Reality check
Outsize expectations for intermodal, on-dock rail should be tempered, freight experts say.
By Eric Kulisch
Conventional wisdom in the freight industry holds that intermodal transportation is the best way to move most merchandise long distance. It represents the future growth wave for railroads and that a key component, on-dock rail, is the Holy Grail for efficient transport of international cargo.
But a couple of freight transportation specialists are articulating a different reality, saying common assumptions about intermodal rail's benefits have not materialized and that government, railroads and ports should reevaluate their public policy and business strategies.
The most pressing concern for carriers is slow growth and profitability, according to Adam Bridges, assistant vice president for strategic planning at CSX Intermodal.
Railroads 'are investing long term with a view that intermodal will grow. It's not growing and hasn't been growing,' Bridges said at an infrastructure finance conference in early June organized by Infocast.
The advent of double-stack railcars and unit trains, combined with higher truck costs and driver shortages, created an incentive for shippers and even truckers to convert long-haul shipments from highways to rail. Railroads achieved economies of scale and speed by using dedicated intermodal trains and a simplified terminal network, especially for international shipments moving cross country on the BNSF Railway and Union Pacific networks from the West Coast. They marketed intermodal rates that were substantially less than trucking to attract shippers. And they touted the anti-congestion and environmental benefits of moving the equivalent of 280 trucks on a single train in an ongoing effort to attract congressional support for rail expansion tax credits, worth about $300 million annually, and major expansion projects.
Improved service and more truck-rail transfer facilities also have recently enabled railroads to compete with motor carriers in some lanes of 500 miles or less.
Logistics professionals and transportation officials expressed the belief that intermodal would continue to take regional market share from trucking and provide a viable solution for freeing up highway capacity.
The theory hasn't worked out as well in practice, according to Bridges.
Total intermodal volumes are roughly where they were at the beginning of 2001. The six-month rolling average of loadings per month through May 2009 was 938,000, according to calculations by Larry Gross, FTR Associates' senior intermodal consultant, based on data from the Intermodal Association of North America (IANA).
In December 2000, railroads averaged 916,000 loads during each of the preceding six months and the six-month average was 852,000 in May 2001 as another, milder recession took hold. At its highest point in late 2006, intermodal averaged 1.2 million loadings per month.
International intermodal volumes significantly increased earlier this decade as U.S. imports reached record levels, while domestic volumes plateaued.
The trend has recently reversed a bit because the recession has dried up imports. In 2008, domestic intermodal volumes (trailers and containers) rose 2.9 percent to 5.9 million units, the best growth since 2004, as the spike in diesel fuel prices led to diversion of highway cargo to rail. International container volume was down 7 percent. Overall, intermodal volume last year was down 3 percent to almost 13.7 million units, according to IANA.
This year, total loadings are down 17.5 percent year-to-date versus 2008, with international off 24.4 percent and domestic down 8.2 percent. International and domestic volumes are almost evenly split now compared to a 60-40 split in favor of international during the mid-decade trade boom.
Intermodal's ability to capture a greater share of truck volumes has been 'underwhelming' so far, Bridges said. Railroads have typically had a cost advantage on long-haul moves longer than 1,000 miles, but aren't picking up enough traffic in the short-to-medium lengths of haul.
Rail experts say that for regional intermodal to be cost effective terminals need to be close to shippers to minimize the cost of local pickup and delivery trucks. It's a chicken-and-egg scenario in which volume won't increase until terminals are built, and railroads have to accept on faith that shippers will substitute intermodal for truck transport if they invest in such facilities.
Bridges attributed the immediate difficulty to truckload carriers slashing prices in the 700-to-1,200 mile range to retain customers during the past 30 months of slack demand.
To be sure, the pricing gap between rail and truck began to narrow four years ago as intermodal quality improved to the point where it no longer had to be radically discounted to get shippers and logistics companies to use it. There still was a rate difference though until the recession forced many motor carriers, staring at excess capacity, to price their service at unsustainable levels on par with rail. Despite that, domestic intermodal is still holding its own in terms of volume.
The greater use of East Coast ports for delivering cargo from Asia has also shifted some intermodal traffic to eastern railroads from western ones, while other shipments have ended up on truck because of the proximity of destination warehouses to those ports.
But most observers view intermodal's decline as a temporary phenomenon caused by the negative U.S. economic growth.
  Trucking companies also have a built-in service advantage because of their ability to deliver goods faster than rail, Bridges acknowledged.
