Last year proved that intermodal shippers could be a tolerant bunch. Despite a fiasco-filled 2014 on the nation's rail network, noncaptive intermodal users, instead of taking their freight elsewhere, threw more business at the railroads than ever before.
This year will be a test of the railroads' resilience and whether they can vindicate shippers' faith in them. It will also be a test of shippers' fortitude, especially if bad winter weather puts rail service behind the curve again.
Intermodal traffic stood to increase in 2014 by 3 to 5 percent over 2013 levels, according to Intermodal Association of North America (IANA) data in mid-December, when this story was written. Through the end of November, 14.9 million trailers and containers moved in domestic and international service, according to IANA. Barring a December collapse, 2014 volumes will break the 2013 record of 15.5 million units, said Joni Casey, IANA's president and CEO. Through mid-December, intermodal traffic grew at a pace expected to double that of 2014 U.S. gross domestic product, according to Lee A. Clair, partner in the consultancy Zubrod/Clair & Co.
The increases, if they hold through 2014's end, will have come amidst the most chaotic rail operating environment in 10 years. Inclement weather that began in late 2013 intensified during the first quarter, wreaking havoc across the country's northern tier and at the industry's main interchange point in Chicago, where the network froze up as rail and road drayage operations were paralyzed. Not surprisingly, rail velocity and dwell time metrics sagged terribly during the quarter and didn't begin recovering until the end of the year. Carriers were and still are unable to say when complete "fluidity" would be restored to their networks.
Railroads were plagued by shortages of locomotives, crews, and infrastructure. Another season of a bountiful harvest triggered continued surges in grain traffic. A sharp spike in such nontraditional commodities as fracking sand and crude oil forced, notably, BNSF Railway—whose network serves the shale oil fields of the Dakotas—to put energy shipments ahead of other commodities and traffic, including intermodal.
Through the first week of December, BNSF's 2014 intermodal volumes were flat year over year, according to Clair. By contrast, Union Pacific Corp., BNSF's rival whose system wasn't as exposed to the rotten weather and the shale and agricultural booms, posted an 8.3-percent intermodal traffic gain over the same period, he said.
Part of intermodal's gain came from truck shippers who switched because many truck routes were paralyzed during the first quarter (even though the additional demand only worsened the rail capacity problems). But as Anthony B. Hatch, a veteran analyst and consultant, noted, intermodal shippers stuck with the service because, as products of the post-deregulation world, they better understand and accept the turbulence inherent in a market-driven system. Intermodal users also cut their providers slack because they had lived through an eight-year period leading up to the end of 2013 when rail reliability and customer service had strengthened considerably, Hatch said.
Shippers believe the railroads are serious about getting their act together, Hatch said. If money is the benchmark for commitment, then shippers will have little to fret about. Railroads in 2015 are expected to make unprecedented investments in capital improvements. BNSF, which took the hardest hits of any rail last year, plans to spend a record $6 billion in 2015 to add power, track, and labor, all of which will benefit intermodal users. Hatch, who expects the overall service picture to brighten as early as the first half of the year, said shippers would give railroads the benefit of the doubt at least until then.
Clair said that despite the problems, intermodal continues to bring value where big shippers want it, namely in longer-haul transport from their factories to warehouses and distribution centers. These moves provide a wider window for hitting delivery commitments and give a customer's supply chain a bit more breathing room, Clair said. Product that must be expedited direct-to-customer could be funneled to faster truckload services, he added. Intermodal service is in better shape than the rails' traditional carload business, which Clair said remains a major problem with no clear resolution.
A SHORT LEASH
It would be a leap of faith to interpret shipper tolerance as infinite patience, experts said. Even Hatch said that if the situation doesn't appreciably improve by the start of the third quarter, intermodal users will "be as upset as 'ag' shippers are today."
The bad winter weather only amplified problems that have been present for years and which have not abated. The Chicago interchange that intersects six of seven North American Class I railroads remains a mess of delays, disruptions, and backlogs. As was often stated during the year to illustrate the bottlenecks at Chicago, it can take a train more time to get from one end of the city to the other than it takes to run from Los Angeles to Chicago.
Megavessels entering the trans-Pacific trades threaten to overwhelm West Coast port infrastructures, while the creation of vessel-sharing agreements like the 2M alliance between Maersk Line and Mediterranean Shipping Co., which was set to begin in January, could alter freight flows because goods arriving at ports on one vessel will often head for different terminals. This has led to significant congestion and has left the "on-dock rail" model, where railcars must be filled before a train leaves the port area, increasingly prone to delays. The pitched contract battle between coastwide waterfront labor and management, which was still raging at this writing and which has slowed the loading and offloading of vessels since the fall, was a stark reminder of the ongoing risks in an interconnected system.
