A Perspective on the State of Intermodal in 2020

Kristi Knichel | Knichel Logistics

As CEO of an IMC in business since 2003, I have seen some fairly dynamic changes take place throughout the intermodal marketplace over the course of my 20-plus years in the transportation industry. As you are probably well aware, 2019 was not a particularly strong year for intermodal. Volume and demand were low across the board, with total volume falling 4.1% according to the Intermodal Association of North America.1 My own company experienced the market change with an intermodal volume drop last year as well. However, things are already starting to look up.

January’s intermodal volume for my company is up quite substantially, which is likely due to intermodal pricing becoming more competitive over truck in certain markets and above average winter temperatures across much of the United States. With that said, I wanted to discuss some of the factors that are influencing how the intermodal sector will pan out in 2020.

To begin with, it is important to be aware of the three key factors that primarily drive how the intermodal market performs. Those factors are cost, service levels, and available truck capacity. With regard to cost, the gap between intermodal and truckload spot pricing during late 2018 had tightened and did not reopen until the latter half of 2019, when truckload rates began rising (per Journal of Commerce’s Q4 2019 US Intermodal Savings Index). The railroads were essentially priced out of the spot market during this time period. On the contract side, the rails will typically push for increases in the beginning of the year with IMCs pushing for less aggressive increases until a compromise is made. Per the JOC’s predictions, intermodal volume is expected to be stronger in 2020, and railroads are ready to compete on pricing as truckload rates rise.2

The transportation industry is incredibly fluid, especially in a global economy, so swings in market changes are to be expected and not every problem has an immediate or solvable solution. However, this fluidity allows for corrections to be made, so if the railroads are losing volume to truckload, they will endeavor to change that dynamic to win back market share. It is a business after all, and businesses do what they need to do to survive and grow.

As far as service levels go, there are a few things to point out that hindered the railroads in the past year or so. One of the largest disruptors from our perspective was the Precision Scheduled Railroading (PSR) initiative that eliminated a large number of low volume/low margin lanes. With those lanes cut, volume that had been dedicated to intermodal was forced to truck. And as you are well aware, once a modal switch has been made and shippers are OK with the new change, it is often very difficult to switch that volume back over, especially if trust has been lost and shippers are concerned that those reintroduced lanes may be cut again.

The elimination of steel wheel interchanges in Chicago was another disruptor that created additional congestion at the rail yards and additional costs to shippers due to the need for crosstown drayage. This one should be easing up, as Union Pacific recently began opening up more interline service.3

Another factor negating the demand of long-haul intermodal is the fact that a lot of international volume has shifted to the East Coast ports because of changing shipping and sourcing patterns in Asia.4 It used to be that imports would predominantly arrive in West Coast ports and be shipped to the East Coast via rail, but now with imports arriving closer to their ultimate destinations in the eastern U.S., it will be a challenge for intermodal to compete in both cost and service versus truck.

Additional factors impacting the intermodal sector negatively include chassis issues at the ports, lack of visibility with rail-controlled containers, and some inherent benefits that come from using trucks such as a wider variety of providers to choose from and advances in technology that are reducing operating costs while increasing productivity.

Intermodal Opportunities

Moving on to where I think intermodal can get an edge over truck; we can start with something that typically happens already as a response to when the markets shift—the adjustment of pricing. Due to the complexity of the railroad networks, their pricing strategies are generally not as responsive compared to those in the trucking sector. Increased pricing sophistication that allows intermodal rail to maintain its competitiveness during market swings would be hugely advantageous.

Internally, we have been noticing, as of late, fewer service interruptions and more seamless interactions with regard to rail performance as the rail industry continues with its PSR initiatives. Additionally, train speeds have been consistently improving.5 Improved overall service—combined with more-nimble pricing—is a great recipe for intermodal to gain back the momentum that truckload has taken over the past year.

To become more digitally sound, the railroads could possibly even leverage their Positive Train Control (PTC) GPS feeds they have been equipping their trains with and integrate with customers’ software for better tracking. I’m also feeling optimistic that the impacts of PSR seem to be leveling off at this stage, meaning the railroads will be able to have a greater sense of stabilization, which will likely bring more consistency and efficiencies to their networks. If that is the case, then logically service would improve even further and draw volume back as well.

On the fuel front, a few things are currently taking place that are likely to raise diesel prices and stores. Obviously international political issues tie directly into diesel pricing which makes them fairly dynamic, but there is also the issue of IMO 2020. That came into play January 1, 2020 and could drive up the prices of diesel because the low sulfur fuel that maritime ships are now required to use also utilizes the same distillates that make up diesel fuel. With that said, stores that are earmarked for diesel fuel could be diverted to maritime fuel, which will consequently raise diesel prices and may move truck traffic to rail due to rail being more fuel efficient.

With all of the new regulations that have recently hit the trucking industry (AB5, Drug & Alcohol Database, AOBRD to ELD), tightened truckload capacity—along with increased rates—could widen the intermodal savings gap and convert freight in certain lanes back to intermodal. Keep in mind that the previous ELD mandate didn’t really cause much negative impact (it seems to have actually increased driver utilization by identifying shippers that waste driver time), so this seems likely to have less of an impact on rail, but it’s something to keep an eye on. Quite a few motor carriers closed-up shop this past year, so tightened truckload capacity could be on the horizon as well.6

In conclusion, we cannot accurately predict the future of intermodal, try as we might, but it has been the lynchpin of my own company’s success, and I feel strongly that this service will continue to be a valuable and in-demand asset for the transportation industry in the long run. There are countless factors that move the needle on demands for particular services, but intermodal has always had a great value proposition. Even if it is not always the most cost-effective option, there is reliable capacity on the rails and it ranks highest in sustainability as the most environmentally friendly mode of freight transport.              

Kristi Knichel, is CEO/President of Knichel Logistics, a certified WBE and WOSB, non-asset based 3PL located in Gibsonia, Pennsylvania. It is a family run business that specializes in intermodal, LTL, full truckload, and specialty services. She may be reached at kknichel@knichellogistics.com.

References
1 LM Staff. “December and calendar year 2019 intermodal volumes see annual declines, reports IANA.” Logistics Management. 29 Jan. 2020 <https://www.logisticsmgmt.com/article/december_and_calendar_year_2019_intermodal_volumes_see_annual_declines_repo>
2 Ashe, Ari. “Intermodal turnaround not expected until summer.” Journal of Commerce. 29 Jan. 2020 < https://www.joc.com/rail-intermodal/intermodal-shipping/intermodal-turnaround-not-expected-until-summer_20200129.html>
3 Ashe, Ari. “UP to resume service on nearly 60 lanes it cut in 2018.” Journal of Commerce. 28 Jan. 2020 < https://www.joc.com/rail-intermodal/class-i-railroads/union-pacific-railroad/resume-service-nearly-60-lanes-it-cut-2018_20200128.html>
4 Mongelluzzo, Bill. “East, Gulf coast ports gain amid China trade war.” Journal of Commerce. 21 Nov. 2019 < https://www.joc.com/port-news/us-ports/east-gulf-coast-ports-gain-amid-china-trade-war_20191121.html>
5 Gross, Larry. “Intermodal in Depth—December 2019.” Gross Transportation Consulting. 24, Dec. 2019. < https://intermodalindepth.com/intermodal-in-depth-december-2019/>
6 Cassidy, William B. “ARO 2020: US truckload carriers search for a turning point.” Journal of Commerce. 26, Dec. 2019. < https://www.joc.com/trucking-logistics/truckload-freight/aro-2020-us-truckload-carriers-search-turning-point_20191226.html>.

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