Intermodal Rising Against a Cloudy Economy

May 1, 2008
Intermodal is growing faster than other modes, but capacity problems are lurking in the wings.

The flip side of the often quoted line from Field of Dreams is, “If you don’t build it, they can’t come.” That’s the case with US transportation infrastructure, and according to John Lanigan Jr., executive vice president, Burlington Northern Santa Fe Railroad, the US can’t build infrastructure fast enough.

Reflecting on the original build-out of the highway system beginning with the administration of President Dwight D. Eisenhower, Lanigan points out that China has embarked on an infrastructure crusade that could be as much as ten times what the US achieved during its heyday of interstate highway construction.

Not only is the Chinese plan ambitious, it is moving at a breakneck speed. In just five years, Lanigan points out, China built a container port, from concept to ribbon cutting, with a capacity of 20 million TEUs (twenty-foot-equivalent units). The average highway project in the US takes 13 years and other infrastructure projects average 10 years, notes Lanigan. BNSF’s own efforts to site an intermodal operation in Southern California are in the fifth year and the railroad still doesn’t have a permit to build. Each year, BNSF re-budgets the project, and each year the costs go up dramatically based on projected materials, labor and other cost factors.

The growth in sourcing from Asia (and particularly China) is part of the reason port traffic has increased 400% since 1980. BNSF has seen 25% more shipments in the last five years, says Lanigan. “It took 150 years for the rail industry to get to 8 million shipments and just five years to go from 8 million to 10.5 million,” he continues.

BNSF is the biggest intermodal railroad in North America, says Lanigan, with about 37% of its current business in intermodal. The other Class 1 railroads are running in the high teens and lower 20% ranges for intermodal. About half the intermodal traffic on the BN is containers and, points out Lanigan, most of the container traffic is international. Lanigan suggests that by 2020, 50% of the BNSF’s revenue will come from intermodal traffic.

“Tight capacity in the truckload segment shined a light on rail as an efficient means to move volumes of freight,” says Lanigan. And even with capacity loosening up as overall volumes decline in the weak US domestic economy, Morgan Stanley Research reports shippers expect to increase their use of intermodal by 3.2% in the next six months, a rate that is nearly triple the next fastest growing mode. And, intermodal is the only mode that will see increases at a faster rate than reported in the prior Morgan Stanley study in September 2007. Shippers expect to increase their use of regional less than truckload (LTL) by 1.2% in the next six months. National LTL use will increase 0.8%, and truckload will remain flat. Intermodal is attracing more shippers who want to control costs, says the Morgan Stanley survey. One-third of respondents (40% of large shippers) said fuel costs were driving a shift to intermodal to lower their costs. Railroads are three to five times more fuel efficient than trucks, but slower service and lack of rail access keeps some shippers away. Intermodal seems to enjoy a better position than carload rail and service has been improving for the most part. Because most intermodal moves include a truck move for pick-up, delivery or both, access is less a problem than rail carload. But generally, railroads will have to improve service in order to be able to increase rates above the rate of inflation, says Morgan Stanley.

There’s already some talk of equipment shortages in intermodal service for specialized equipment, and should that continue or expand into conventional containers, it could keep some shippers away from the mode.

Fuel costs are hitting long-haul trucking very hard, and though lower freight volumes might be expected to free up more capacity, the cost of operating is driving more smaller operators out of business or leading them to change their focus to shorter lengths of haul. Rate and cost increases aren’t balanced for trucks, says Morgan Stanley. Collecting fuel surcharges could be a bigger issue than rate increases. If it’s difficult for motor carriers, railroads aren’t immune to issues when it comes to fuel surcharges. One respondent to the Morgan Stanley survey summed up the view of many saying, “Fuel surcharge tariffs far exceed railroads’ actual cost of fuel. Railroads are at serious risk of class action [law suits].”

US Infrastructure Needs Transportation Growth Projections 2020
Vehicle Miles Traveled (highway) 4 trillion
Rail Ton Miles 2 trillion
Motor Carrier Ton Miles 4 trillion
Port Traffic 58 million TEUs
Since 1980, US railroads have taken 39% of track miles out of service. Port infrastructure has been added, but no new ports developed while container volumes increased 400%, says John Lanigan Jr, executive vice president, Burlington Northern Santa Fe Railroad.

Rail locomotives use a different grade of diesel fuel than trucks that is between a bunker rate (ocean) and the rate paid by motor carriers. Whether or not the railroads are out of line with what they charge, the legal threat is real. The US Department of Justice and a number of international bodies have mounted investigations into airline pricing centered around fuel surcharges and investigations have already begun in maritime as well. At least one major rail case is pending.

Despite shipper perceptions that include an observation that, “Rail organizations are pushing rates beyond the pale of reasonableness just because ‘they can,’” intermodal is on the rise. The rate of increase for intermodal growth may have slowed from the pace of just two or three years ago, but that appears to be more a reflection of the state of the economy and not dissatisfaction with service. Intermodal prices remain about 15% lower than truckload, says Morgan Stanley, but the gap is more like 20% with fuel surcharges. And, improved service could drive pricing and also allow railroads to compete more in shorter lanes where motor carriers had the service advantage.

It’s not quite the last word on pricing, but the current expectation is intermodal prices will rise 1.7% in the next six months. This is a faster pace than last September when respondents to the Freight Pulse 13 study said they expected rates to rise 0.7% over six months. Historically, the highest expected increase was reported in September 2007 when shippers said they expected to be paying 4.1% more. The lowest rate was 0.2% in the May 2002 survey. If there is any seasonality to the figures, shipper expectations expressed by respondents to the April 2007 survey came up with was 1.7%, the same as the current March 2008 projection.

Given that the economy weighs so heavy on freight volumes, how did shippers rank the current state of the US economy? On a 10-point scale where 10 is “strong” and 1 is “recession,” they give it a 4.7. That’s the lowest in the history of the Freight Pulse Survey, but it is only slightly below the 5.0 line between growth and contraction. The trend has clearly been down. In March 2006, shippers gave the economy a grade of 7.0 and then lowered that to 6.0 in April 2007. But more shippers are saying inventories are in line with plans than in the prior survey, suggesting they were taking action in line with events.

Shippers don’t see a deep recession, according to the survey, and expect to see things start to improve in the second half of 2008.

An interesting issue facing US companies this year is the impact of the Olympic Games in China. Expected plant closures and disruptions has some companies planning to build some inventories before the games and others expecting to hold off and then buy more after the games are concluded. Mostly, sentiment is that it won’t affect ordering plans. With over one quarter of respondents saying they agree that it will cause some sort of change in their ordering plans, it doesn’t sound like a majority, but, over 20% of respondents were unsure how it would affect them.

Whatever the shorter term concerns expressed by respondents to the Morgan Stanley survey, it’s clear the significant infrastructure and other systemic issues will not have been resolved when the US re-emerges from the current economic slowdown. For instance, if more small carriers exit the business during the downturn, it will add to the pressure on intermodal that has already been created by a lack of long-haul drivers. If the recovery brings any significant surge in freight volumes, capacity in the modes and at the ports will be an issue.

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