company's rail partners.

But as these new operating plans have been aggressively implemented and refined, the skeptic has turned believer. "UP and NS have gone about it in a very methodical way," Yeager observes. "On-time service of the domestic product at Norfolk Southern is as good as it has ever been." He added that Union Pacific "has improved [service] well over 1,000 basis points since January."

What's the tipping point that drives the decision for shippers and their IMCs or brokers to choose rail intermodal versus over-the-road truck, or vice versa? "Logistically, there is no more efficient way to move long-haul shipments than by rail," emphasizes BNSF's Williams. "Our trucking partners work in tandem with us to finish the final miles ... to the customer's door."

To some extent, Mark D'Amico, senior analyst with Pittsburgh, Pennsylvania-based S.J. Consulting Group, agrees. "Rail gets more competitive in the longer-haul [transcontinental] lanes compared with shorter haul," he says. "With short haul, the spread between transit times and rates is less attractive." D'Amico also cites as revealing a third-party industry metric that calculates the spread between spot intermodal and spot over-the-road truckload (TL) rates over time. "In 2015, the value of this metric implied that the average intermodal savings was 20.1% versus truckload. Comparatively, in the July 2018-to-June 2019 period, that average savings had dropped to 3%, which sheds some color on the shift from TL to intermodal," he notes.

A FOCUS ON SERVICE

Yet at the end of the day, service reigns. Says Hub Group's Yeager: "Our first and foremost criterion is always what is the customer's delivery expectation. The first [decision point] is service, second is economics. If intermodal is a day or two longer and the appointment time won't tolerate that, [you] go truck," he explains. Where all things are equal from a service-need perspective, "we choose intermodal because it is more economical."

Steve Keppler, senior vice president of member services for IANA, notes that today's intermodal shippers are more demanding and sophisticated, balancing needs for capacity, service, cost control, and environmental stewardship. "Intermodal is a mature and cost-effective option [that is] more environmentally friendly and [has] a reduced carbon footprint," he notes. In addition, a truckload trailer-on-flatcar or 53-foot container moving on the rail is one less truck on the highway—reducing congestion and road wear and tear. "Intermodal is an important part of the solution set," he says.

Keppler notes as well that the industry needs to accelerate adoption of new technologies if carriers are to meet shipper demands for visibility, transparency, better planning, and faster, more efficient operations. Mike Albert, chief executive officer of technology provider DrayNow, agrees, citing the drayage industry, which still operates largely using phone, email, and fax, as in particularly acute need of a major technology makeover.

Albert describes DrayNow, launched in 2017, as "a real-time marketplace that connects customers [mainly the IMCs] with capacity [drivers operating trucks]." It's a highly fragmented market, with the typical dray carrier operating five or fewer trucks.

Operating in major intermodal markets of Los Angeles/Long Beach, Dallas, Memphis (Tennessee), Chicago, New York, and Atlanta, DrayNow drivers are equipped with a smartphone-based app they use to monitor loads posted in their area of service. On the app, the driver can examine load characteristics and easily accept a load with the click of a button. To address the tracking/visibility challenge, the app on the driver's phone constantly pings its location, which is fed in real time into a central portal and is continually updated.

"Technology has never been holistically based on [creating a solution to] digitizing the entire intermodal move," Albert says. "Players who really differentiate themselves with technology; bring intelligent, effective automation to replace the archaic, manual processes we use today; and provide complete door-to-door or ramp-to-ramp accurate, timely visibility will win."

About the Author

Gary Frantz
Contributing Editor
Gary Frantz is a veteran communications executive with more than 30 years of experience in the transportation and logistics industries. He's served as communications director and strategic media relations counselor for companies including XPO Logistics, Con-way, Menlo Logistics, GT Nexus, Circle International Group, and Consolidated Freightways. Gary is currently principal of GNF Communications LLC, a consultancy providing freelance writing, editorial and media strategy services. He's a proud graduate of the Journalism program at California State University–Chico.

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