Despite U.S. intermodal containers traffic trending lower on a cumulative basis in 2023, intermodal rail is still a viable way to not only compete against the trucking market but also to support the long-term growth of the North American freight rail industry — provided that the industry and its stakeholders be willing to take some risks to ensure the success of rail, according to a report from consulting firm Supply Chain Ecology and commissioned by environmental group Environmental Defense Fund (EDF).
The report, Decarbonizing Long Haul Freight: A study on intermodal rail as a viable option for freight decarbonization, sought out a number of industry experts and came up with five recommendations:
- Integrate short-line railroads into the Class I railroads’ network via haulage agreements.
- Develop more intermodal hubs, which can be used by short lines to enable more rail-to-truck transfers.
- Utilize advancements in freight technology, including autonomous rail cars and technology that promotes improved traffic management.
- Develop freight intelligence tools that enable shippers to see service reliability and costs-related data.
- Update service standards via measures such as allowing the Surface Transportation Board to define the common carrier obligation.
While the report recommends some actions that rail shippers have historically supported, these actions don’t have to be at odds with Wall Street investors tracking the profitability of the Class I railroads, authors of the report argue. Rather, these two communities — along with the railroads themselves and federal regulators and Congress — can consider implementing these recommendations as a way to support wider business-related trends, particularly ensuring sustainability along the supply chain.
FreightWaves discussed the report with Andrew Howell, senior director of sustainable finance at EDF, and Bill Loftis of Supply Chain Ecology.
This question-and-answer session has been edited for length and clarity.
FREIGHTWAVES: Can you introduce yourselves? How did you come across researching this topic?
HOWELL: I work on the sustainable finance team [at EDF], which is working with the financial sector to try to encourage action on energy transition that is science aligned and gets us there as fast as we can.
We’re a large environmental organization looking at lots of different aspects of climate and the energy transition. And one of the most carbon-intensive sectors in the United States is transportation, and it’s an area that we work on a lot. We often work with experts on how to encourage this very tricky, difficult transition to reduce the emissions from transportation, which is a big source of emissions. We were working on trucking specifically: How do you decarbonize trucking? That’s probably going to involve mostly moving to electric trucks. And how do you make that happen?
Well, one of the key ingredients is encouraging both the operators of those trucks but also the companies that use those trucks — the shipping companies — and get them to ask more often for lower emissions in trucking, basically having them demand that some of their goods get shipped on EV [electric vehicle] trucks. And one strategy for us has been asking for that through the financial community — getting the investors of these shippers to say, “Hey, you should ask for lower emissions in trucking.”
So that was the first big piece of work we did with Bill. We [then] switched to a new piece of work that followed a specific strategy of decarbonizing your trucking footprint, which could be involving intermodal. That was an idea that was brought to us, and the more we looked at it, the more we agreed that this was a great opportunity. And there are things that are happening right now, in real time, which could make this an even better opportunity that’s ripe for the taking. So Bill led this work for us.
The target audience — there are many different audiences for this work, from policymakers to the rail companies themselves to the intermodal operators and then also to the finance community. Basically, as finance providers, you should be asking for a greater focus on intermodal rail as a solution, particularly for those long-haul, hard-to-electrify routes over longer distances. So that’s the framing for this backdrop.
LOFTIS: I’ve been a supply chain management consultant for my entire career and got introduced to EDF probably a decade ago with one of Andrew’s colleagues.
We were working really hard on how to electrify trucking, and about the same time, research was starting to form saying that there are certain duty cycles where it’s going to be a lot harder to electrify than others. And it was that point that I said, “You know, Andrew, there’s been a conventional solution, and that’s intermodal as an energy-saving as well as an emissions-saving mode. It’s not new, but with everything changing these days, it’s something worth revisiting.”
So that’s what kicked off this report. There was some research saying it is going to be a couple years, a decade plus, and [EV trucks would be] so expensive and all that kind of stuff. The idea that there might be something to be had much more immediately made a lot of sense. And so that’s what we focused on in the report.
FREIGHTWAVES: How has the report been received so far?
HOWELL: I think there’s skepticism out there about the potential for rail to change its trajectory. As the report shows, rail intermodal has been losing share over a number of years. An increased focus on service and essentially very short delivery times has been the expectation for a broad range of customers, and I think there’s a perception out there that it’s hard for rail to compete.
And that is what I think makes this report interesting. It’s trying to address that perception. It’s saying maybe that perception is not necessarily wrong but there are some ingredients out there that we see that could help rail make a comeback. And because the environmental savings are so significant, that obviously is going to be a tailwind for rail. But I think there’s a certain sort of skepticism since the rails are not new and intermodal has been around for a long time.
LOFTIS: I was comforted in that the advisers that we pulled onto the project are experienced veterans. Larry Gross [an intermodal consultant] was an adviser to the project. Jim Hertwig was an executive at both Class I and Class II rail companies. I wanted that inclusion to make sure we weren’t saying things that might not be feasible or might not be possible. There’s not a whole lot of rocket science here, but there are some norms to current behavior that would need to change and they were very open to the idea. Their input drove a lot of the ideas in the project.
FREIGHTWAVES: Was there anything that surprised you as you produced the report or are there any findings that you’d like to emphasize?
