Intermodal Business Primed for Growth
The potential benefits of intermodal transportation have been recognized for years. However, for many shippers, intermodal transportation has been viewed as a niche service. It is an attractive option for truckloads moving 1000 miles or more that are not service sensitive. For short and medium length of haul movements, where speed to market is a requirement, over the road truckload is the preferred option.
There are several forces at play that are suggesting that intermodal transportation is about to make the leap to prime time. One major impetus for change came from a book published in 2006, written by Rahm Emanuel and Bruce Reed, entitled “The Plan – Big Ideas for America.” Emanuel who is now White House Chief of Staff and Reed who is CEO of the Democratic Leadership Council, wrote then that “railroads are a highly efficient way to move people and goods.” Shifting 25 percent of freight from trucks to rail “would save 15 billion gallons a year” of fuel. It would also reduce commuting time and relieve congestion on America’s highways.
The Obama Administration is championing this recommendation by forming a national freight transportation policy that has as its mission to take more trucks off the road. Deputy Transportation Secretary John Pocari elaborated on this policy at a March 24 Senate Environment and Public Works Committee hearing where he stated that “we want to keep goods movement on water as long as possible and then on rail as long as possible and truck it for the last miles.”
Certainly another factor that is helping the intermodal cause is the current state of America’s economy and more specifically, the potential magnitude of the U.S. debt. Huge budget deficits may limit the funds available for investment in road infrastructure. At the same time, shippers trying to restrain their expenditures on freight transportation should also serve to boost the demand for intermodal service.
The fuel cost spikes in 2008 caused a number of major truckload carriers to re-evaluate their business models and trucking networks. While J.B. Hunt has been the leader in migrating their long haul business to intermodal and shrinking their over the road truckload business to the short haul and dedicated business segments, other leading carriers such as Schneider and Heartland Express have followed Hunt’s lead.
On a going forward basis, fuel prices will need to be closely watched. As of today’s writing, the economic debt problems in Greece and potential problems in other European countries have driven down the price of a barrel of oil to $75. Some folks are questioning if these problems may trigger a worldwide economic retreat. On the other side, one leading Canadian economist, Jeff Rubin, is forecasting the price of oil to rise to $150 a barrel by year end 2010 and $200 a barrel by the end of 2011. We will have to wait and see how the events of the past few days, including the Gulf oil leak, will play out in the future cost of oil. Nevertheless, any future spike in oil costs (and fuel surcharges) could trigger an upsurge in demand for intermodal service.
Another driver for intermodal growth is that an increasing number of carriers see intermodal's length of haul shortening considerably, especially in the Eastern USA, as Norfolk Southern and CSX build the infrastructure needed to haul intermodal freight economically in the 500- to 800-mile range. "In the East we're seeing more intermodal opportunities for what would typically be considered short haul," said Chad Thomas, director of intermodal at J.B. Hunt Transport Services. "There are significant highway conversion opportunities for shippers in that market," Thomas said.
This strategy is now moving beyond the key truckload players. LTL trucking company FedEx Freight, which has pointedly rejected rail transport in the past, could switch and turn to intermodal in coming years if the price is right and customers want the option. The transportation industry is changing rapidly, and carriers must also be ready to change, Bill Logue, president of FedEx Freight, told shippers at the NASSTRAC annual meeting this week in Orlando, Fla. "Customers want options," said Logue, president of FedEx Freight.
The less-than-truckload sister company of FedEx Express has characterized rail transport as inefficient and unwieldy for what it terms “fast-cycle logistics,” delivering freight next-day or second day up to 800 miles. The stance has put FedEx Freight on the opposite side of UPS, which has long been one of the largest customers in the rail industry for the longer linehaul portions of its domestic parcel network. Logue says he isn't ready to drive freight toward intermodal yards. "We find in most cases the railroads still have a transit time issue," he said. "But five years down the road, intermodal may be much more significant. As international globalization continues, the dynamics will change, and there will be an opportunity for more rail," Logue said.
Averitt Express, another large LTL player, is now providing intermodal services as part of its full-load/volume transportation services package. Averitt's Executive Vice President of Sales and Marketing Phil Pierce says Averitt's foray into the intermodal arena is a result of market conditions and customer feedback. "Working with a single provider who can handle multiple facets of your shipping saves you time, money and headaches," said Pierce. Averitt can bundle our intermodal services together with our LTL, truckload, international ocean/air, warehousing, PortSide® and leading-edge transportation management technology to bring shippers the ultimate value for their transportation dollar. Very few providers in the industry can do that. . . Our LTL distribution network and our 1,500 unit over-the-road fleet help us provide customers with operational and pricing flexibility they can't get anywhere else. We can react more quickly than other intermodal providers to sudden shifts — even with shipments already en route.”
This begs the question of what share of the transportation pie can intermodal service expect to garner in the years ahead. The trucker’s view is that highways are the most expeditious way of moving freight in North America and will likely continue to garner 70 percent of North America’s freight movements. Will intermodal be able to build on its base of long haul movements and gain market share in the mid range markets (500 to 800 miles) over time? The combination of rail service improvements, particularly in relatively untapped mid range eastern markets, the shift by national truckload carriers to more regional truckload business models, the potential increase in LTL linehaul traffic, a possible upward movement in fuel costs, government policy initiatives and customer demand for more cost effective transportation should allow intermodal service to make some strong single digit market share gains in the years ahead.