Problems faced by trucking, other shipping industries foster inland transport changes.
The intermodal industry has been on a roll since the financial crisis, with total volumes climbing every year since 2009.
This year that growth has continued. The Intermodal Association of America said the industry handled 7.95 million containers in the first half of 2014, both domestic and international as well as trailers, up about 5.5 percent from around 7.54 million in the first half of 2013.
Speaking at IANA’s Intermodal Expo in September, Noel Perry, managing director of FTR, said unlike the recoveries in 1981 and 2001 freight has grown more rapidly than the gross domestic product. In the first half the recover, intermodal not only grew faster than GDP, but faster than truck and rail freight.
In the second half of the recovery, FTR believes transportation will still exceed GDP though not by as much since second halves of recoveries tend to be driven more by the service than manufacturing economy.
FTR’s forecast is that intermodal will finish 2014 with growth of 5.1 percent, 3.2 percent in 2015, and 2.4 percent in 2016.
But Perry said the business could do better.
“Worry about the upside,” he told attendees.
Larry Gross, senior consultant at FTR, said the intermodal industry is facing both “the best of times and the worst of times. It is certainly the best of times if you are talking volumes. If you are talking intermodal service and operational concerns, perhaps a little bit of the worst of times.”
Intermodal volumes have been more or less stable since the spring and the industry had its biggest week ever in early September. Gross said in the first half of the year, international traffic was unusually strong, probably because of shippers trying to get goods into the country early, before the expiration of the International Longshore and Warehouse Union contract on July 1. That labor uncertainty also led to faster growth in Canadian intermodal cargo, as shippers moved containers bound for the U.S. Midwest and beyond through Vancouver and Prince Rupert in British Columbia, as ILWU members there are covered by a different contract.
But the industry faces a variety of challenges: severe congestion in ports stemming from terminals having to discharge more containers from larger ships; large, new alliances among container carriers; shortages of chassis; not enough truck drivers; and competition on the railroads with other types of cargo, including crude oil.
During the past year the shipping industry has also had to deal with not only the uncertain labor situation, but severe weather in several parts of the country, including the Port of New York and New Jersey and the Midwest.
Some executives are even more optimistic. Jim Filter, senior vice president of intermodal at Schneider National, estimated average growth in the industry will be above 7 percent next year.
“That is going to be driven because the over-the-road capacity is not going to be there and shippers are going to have to look at other means to move their freight,” he said.
“In the medium term, I think intermodal will continue to grow probably twice GDP, which suggests that they are taking some market share from truck,” said Jason Kuehn, vice president of surface transportation at the consulting firm Oliver Wyman.
“In the near term, shippers are going to be a little unhappy,” he added. “Truckers don’t have any capacity and the railroads are in a similar situation. We have a lot of train delays and dwell-time, particularly through the key point of Chicago.”
Gross said average intermodal train speeds, which were 31 mph or higher for almost all of 2011-2013, have fallen to about 29 mph recently.
Kuehn said things are “at the tipping point,” where railroads are still able to handle intermodal cargo efficiently, but noted they are tackling both general network congestion and spending on terminals and other projects specifically at intermodal cargo.
However, he said these projects must compete for capital with other priorities, such as railroads bringing themselves into compliance with federal Positive Train Control mandates.
“Just to keep up with the kind of growth that has been going on in intermodal, railroads need to build between two and four—depending on their size—intermodal terminals every year,” he said.
While commodities such as crude oil are growing quickly, Kuehn expects railroads will still favor spending on intermodal projects. He said intermodal accounts for about 22 percent of revenue and 43 percent of volume.
While railroads like a diversified book of business and as much business as they can handle efficiently, “crude oil is about 4 percent of railroad volume. I don’t think any rational carrier is going to chase 4 percent at the expense of 40 percent of unit volume,” he said.
“Intermodal is a good business, it will always be a good business and it will be something that railroads focus on,” he added.
Driver Shortage. A shortage of truck drivers is one of the forces fueling the growth in intermodal—each double-stack train represents thousands of driver miles saved. But it’s a double-edged sword since the driver shortage also affects trucking companies trying to hire drivers to move containers at either end of the rail leg.
