Sweetening the æsweet spotÆ
Short-haul intermodal movements pick up steam.
By Eric Kulisch
Railroad service improvements and changing freight economics have made regional intermodal service a viable option for shippers in certain lanes, according to intermodal industry executives and analysts.
Railroads have generally held a cost advantage moving international and domestic shipments of consumer goods more than 1,000 miles, but the breakeven point where it makes sense to convert from over-the-road truck to rail is now in the 550-mile range despite the narrowing gap in rail and truck rates, said Bill Matheson, president of intermodal services for Schneider National, in an April 8 webinar hosted by American Shipper.
Truck rates have plummeted during the past two years in line with the economic downturn, giving shippers a temporary advantage. But a substantial amount of truck supply has left the market and will not be available when the economy begins to recover late this year or next, analysts say. Many large fleets have exited the long-haul market, thousands of used trucks have been exported, motor carrier bankruptcies are expected to increase in the second half of the year and fuel costs are beginning to rise again.
'So inflationary costs for truck will increase at an accelerated rate relative to intermodal costs,' driving down the distance where it makes sense to convert, Matheson said.
Also dragging down the desirability of long-haul truck transport is the continuing decrease in driver productivity, largely due to safety and emissions regulations that limit on-duty hours and worsen fuel mileage.
At the same time, intermodal transport is rising as an attractive option for shippers due to improved rail service and the ability of some carriers to maintain control of containers, Matheson said.
CSX, a major eastern railroad that partners with Schneider, has improved train speed to an average of 29 mph or more, and intermodal terminals have increased efficiency processing containers by 50 percent during the past three years, according to Jim Hertwig, president of CSX Intermodal.
CSX Intermodal is strictly a rail transportation provider that does business with wholesale intermediaries such as ocean carriers, intermodal marketing companies, and motor carriers that deal directly with the beneficial cargo owner to arrange door-to-door moves.
The two executives said service improvements on the rail and drayage sides have allowed their companies to overcome shipper concerns and provide on-time delivery on many routes at a level similar to that of trucks.
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| Bill Matheson president of intermodal services, Schneider National |
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| 'The big difference today is that an asset-based solution allows us truck-like ability to access capacity on orgin and destination dray.' | |
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Intermodal demand is a relative concept during the current recession. Although intermodal has been the strongest growth segment for railroads this decade, intermodal volumes were down 16.3 percent in the first quarter compared to the same year-ago period, according to the Intermodal Association of North America (IANA). The main contributor to the decline was a 22.7 percent fall in international box moves. Volumes for domestic intermodal, continuing its renaissance, stayed flat. In 2008, domestic intermodal volumes actually rose 2.9 percent, the best growth rate since 2004, while international volume was down 11 percent.
Much of the domestic gain over the past year has been in the shorter lengths of haul. Growth in lanes of less than 1,000 miles was almost 7 percent through the first three quarters of 2008, more than twice the growth rate in lanes greater than 1,000 miles, IANA reported last fall. More than 60 percent of total domestic growth was in the shorter-haul lanes.
Among the factors driving the trend, the trade association said, were greater network capacity, improved velocity and high fuel prices that improved rail's competitiveness in shorter lanes. It called corridors of 700 to 1,000 miles the 'sweet spot' for growth.
Comparing truck and rail transit times in hours, Matheson said, can be misleading because the more relevant criteria for shippers is having certitude that a shipment will arrive on its scheduled delivery date.
He pointed to Schneider's three-year-old intermodal service from the Ohio Valley to Kansas City, Mo., as an example of a successful substitute for over-the-road truck transport. Schneider provides local pickup and delivery and operates the intermodal ramp to load several dedicated CSX trains per week running the 700-mile route, with connecting service to the West that is one day faster than normal.
Schneider's reliance on company-employed drivers instead of independent contractors, as well as its own trucks and standardized domestic containers, allows it to provide the consistent, repeatable pickup and delivery processes necessary to maintain high-quality intermodal service, Matheson said.
'The big difference today is that an asset-based solution allows us truck-like ability to access capacity on origin and destination dray. Additionally, having a company-owned box allows similar pools and standardization around equipment (similar to) what a traditional over-the-road trailer provides,' Matheson said. Also important are systems for tracking and order management.
Schneider this year eliminated handling truck trailers for intermodal and now strictly uses a standard 53-foot domestic container.
In early 2008, the Green Bay, Wis.-based company consolidated its network of primary rail providers to concentrate movements with CSX Intermodal in the East and BSNF Railway in the West.
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| 'I've heard truckers say that anything from 500 miles to 700 miles, they look at rail.' | |
| Patrick J. Casey vice president of fleet management, TTX Co. |
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The move was designed to simplify container/trailer pools, improve transit times, deliver cost efficiencies and enhance customer service.
The new agreements provide Schneider customers with preferential loading, capacity and operational ties that increase accessibility and efficiency of rail moves.
