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Intermodal at a critical crossroads

11.20.14

By Larry Gross 
Original article published November 12th, 2014 at JOC.com

With intermodal loadings in record territory and the railroads pushed to the limit to move the volume, it might seem a bit strange to be sounding an alarm about a slowdown. But the intermodal industry is entering a period of vulnerability after a prolonged period of growth. While trouble isn’t inevitable, intermodal’s near-term destiny has passed to forces outside of intermodal’s control.

This hasn’t been the case previously. Intermodal’s historical gains have been hard-won. The industry has put together a sufficiently fine service that the intermodal equation -- a reasonable degree of reliability coupled with cost savings -- has resonated with more and more shippers. Now, the prolonged service meltdown that shows no real sign of improvement threatens that equation.

As of the end of October, the objective data, in the form of average intermodal train speeds published by the railroads, was telling a sad story. Average intermodal train speed over the previous four weeks stood at just 28.4 mph, down 2.7 mph, or 8.7 percent, from a year earlier. This is the lowest level during the current crisis, lower even than during the depths of the polar vortex. This is important not because of the speed itself, but because this statistic also serves as a barometer of congestion and service variability.

Nevertheless, intermodal volume has held up well, to put it mildly. Over the same four-week period, intermodal volume tracked by the Association of American Railroads was up a solid 5.3 percent year-over-year and stood just below the record for this measure, set a month earlier. But it would be a mistake to assume that such continued growth is inevitable, regardless of service quality or price.

Simply put, intermodal has grown through the service crisis because highway capacity has remained tight. This has led shippers to continue to make use of the intermodal alternative. Shippers have become convinced that the truck driver crisis is here and relief may be a long way off, so they’re reluctant to release any current avenue to freight capacity. But from here, intermodal will keep growing only as long as tight highway capacity continues.

Current work by FTR Transportation Intelligence indicates that demand for truck transportation is running at more than 98 percent of capacity. Further, we expect this situation will persist for at least the next 12 to 18 months. But a scenario could just as easily be painted for improvement. For example, what if the newly elected Republican Congress pushes through a rollback of hours-of-service regulations, and thereby gives 3 or 4 percent capacity improvement back to the industry? Immediate crisis ended!

Further, FTR’s expectation for truck capacity to go critical sometime in 2016 is based on our best guess for the timing of proposed additional regulations such as electronic on-board recorders and speed limiters.  With an acting head of the Federal Motor Carrier Safety Administration and a change in control in the Senate, will that timetable hold?

At current intermodal service levels, if trucking capacity begins to loosen up, then domestic intermodal growth will stop. Furthermore, it’s not out of the question that traffic will begin to convert back to highway. 

FTR’s most recent estimate for intermodal market share sounds a cautionary note. After rising a sharp 1.4 percent during the first half of the year -- to 18.9 percent of long-haul dry van traffic -- intermodal’s share plunged back to 17.9 percent in the third quarter. Setting aside the recently volatile international sector, the portion of intermodal share accounted for by the movement of domestic equipment also dropped sharply in the third quarter. So despite recent growth in intermodal activity, there are signs that the service situation is starting to bite.

Later this month, I’ll be listening to a bevy of railroad executives at the Railtrends conference in New York. What I’ll be listening for are concrete plans for getting the service situation under control in the near term, and changes in the normal way of doing business in the longer term, so as to prevent another meltdown the next time it snows in Chicago.

Intermodal’s bright future has been put at risk by the current service problems. In the near term, intermodal’s destiny depends on what happens to the truck capacity situation. In the long term, it depends on whether the industry can regain shippers’ trust as a consistent and reliable transportation option.

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Lawrence Gross is president of Gross Transportation Consulting in Mahwah, New Jersey, and a partner at FTR Transportation Intelligence. A veteran with 34 years in the transportation business, he covers freight transportation, concentrating on the intermodal and trucking sectors from a transportation and equipment perspective. He is a frequent speaker at industry events. Contact him at [email protected] and follow him on Twitter: @intermodalist