Rail giants target East Coast TL freight

The two Eastern Class I railroads are poised to make an aggressive push to convert East Coast truckload traffic to intermodal service, believing there is a large untapped market out there for conversion.

One of the rails, CSX Corp., made its intentions clear at a meeting last week with analysts in Detroit. CSX executives told analysts that of 14 million domestic truckloads moving 550 miles or more each year within the Eastern United States, 5.1 million—or 35 percent—have already been shifted to intermodal. That leaves a market of about 9 million truckloads that are potential candidates for conversion, CSX told the analysts.

For the Eastern rails, the market for conversions in the heavily congested region "represents a large opportunity, in our view," said Jon A. Langenfeld, analyst for Milwaukee-based Robert W. Baird & Co., who attended the meeting with CSX executives.

Langenfeld said CSX already handles about 40 percent of the 5.1 million loads that have been converted from truckload to intermodal.

Edward Wolfe and Francois Trahan, who co-head the Wolfe Trahan transport investment firm, said they were told by CSX executives that the railroad wants to expand its intermodal share so it can build density moving through the railroad's newly opened Northwest intermodal terminal in Baltimore, Ohio, near Toledo. The railroad is running 17 daily trains through the facility but wants to expand daily throughput to 32 trains by year's end, the analysts say.

The facility is designed to handle container traffic moving from East Coast ports into Midwest markets, and also serves as a transfer point for trains moving from West Coast ports to East Coast and Midwest destinations without having to be routed through the congested Chicago region.

CSX's chief rival, Norfolk Southern Corp., is also converting truckload customers over to intermodal, according to John Larkin, chief transport analyst for investment firm Stifel, Nicolaus & Co. Norfolk Southern has a smaller network than CSX, and unlike its rival, relies on intermodal marketing relationships with firms like The Hub Group Inc. and J.B. Hunt Transport Services Inc. to support its conversion efforts.

Analysts at Wolfe Trahan said they've been told by an executive at a large containership carrier, whom they declined to identify, that Norfolk Southern is trying to aggressively raise its intermodal prices to take advantage of stronger demand.

Spokeswomen for both railroads were unavailable for comment.

Changing market dynamics
Not every load is suitable for conversion to intermodal. Truckload services are faster and have more direct routings than an intermodal service that involves local drayage at either end of the rail move. As a result, truckload will always be the preferred transport mode for companies looking to maintain faster transit times to minimize inventory-carrying costs.

However, increasing highway congestion and sharply escalating diesel fuel prices have begun to drive long-time truckload users to at least consider intermodal. Rising truck rates stemming from a dramatic reduction in capacity may also drive truck users to the rails.

Charles W. Clowdis Jr., managing director, transportation advisory services for the consultancy IHS Global Insight, said intermodal's improving reliability and transit times will gain it new converts at lengths of haul once thought uncompetitive for rails. "Even if oil prices decline from these levels, users who try intermodal will stick with it, at least for some of their freight," Clowdis said.

CSX's and Norfolk Southern's drive to penetrate the truckload market in the Eastern United States comes amid a broader repositioning of the U.S. intermodal market. For decades, intermodal service in the United States has been viewed as an attachment to an international movement. Now, however, with truck shippers facing traffic bottlenecks and reduced capacity, railroads are beginning to throw more of their intermodal weight behind the domestic origin-destination market.

In the first quarter, volumes for domestic intermodal containers, which account for about three-fourths of all domestic equipment volumes, rose 8.8 percent from the fourth quarter of 2010, according to the Intermodal Association of North America. "Unlike most recent quarters, gains [in domestic container traffic] were not driven by trans-loaded international freight," the trade group said.

Several weeks ago, UPS Inc. disclosed that it placed a multi-year order for between 6,000 and 7,000 double-stack intermodal container units, all of which will be used within UPS's domestic network, according to company spokesman Norman Black.