On April 27, 1984, a train operated by the Southern Pacific Transportation Co. left Los Angeles for South Kearny, N.J. This wasn't just another train, however. On board were containers stacked two-high on specially designed "wellcars." The lower boxes rested in a depression built into each car's center area, allowing the train to clear bridges and tunnels despite the higher cube.
The launch of the "Stacktrain," developed by steamship line American President Lines Ltd. and railcar manufacturer Thrall Car Manufacturing Co., became another "quantum leap" moment in the history of freight transportation in America. Railroads limited to hauling single trailers or containers on flatcars could now double their capacity with little additional investment. Shippers, meanwhile, would enjoy a second surge of fleet productivity just two years after Congress permitted the use of longer and heavier trucks on the country's interstates.
It's been a prolonged adolescence, but 30 years on, domestic intermodal—70 percent of which today moves in double-stack configuration—appears to have come of age. Its growth rate is currently about four times that of over-the-road truck. Shippers, brokers, and motor carriers concerned about road congestion, driver shortages, and volatile diesel prices continue to convert to intermodal; in the country's densely populated Eastern half, they are doing so over shorter stage lengths once reserved for trucks.
Intermodal has a ground-floor opportunity to capture up to 2 to 3 million truckloads crossing the U.S.-Mexican border each year (see sidebar). Intermodal executives are pursuing small to mid-sized brokers, truckers, and intermodal marketing companies (IMCs)—firms that retail intermodal service to shippers—with door-to-door services that didn't exist for them a decade ago. On the distant horizon is the $292 billion-a-year private truck fleet market, a category that may not be overly suitable for intermodal conversion because most moves are truck-friendly short-hauls from DC to store, but that could offer opportunities under certain scenarios.
During the 12-month period that ran through the end of 2014's first quarter, the domestic intermodal system moved 19,070 containers and trailers of dry van freight per calendar day, according to the consultancy FTR Associates. In the prior 12-month period, 18,573 units moved through the system daily. Larry Gross, a principal at FTR who specializes in intermodal, said the year-over-year increase—497 units per day—is significant. Conversion from over-the-road accounted for 15 percent of intermodal's year-on-year growth, Gross estimates.
A TOUGH SELL
Intermodal executives aware their industry has a spotty track record of operational consistency focus more time these days on education than anything else. To newcomers, they tout intermodal's benefits (economies of scale, fuel efficiency, environmental friendliness, etc.). To former users that may have been burned years ago, they say that multibillion dollar investments in ramps and terminals have brought intermodal close to being cost and service competitive with single-driver truck operators, mostly in the East.
"Intermodal is very much a truck-like business today. It's just done a little differently," said Matt Meeks, head of ABF Multimodal, a unit of Fort Smith, Ark.-based ArcBest Corp. (formerly Arkansas Best Corp.) that manages the company's intermodal business. To reinforce the tutorial, Schneider National Inc., the trucking and logistics giant and a big intermodal user, often sends a director-level executive on customer calls to explain the ins and outs of the service, according to Jim Filter, the Green Bay, Wis.-based company's vice president, intermodal commercial sales. It can be a tough sell, Filter admitted: Some shippers still have a hard time grasping intermodal; others worry about erratic rail service levels. Some potential users "think they need a rail siding to ship intermodal," he added.
Aware of these concerns, executives take pains to educate potential users in situations where intermodal might not work. The cost of truck dray services to and from intermodal ramps is a crucial element. The longer the dray distance, the higher the total expense. Service to and from high-density markets like Chicago and the Ohio Valley make dray service economical. However, the returns begin diminishing when the service hits lower-density markets.
A ratio of dray miles to over-the-road linehaul miles above 30 percent would likely put intermodal at a cost disadvantage to truck, according to Sam Niness, assistant vice president and general manager of "Thoroughbred Direct," the intermodal unit of Norfolk, Va.-based rail Norfolk Southern Corp. (NS). For example, if the truck mileage is 800 miles and a shipper and consignee are each 100 miles from their respective ramps, a 50-percent ratio (truck mileage divided by the total round-trip dray miles on both ends) would pose a conversion challenge, based on Niness's formula. However, change that truck haul to 2,000 miles, and intermodal becomes an attractive option. In an effort to reduce dray costs, a growing number of NS's customers are working with the railroad to position new distribution centers close to its ramps, Niness said.
OPENING THE DOORS
The past 10 years have seen dramatic changes in how intermodal is marketed. In a move to attract freight brokers, railroads have made intermodal available on the spot market, the world brokers live in. In addition, the rails now offer brokers door-to-door services by bolting drayage operations onto the traditional ramp-to-ramp business. While this has benefited all brokers, it has been a particular boon to smaller players, which had to find their own dray services but often lacked the scale or network contacts to do it economically.
In 2007, Union Pacific Railroad Co. created a unit called "Streamline" catering to smaller users that previously could only secure ramp-to-ramp service from their rail partners. By leveraging its enormous resources, Omaha, Neb.-based Streamline gave users the opportunity to offer end-to-end intermodal solutions to their customers, according to Kari A. Kirchhoefer, Streamline's president.
Rail intermodal folk contend that the ability to sell a door-to-door product has demystified intermodal service for many shippers and has opened doors previously closed. Potential users are "amazed at how easy it is," said Niness of Thoroughbred.
