The two Western rail giants, Burlington Northern Santa Fe Railway and the Union Pacific Railroad Co., are positioning themselves to capitalize on a potential bonanza: The conversion of millions of truckloads mostly moving west of the Mississippi to domestic intermodal service.
Omaha, Neb.-based UP estimates that approximately 11 million truckloads shipped within its service territory are candidates for conversion to domestic intermodal service. About 3 million of those move in UP's 10 primary domestic corridors, according to the railroad. Fort Worth, Texas-based BNSF projects that 7 million truckloads in its territory are candidates for conversion. In 2010, BNSF handled between 2.25 and 2.5 million domestic intermodal loads, while UP handles, on average, about 2 million a year.
The Western rails, which like their brethren in the East have been criticized in the past for overstating the reliability of their intermodal service, say they have brought their infrastructure, rolling stock, and terminal capacity up to levels where they can now compete with trucks on most traffic lanes and at lengths-of-haul as short as 700 miles, well under their traditional 1,500- to 2,000-mile movements.
For the rails' senior intermodal executives, the prospect of converting 18 million truckloads to intermodal is sufficient motivation to get it right.
"We have a unique opportunity, and the opportunity is huge," says Steve Branscum, BNSF's group vice president, consumer products marketing.
The efforts by the Western rails—along with similar strategies being employed by their two Eastern counterparts, CSX Corp. and Norfolk Southern Corp.—represent a fundamental change in how the industry has marketed and operated its intermodal business. For decades, domestic intermodal operations were viewed as a "bolt on" to international service that involved a prior or subsequent ocean freight movement. Over the last decade, domestic intermodal has grown as a stand-alone service, but mostly from east to west and over lengthy distances. Eastbound intermodal movements remained mostly an extension of ocean service linking West Coast ports with inland points.
Today, however, challenges ranging from high fuel prices to fears of a driver shortage to highway congestion are forcing more truck shippers to consider domestic intermodal as an alternative, regardless of location. The increasing demand is fast making domestic the tail that wags the intermodal dog. UP, for example, reported a 17-percent increase in 2010 domestic intermodal volumes over the prior year. BNSF's 2010 domestic intermodal traffic volume rose 4 percent over 2009 levels. However, first-quarter domestic traffic grew 13 percent over the same period in 2010.
In the first quarter of 2011, domestic service accounted for 46.7 percent of total intermodal volume, slightly higher than full-year 2010 figures, according to the Intermodal Association of North America (IANA).
Hurdles to clear
But with the growth and opportunity come challenges, especially as the railroads become more aggressive in the 600- to 1,000-mile lane segments long dominated by over-the-road truckers. 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, are synchronized to deliver fast, consistent service at lower price points than trucks can offer.
Many of those 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 the railroads have made significant speed and reliability improvements in their intermodal operations, and can now compete with trucks across the country better than ever before. However, Howland notes that intermodal service in the secondary markets—he cites the Ohio Valley 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.
Matt Gloeb, UP's assistant vice president of domestic intermodal, 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.
Gloeb says of UP's 10 primary corridors, only the Los Angeles–Seattle and Los Angeles–Houston lanes are not yet at service levels where they can regularly compete with trucks. The rail is expected to reach service parity on the two lanes by the end of the year, Gloeb says.
Another challenge for the railroads is convincing truck shippers that domestic intermodal can work for them and, perhaps more importantly, that the rails can deliver on their service commitments. UP and BNSF say with their physical networks in place, it now becomes a matter of persuading prospective intermodal customers to come on board, getting existing intermodal users to use more of it, and assuring both new and current customers that they can rely on it to do the job.
Branscum of BNSF says most of his company's customer base relies on intermodal for only about one-quarter of their total transport needs.
"A lot of customers keep freight on the highway because they don't think there's an intermodal solution," Branscum says. 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.
As part of its marketing effort, BNSF earlier this year stepped up its "Next Generation" program, launched in 2010, in which it works closely with intermodal providers to educate shippers on the benefits of the service, Branscum says.
Rates on the rise?
Education aside, intermodal users will be paying more for the service this year than they have in several years. Projections range from between 3 and 8 percent, 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 the "Big Four" intermodal marketing companies—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.
The rails are well aware that in a climate of elevated diesel fuel prices, road congestion, and driver and capacity shortages, the intrinsic economics of intermodal service afford them some degree of pricing leverage. However, Branscum says the increases, if any, will just narrow the rate gap between intermodal and more-costly over-the-road service.
"If intermodal was 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 trans-load 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 intermodal 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. 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.
While there are many variables that could disrupt the railroads' best-laid 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.