Intermodal providers are holding to a long-term vision that the cost advantage will swing back to intermodal as diesel fuel prices and congestion increase, and a rebound in the economy exposes a huge shortage of truck and driver capacity, Bridges said. Intermodal could also gain from shippers' efforts to meet new environmental requirements by reducing their carbon footprints, railroad executives say.
'This pricing environment has to change. The railroads need to make money on intermodal at the end of the day,' he elaborated.
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| 'Intermodal has become an extremely important piece of the railroad picture. They are investing tremendous sums in intermodal and they wouldn't be doing that if it wasn't profitable.' |
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| Larry Gross senior intermodal consultant FTR Associates |
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Gross predicted that domestic intermodal traffic will overtake international for awhile when the economy comes back because of the looming trucking shortage.
Railroads are not making enough money from intermodal either, Bridges said.
Intermodal needs to compete within each rail company for capital, locomotives, crews and rail right-of-way with other legacy operations such as coal, agriculture and chemicals. Business lines that show higher profitability tend to receive priority for resources from top railroad executives, he said.
In 2008, intermodal accounted for about 13 percent of CSX's $11.3 billion in revenue and 30 percent of its volume. CSX Intermodal generated $290 million in operating income, but its volume is almost exactly the same as it was in 2000. Its revenue share was 16 percent in 2002, according to the company's annual report.
Gross, although lacking specific corporate financial information, expressed skepticism that intermodal is a marginally profitable business for railroads.
'Intermodal has become an extremely important piece of the railroad picture. They are investing tremendous sums in intermodal and they wouldn't be doing that if it wasn't profitable,' he said.
'Intermodal is never going to be as profitable as coal; it's just not the nature of it. Coal is the ideal railroad commodity. It moves in huge quantities, over long distances and doesn't require tender loving care.
'But the growth opportunity for rail, looking at their portfolio, is intermodal.'
Railroads need to improve their business model in the face of such challenges if they aspire to capture more highway business, Bridges elaborated in a follow-up interview. Truck prices become more competitive at shorter distances because intermodal must still pay the same drayage rates on each end of the haul and are not offset as much by long-distance savings. That means railroads need to continue making intermodal more accessible through terminal expansion, improve transparency so customers can see how prices are split when a straight-through transport move is booked with ocean and trucking partners, and offer better speed, availability, frequency and on-time performance, the CSX executive said.
Policymakers, in turn, need to make regulatory changes if they want to promote the use of intermodal transportation, he said. A common rail industry argument is that trucking companies are heavily subsidized because they operate on public highways and should contribute more through higher diesel taxes.
'One element of success is to have a fair and balanced regulatory policy that enables those of us that invest private capital to fairly compete for money with public capital that is going into highway and rail,' Bridges said.
Making heavy-duty trucks pay the real cost of degradation they place on highways would help equalize the market for intermodal, he added.
The American Trucking Associations has said its members support an increase in diesel taxes to help with a growing funding shortfall as long as there are guarantees that money will go to rehabilitate and enhance portions of the highway system utilized by motor carriers.
As the federal government crafts a new multiyear surface transportation spending plan with a new emphasis on freight, there is a danger that politicians and bureaucrats will try to dictate where increased investment in intermodal should go, Bridges said, adding that efforts on Capitol Hill to reregulate the rail industry would also limit carriers' ability to price and invest appropriately.
Long-haul intermodal is a proven business model, but 'the per-unit profitability tends to decline and the capital demands are significant for regional service. We need to look at whether any regulation that decreases profitability or increases the subsidy for highways can stunt its growth potential,' he said.
Policymakers should consult closely with freight transportation providers, who know the high-volume, origin-destination pairs where intermodal is viable, before supporting specific intermodal programs and projects. The private sector has to believe that long-term volumes and profits are achievable before investing its own money in a public-private venture, he stressed.
Government contributions for intermodal projects are reasonable and necessary when the public benefits in reduced congestion and air pollution are involved because they can tip the railroad's return-on-investment equation in favor of moving ahead with expensive upgrades, railroad officials say. A 2007 study by Cambridge Systematics on behalf of the American Association of Railroads determined that freight railroads would only be able to pay for $96 billion of the $148 billion in new infrastructure capacity needed to accommodate projected volume increases by 2035.