The new short-haul trend brings the intermodal industry full circle. In the early days of intermodal, railroads had numerous terminals where trucks could back their trailer onto a flatbed car that moved on mixed trains. But as containerization and double-stack cars became the norm, railroads began to streamline their terminal system and simplify operations with dedicated intermodal trains in order to improve service and profitability. Intermodal became the favored mode for moving international traffic long distances from West Coast ports across the country. Nonetheless, railroads have long run intermodal trains on heavy freight corridors such as New York to Boston, although often on an infrequent basis.
The surge in fuel prices last summer pushed many shippers and transportation logistics companies such as Lowell, Ark.-based J.B. Hunt and Schneider to take a closer look at expanding shorter-haul intermodal service on heavy commercial corridors where the penetration of intermodal is already high, said Larry Gross, a senior consultant for intermodal issues at FTR Associates, in an interview.
'A J.B. Hunt, since they're both an intermodal provider and a trucker, has a very good fix on what the economics are of the two modes, and realizes there is an opportunity to convert some of this freight over,' especially since there is more freight that moves shorter distances, Gross said.
Penciling Out Intermodal. The key factors in determining whether a medium or short-haul rail intermodal move is viable are the drayage distance between the shipper's dock and the rail ramp and the out-of-route miles traveled on the rail network, Matheson said.
Although the best transits and savings opportunities follow the most direct route, some indirect routes still have potential.
An intermodal move from Rockford, Ill., to Lowell, Mass., for example, adds only one hour in transit time and 20 miles in distance compared to the 44 hours and 1,049 length of haul by truck, but at a savings of $460 in rate and fuel costs, Matheson said.
Transportation from Kalamazoo, Mich., to Lowell, involves a 30 percent increase in mileage (867 vs. 1,125) and nine extra hours of transit (39 vs. 48) due to the long reverse-direction truck haul to a Chicago terminal, producing a smaller saving of $133.
A Dayton, Ohio'Orlando, Fla., route is longer by one day for intermodal compared to truck (41 hours to 64 hours) primarily because CSX only has a single-track line available. But, Matheson said, a shipper still achieves a 15 percent saving, or $300, using the intermodal option instead of truck ($2,112) even in the current environment of depressed truck pricing. A key advantage is that most distribution centers in the area are within 50 miles of the rail ramp and the trucks continue in a forward direction ' meaning their destination is straight ahead with no backtracking against the inbound rail miles already traveled.
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| 'As you move down the length-of-haul spectrum you need more things to go right. The Key is whether the door-to-door cost of intermodal is less than highway. If not, game over.' | |
| Larry Gross senior consultant for intermodal issues, FTR Associates |
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Schneider has created a calculator that helps shippers evaluate the total cost of delivery factoring in the extra safety stock they may need because of the extra day of transit. In many cases, it can still make sense to convert because the transportation savings outweigh the slight increase in inventory carried, Matheson said.
Not every origin and destination pair is ripe for intermodal conversion, especially for lanes of 600 miles and under, freight transportation experts say.
'As the length of haul on the railroad is reduced, proximity to the ramp from a dray standpoint is critical,' Matheson said. 'If the origin and destination points are very close to the ramp, then it comes down to velocity of the container or dray resources' and customer shipping patterns.
'There's going to be a tremendous amount of freight where truck is still going to be the best solution. Additionally, with distribution centers and production facilities moving closer to market, there is going to be a tremendous amount of freight that is going to move in that 300-mile length of haul band that is still going to require a truck solution,' he said.
Schneider National is also one of the largest truckload carriers in the nation.
'As you go down to shorter lengths of haul, the move becomes less forgiving in terms of excess cost and service. So you need a very disciplined, highly integrated and highly efficient service to compete,' Gross added.
'If you're running from Los Angeles to Chicago you may have many miles of low-cost rail against truck because every mile is cheaper. So you can afford to pay for some drayage at the end. You can reach out from the terminal a long way and still have a door-to-door cost that is cheaper.
'But if you have a shorter length of haul you have fewer miles generating savings, so the distance that you can reach from the terminal on the highway is much more limited. It's more important that the terminals be located more closely together and that there be more of them, and that's what the railroads are starting to do. If you have a very concentrated area, such as a logistics park, then you basically have no dray on one end. So that pretty much changes the equation pretty drastically.
'As you move down the length-of-haul spectrum you need more things to go right. The key is whether the door-to-door cost of intermodal is less than highway. If not, game over.'
Gross, who also runs his own Gross Transportation Consulting business, said integrated, asset-based carriers that have complete control of the shipment have a better shot at providing short-to-medium haul service than traditional intermodal marketing companies (IMCs) that rely on third-party truck drivers and are not able to coordinate the elements of the move as well.
The integrated carriers also have better opportunities to find backhauls for their containers, rather than having to return an empty box to the railroad or leasing company, so their shuttle operations are better balanced and denser, he said.
J.B. Hunt, for example, owns 39,310 53-foot containers and has one of the largest private shuttle fleets in the United States, with more than 2,100 trucks and 2,500 company drivers.
'Its highway conversion momentum is quite real as we are aware of a number of shippers that continue to shift a greater percentage of their overall loads to intermodal from truck,' despite the abundance of cheap truck rates, Stephens Inc. stock analyst Thom Albrecht, wrote in a recent client note.
