After an unprecedented punch to the gut, intermodal roars back
In the spring, rail intermodal players struggled with a historic, pandemic-induced crash in demand. Yet by late summer, the market rebounded, a capacity crunch hit, and rates were on the rise. What’s next?
Gary Frantz is a contributing editor for DC Velocity and its sister publication CSCMP's Supply Chain Quarterly, and a veteran communications executive with more than 30 years of experience in the transportation and logistics industries. He's served as communications director and strategic media relations counselor for companies including XPO Logistics, Con-way, Menlo Logistics, GT Nexus, Circle International Group, and Consolidated Freightways. Gary is currently principal of GNF Communications LLC, a consultancy providing freelance writing, editorial and media strategy services. He's a proud graduate of the Journalism program at California State University–Chico.
Intermodal freight operators entered the year expecting modest gains over a somewhat lackluster 2019 in which the industry handled some 13.7 million rail container units. Then the Covid-19 pandemic hit. Businesses shut their doors and sent employees to work from home. Consumers sheltered in place, unemployment skyrocketed, and the economy contracted to levels not seen since the Great Depression.
The impact on intermodal traffic was immediate. April and May saw volumes crater as weekly intermodal shipments dropped at an unprecedented pace. Ocean lines canceled hundreds of ship calls, reducing the flow of import containers into the U.S. to a trickle. Transportation companies furloughed employees. Railroads parked locomotives and sidelined railcars. Containers and chassis stacked up at ports and intermodal yards across the nation.
Then June arrived, and the market came roaring back. Consumers, stuck at home, embraced online ordering of everything from foodstuffs to exercise equipment to home improvement products. Retailers’ inventories were rapidly depleted. Essential goods demanding timely delivery began to soak up available truck and rail capacity. Service providers pivoted to redeploy equipment, bring back workers, and ramp up services.
By August and September, the industry was in a completely different place, facing capacity shortages and struggling with demand and volume challenges that just 60 days prior could not have been imagined.
“I have never seen a market like this,” observed Phillip D. Yeager, president and chief operating officer of Oak Brook, Illinois-based Hub Group, the nation’s second-largest intermodal services provider with $3.7 billion in revenue, a fleet of 42,000 containers and 5,000 trucks, and 5,000 employees. “It’s just been an amazing increase in volume and demand” as appetite for consumer products surged and retailers struggled to restock. “Consumers … are putting their government subsidies into home improvement and other discretionary items, whereas before they’d be spending on going out to restaurants and travel,” he notes.
In response, Hub Group upped its investment in capacity, buying and deploying 3,500 new containers in June, and, anticipating the surge in business, taking on some additional costs to reposition equipment and adjust its network to support customers, Yeager adds.
DEMAND SPIKES BRING PRICE HIKES
Going into the fall, the capacity crunch shows few signs of letting up—which means many shippers will soon be paying more for service. Rail lines already have implemented multiple rounds of surcharges, particularly on containers coming off the West Coast. At the same time, the surge in volume, coupled with tight capacity, is driving up spot rates for both over-the-road (OTR) truckload and intermodal. Higher contract rates are likely to follow.
Yeager believes that if the current demand trends continue, “it sets us up for a really interesting 2021 bid season coming out of 2020.” Shippers who “support their partners” and have locked in capacity will do well, he says, noting that peak season “is happening right now. I think it’s going to be a spiky but prolonged peak,” with tight capacity extending through the end of the year.
Brandon Leonard, president of intermodal for Salt Lake City, Utah-based refrigerated carrier C.R. England, is seeing some service providers, already capacity constrained, turning down tenders and giving back recently awarded freight. “I think some are experiencing buyer’s remorse” on bids they won in April and May, Leonard says. He reports that he’s getting more “mini-bids” from large shippers who are looking for alternatives to cover freight that their existing providers can’t handle or are servicing poorly.
England’s focus is entirely on refrigerated, deploying a fleet of 1,600 intermodal “reefer” containers. Compared with dry-goods containers, turning around a “reefer” takes more time because of the maintenance (such as fueling) and cleaning that’s required between shipments. With reefer containers typically handling perishable goods, Leonard notes the company is less transaction-oriented and more focused on strategic, long-term customer relationships based on consistent year-round freight. Yet as capacity has tightened, shippers are knocking on the door. “We have all these new friends [coming to us] who have great long-term opportunities for us—starting tomorrow,” he says.
From a service perspective, Leonard generally gives good marks to rail operators but notes that the rapid spike in volumes has presented challenges, particularly for intermodal terminal operations. “Time from train arrival to the unit’s being grounded on a chassis is much longer than it was six to eight weeks ago,” he notes. Yet the pressure of responding to fast-rising volumes is rippling across all segments of the supply chain. “Whether from a truck driver perspective, warehouse or DC, freight terminal, rail crew, or drayage, there is a shortage of people able to go back to work,” he notes.
