Those seeking to divine the future of American trucking may want to examine the third-quarter results of J.B. Hunt Transport Services Inc.
Like everyone else in an industry suffering through the worst freight recession in decades, the Lowell, Ark.-based freight giant posted double-digit declines in its over-the-road revenue and income. But its intermodal traffic—by far the largest segment of Hunt's business—grew at a record pace, with revenue and operating income up 24 percent and 21 percent, respectively.
Hunt is reaping the fruits of a multiyear strategy to convert some of its customer loads from the highways to more fuel-efficient intermodal service. Higher fuel costs, environmental concerns, and worsening road conditions are pushing shippers to consider intermodal options, decisions helped along by recent improvements in infrastructure and service consistency.
Hunt's own equipment mix reflects this trend: At quarter's end, it had 37,000 intermodal containers in its fleet, an increase of 4,000 from the 2007 period. By contrast, Hunt ended the quarter with 3,309 tractors, a reduction of 1,419 rigs from the third quarter of 2007.
"In increasing numbers, traditional over-the-road shippers are turning to intermodal for the first time" as they seek to drive down costs and reduce carbon emissions, Kirk Thompson, Hunt's president and CEO, said in a statement accompanying the company's third-quarter results.
Hunt is not alone. Steve Van Kirk, vice president of commercial development for Schneider Intermodal, a unit of privately held truckload carrier Schneider National, says his division is growing at a pace that is "faster than the industry average."
Even truckers who've never before played on the intermodal field are seeing unexpected gains. USA Truck Inc., a large truckload carrier based in Van Buren, Ark., posted $2.1 million in intermodal revenue in its third quarter. The revenue is a tiny fraction of USA Truck's third-quarter revenue of $103 million (excluding fuel surcharges). However, the company had projected only $2 million in intermodal revenue for all of 2008.
"Our intermodal volume is small, and we are still on the steep slope of the learning curve, but we are pleased with our progress," said Cliff Beckham, USA Truck's president and CEO, in a statement.
Further evidence of truckers' growing use of intermodal can be found in the third-quarter numbers posted by the Intermodal Association of North America. Domestic intermodal operations showed their best quarterly results in more than four years, according to IANA, up by 6.7 percent over the third quarter last year. The surge was led by a 10.5-percent jump in domestic container loadings and buttressed by small gains in trailer loadings. Through September, domestic intermodal volume for both trailers and containers rose 4.7 percent from 2007 levels, according to the group.
Although in the past, intermodal movements tended to be long hauls, that's quickly changing. Through the first nine months of this year, intermodal loads transiting less than 1,000 miles grew by 7 percent, twice the growth rate reported for 1,000-mile plus lanes, IANA says. The "sweet spots," according to IANA, were in corridors between 700 and 1,000 miles; there, freight shipped in domestic equipment—predominantly 53-foot containers—grew by 9 percent through September. The IANA data underscore that the real action in intermodal is now on the short to intermediate corridors, where in the past goods have generally moved over the road via truckload carrier.
Hunt's numbers bear that out. For example, while the carrier's total intermodal load count in 2008's third quarter rose 13 percent over the same quarter in 2007, volumes on its Eastern regional network increased by more than 50 percent. Hunt's typical intermodal movement remains a fairly lengthy haul—the trucker says an average intermodal movement in the quarter traveled 1,817 miles. However, that's down 5 percent from 1,913 miles in the same period a year ago.
The company doesn't see that trend reversing itself anytime soon. Intermodal's length of haul "is going to continue to come down" as it has for over-the-road trucking, says Hunt CFO Jerry Walton. Positioning both intermodal and over-the-road services for shorter lengths of haul is "certainly where the trucker is headed," he said in an interview.
It's a similar story over at Schneider Intermodal. Van Kirk notes that his unit's growth is skewed toward intermediate hauls averaging 1,000 miles. Most of Schneider Intermodal's shorter-haul growth has come from business converted from over-the-road trucking, he says. By contrast, longer-haul volume gains are largely driven by new business.
