Not all that long ago, the U.S. railroad system bore more than a passing resemblance to Dante's vision of hell. Each week, thousands of rail cars went into the yards in Houston; none ever seemed to come out. Logistics managers could abandon all hope of seeing any freight that entered there.
To put it bluntly, rail service had tanked following the mergers of several large rail systems in the '90s. The gridlock was so bad it made the evening news. Shipments that had once taken three or four days were now taking 30 to 45. Plants shut down for lack of supplies. Food spoiled sitting by the tracks. All told, this train wreck of a situation cost U.S. industry several billion dollars.
For those who had options,the choice of modes—road or rail—was easy. Truckload transportation may have been more expensive than intermodal, but it was reliable. Many a logistics and distribution manager turned away from intermodal transportation and vowed never to return.
But now may be the time to rethink that vow. Both significant improvements in railroad service and troubles visited upon the motor carriers provide fresh incentive to reconsider intermodal transportation. And if that's not enticement enough, there's cost—at a time when the economy's bumping along the bottom, it's hard to ignore the potential savings intermodal can bring.
The numbers suggest that many shippers have already made the move. (And many never did leave, despite the frustrations.) In the face of a sluggish economy (to put it kindly) and the 10-day West Coast port slowdown last fall, intermodal shipments increased markedly last year. According to statistics compiled by the Intermodal Association of North America (IANA), total rail intermodal shipments grew by 5.7 percent in the fourth quarter of 2002. Even more impressive, domestic container shipments went ahead 9.7 percent over the fourth quarter of 2001. Furthermore, trailer loadings were up for the first time since 1999—though IANA attributes that in part to dislocations caused by problems at the ports.
|Total domestic equipment||4,919,089||5,063,451||2.9%|
Source: Intermodal Association of North America
For the year, total intermodal shipments grew by 5.8 percent, with the strongest growth in the domestic container segment of the business, up 8.5 percent. International shipments, which make up most of the rails' intermodal business, also grew briskly—up 8.4 percent. Trailer shipments declined slightly. (See the table) Overall, the industry showed the best growth since 1997.
Where's the growth coming from? A big part of the story is the trouble in trucking—high fuel prices,the cost of capital and steep insurance costs—which has led to bankruptcies. Fewer truckers are on the roads these days,and that has sometimes led to a capacity crunch.
Even the surviving truckload haulers are reluctant to add new trucks and new capacity until their concerns about the performance and reliability of new lower-emission engines mandated by the federal government are allayed, says Brian Bowers, vice president of intermodal services for Schneider National, one of the nation's largest truckload carriers. "In a year when highway capacity's definitely contracting, there is definite opportunity for intermodal."
But the other part of the story is that rail service has unquestionably improved. That improvement reflects large capital investments made in recent years, says Tom Piatak, president and chief operating officer for Vexure, a third-party logistics company based in Florida. "The railroads have spent a significant amount of money to make the service as truck-like as possible."
"Looking at it overall, we're going through one of the best service periods I've ever seen from the railroads, and I've been in the business for 44 years," says Phillip C. Yeager, chairman of Hub Group and a veteran of the intermodal industry. Customers are taking note, too, he adds. "About September or October, they began coming back to intermodal," Yeager reports, "and some had said they would never come back."
All this is a victory for rail management. The railroads, whose major commodity businesses are quite mature and cyclical in nature, now realize that intermodal represents one of their few growth are as, says Richard M. Rogan, Hub Group's vice president of sales and marketing. They 've also figured out that they need to stay with the improvement program. The railroads, he says, recognize that to capture market share from truckers, service consistency must be near 100 percent.
Back on track
There's no question many shippers have returned to intermodal—or at least increased the amount of freight they commit to it. Says Rogan, "I deal with Fortune 1,000 companies. Over the last two years, I have seen a modal conversion trend on their part that continues to grow. At its core, there are a couple of issues." Rail service is generally good, he says, if you equate "good " with consistency. " Plus, there's a real premium on looking for ways to save money."
Third-party logistics company APL Logistics moves more than half the loads it manages via intermodal. Kirk Williams, vice president of freight services for APL Logistics, says, " It's something that every shipper with truckloads moving 700 miles or more should take a look at." Though he occasionally encounters equipment shortages, he says, service has not been an issue. "The on-time performance is as good as or bet ter than it was before the mergers. There will always be spots where service is not as good as it should be, but the issues with mergers are behind us."
Not everyone agrees. Adam Bridges, vice president of marketing for CSX Intermodal, which wholesales rail service to truckers, intermodal marketing companies and third parties, says service still lags. "The highest end of service is not as good as it was before the mergers," Bridges says. But he concedes that while the railroads still have work to do so that trains arrive on schedule, intermodal remains a good option for shippers with some flexibility in delivery times. " In DC-to-DC markets, where you can add a day to your schedule," he says, " we're at 99 percent."
Those DC-to-DC markets, in fact, represent a big opportunity for intermodal. Historically, intermodal's sweet spot has been inbound shipments to distribution centers from manufacturing plants. But Yeager, for one, believes that recent service improvements will allow companies like Hub to offer distribution services as well. (Hub Group, based in Downers Grove, Ill., is a freight management business whose operations include the nation's largest IMC—or intermodal marketing company. IMCs purchase linehaul services from the railroads and sell and arrange intermodal transportation for their customers.)
Yeager is not alone in his enthusiasm. Schneider's Bowers remarks, "We're real excited about taking this trend to the next level—converting freight for the DC-to-DC move." The big opportunity is the DC customer space." But capturing that business, he acknowledges, will depend on intermodal's ability to guarantee 95- to 100-percent ontime performance —far better than its historic 70- to 80-percent on-time record.
