Rail intermodal folk don't know if these are the best of times or the worst of times.
Judging by the numbers, the outlook appears bright. Total annual volumes—domestic and international—are expected to grow somewhere between 3.6 and a little over 5 percent through 2017, according to an analysis from FTR Associates, a consultancy. Domestic intermodal volumes rose 8 percent in May, 7 percent in June, and 5 percent in July over the comparable periods in 2013, according to the Association of American Railroads.
Intermodal has much going for it compared to truck: superior economies of scale, better fuel economy, and a cleaner environmental footprint. As a result, a good portion of intermodal's growth has come at the expense of over-the-road truckers that confront a myriad of operational challenges that could render them uncompetitive on many lanes.
But as events of the past nine months have shown, what intermodal doesn't currently have are the consistent service levels that shippers had come to expect from motor carriers, albeit at a higher price.
Perhaps that was never clearer than in August, when Cold Train—a double-stack service moving fresh and frozen produce from Quincy, Wash. and Portland, Ore., to 20 U.S. markets and Toronto—suspended operations after a little more than four years. Overland Park, Kan.-based Cold Train, which ran on BNSF Railway's northern corridor, said its customers couldn't tolerate the poor reliability, slower-than-normal transit times, and chronic absence of BNSF locomotives. Miserable congestion on BNSF's lines turned normal four-day transit times from the Pacific Northwest to Chicago into seven days, wreaking havoc on deliveries of perishable cargo. On-time deliveries last November fell to 5 percent from 90 percent. BNSF, hammered by a terrible winter in its northern geographies and inundated with record crude oil and grain volumes, couldn't free up enough equipment to give Cold Train the service it needed. At this point, it is uncertain when, or if, the service will resume.
Ironically, the suspension came just five months after Cold Train's new owner, Michigan-based Federated Railways Inc., said it planned to add at least 1,000 53-foot containers to the Cold Train fleet during the next five years, bringing its container fleet to about 1,400. Despite the suspension, other temperature-controlled intermodal shippers continue to use rail. However, they, too, are experiencing service issues, especially along the Pacific Northwest-Chicago corridor. As a result, some perishable users who had converted to rail have migrated back to truck, though that evidence is anecdotal and not empirical.
The Cold Train experience may have been the most visible setback for rail interests, but the service issues have been more widespread than with just one user. Ever since last year's fourth quarter, service metrics have deteriorated. Train speeds have slowed and terminal dwell times increased. Average dwell times for the seven U.S. class I rails (including the U.S. operations of Canadian National Inc. and Canadian Pacific Railway) remain high at 24 hours as of mid-September, according to investment firm Morgan Stanley & Co. Perhaps unsurprisingly, the overall numbers are skewed by BNSF's 30-hour dwell times, according to the data. BNSF's train velocity, which slowed precipitously during the weather-addled first quarter, has not recovered to levels of a year ago.
Nor, it seems, has the rest of the industry. Eastern railroad Norfolk Southern Corp. has told its shippers not to expect tangible network improvements until late November. For some railroads, that timetable may be too optimistic. Thom Albrecht, transport analyst at BB&T Capital Markets, said rail networks might not return to 2013 levels until the fall of 2015. That could be pushed back into 2016 if another bad winter hits the nation early next year, Albrecht warned in a mid-September research note.
Larry Gross, an intermodal analyst for FTR, told attendees at the Intermodal Association of North America's (IANA) annual Intermodal Expo yesterday in Long Beach, Calif., that train speeds, on average, have declined 8 to 9 percent year-over-year and that there are "no real signs" of improvement. Service remains "stable at unsatisfactory levels," Gross said.
The challenges for intermodal service are well known. Bad winter weather paralyzed large portions of the rail network. A surge in peak-holiday season volume that would normally have hit the U.S. in early fall came early this year; the reason being that retailers wanted to speed deliveries of goods to avoid possible labor disruptions along the West Coast as the International Longshore Warehouse Union (ILWU) and the Pacific Maritime Association (PMA) remain at loggerheads over a new contract to replace the pact that expired Sept. 30. Through it all, demand for intermodal services has remained strong.
Railroads have allocated record amounts in capital investment to solve their operational problems and position themselves for growth. BNSF is slated to spend more than $5 billion on capital improvements, a decent chunk of which is earmarked to widening and modernizing capacity along its northern corridor. While the projects should yield significant long-term benefits, for now the mess accompanying the construction is having the perverse effect of compounding the slowdown. "The infrastructure work is causing its own congestion," said Jim Filter, senior vice president, intermodal commercial management for Schneider National Inc., the truckload and logistics giant.
Top rail executives are confident that the problems are fixable. However, they are loath to commit to sending an all-clear signal. "We are making modest, incremental improvement every week," Lance M. Fritz, president and chief operating officer of Union Pacific Railroad Co. (UP), the main unit of Union Pacific Corp., told the IANA gathering. Yet Fritz refused to be pinned down to a specific time frame as to when service would be restored to normal levels.
UP has allocated $4.1 billion in capital investment during 2014, $2 billion of which Fritz described as "replacement capital." Fritz said UP has been adding crews, a shortage of which contributed to its service issues. UP, the nation's largest railroad, has adequate resources to overcome the problems, Fritz said, adding that he doesn't see any obstacles standing in its way.
At the same time that railroads are coping with service problems, intermodal rates continue to climb. Intermodal rates in July rose 3.4 percent from year-earlier levels, according to a monthly index published by investment firm Avondale Partners LLC and Cass Information Systems, a freight-auditing firm. Avondale said it expects intermodal rates in 2014 to rise at a low single-digit pace as tighter truckload capacity creates cover for intermodal price hikes. The recent significant decline in diesel fuel prices might help moderate future intermodal rate increases because the index takes diesel prices into account when calculating "all-in" intermodal prices.
The concern, according to one long-time intermodal executive who asked not to be identified, is that railroads will be perceived as acting with impunity by raising rates while their service remains sub-par. The rails' image will not be helped if shippers think they are capitalizing on challenges facing the trucking industry to gouge intermodal users.
"Intermodal rates are going up everywhere, and the service continues to be terrible," the executive said. "I don't know what the rail mindset is right now."
For some with long memories, the 2014 service issues harken back to an era when intermodal reliability was the exception and not the norm. That era lasted for many years, and it won't take much to wipe out many of the industry's hard-won gains. The last time rail service took such a hard hit was in 2004, when an avalanche of Asian imports entering the West Coast overwhelmed their networks. Before that, one would have to go back to 1996 to find a period when service was this poor for this long, according to the executive.
The predicament may have been summed up best in a comment made by an executive of a privately held intermodal marketing company (IMC), which sells intermodal service on behalf of the rails, to Albrecht, the BB&T analyst: "Except for a shortage of locomotives, railcars, crews, and track, the railroads are doing fine."