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| 'If the private railroads can't demonstrate to their shareholders that this thing can grow, and grow profitably, they'll have to stop investing in intermodal franchises. And I think that would have a real devastating impact on the public infrastructure.' |
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| Adam Bridges assistant vice president for strategic planning, CSX Intermodal |
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The federal government and three states, for example, are chipping in $95 million and $38 million respectively, for the Heartland Corridor project, a three-year railway improvement effort that involves clearing 29 tunnels for double-stack railcars on former export coal routes to increase the speed of containerized freight between the Port of Virginia in Norfolk and the Midwest. Norfolk Southern is investing $191 million for construction.
It is also developing plans for a $2 billion-plus public-private partnership called the Crescent Corridor stretching from the South to New Jersey. Norfolk Southern recently announced it will invest $112 million on a new intermodal terminal in McCalla, Ala., to open in 2012, as part of the initiative.
CSX is also seeking public support for its proposed National Gateway, a $700 million-plus initiative that would allow increased use of double-stack trains from East Coat ports to the Midwest through upgrades to tracks, equipment and facilities on three existing rail corridors, as well as improved clearances. CSX has said it has committed to fund half of the project, including two new truck-rail transfer terminals in Ohio.
Last year, the company opened an intermodal terminal at Chambersburg, Pa., and continues work to streamline operations in Chicago and expand facilities in markets such as Charlotte, N.C. A modern intermodal terminal is also on the drawing board for Winterhaven, Fla.
Railroads in the Chicagoland area are working together on the CREATE project, an ambitious $1.5 billion effort to reduce intermodal bottlenecks by elevating rail lines above roadways, improve signaling, and create common rail interchange facilities. Only a portion of the plan has been implemented so far because the federal government and the state of Illinois have not contributed as much as expected. Congress has only provided $100 million to the project to date.
'We want to participate as a change agent in mid-length corridors for diversion of freight, but without some public assistance those infrastructure needs are very challenging,' Bridges said.
'If the private railroads can't demonstrate to their shareholders that this thing can grow, and grow profitably, they'll have to stop investing in intermodal franchises. And I think that would have a real devastating impact on the public infrastructure.
'So it's just important that the industry has a voice that says, 'Don't take it for granted that intermodal works perfectly for railroads, that we can easily convert freight in that shorter-haul market, that this intermodal alternative is deeply robust.' It's still in its infancy in terms of showing that in medium-lengths of haul it is truly competitive,' he told American Shipper.
'My point is not that CSX is not going to invest in intermodal because we are. But we need to think about these externalities that are preventing growth in the short term, that are working against intermodal.'
On-dock Hype? Bridges and another transportation planner, Asaf Ashar, are also sounding a cautionary note about ports' demand for a rail interface on the waterfront to expedite the discharge of cargo to inland destinations.
One of Norfolk Southern's goals, for example, is to have access to at least one on-dock rail terminal at every major port it serves, while still offering some sort of near-dock option for other terminals.
On-dock rail makes sense when it is located on a high-density pier with non-stop trains headed to single inland destination, but many marine terminals that seek direct rail access do not have sufficient throughput, according to Bridges and Ashar.
In most cases, near-dock rail is a better solution because cargo from several wharfs can be combined there along with domestic cargo to create long trains with more frequent service for more inland destinations, the two industry practitioners said.
'I really think the port and drayage community needs to think thoughtfully about whether an on-dock facility is the right infrastructure solution,' Bridges told the small Infocast audience.
Ashar, a research professor at the University of New Orleans' National Ports and Waterways Institute and an independent consultant based in Washington, argues that small to medium-size terminals would be better served by using scarce waterfront property for handling ships and storing containers rather than turning the space into a rail transfer facility.
Those types of terminals tend not to achieve high utilization of their intermodal stations because of their limited volumes, he said in an interview.
CSX Intermodal, for example, operates a 66-acre container transfer facility adjacent to the Seagirt Marine Terminal at the Port of Baltimore with capacity for up to three trains per day to the Midwest. The number of trains is not consistent because it depends on irregular arrivals of international containers, a port spokesman said. The site has four loading and unloading tracks, two storage tracks and one run-around track for positioning locomotives at the head of the train.
Norfolk Southern operates a similar facility near the Dundalk Marine Terminal.
All that infrastructure ties up valuable space that could be devoted to container yards, especially considering that most ports have little or no expansion room to meet growth projections for international trade or to accommodate the cargo surge from the new breed of massive vessels, Ashar said.
