Commentary: Belay that RR intermodal market hype

Somewhere better than 50-50 and perhaps 75% probable might be a reasonable upside projection.

Want more certainty? Then take these steps.

Find out how many new trailer on flat car (TOFC) railcars TTX has now issued a purchase order to buy.

As for the container business recovery, how many new container stack cars is TTX now ordering?

My sources suggest the answer to both questions is “none.”

There is no current news from this journalist’s sources that suggests the immediate need to acquire more railway intermodal cars. 

There appear to be sufficient intermodal cars in the TTX fleet to handle existing traffic volumes.

The one exception is that a continuing surge of semi-trailer demand might result in an admitted shortage of the TOFC rail cars.

However, over the past decades there is a consistent pattern of watching trailers on railroad flat cars almost continually shrink. It has not been a growth business segment.

A spot market demand for a short economic recovery period is therefore unlikely to spike confidence in going forward with new TOFC car purchases. That is not a likely business case proposition when the railroads are focused on maintaining long-term high profit margins and seeking ever-higher returns on invested assets on their balance sheets (or the balance sheet of TTX).

(To learn more about the role of TTX in managing the railroad intermodal car fleet and the control of the fleet assets, refer to our Jan. 20 FreightWaves report as to how TTX is the railroads’ silent intermodal business partner.)

On the other hand, there may be an imbalance and shortage of railroad-suitable containers. The railroads have not been aggressively adding to their fleet of domestic pool containers.

Does that reflect an internal negative outlook toward this intermodal segment within railroad corporate headquarters? Or is it simply a reflection of the railroads’ being mostly focused on downsizing their overall assets to instead improve returns on assets? 

Someone needs to ask these questions at the upcoming quarterly railroad briefings in mid-October.

With the business issues laid out in the above text, let’s turn to a quick overview of what the statistics are showing.

Market view from selected high-volume ports

In the Southwest, traffic growth has been extraordinarily high in the twin port complex of Long Beach and Los Angeles.

The big railroads like BNSF and Union Pacific can usually cut back on both equipment assets like rail cars and locomotives as well as in their employee headcounts quite rapidly when traffic falls off. 

But historically, putting those assets quickly back into service when and where needed is a far more time-delayed process. 

In the case of LA/Long Beach, traffic rapidly declined within about 45 days by as much as 70% on Pacific-imported containers. 

The problem occurs when the recovery surge is quite rapid versus its lowest recent month’s depth. In some cases, a 15% or higher increase over the previous year’s same monthly period occurs.

Railroads are typically very slow at repositioning their human assets and their hard equipment assets during such recovery spurts.

Protecting against the financial ravages of declines in business is a fundamental skill of the big seven North American railroad companies.

It is a protective benefit. Think about it. It is why none of them need a federal relief package during this pandemic.

The reciprocal of that management strength is why I believe that companies like the Union Pacific have struggled with the spot market demand surge for intermodal. They just can’t handle it right now.

Particularly since this replenishment surge by some customers overlaps the normal seasonal period of pre-holiday end-of-year advanced stocking of goods from largely overseas sources. 

For the railroad intermodal business sector, that annual holiday stocking typically occurs between July and October — then starts to taper off into early December. Reacting to an abnormal 5%-8% year-over-year known high-traffic period is not much of a railroad hurdle. Maybe even a 10%-12% one-month or so year-over-year growth they adapt to without much delay or customer disruption.

But this year’s rapid turn-around is a bit much for railroad planners.

Perhaps if they had been informed two to three weeks before the loaded ships started to arrive at LA-Long Beach, the railroads might have restored and moved crews, power and rail cars into place more rapidly. But my sources suggest that that supply chain advanced intelligence sharing did not occur.

That is a yearlong supply chain role lesson learned.

Here is the good news: The Port of LA announced that it has now introduced an advanced vessel consignment sharing process so that the port’s LA-area stevedores and the railroad planners will henceforth be getting such transport management systems (TMS) intelligence in the future. That will give the UP and BNSF more time to set assets into place.

Market view from week 38

Just under three-quarters of the year is in the history books. What is that data telling us for the U.S. rail market?

Overall, the broad intermodal sector is down a considerable — but not disastrous — 6.5% for the full year 2020 to date, versus the year-to-date in 2019.

Compare that to the overall non-intermodal carload business sector discussed in the previous week’s rail market view column.

Overall carloads are down through week 38 by 15.6%.

Here is the recent pattern, showing trending improvement: During week 38, U.S. intermodal increased 6.3% y/y (versus a 6.6% increase in the past four weeks). Merchandise carloads continue to struggle, down 5.8% y/y (versus a decrease of 8.4% over the last four weeks).

There are some market consequences

Here is good news and a bad news business example. Domestic container volume moving between the Southwest and Midwest rose 9.3% last month. But there appears to be a big imbalance in the returning. 

The consequence is that there are way too many loaded containers moving east and many fewer (and most empty) containers and railroad platform cars moving back westward.

This is important because so-called PSR railroad managers hate to see a volume imbalance. It hurts their profitability.

That’s not good.

Wrap-up

It is too early to call the intermodal recovery a long-term win for the railroads.

Intermodal is doing well for the moment.

But a second COVID-19 surge could reduce traffic levels again. 

Furthermore, a hard hit to the nation’s economic recovery might occur if small business bankruptcies increase and discretionary incomes decline for a large percentage of the population. 

Here is the good news sign I’ll be watching for:

If TTX orders equipment early in the fourth quarter, that might be a railway headline story.

But I have a low level of confidence about that. What’s your intermodal outlook? 

Appendix

A look at North America’s different intermodal volume changes courtesy of FreightWaves’ SONAR data files:

Table 1 is AAR reported and published data on the geography of North American intermodal as of week 38 compared to 2019.

Note: There are some strikes impacting Mexican train delays.

Table 2 shows the simple geography of some of the largest-volume 2020 U.S. intermodal corridors through transcontinental flows.

Table 3 shows flows in the eastern United States.

Commentary: Rail freight recovery lags US economic pace

Commentary: Railway insight from New England

Commentary: Intermodal missed signals? Fumbling so close to the growth goal line?

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