Matt Parry, senior vice president of logistics for Werner Logistics, agrees. “Demand … is significantly outpacing supply capabilities in all modes,” he notes. “The challenge … will center around the fluidity of the entire transportation network. Customers are struggling to support enormous inventory replenishment efforts. It’s a fragile network with interdependencies throughout.”
That network fragility is also creating headaches for the intermodal services companies—known as intermodal marketing companies, or IMCs—that purchase rail capacity for their customers and coordinate the intermodal moves. Most intermodal companies also have their own (or have access to) over-the-road truckload resources so they can balance the best capacity choice for the shipper’s service and cost needs. As capacity constraints shrink the spread between intermodal and OTR rates, making that modal call becomes that much more involved.
Decision factors can include raw transportation cost, service consistency, sustainability, and diversity, notes Parry. “The cost of moving OTR versus rail can often be a lot more complex than [just] rate per mile,” he explains. “Transit time, securement cost, and inventory-carrying cost all need to be considered.” Poor service and/or low reliability also can add cost to the supply chain. Mitigating risk and building in flexibility are key. “Many times, we recommend to source 70% of a lane intermodal and 30% OTR to create the most effective balance between capacity, consistency, and cost,” he adds.
BUILDING MORE RESILIENT SUPPLY CHAINS
The fallout from the pandemic is leading some supply chain leaders to reconsider the lean, just-in-time (JIT) supply chain models they’ve had in place for years. Covid-19 has exposed the inflexibility and brittleness of JIT supply chains, causing managers to examine how they can improve resilience and their supply chains’ ability to withstand shock—whether it’s a hurricane, fire, flood, or health pandemic.
“I think we’ll see companies rethinking DC (distribution center) sizes, to allow for more inventory to be forward-stocked,” says Glen Wegel, vice president of operations and IT for Raleigh, North Carolina-based Kitchen Cabinet Distributors.
At KCD, one of the nation’s larger providers of pre-made kitchen cabinetry, Wegel directs a logistics operation that brings in over 500 containers a year from Asia, into four primary U.S. ports. He uses a combination of OTR truckload, intermodal, and less-than-truckload services to move product from two U.S. warehouses, distributing to building suppliers, cabinetry dealers, and local contractors supporting the repair and remodel industry.
With growth in excess of 35% projected for this year, Wegel is planning for a third warehouse.
“I think 2020 remains volatile” with respect to the freight markets, he says, noting that we may not yet have seen the “bullwhip” effect of an economy recovering from the pandemic. Among his current strategies: avoiding Los Angeles and Long Beach and booking inbound ocean containers into ports that are less capacity-constrained, planning for longer shipment transit times, and shifting freight from rail to OTR. As for the latter, Wegel says he’s still using intermodal where service is consistent and reliable, but has shifted “quite a bit of freight” to OTR at his customers’ request. “Considering OTR fulfillment can shave seven to 10 days off a delivery window, many of our customers are requesting OTR and are willing to pay the cost difference,” he reports, adding that KCD has had “great luck” with service from truckload carriers Schneider and Knight-Swift.
ROLLER COASTER FOR THE RAILS
As one might expect, the pandemic roller coaster has also been a stressful ride for the nation’s rail lines. At Union Pacific (UP), weekly intermodal volumes in April bottomed out at 25% below levels for the same period in 2019, noted Kenny Rocker, UP’s executive vice president, marketing and sales, in the company’s second-quarter earnings call. “Our weekly run rates have been improving since that time,” he said.
As the economy recovers and freight volumes rebound, some shippers are citing equipment shortages as the cause of recent service problems. Lance Fritz, UP’s chairman, president, and CEO, rejects that notion. “We do not have an equipment shortage,” he emphasized during the earnings call. Capacity has been staged and available all along, just waiting to be redeployed as volumes returned, he said.
“I went for a train ride, and we had cars parked in places that I never thought I would ever see cars park,” he recalled. At one point during the pandemic, the UP had more locomotives stored than it had operating, Fritz acknowledged. Yet they were “ready to go … we had them close at hand.” When the time came, train crews and staff came off furlough and returned to work, “with more than 90% “accepting [offers] to come back to work, which is fantastic. We’re not having to worry about having to retrain people,” he added. According to one industry report, in the four weeks from mid-July to mid-August, the UP’s intermodal volume was back, averaging 5.5% higher than the year-ago period.
It was a similar situation at the Burlington Northern Santa Fe Railway (BNSF). “Peak-like volumes” have returned, says Tom Williams, the BNSF’s group vice president, consumer products. “Customers’ inventories were low as we went into the pandemic,” he noted. Since then, a combination of surging online sales, demand for personal protective equipment, and rebounding brick-and-mortar store sales has driven up traffic.
“Our network is in good condition,” Williams adds. “We have invested heavily in our network and continue to expand our capacity.” The railroad’s Southern California-to-Chicago line is nearly “100% double tracked … a super-highway for high-velocity trains.” He notes that the BNSF’s expedited service in this lane is 2.5 days.