On-dock rail is usually not worth the trouble, he said. 'The equipment is expensive and you lose a train for a day (moving) into the port environment. It takes more time. If you're doing on-dock, you may have to wait a day or more until you have enough volume, so it cuts the speed' of delivery, he said.
Off-dock rail close to the port is less costly than switching long trains to smaller on-dock yards, requiring breaking trains into short strings and then reassembling them, and blocking traffic in and around the terminal, he said. Other advantages include employment of less restrictive labor than port labor.
Near-dock yards require shuttle trucks, but the short distances involved means drayage is fast and relatively inexpensive, according to Ashar.
His rule of thumb, which varies in each location and situation, is that waterfront rail is feasible if at least half of the boxes are slated for intermodal transport.
About 20 percent of the container volume at the Port of Charleston, S.C., moves by rail. The port has two container terminals that have direct rail access, but it is lightly used, according to spokesman Byron Miller. Instead, most of the intermodal cargo is trucked a short distance to nearby facilities operated by CSX and Norfolk Southern. Before the economic downturn, the two carriers were doing more than 300,000 lifts per year.
The Port of Charleston is in discussions with both railroads about upgrading rail service to take advantage of increased vessel traffic due to the opening of the new Panama Canal locks in 2014 or 2015, Miller said.
Port officials believe they have the potential to lure another 1 million TEUs to the port from competitors like Savannah due to their 45-foot channel and high tides that are conducive for larger vessels, as well as access to the Carolina, Tennessee and Kentucky markets, and the Interstate 85 industrial corridor between Charlotte, N.C., and Atlanta, he said.
Even a major port complex such as Los Angeles-Long Beach should consider locating rail facilities two or three miles behind the harbor gate to free up real estate.
'You don't have to take big trains and shove them into the port area,' Ashar said. 'The key is to connect the two with dedicated roads that port equipment can move on.'
A big factor for the two Southern California ports is that intermodal's share of discharged cargo is expected to decline in the future as more cargo stays local to supply the growing metropolis. Local cargo moves by truck. Industry officials say West Coast shipments bound for the Midwest by rail, which represents about 40 percent of total traffic, will gradually migrate to ship-to-rail terminals in places such as Oakland, Prince Rupert, Canada, and possibly Lazaro Cardenas in Mexico, or a potential East Coast version of Rupert in Nova Scotia.
The growing popularity of transloading among shippers also undermines the need for on-dock rail, Ashar said. The logistics process involves swapping the contents of 40-foot international containers into 53-foot domestic containers to reduce the number of railcar bookings, redirect merchandise where it's needed and provide in-transit remixing of products from multiple sources. Containers to be transloaded are trucked to warehouses near the port, reassembled and driven to the rail ramp. Transloaded cargo doesn't use on-dock rail.
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| Asaf Ashar research professor, National Ports and Waterways Institute, University of New Orleans |
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| 'We've had some plain vanilla intermodal. Now I see a new species. I even predict that if intermodal becomes an express service, maybe a shipping line will devote a whole service calling only one port.' | |
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An efficient interface could be created, he suggested, by using specialized tractors that can pull four or five double-stack chassis in a 'mini trailer train' shuttling between the wharf and intermodal terminal as is done in Europe.
Ashar's futuristic layout for the few remaining ports with on-dock rail would eliminate the practice of staging boxes in a container yard before loading them on the rail. Instead rail tracks would be perpendicular to the dock to enable cranes to live load straight from the ship.
The arrangement requires a deep terminal, but allows for easier switching of rail car strings and greater automation along the lines of how APM Terminals uses rail-mounted, container-stacking cranes at the Port of Norfolk in Virginia, he said.
The Los Angeles and Long Beach ports, along with the Alameda Corridor Transportation Authority, on June 3 solicited private sector proposals for creating a zero-emissions system for moving containers to the local rail yard operated by the Union Pacific. Proposed technologies might include electric guideways, zero-emission trucks, or electrified rail, all of which use electricity to power the movement of cargo, rather than diesel-fueled trucks.
Ashar's position on rail-served ports has evolved over the years. As a senior port planner and transportation analyst with the Port of Seattle in the mid-1980s, he was a proponent of on-dock rail. At the time the logic was different because the rail yards were located 20 miles or more from downtown Los Angeles and other port cities, trains were smaller and volumes were different.
'Now, you need to specialize,' he said.
As more shippers utilize all-water service to the East Coast to diversify their logistics options and take advantage of lower ocean rates and the coming expansion of the Panama Canal, intermodal service will become less concentrated in a couple of big ports. The segmentation spreads out volumes and argues against on-dock rail for each facility, with fast cargo going to a pure rail port like Prince Rupert, Ashar said.