“It’s the number of drivers and your utilization of drivers that is going to impact your ability to grow,” Filter said. “Capacity is constraining us in both the over-the-road, as well as the intermodal business.
“Demographics are working against us,” he said. More drivers are retiring and leaving the industry than are entering trucking. He also noted motor carriers must compete for workers with other sectors of the economy that are picking up and looking to hire.
Schneider has about 1,500 drayage trucks and recently added 380 new trucks for drayage with automatic transmissions to help attract and retain drivers.
He said there is a less steep learning curve for drivers using an automatic transmission. It gives the driver “an experience where they feel more comfortable driving,” which can improve safety as they do “not have to worry about shifting and focus more on what is going around them in the environment.”
Filter said the company gives the trucks with automatic transmission to a mix of new and experienced drivers.
Prior to 2013, Schneider only hired experienced drivers, but changed that policy and started hiring drivers out of training schools.
Schneider uses employee drivers and does a lot of recruiting, but Filter said 90 percent of applicants it cannot hire because of three reasons—motor vehicle reports and past infractions that show up in the Federal Motor Carrier Safety Administration’s Compliance, Safety, Accountability (CSA) program; criminal records; and the inability to pass a physical and drug screening. Schneider uses a hair follicle test that can determine if a driver has used drugs in the past six months.
Some of Filter’s comments were echoed by an executive at a large drayage firm that, like much of the industry, relies on owner-operators.
He said some drivers do not want to deal with increased regulations, and after the harshness of last winter, some drivers could not make truck payments or decided they were financially better off not driving and retired.
“Unfortunately, there are not a whole lot of people who want to be truck drivers. It is not that attractive paying job. How many guys want to be away from their family? How many want to deal with the congestion that we have in the U.S., road construction, demanding customers who want freight delivered within a 30-minute window? It makes it tough on them,” he said.
His company, which is in the drayage business exclusively, does not have the same ability to train drivers as, for example, a company that moves less-than-truckload freight.
An LTL company might be able to take a dockworker, put them through a driver training program and turn out a driver who is just 21 or 22 years of age.
“These guys go from moving freight around the dock to driving a hostler truck moving trailers around the yard, so that they get experience backing up a truck. Then they have them become a city driver, then a long-haul driver,” the drayman explained.
“You don’t really have that graduation program in the drayage market or at many of the truckload drivers.”
He also noted that his company cannot hire less experienced drivers, because it would drive up insurance rates.
Filter said the salaries drayage companies pay drivers have to keep up with what they can earn elsewhere, but that regulations, such as the new hours-of-service (HOS) rules, have reduced the amount of time a driver can be on the road. He said there has been about a 3-4 percent reduction in productivity—the hours employees can work and the miles they can drive—because of new HOS regulations.
“Even though you may be paying him more per mile, you have to make it enough so it is there in what they are taking home,” he said.
Shipper Cooperation. Filter said the drayage community needs the shipper community to make adjustments as well.
“We can’t do it alone,” he said, adding driver productivity depends on the policies of shippers—for example, whether a trucker can drop and hook equipment or the shipper insists on a live-load, and how quickly a driver can get in and out of a terminal or warehouse.
Filter said it is almost always more attractive to do a drop-and-hook because a driver and his power unit are so much more expensive than a chassis and container. However, “live loading” may make sense for infrequent shippers, he said.
Flexibility—giving a driver a wide window of when they can pick up or deliver freight, not insisting all their activity gets done in the morning or on certain days of the week or month, can have a big impact on an intermodal trucker’s productivity.
“Being able to level out that flow, we can get better utilization of our drivers. We can’t necessarily do that on our own, but we are sharing that information with our shippers,” Filter said.
These factors, what Filter calls “freight characteristics,” are becoming a bigger component of pricing. They are both a carrot and stick.
“It’s a carrot, in that you are going to be able to get capacity,” he said. “But the stick is that price is going to increase if we are not able to have better freight characteristics.”
He said some shippers are extending hours of distribution centers and taking steps to make their businesses more driver-friendly, but says “we are having to meet with them one at a time.”