LOFTIS: One of the things that struck me more than anything else is just the overwhelming benefit of rail, drop in the fact that it’s been overlooked. I mean, you can go down the list of benefits and rail just wins. And it’s weird that it has been overlooked. But to me, that was a big, big, strong takeaway, and it’s like this research needed to happen and be broadcast to let more people know about it.
We dug into the economics of shortline versus Class I rail economics, and we confirmed through some examples the idea that costs can be competitive with truck in shorter, less dense lanes. That’s viable now. It’s not for every single lane but there are a lot more opportunities for rail to compete costwise with truck if we include the short line. So that kind of detailed analysis we went through the rigor of preparing, and so far, it seems to be proving itself out in a number of cases.
It was [also] a substantiation or validation that there’s really a dearth of data to enable good, informed mode decisions. There’s a lot more shooting from the hip if you will. They truly don’t have predictable information on reliability. … So I think that when in doubt, there will be a default to truckload because they don’t have the reliability data from a marketplace perspective that would put them in a position to try out a new lane. Right now the only data they have is what they’ve experienced. But I know in some of my previous client work, transportation lanes are changing all the time. I did a big network bid for a national shipper once, and we monitored the bid after the fact. That was a case where there was a stable product, a national network of 3,000 or 4,000 lanes, and guess what? Three months after the bid was let, 10% of the lanes that they served were brand new.
So the reality in transportation is that changes are happening all the time, and without good data to make informed decisions, we don’t have a powerful reason to go to intermodal. We need to find a way to get that out in the marketplace and that’s a big missing piece of the expansion equation. So part of it is the new scope: Can we integrate the short lines and the Class Is in a win-win way so that we broaden and get more lanes exposed to intermodal? The other is to have better data and better service from the intermodal providers. If we could get those pieces plugged into the ecosystem, then we should expect expansion.
HOWELL: One of the challenges that jumped out to me that’s a problem but it’s also something that you can address through money is that the number of intermodal hubs has declined. The network of hubs where you actually move freight from a truck onto the rail system has declined. But also the hub [needs to be at] the right location. You’ve seen the dramatic growth of the warehouse network around the U.S. Those hubs have not kept pace, and so you really need more intermodal hubs. That is like an ingredient that would be enormously helpful.
And there is money — infrastructure money that’s out there that could potentially be used for that purpose and bring major benefits.
The other interesting piece is that there is a technology element to this as well. There are some interesting innovations. One of the ones that Bill pointed to is Parallel Systems. They make these bogies, basically driverless trains. That’s pretty exciting to think that this could be an amazing technology. You don’t really think about rail as being a hotbed of innovation, but there actually is some stuff that’s going on which could help unlock some of these opportunities.
FREIGHTWAVES: What are some of the perceptions that need to change so that rail intermodal can be more fully utilized?
LOFTIS: That’s a good question. It’s just things like, how do you make intermodal a preferred choice? That’s one of our things. How do we make that happen? It’s not a preferred choice for a lot of shippers. There’s just a default to truck. So how do we change the mindset to make that happen? I would call that somewhat of a norm that needs to be explored.
There are other things, like the fact that the short-line rails are, for the most part, excluded from the intermodal ecosystem right now. There are a few integrations, but not near the scale of the relative truck makeup. Short lines are 27% of North America’s track, but intermodal is 1% of their volume, so that’s just a business mix norm that hasn’t been integrated yet.
FREIGHTWAVES: The investor community has been focused on operating ratio and the freight railroads’ efforts to reduce costs as a means to improve OR. Do the recommendations you’ve made conflict with the focus on OR or precision scheduled railroading?
HOWELL: I would say this does offer the opportunity to shift the mindset around rail. This focus on operating ratio is a signal that rail is seen by investors as similar to other industries in decline. That type of margin focus has also characterized the tobacco industry, for example. And so you’re looking at an oligopolistic industry with not a whole lot of growth opportunity, where the only way you can really squeeze value out of a company is to focus entirely on costs. And you bring down costs below at that margin [and] pay out big dividends.
The reality is the paradigm for rail could be a bit different and contain more of an element of growth. Make it a lot more interesting, probably. That could positively impact the way that you value the industry, but it would require an adjustment away from this sense that you have to take costs out of the system wherever you can.
You have to almost put on blinders and think that if you invest in these companies — with opportunities to shift some of the freight moving through other methods onto rail, take advantage of the significant spare capacity that is currently in the system, use technologies so you can utilize those pockets of spare capacity existing with Class II and Class III operators — that there are a lot of really exciting opportunities.
But it is a bit at odds with how this industry is viewed right now by investors. And that’s one thing we’re trying to do, which is to say actually, this could be more about growth and it doesn’t need to be purely about margin to the exclusion of all other concerns.
LOFTIS: One of the things that strikes me about the rail industry is it’s a capital-intensive industry, and probably one of the most valuable things that the railroads own are their tracks and their right-of-way. So what we are calling into question is, what if we could integrate [the network] such that the short lines bring more volume on those tracks? And, you know, in any capital-intensive industry, the more volume you can put on the tracks, the more profitable it’s going to be.
So I’m not so sure the idea of this integrating the carriers conflicts with the gross profit margins of the Class Is, to be quite honest. I think that [opportunities are] looming out there. … You’ve got a huge opportunity for volume expansion for the rail companies if they can finesse it. So I’m not sure there’s a competition or conflict around their 40% profit margins.
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