'We've had some plain vanilla intermodal. Now I see a new species. I even predict that if intermodal becomes an express service, maybe a shipping line will devote a whole service calling only one port,' essentially operating a shuttle service to Rupert and saving money on ocean transport costs, he said.
Los Angeles and Long Beach can't compete with Rupert given the three extra days of sailing time, high port fees, congestion, potential unionization of harbor trucking, stringent environmental requirements, speed reduction for ships and ship-electrification upgrades to hook up to onshore power, Ashar said. They should relinquish efforts to hold onto their status as the national gateway for Asian cargo given the rising number of port options available to shippers.
But Los Angeles and Long Beach remain committed to expanding their on-dock rail capacity. About a quarter of their combined container volume heads inland from on-dock rail. At the Port of Long Beach, 17 percent of overall volume utilizes on-dock facilities, led by Hanjin's Pier T Terminal with 27 percent of containers loaded direct to rail. The rest of the inland rail containers are trucked two or three miles to the Union Pacific's main intermodal transfer facility or the UP and BNSF yards on the outskirts of Los Angeles, more than 20 miles away. The BNSF plans to build a new intermodal facility about five miles north of the port complex to accommodate anticipated growth, minimize truck traffic on the highway, and improve cargo transit times.
Port commissioners recently approved a $750 million redevelopment of the Middle Harbor Area that massively increases the on-dock rail capability of the California United Terminal and the Long Beach Container Terminal. Once completed, the two terminals will be able to move almost 30 percent of their ocean boxes by rail, port spokesman John Pope said.
Both railroads are also making a conscious effort to suck up as much volume at the pier as possible, according to industry officials. In the past year, for example, they have increased the number of destinations that loaded trains serve. And they have introduced longer, denser trains. The density was achieved by segregating out wellcars for 53-foot domestic containers from those specifically designed for 20-foot and 40-foot international boxes at the ports. That enabled the railroads to move more cargo on the same trains, which now extend two miles.
'The direction we're seeing is to expand on-dock capabilities and make better use of the Alameda Corridor,' Pope said.
The Alameda Corridor is a 20-mile trench from the port area to the railroads' main lines outside the city where trains travel the Midwest and points east. It was built at a cost of $2.4 billion to eliminate grade crossings and allow the free flow of trade without disrupting street traffic. Each loaded container that travels the system is assessed a $19.31 fee.
The multitracked Alameda Corridor carries a daily average of 9,778 TEUs on almost 34 trains per day, compared to 55 trains on average during the freight heyday of 2006, according to the latest statistics from the facility's governing body. Part of the reduction in train numbers is also a function of the increased efficiency.
It has capacity for up to 150 trains per day.
Ashar questioned why the twin ports remain so interested in intermodal service, considering that 'de-intermodalization' in the region is inevitable.
'The local economic impact of intermodal is none. If you put it on a train and send it away, the economic impact is nil. Nobody is opening the containers, there is no storage, no stuffing. It goes intact. Why not send it to Prince Rupert?' he said. The rise of alternative gateways has also decreased the profitability of intermodal compared to local cargo, which is a captive market.
The huge APM Terminal for the Maersk container line perhaps can justify on-dock rail, but the rest of the Los Angeles and Long Beach terminals should reassess the market dynamics, examining issues such as the intermodal content, rail equipment utilization and alternative land uses, before undertaking new investment in rail infrastructure, he recommended. Some terminals should even consider removing existing on-dock rail infrastructure, he added. The focus should be on improving the connections to the nearby UP and BNSF intermodal hubs because direct rail access is unnecessary in most cases.
'On-dock rail is a bit of a marketing tool, it seems to me' as ports try to sell themselves to shippers and ocean carriers, Ashar said.
He pointed to the Port of Savannah, Ga., which is blessed with abundant land, as a good example of a port that has rail facilities located nearby, outside the container yard.
The Port of New York-New Jersey also has a good arrangement, he said, because it has a central yard that takes railcars from all three on-dock rail facilities and combines them into 10,000-foot trains headed for specific destinations, such as Chicago. The yard reduces the need for CSX and Norfolk Southern to take railcars from multiple piers and build them into single trains at their respective hubs in Syracuse, N.Y., and Harrisburg, Pa. That lowers their costs and improves transit times for customers, according to the port.