Enough Intermodal Market Hype!

There has been lots of surging intermodal volume reported since August. So, intermodal is coming back, correct? All is right with the intermodal world? It is sunny skies and good news ahead? Hold that thought. Ask one simple question. What is your actual level of confidence about that optimistic projection? Is it sustainable? Is there 100% certainty? No, a perfect outlook about the future is unreasonable, given the complexity of intermodal supply chain lengths and the number of players involved. Somewhere better than 50-50 and perhaps 75% probable might be a reasonable upside projection.

Want more certainty? Then take these steps: Find out how many new trailer on flat car (TOFC) railcars TTX has issued a purchase order to buy. As for the container business recovery, how many new stack cars is TTX ordering? My sources suggest the answer to both questions is “zero.”

There is no current news from my sources that suggests the immediate need to acquire more intermodal cars. There appear to be sufficient icars in the TTX fleet to handle existing traffic volumes. The one exception is that a continuing surge of semi-trailer demand might result in an admitted shortage of TOFC railcars.

However, during past decades, there is a consistent pattern of watching TOFC cars almost continually shrink. It has not been a growth business segment. A spot market demand for a short economic recovery period is therefore unlikely to spike confidence in going forward with new TOFC car purchases. That is not a likely business case proposition when the railroads are focused on maintaining long-term high profit margins and seeking ever-higher returns on invested assets on their balance sheets, or the balance sheet of TTX, which Class I’s jointly own.

On the other hand, there may be an imbalance and shortage of railroad-suitable containers. The railroads have not been aggressively adding to their fleet of domestic pool containers. Does that reflect an internal negative outlook toward this intermodal segment within railroad corporate headquarters? Or is it simply a reflection of the railroads’ being mostly focused on downsizing their overall assets to instead improve returns on assets? Someone needs to ask these questions at the upcoming quarterly railroad briefings in mid-October.

With the business issues laid out above, let’s turn to a quick overview of what the statistics are showing. In the Southwest, traffic growth has been extraordinarily high in the twin port complex of Long Beach and Los Angeles. BNSF and Union Pacific can usually cut back on equipment assets like railcars and locomotives as well as in their employee headcounts quite rapidly when traffic falls off. But historically, putting those assets quickly back into service when and where needed is a far more time-delayed process. 

In the case of LA/Long Beach, traffic rapidly declined within about 45 days by as much as 70% on Pacific-imported containers. The problem occurs when the recovery surge is quite rapid vs. its lowest recent month’s depth. In some cases, a 15% or higher increase over the previous year’s same monthly period occurs. Railroads are typically very slow at repositioning their human assets and their hard equipment assets during such recovery spurts.

Protecting against the financial ravages of declines in business is a fundamental skill of the “Big Seven” North American Class I’s. It is a protective benefit. Think about it. It is why none of them need a federal relief package during this pandemic. The reciprocal of that management strength is why I believe that companies like Union Pacific have struggled with the spot market demand surge for intermodal. They just can’t handle it right now, particularly since this replenishment surge by some customers overlaps the normal seasonal period of pre-holiday, end-of-year advanced stocking of goods from largely overseas sources. 

For the railroad intermodal business sector, that annual holiday stocking typically occurs between July and October, then starts to taper off into early December. Reacting to an abnormal 5%-8% year-over-year known high-traffic period is not much of a railroad hurdle. They adapt to maybe even a 10%-12% one-month or so year-over-year growth without much delay or customer disruption.

But this year’s rapid turnaround is a bit much for railroad planners. Perhaps if they had been informed two to three weeks before the loaded ships started to arrive at LA/Long Beach, the railroads might have restored and moved crews, power and railcars into place more rapidly. But my sources suggest that that supply chain advanced intelligence sharing did not occur. That is a yearlong supply chain role lesson learned.

Here is the good news: The Port of LA announced that it has introduced an advanced vessel consignment sharing process so that the port’s LA-area stevedores and railroad planners will henceforth be getting such transport management systems (TMS) intelligence in the future. That will give UP and BNSF more time to set assets into place.

Three-quarters of the year is in the history books. What is that data telling us for the U.S. rail market? Overall, the broad intermodal sector is down a considerable, but not disastrous, 6.3% for full-year 2020 to date, vs. the year-to-date in 2019. Compare that to the overall non-intermodal carload business sector, which is down through Week 39 by 13.8%.

Here is the U.S. pattern, showing trending improvement: During Week 39, U.S. intermodal increased 5.5% y/y. Carloads continue to struggle, down 10.5% y/y.

Here are good-news and bad-news business examples: Domestic container volume moving between the Southwest and Midwest rose 9.3% last month. But there appears to be a big imbalance in cars moving Midwest to Southwest. The consequence is that there are way too many loaded containers moving east and many fewer (and most empty) containers and platforms cars moving back westward. This is important because so-called PSR railroad managers hate to see a volume imbalance. It hurts their profitability. That’s not good.

It is too early to call the intermodal recovery a long-term win for the railroads. Intermodal is doing well for the moment. But a second COVID-19 surge could reduce traffic levels again. Furthermore, a hard hit to the nation’s economic recovery might occur if small business bankruptcies increase and discretionary incomes decline for a large percentage of the population.  Here is the good news sign I’ll be watching for: If TTX orders equipment early in the fourth quarter, that might be a railway headline story. But I have a low level of confidence about that.

For further insight, see Nick Little’s commentary, How Well is Rail Intermodal Integrated into Supply and Value Chain Behavior?

Independent railway economist, Railway Age Contributing Editor and FreightWaves author Jim Blaze has been in the railroad industry for more than 40 years. Trained in logistics, he served seven years with the Illinois DOT as a Chicago long-range freight planner and almost two years with the USRA technical staff in Washington, D.C. Jim then spent 21 years with Conrail in cross-functional strategic roles from branch line economics to mergers, IT, logistics, and corporate change. He followed this with 20 years of international consulting at rail engineering firm Zeta-Tech Associated. Jim is a Magna cum Laude Graduate of St Anselm’s College with a master’s degree from the University of Chicago. Married with six children, he lives outside of Philadelphia. “This column reflects my continued passion for the future of railroading as a competitive industry,” says Jim. “Only by occasionally challenging our institutions can we probe for better quality and performance. My opinions are my own, independent of Railway Age and FreightWaves. As always, contrary business opinions are welcome.”