Each month, Cass Information Systems Inc., a freight audit and payment company, and Avondale Partners, an investment firm, produce an index showing how much Cass customers, who generate $25 billion a year in freight bills, pay for domestic intermodal service. After a solid multiyear rebound from the Great Recession, the index, which encompasses linehaul costs, fuel surcharges, and accessorial fees, has sloped down relentlessly for the last 18 months. During that time, the federal government's weekly read on diesel fuel prices—which had been dropping since the start of 2015—began another plunge that by February had taken nationwide prices down to levels not seen in 11 years. Diesel prices had rebounded to $2.42 a gallon as of early July but were still more than 30 percent below where they were 18 months prior.
Does the data show a link between the prolonged decline in diesel prices and the drop in demand for intermodal traffic moving by rail? Donald Broughton, an Avondale managing director and chief investment strategist who has covered transport for decades, says it does. For months, Broughton has argued that falling diesel prices have led rail users to shift some of their intermodal business back to the highway, especially in shorter-haul markets in the country's densely populated Eastern half, which have long been the province of motor carriers and whose business the railroads have been chasing for years. (Rail executives estimate that 10 million to 12 million domestic loads, most of them in the East, are ripe for conversion to rail service.)
In April, Broughton told a gathering of the Transportation Intermediaries Association (TIA) that "cheap diesel [is] driving intermodal loads off rail [and] back onto the highway, especially in shorter lengths of haul." Broughton's views had not changed as of late June, when he wrote in his analysis accompanying the most recent Cass-Avondale data that "intermodal rates are expected to continue declining for the remainder of 2016 as the dramatic drop in diesel prices ... takes its toll on U.S. domestic demand." Prospects for any growth in the domestic container trade—the bulwark of U.S. intermodal business—for the rest of the year are "dependent upon demand in longer lengths of haul growing fast enough to offset the loss of volume in shorter lengths of haul, particularly in the East," he added. Broughton, who did not respond to an early July request for comment, had forecast in April a continued drop in oil and fuel prices through the rest of 2016.
A VOICE IN THE WILDERNESS
Broughton's is the minority view. In interviews and public statements, other intermodal experts said declining diesel prices are just one factor, and not the most important one, influencing modal choice and conversion. Many rail users of intermodal services have long-established relationships with their providers and tend to ignore an issue like fuel price fluctuations that is beyond their control, said John G. Larkin, lead transportation analyst for Stifel, an investment firm. "Most big shippers have a strategic commitment to intermodal and are more service-sensitive than fuel-price-sensitive," Larkin said. "Only a few of the most price-sensitive shippers switch back and forth as fuel prices fluctuate."
For well-entrenched users of intermodal services, it may not pay to shift traffic to truck even if lower fuel prices make over-the-road service a more cost-effective option than before. "It costs the shipper to change carriers, but it can cost a lot more to change modes," said Charles W. Clowdis Jr., managing director, transportation for consultancy IHS Economics & Country Risk.
Rail and intermodal executives acknowledge that conversion has occurred on shorter-haul corridors. However, they maintain it is due to the oversupply of commercial truck drivers and tractors, which keeps more capacity on the road. The abundance of supply has helped drive down truck rates to levels where they are converging with, and even dropping below, intermodal prices. (Ironically, one of the consequences of lower diesel prices is that it incents many marginal carriers—ones that might have exited the market if pump prices were $1 a gallon higher—to stay on the road.) The flip to a tight driver market could rev up rail demand as well as drive up rates for both rail and truck services regardless of the prevailing fuel prices, they contended.
"We could have fuel at this level, and if [truck] capacity was tight, prices would be higher," said Jim Filter, senior vice president and general manager, intermodal for Schneider National Inc., the Green Bay, Wis.-based truckload and logistics giant, whose roots are in trucking but over the years has become a large intermodal user.
Those who follow the railroads said the industry has little to fear from the "lower for longer" phase of oil and fuel prices. The typical railroad gets 438 ton-miles to the gallon, making it about four times more fuel-efficient than a motor carrier, according to the Association of American Railroads (AAR), the industry trade group. Using rail will cut an intermodal user's fuel consumption by 40 to 50 percent compared with truck, said Daniel Cullen, director of applied knowledge at Breakthrough Fuel, a Green Bay-based firm that works with about 40 shippers—most representing Fortune 500 companies—to process fuel reimbursements and analyze usage. In addition, shipments moving by rail are not subject to the federal and state excise tax burdens placed on motor carriers, though the rails do pay state sales taxes. The excise tax exemption can equate to savings of 40 to 50 cents per gallon, Cullen said.
"Diesel prices can be at any level, and it still doesn't change the fundamental story," said Cullen, who hasn't seen a material modal shift due to the drop in diesel costs.
Larkin of Stifel said an intermodal fuel surcharge is about 60 percent of the comparable truckload surcharge (consistent with the consumption differential), though the gap can narrow depending on the length of the truck dray that links the shipper to the rail ramp on one end and the ramp to the consignee on the other. "The intermodal cost advantage is significant enough even with a zero fuel surcharge that most shippers will stick with intermodal as long as service approaches truckload-like levels with respect to transit time and transit time variability," he said.
Therein lies the potential rub. A shipper that wants to compress its time to market, and do it relatively seamlessly, may find more value, at current truck rate and surcharge levels, to opt for a motor carrier over a railroad. To gain and keep market share, railroads must improve their transit times and deliver reliable service that's as close to being "truck-seamless" as possible. Superior fuel efficiency will matter little if the rails' service falls short.
Sarthak Verma, vice president of intermodal pricing for Lowell, Ark.-based J.B. Hunt Transport Services Inc., another traditional trucker who over the years has become an intermodal bulwark, said intermodal's value is no longer in achieving direct cost input efficiencies, but in providing capacity assurance in an era of truck supply volatility and in delivering a level of service on par with trucks. On the latter score, Verma told the SMC3 semiannual conference in June, progress is being made.
"Truck service plus a day is not far off," he said.