One of the first things to understand about rail intermodal is that some lanes are more competitive with the highway than others.
In dense lanes with very long lengths of haul, like Los Angeles to Chicago, a trip that exceeds 2,000 miles, it’s easy for rail intermodal to undercut truckload on price. In that lane, the per-mile cost advantage that intermodal has on the rail linehaul and fuel surcharge portions of the total cost generally more than offset the relatively high per-mile first- and final-mile drayage costs associated with rail intermodal. As a result, intermodal volumes in that and similar lanes are largely protected against a loose truckload market.
Market dynamics are far different in shorter-haul lanes. Shorter intermodal lanes, which are primarily located in the Eastern one-third of the country, are far more competitive with the highway. Examples include Chicago to Atlanta; Newark, New Jersey, to Chicago; and Chicago to Harrisburg, Pennsylvania. Those lanes take no longer than two days on the highway, and the cost benefit of the lower rail linehaul costs is greatly diminished simply because the rail linehaul covers fewer miles and thus, a lower portion of the all-in cost.
The Intermodal Contract Savings Index in SONAR illustrates that dynamic. It compares the cost to move a load on the highway to the cost to move rail intermodal, with fuel included for both modes. To eliminate variables, it only compares loads moving within the same five-digit zip code origin-destination pairs moving in the same week. It currently shows that intermodal shippers save an average of 17% on long hauls (green line — routes exceeding 1,200 miles) versus truckload, exceeding the 9% savings rate when all lengths of haul are included (white line).
Carriers’ first-quarter earnings reports also show divergent market dynamics in longer-haul versus shorter-haul intermodal lanes. In the first quarter of 2024, J.B. Hunt, the largest truckload-based domestic intermodal provider, posted intermodal volume that was flat with the first quarter of 2023. But, its outbound Los Angeles volume increased at a double-digit year-over-year percentage which was offset by a decline in shorter-haul lanes in the eastern U.S. Not surprisingly, the carrier attributed it to the loose truckload market.
SONAR corroborates that sentiment while allowing users to dig deeper into individual corridors. Charting loaded domestic intermodal volume against dry van tender rejections, a measure of relative tightness in capacity, shows that tender rejections are often a leading indicator of domestic intermodal volume — but only in competitive lanes. Falling dry van tender rejection rates lead to lower dry van spot rates, which reduces the savings that can be realized by using rail intermodal, or eliminate that savings altogether.
Chicago to Atlanta is one such competitive lane. In November of last year, the volume of domestic containers moved via rail intermodal in the lane peaked at about 350 per day (white line above). That coincided with a seasonal peak in the dry van tender rejection rate in that lane at roughly 5.5% (red line above). Outside of that seasonal peak, loaded domestic containers in the lane had been generally running between 300 and 325 per day.
In this year’s first quarter, the dry van tender rejection rate in the lane weakened from over 5% to just over 2%. Domestic intermodal volume subsequently fell from 325 containers a day to 270. Certainly, there is a baseload of intermodal volume that will continue to run in the lane, likely for large shippers with preferential contractual rates. But, it also appears that some shippers are taking advantage of the lower highway spot rate by moving freight from the rail to the road. While domestic intermodal volume in that lane improved to 284 containers per day, the decline in the dry van tender rejection rate suggests that domestic intermodal volume should remain under pressure.
The spot rates shown in the SONAR Market Dashboard app demonstrate how that has translated to highway rates, falling from over $2.90 a mile at the start of February to a current rate of $2.35. That roughly 20% decline can easily be the difference between shippers deciding to use the highway instead of truckload in such a modally competitive lane.
I recommend that shippers utilize the domestic intermodal volume data in SONAR as a way to gauge whether other shippers are seeing value in intermodal in their lanes. In addition, intermodal shippers should use SONAR tender and rate data to assess modal competitiveness in the “local east” lanes.
This post is taken from the SONAR Blog, a site updated each week with insights gleaned from our data product.