An economic advantage
Carriers may be bullish on intermodal's future, but analysts are divided on whether intermodal can sustain the momentum. Satish Jindel, president of Pittsburgh-based SJ Consulting Group Inc., says intermodal gains last year were sparked in part by soaring oil prices, and oil's dramatic reversal in recent months will lessen intermodal's appeal. However, intermodal growth is likely to be supported over the long term by concerns over a worsening domestic road infrastructure that may force freight off the highways, Jindel adds.
Eric Starks, president of FTR Associates, a Houston-based consultancy, says the sharp decline in diesel prices will "remove a major tailwind behind the recent intermodal conversion. We expect that any additional conversion [to intermodal] will significantly slow down and likely pause completely for the near term." He notes, however, that intermodal will retain its current share of the market, including recently added short-haul traffic.
Other experts say intermodal is poised for a period of growth regardless of how oil prices behave.
"The wake-up call was when diesel prices hit $5 a gallon," says Charles Clowdis, managing director-North American markets, trade & transportation advisory services for IHS Global Insight Inc., a Lexington, Mass., consulting firm. "But even if prices never reach those levels again, it won't change the dynamic. In intermodal, the industry has found a system that works."
Jindel notes that railroads are poised to deliver "better transit times and on-time performance" in large part through significant infrastructure improvements. As an example, SJ Consulting cites a Norfolk Southern Corp. initiative to enable double-stack service between the port of Portsmouth, Va., and Chicago by raising clearances at 28 tunnels and seven bridges. The $155 million project will shave one day of transit time from intermodal service between the East Coast and the Midwest when it's completed in 2010, according to the firm.
NS's East Coast rival, CSX Corp., has launched its own intermodal expansion by creating double-stack clearances linking Washington, D.C., and Northwest Ohio via Pittsburgh; between North Carolina and Baltimore via Washington; and between Wilmington and Charlotte, N.C. The $700 million project is slated for completion in 2015.
Yet the potential of those future projects does not hide the reality that many short and intermediate traffic lanes are still not ready for intermodal operations. The existing rail infrastructure would not be able to support increases in intermodal demand on many of those corridors, according to industry observers.
"There are a zillion markets that will never be intermodally competitive unless the railroads or the government spends money on infrastructure," says John G. Larkin, managing director, transportation logistics group for the investment firm Stifel, Nicolaus & Co.
Tom White, spokesman for the Association of American Railroads, says future intermodal growth "will depend on whether there are capacity constraints in individual corridors. Railroads are investing heavily in expansion aimed at intermodal, but it does take some time for those projects to come on line."
Truckers also will be under pressure to better manage their drayage fleets to ensure that loads can be promptly fed to and from intermodal ramps while minimizing the dray that adds time and expense to an intermodal move. "As the length of haul declines, so too does the 'economic radius' around the rail ramp," Starks of FTR says. "Loads must originate and/or terminate near the ramp in order to minimize high-cost dray miles as a percentage of the total door-to-door move." As a result, Starks predicts intermodal will be hard-pressed to compete for shorter-haul loads outside high-density traffic lanes usually located near rail ramps.
Van Kirk of Schneider Intermodal says the efficiency of drayage operations will often determine whether the shipments should go on a train or a truck. In what may be an attempt to better control that segment of the business, Hunt expanded its in-house drayage fleet by 20 percent in the third quarter of 2008 to reduce its reliance on independent contractors.
Offsetting the increasing costs of dray service as loads are staged farther from main intermodal ramps may prove difficult, according to Larkin. "The longer the dray, the quicker the economies [of intermodal] break down," he says.
Challenges aside, there is little doubt that for a trucking industry confronting weak domestic and international economies, a deteriorating infrastructure, oil price volatility, environmental imperatives, and a demanding clientele, intermodal will take on increased importance.
In the process, companies that made their living off the highways may need to rethink their business models. Those companies that have successfully made the transition have needed to adjust their culture. That goes for firms whose names are virtually synonymous with trucking.
"J.B. Hunt himself might be rolling over in his grave if he knew that intermodal had become the growth and profitability driver for his company," says Clowdis.