The cost and availability of drayage services that truck containers between ports, intermodal ramps, and shipping docks remains a significant problem. Port congestion and rail reliability played havoc with dray schedules, forcing drivers to wait longer than normal for loads and cutting into their productivity. Dray has not been immune to the impact of a shortage of commercial drivers. Drayage costs, which for a long-distance round-trip could run over $1,000, can neutralize the benefits of the relatively inexpensive train portion of the overall movement. Shortening dray miles would require the construction of smaller terminals closer to the customer; BNSF said it has terminals within 200 miles of 98 percent of the U.S. importer population.
The silver lining, according to Clair, is that sophisticated and deep-pocketed truckers are entering the space with experienced drivers and cleaner, more fuel-efficient rigs. Their presence should raise the quality and consistency of drayage services, albeit at higher prices than users are accustomed to paying, he said.
Meanwhile, intermodal demand will continue to rise, creating opportunities for the carriers as well as potential headaches in managing growth through the ongoing turbulence. On that score, the industry has been a victim of its own success. Railroads have effectively marketed intermodal as a lower-cost, fuel-miserly, and environmentally friendly alternative to over-the-road truck. In the domestic market, railroads are aggressively competing with trucks on short-haul movements, hoping to convert millions of road shipments to intermodal. Internationally, U.S. imports will keep on coming, maintaining pressure on the intermodal infrastructure to accommodate the flow.
WANTED: A LITTLE CLARITY
Perhaps the biggest challenge for users will be to gain clarity from rail operations people as to when the trains will consistently run on time. According to an intermodal user who asked not to be identified, shippers have been told to re-evaluate their 2015 growth plans because the system in its current state can't handle any growth. The user said there is no accountability at the railroads for the erratic performance, adding that operations people are focused on process, not results.
At this time, all shippers seem to be certain of is that their 2015 rates will increase over 2014's by mid- to high-single-digit levels, the executive said in mid-December. "They're terrified" about the situation, the executive added.
The railroads said the unknowable of first-quarter weather will play a huge role in setting the timetable for back-to-normal service. For example, CSX Corp., the Jacksonville, Fla.-based Eastern railroad, expects to see improvements sometime in the second quarter, according to Melanie Cost, a CSX spokeswoman. The timing will largely depend on the weather, she added.
Ted Prince, a long-time intermodal consultant and chief operating officer of Tiger Cool Express LLC, an Overland Park, Kan.-based company that uses refrigerated intermodal services to move produce eastbound off the West Coast, argued that the problems facing intermodal are more secular. The carriers focus too much on optimizing their individual networks, he said, and lose sight of the fact that intermodal is one national and global system where a yank on one strand sets the whole ball to unraveling. Clair of Zubrod/Clair countered that each railroad is accountable to its owners and its customers, and must develop and execute its individual strategy accordingly.
The railroads are doing what they can. CSX has developed an intermodal hub in the northwest Ohio town of North Baltimore. Western-originating freight headed to destinations east of Ohio is interchanged to CSX at Chicago, then brought to the hub and placed on CSX trains that move the goods to their destinations. The network is being expanded this year to handle 1 million "lifts," according to Cost; one lift is equal to one container being placed on or taken off a railcar. In its first year in 2011, the hub handled 600,000 annual lifts. CSX has added 250 intermodal lanes since the hub opened, she said.
The hub has been hailed by some as the future of intermodal. Instead of Chicago-bound freight's being drayed across town to one of several of CSX's Chicago ramps, the volume flows through in a pure rail-to-rail interchange from Chicago to the Ohio hub. The operation is aimed at avoiding the time-consuming dray at Chicago, thus expediting the discharge of freight from the region.
The hub-and-spoke-like model is "anathema" to traditional linear rail structures, Prince said. However, it offers an innovative way to increase geographic scope and freight density, while easing the pressure on Chicago, he added. Larry Gross, a principal at consultancy FTR Associates specializing in intermodal, called it a "bold experiment" in developing sorting facilities to connect the growing number of Eastern rail facilities. The key to the project's long-term success, Gross said, is to ensure that the benefits of strengthening the network and boosting the density and train size on each of the spokes outweigh the cost and service impacts of sorting containers mid-route.
BNSF, meanwhile, has virtually completed a 10-year, $3 billion initiative to "double-track" its transcontinental route connecting Southern California to the Midwest, according to Katie Farmer, the railroad's group vice president for consumer products. The railroad has launched projects to expand line capacity in the corridor; those efforts will be highly visible throughout 2015, Farmer said in a mid-December e-mail.
A rail-to-rail interchange with CSX that recently opened at Bedford Park, Ill., a small industrial city just southwest of Chicago, has streamlined the handover process between the two rails, easing congestion and boosting on-time metrics along BNSF's transcontinental main line, Farmer said.
Yet in a sign that BNSF has a ways to go, Farmer said the railroad remains "challenged" east and west of Fargo, N.D., due to line capacity projects that require trains to slow down through the respective construction areas.