Albrecht listed J.B. Hunt's excellent truck pickup and delivery service as one of the factor's influencing shipper behavior.
Most large truckload carriers now sell intermodal service or are given discretion by their customers to move the freight themselves or by rail. Other large trucking companies with a significant intermodal presence include U.S. Xpress and Swift Transportation.
'I've heard truckers say that anything from 500 miles to 700 miles, they look at rail,' said Patrick J. Casey, vice president of fleet management at Chicago-based TTX Co., in an interview.
TTX rents railcars to railroads.
Many national motor carriers are reconfiguring their operations to offer more regional service, where intermodal is not a strength, such as in the Southwest, Matheson said.
Meanwhile, some traditional IMCs such as Hub Group have gradually invested in some equipment of their own, and those have much smaller fleets than asset-based players. Their main selling point is price.
The Port Play. Much of the increased interest in short-haul intermodal is due to the growing volumes of import container traffic arriving at East Coast ports during the past four years.
Rail loading numbers for intermodal are down 15 percent on the West Coast and only 2 percent on the East Coast during the first quarter in a down economy, according to IANA, reflecting the relative shift in market share between the coasts.
During the first quarter of 2009, J.B. Hunt's intermodal loads on the eastern part of its network grew 38 percent as it captured more highway freight, while its transcontinental business contracted 4 percent. Its average length of haul shrank 4.3 percent to 1,798 miles and it continued to open new lanes in the East.
East Coast ports have gained popularity with shippers seeking to diversify their supply chains so as not to be overly dependent on West Coast ports, avoid rising West Coast port fees and high transcontinental rail costs, and get closer to their customer base. At the same time, manufacturers and retailers have been building huge distribution centers near port complexes in the South and East to process the import cargo and quickly get it to stores and customers.
The expansion of the Panama Canal in 2014 is expected to accelerate that trend as behemoth container vessels from Asia will be able to take the all-water route to the Gulf and East coasts.
Logistics specialists are also relying more heavily on transloading, the process of unloading 40-foot international containers and transferring the contents into 53-foot domestic containers to move cargo inland. Ocean carriers prefer that method because it keeps their boxes in the port area for quick turnaround and shippers can save money by booking fewer containers with the railroad to move the same amount of freight. And, it provides intermodal service providers greater returns on investment because they can run loaded containers in either direction ' inbound and outbound ' while mixing domestic and international cargo, especially when able to use a double-stack configuration.
CSX operates several short-haul services, including Port of New York and New Jersey-Boston; Atlanta-Savannah, Ga.; Charlotte, N.C.,-Miami; and Atlanta and Memphis to Orlando ' the later three added in the past year.
And it is looking for new opportunities to expand intra-regional service.
'We're going to find new services developed where we're gonna be able to run direct trainloads for shorter areas or even between the ports,' Hertwig said. 'I think we're going to see even more so DCs built up around the ports, transloading, and then handling domestic containers inland.'
The changing freight industry dynamics and railroads' investments in new terminals, automation and routes have also expanded the potential market for intermodal service.
Hertwig said CSX would continue to increase the size of its sidings, particularly on main lines. CSX has already spent about $200 million to double-track the Chicago-Atlanta-Florida corridor, and has similar plans for the Cincinnati-Atlanta line. The Jacksonville, Fla.-based carrier isn't running parallel track the entire length of the lines, but is expanding the length of the sidings 'so that it almost appears as if you got a double-track network. And as you do that you can run more trains on your system,' he said.
This year, the railroad began work on an intermodal facility at North Baltimore in northwestern Ohio, is streamlining operations in Chicago, and continues to expand facilities in major markets such as Charlotte. In 2008, the company opened an intermodal terminal in Chambersburg, Pa.
The intermodal facility in Ohio is a key element of the National Gateway, a $700 million public-private partnership seeking to create a more efficient rail route between mid-Atlantic ports and the Midwest through use of double-stack trains.
CSX has plans to build a modern truck-rail transfer station in Winterhaven, Fla.
Rival Norfolk Southern is also developing, with state and federal assistance, the Heartland Corridor to create double-stack tunnel clearances for a more direct route between the Port of Virginia in Norfolk and a new terminal in Columbus, Ohio.
It is also developing plans for a $2 billion-plus public-private partnership called the 'Crescent Corridor' stretching from sites near both Memphis and New Orleans to New Jersey. The project will add track, rail sidings, signal improvements and other upgrades to remove bottlenecks in an effort to capture more trucking business that relies on major north-south interstate highways.
In February, Norfolk Southern opened a new intermodal terminal in Titusville, Fla.
Last year, Norfolk Southern reached an agreement with short-line operator Pan Am Railways to create a joint venture to improve freight rail service from Boston to Albany, N.Y. The service will use Pan Am's 400 miles of main, secondary and branch lines while Norfolk Southern contributes more than $220 million in capital improvements and existing assets such as rolling stock in exchange for trackage rights. The companies also plan to build intermodal and automotive terminals in Albany.
To view the free intermodal webinar, Regional Intermodal Trends: A fresh look at cost and service comparisons and the shift to intermodal, go to www.AmericanShipper.com/intermodal.