One objective of intermodal executives is to migrate intermediaries away from transactional business into long-term strategic relationships. Streamline, for example, has developed annualized rate programs for repeat broker customers, and pledges equipment and dray capacity in return for freight volume commitments. Kirchhoefer said many brokers working with Streamline shifted to the relationship model once they became confident in the service.
TECH RULES
The ubiquity of IT tools has enhanced intermodal's value proposition. Some large users have said they would like to see better data integration between their platforms and the rails' so that information doesn't have to be entered twice. On balance, however, the expanded use of technology has helped make users' lives easier, which is a good thing for providers.
It is commonplace today for users to share data on their current truck business with the railroads, which will, in turn, overlay their intermodal schedules on top of that to determine where rail service might be a better fit. C.H. Robinson Worldwide Inc., the third-party logistics service specialist, doesn't rely on published schedules; instead, it uses proprietary technology to analyze and assess intermodal opportunities, according to Phil Shook, director of intermodal for Eden Prairie, Minn.-based Robinson.
Robinson's analysis focuses on analyzing "normalized" ramp-to-ramp transit times to determine the highest likelihood of schedule variance, said Shook. Big intermediaries like Robinson have the resources to manage the dray process themselves.
Streamline offers an online visual graph that lights up to show where intermodal service is available, where ramps are located, and their proximity to key points of interest. Streamline's site also compares intermodal door-to-door and over-the-road pricing, but only shows the potential savings in each lane; access to the actual rates is limited to customers.
Then there are the disrupters like Chris Ricciardi, chief product officer of Chicago-based Logistical Labs. Ricciardi is directing a project that would consolidate all intermodal information in one pOréal. Today, users have to visit multiple sites to compare rates, services, and schedules from various providers.
Ricciardi's model is based on the premise that the one-stop online shop that has worked so well in areas like travel can be applied to the intermodal world. "We want," he said, "to be the Expedia of intermodal."
If the prospect of converting thousands if not millions of domestic truckloads to the rails isn't enough to put a smile on an intermodal executive's face, just ask him or her about the outlook south of the border.
The conversion trend in the U.S., while far from running its course, is well under way. But in the U.S.-Mexican market, the conversion game is still in the top of the first inning.
Kansas City Southern Railway (KCS), whose primary business is moving goods in and out of Mexico, estimates that 3 million truckloads per year have at least the potential for conversion to its intermodal services. Union Pacific Railroad Co., which operates across the border through a relationship with Mexican railroad Ferromex, estimates that 2 million daily truckloads are ripe for the taking. Dan Beers, intermodal project leader for the Mexican unit of Dallas-based third-party logistics firm Transplace, said the annual conversion rate could be as high as 6 to 8 percent.
Patrick Ottensmeyer, KCS's chief marketing officer, estimates that the railroad has a less than 3-percent share of the market that either could be converted today or would have the potential for conversion once planned new services become available. Transplace, which in mid-May announced a plan to expand its cross-border intermodal offerings, uses rail for only 1 percent of its shipments in the market.
Some of the growth spurs for intermodal are familiar to U.S. users: road congestion, volatile diesel fuel costs, and environmental concerns. Other factors, though, are unique to the border. Those include security concerns and a severe equipment imbalance favoring the northbound legs. Normally, two tractor-trailers move northbound for every one that heads south. However, this year, the demand imbalance has ranged from 3-to-1 to as high as 5-to-1. This has resulted in loaded trailers' sitting at the border for days or weeks waiting for tractors.
Intermodal can resolve a number of those problems, industry executives said. Containers moving by rail are often shipped "in-bond" to interior locations. This means intermodal users avoid the delays caused by detailed customs inspections, where truck operators must unload their cargo and have it examined before the goods are reloaded and the vehicles allowed to proceed.
Beers of Transplace added that abundant container capacity frees intermodal users from concerns over truck shortages. Security issues aren't a problem because a wellcar holding two stacked containers is virtually impossible to break into due to the height of the top box and the deep location of the bottom box.
Then there is the cost: According to Beers, intermodal shipping rates are 15 to 20 percent lower than truck. In addition, rail fuel surcharges are 40 to 50 percent less than truck because rail service is inherently more fuel efficient, he said.
Of course, working in the U.S.-Mexican market is not the same as playing on the domestic field. Different rules apply. Goods need to clear customs at origin and destination. Shippers will confront two sets of linehaul rates because the U.S. portion will contain fuel surcharges, while the Mexican portion won't. Insurance that is in force in the U.S. is not applicable in Mexico. Different policies and procedures at Mexican customs sometimes cause bottlenecks in the country even before the goods reach the border. Phil Shook, director of intermodal for third-party service provider C.H. Robinson Worldwide Inc., said Mexico suffers from a lack of intermodal ramp density that could temper growth prospects.
As in the U.S., the length of the rail move dictates the cost-effectiveness of cross-border intermodal service. A trip from Chicago to the border will offset the cost of the dray on either end. A trip from Dallas, on the other hand, will not pay its way. Users will also have to balance the cost-savings with the knowledge that a shipment moving by rail may arrive one to two days later than truck, even with the border congestion.
Another common denominator in both markets is the need to educate the marketplace on intermodal's pros and cons. Rail has only a 14-percent share of the value of the U.S.-Mexican market, according to the latest available U.S. government figures. Many shippers don't know any other form of transport besides truck, and they are unclear about intermodal's capabilities. Beers of Transplace said the conversion rate would be higher if shippers understood the benefits of intermodal and the trade-offs with over-the-road transport.
EXHIBIT 1: Market forecast for industrial robots - revenuesInteract Analysis