At the same time, yet another growth opportunity has emerged: Third-party logistics providers (3PLs), which handle portions of customers' logistics operations under contract, are turning to intermodal transportation, some for the first time. Rogan believes that 3PLs, flush with success cutting their customers' costs through network rationalization, carrier consolidation and similar tactics, are looking for additional opportunities to reduce costs. One of those is intermodal.
But that may be premature. Though costs for intermodal services have historically run 10 or more percentage points below costs for truckload services, both Bridges and Piatak argue that the difference is disappearing —and ought to.
Says Bridges, "If all you're looking for is ramp to ramp, [intermodal] is pretty inexpensive. But we're finding that customers want [the intermodal provider] to handle the pickup and delivery, that they are looking for one bill, and that they want you to provide the box. By the time you provide the box, the dray on both ends, one bill and collection, we feel those value-adds get us right against truck in terms of pricing."
Piatak says Vexure's intermodal business, TRT Carriers, does not necessarily price intermodal below truckload services. "The perception is that although intermodal is not as reliable as truckload, it's cheaper. But for the railroads to grow this segment, they need to be able to reinvest the capital. There's a balance between making an adequate return and giving the shipper the entire break."
Despite recent advances, intermodal service still has its limits. It cannot compete with the speed of team drivers, for instance. And the greater the distance between the DC and the intermodal terminal, the higher the cost of the drayage, which offsets some of the linehaul cost savings. The handling required by draying at both ends adds time that m a kes intermodal uncompetitive on most short-haullanes—its efficiencies kick in at about 700 to 800 miles. And even with the much-heralded improvements, service levels can still vary markedly by lane.
There are other lingering problems as well. APL's Williams says, "There's less flexibility with rail. Once it's on a train, you cannot pull it off easily. If there's a long drayage, that eats up the savings. For most freight moving in the country today, a delay of several hours or even a day will not cause a plant to shut down. But a lot of freight is moving on a just-in-time basis." Intermodal is not a good option for that freight.
Most intermodal providers understand those limits. They also understand that service varies markedly from lane to lane. In fact, many have developed good lane-by-lane performance data and will work with skeptical customers to run test loads on specific lanes if they have any doubts.
The IMCs and other intermodal service providers have set ambitious long-term goals for themselves. Bowers of Schneider National says his company's aim is to provide service that emulates the best single-driver truckload service. Those standards call for moving goods 500 to 750 miles a day and delivering by 10 a.m. on the scheduled delivery day, with a minimum 97-percent on-time performance record. "We think we have a viable [shot] at the direct-tocustomer space as long as the standard is built around a single driver."
At the same time,he notes,intermodal also gives shippers a range of lower-cost, though slower, options. "We can do anything from bang on with truckload to two days slower," he says.
Ultimately, all of that hinges on the railroads' ability to carry out their commitment to better service. Quips Rogan: "As long as the railroads don't try to merge again, we have bright prospects."
It used to be that intermodal service could be neatly divided into two categories: trailer on flatcar (TOFC) or doublestack container service. But now, another type of service has joined the mix, using what might seem like the most unlikely of vehicles: the old-fashioned boxcar.
Today, at least one intermodal marketing company (IMC) offers the service. "We refer to it as an intermodal boxcar program," says Burke Anderson, director of Hub Group's rail services, who helped establish Hub's boxcar group. The service, which was initially aimed at the consumer goods market, is now expanding into other areas, he says, including paper and steel coils. The appeal? Low cost and high capacity: A single boxcar can carry as much as three trailers or containers can.
Hub's boxcar program has met with particular success with shippers moving wine out of California as well as some canned goods, reports Richard M. Rogan, vice president of sales and marketing for the Hub Group, which has offered the boxcar service for the past six years. "We can take a shipment of wine in northern California, move it to New Jersey, offload it into trucks, and make deliveries to distributors in the area," he says. "It can start and finish as a truckload shipment."
But Hub's biggest customer for the service is Diageo, the Europe-based drinks business that is parent to such brands as Guinness, Johnnie Walker, Jose Cuervo, Smirnoff, J&B, Bailey's, Tanqueray, Captain Morgan, Beaulieu Vineyard and Sterling Vineyards. "They've built a whole distribution network based on the boxcar," Rogan says.
Initially, railroads were reluctant to give IMCs access to boxcar business, since they sell that service directly to customers, Rogan reports. But he says the shipments Hub handles are largely those that either originate or terminate at facilities without a rail siding—which reduces their appeal to the rails. In any event, many of the IMC's customers are too small to attract attention from the railroads' sales forces. And competition for equipment is not an issue: The service uses private equipment, not the railroads' boxcars (the 60-foot boxcars, which can handle 170,000 pounds apiece, are heavily insulated cars initially built for shipping french fries). "The railroads are not hugging us over this," he says, "but they are less resistant to the idea."
The economics of using boxcars can be compelling. Rogan reports that a typical move costs 10-to 15-percent less than traditional intermodal shipments, which themselves usually move at a discount from over-the-road shipments.
The tradeoff, of course, is time. Transit times are slower, so time-sensitive freight is not a candidate for the service. A coast-to-coast boxcar shipment will take about 11 days, compared to about six days for a single-driver truckload shipment, and a day or two longer for a container or TOFC shipment.
The success of the service is heavily dependent on distribution centers, Rogan says, because they manage the bulk of the transloading. He reports that most moves require transloading to or from trucks on one end of the move, noting that the economic benefits drop significantly if transloading is required at both ends.
Burke adds, "We're trying to use the distribution center concept to bring truckload business back to rail." So far, he says, Hub Group has developed relationships with more than 50 public distribution centers in Canada and the United States. That hasn't been tough to do, Rogan says: "They like this business because it's a throughput business."
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