Another drayage executive that uses independent contractors agreed shipper behavior can affect whether they get the service they want. He said one driver told him if he is not treated well at a guard shack or check-in desk he will decline to accept loads to that location.
“It all boils down to we are going to have to pay our drivers more, which is going to increase rates to the customer, and the ones who pay are going to be the ones that are going to get the trucks,” the executive said.
Chassis Breakthrough. Chassis availability has become a major issue at both ports and inland locations.
Most ocean carriers have exited ownership of chassis and depend on chassis from pools. But in some ports there are multiple pools operating. So a driver may not be able to obtain a chassis at a terminal to haul a container for a carrier that belongs to one pool when there are hundreds of chassis from another pool at the same location.
There did appear to be a breakthrough in the chassis issue at the ports of Los Angeles and Long Beach during the Intermodal Expo. The U.S. Justice Department announced it would not challenge a proposal by Flexi-Van Leasing and Direct ChassisLink to enter into a chassis-use agreement that would permit the establishment of a “gray” pool, allowing the interchange of chassis across multiple pools in the two ports. The agreement would also encompass other leading chassis providers, such as SSA and TRAC.
Some shippers want more chassis in circulation.
Jonathan Gold, vice president of supply chain and customs policy for the National Retail Federation, said “we’re hearing about issues with chassis maintenance, as well as skilled labor not taking jobs, so there’s a high level of positions unfilled or filled by unskilled/casual labor, which is resulting in shortages.”
In the Port of New York and New Jersey, one of the chief recommendations of a report issued by its Port Performance Task Force, which was created after the port suffered gridlock last year, was that “a system to improve chassis management be implemented.”
Because of issues with chassis availability, Schneider has been purchasing its own chassis with the goal of eventually using its own equipment exclusively.
“It is going to take several years before we have 100-percent Schneider chassis, but that is our intention,” Filter said. Schneider has about 17,000 containers (including 3,700 purchased this year), but needs fewer chassis since many of those containers at any time are on railcars.
“Our maintenance program and having that control puts us in a better position,” he said. “Right now, if you go into a chassis pool, there are at least five different types of chassis out there. So when you pick up a load you might go to the scale and everything is fine, you put it on the railroad and it gets to the destination and you pick it up again and it gets scaled again and all of a sudden you have an issue because you had a light chassis at one side and a heavy chassis at the other. (Chassis can vary in weight by 500 pounds.) With a standard chassis you take the mystery out and we will also allow our shippers to put more weight in the boxes because we will know exactly what chassis will be at the other end.”
Schneider purchased 600 chassis last year for its operation in Stockton, Calif., and has started to add chassis on the East Coast where it works with CSX.
‘Donut Hole.’ Intermodal has done well west of the Mississippi River because of the long distances between major cities and big load centers.
But executives, like Filter at Schneider, said they have seen their average length of haul for intermodal cargo decrease, in part because it is growing in the East, where shorter hauls are more common.
Gross said most intermodal cargo moves either long distances (29.30 percent of the freight in the past five years moved 2,001-2,500 miles; and 10.2 percent traveled 2,501 miles or more). There is another peak, 28.4 percent of cargo moves 751-1,000 miles.
In between those peaks is a “donut hole” with only 12.8 percent of intermodal cargo moving 1,001-2,000 miles. (Interestingly, this is even less than the 18.8 percent of intermodal cargo that moves 750 miles or less.)
“This donut hole, I think, is a major intermodal opportunity,” Gross said.
Mid-length hauls like that typically require an interchange of a container between two railroads, which can be challenging, but Gross believes it can be done “if we can figure out how to deal with the gateways and get the rails to work even better together than they are today.”
Freight is not as concentrated east of the Mississippi, Oliver Wyman’s Kuehn said.
“There are big cities, but there’s also an awful lot of stuff in the hinterland, so you don’t have quite the same load centering. It makes it a much more difficult market for intermodal to compete in,” he said. “But the railroads are clearly doing it, given the growth in the eastern U.S. being higher than the western U.S.”
Many new terminals are being built, but Kuehn said his firm believes the next phase in the intermodal business is going to be away from mega-terminals, in favor of small terminals and that may encourage a shortening of the length of haul.
This article was published in the November 2014 issue of American Shipper.