Even as intermodal volumes return and railroads and IMCs ramp up—despite a pandemic that continues to ravage the country—shippers still seek one measurable attribute that remains most compelling of all. “What do shippers want?” asks the UP’s chief operating officer, Jim Vena. “They want reliability. They want consistency and to save on their assets … We’re going to be there to give them service.”
Most of the apparel sold in North America is manufactured in Asia, meaning the finished goods travel long distances to reach end markets, with all the associated greenhouse gas emissions. On top of that, apparel manufacturing itself requires a significant amount of energy, water, and raw materials like cotton. Overall, the production of apparel is responsible for about 2% of the world’s total greenhouse gas emissions, according to a report titled
Taking Stock of Progress Against the Roadmap to Net Zeroby the Apparel Impact Institute. Founded in 2017, the Apparel Impact Institute is an organization dedicated to identifying, funding, and then scaling solutions aimed at reducing the carbon emissions and other environmental impacts of the apparel and textile industries.
The author of this annual study is researcher and consultant Michael Sadowski. He wrote the first report in 2021 as well as the latest edition, which was released earlier this year. Sadowski, who is also executive director of the environmental nonprofit
The Circulate Initiative, recently joined DC Velocity Group Editorial Director David Maloney on an episode of the “Logistics Matters” podcast to discuss the key findings of the research, what companies are doing to reduce emissions, and the progress they’ve made since the first report was issued.
A: While companies in the apparel industry can set their own sustainability targets, we realized there was a need to give them a blueprint for actually reducing emissions. And so, we produced the first report back in 2021, where we laid out the emissions from the sector, based on the best estimates [we could make using] data from various sources. It gives companies and the sector a blueprint for what we collectively need to do to drive toward the ambitious reduction [target] of staying within a 1.5 degrees Celsius pathway. That was the first report, and then we committed to refresh the analysis on an annual basis. The second report was published last year, and the third report came out in May of this year.
Q: What were some of the key findings of your research?
A: We found that about half of the emissions in the sector come from Tier Two, which is essentially textile production. That includes the knitting, weaving, dyeing, and finishing of fabric, which together account for over half of the total emissions. That was a really important finding, and it allows us to focus our attention on the interventions that can drive those emissions down.
Raw material production accounts for another quarter of emissions. That includes cotton farming, extracting gas and oil from the ground to make synthetics, and things like that. So we now have a really keen understanding of the source of our industry’s emissions.
Q: Your report mentions that the apparel industry is responsible for about 2% of global emissions. Is that an accurate statistic?
A: That’s our best estimate of the total emissions [generated by] the apparel sector. Some other reports on the industry have apparel at up to 8% of global emissions. And there is a commonly misquoted number in the media that it’s 10%. From my perspective, I think the best estimate is somewhere under 2%.
We know that globally, humankind needs to reduce emissions by roughly half by 2030 and reach net zero by 2050 to hit international goals. [Reaching that target will require the involvement of] every facet of the global economy and every aspect of the apparel sector—transportation, material production, manufacturing, cotton farming. Through our work and that of others, I think the apparel sector understands what has to happen. We have highlighted examples of how companies are taking action to reduce emissions in the roadmap reports.
Q: What are some of those actions the industry can take to reduce emissions?
A: I think one of the positive developments since we wrote the first report is that we’re seeing companies really focus on the most impactful areas. We see companies diving deep on thermal energy, for example. With respect to Tier Two, we [focus] a lot of attention on things like ocean freight versus air. There’s a rule of thumb I’ve heard that indicates air freight is about 10 times the cost [of ocean] and also produces 10 times more greenhouse gas emissions.
There is money available to invest in sustainability efforts. It’s really exciting to see the funding that’s coming through for AI [artificial intelligence] and to see that individual companies, such as H&M and Lululemon, are investing in real solutions in their supply chains. I think a lot of concrete actions are being taken.
And yet we know that reducing emissions by half on an absolute basis by 2030 is a monumental undertaking. So I don’t want to be overly optimistic, because I think we have a lot of work to do. But I do think we’ve got some amazing progress happening.
Q: You mentioned several companies that are starting to address their emissions. Is that a result of their being more aware of the emissions they generate? Have you seen progress made since the first report came out in 2021?
A: Yes. When we published the first roadmap back in 2021, our statistics showed that only about 12 companies had met the criteria [for setting] science-based targets. In 2024, the number of apparel, textile, and footwear companies that have set targets or have commitments to set targets is close to 500. It’s an enormous increase. I think they see the urgency more than other sectors do.
We have companies that have been working at sustainability for quite a long time. I think the apparel sector has developed a keen understanding of the impacts of climate change. You can see the impacts of flooding, drought, heat, and other things happening in places like Bangladesh and Pakistan and India. If you’re a brand or a manufacturer and you have operations and supply chains in these places, I think you understand what the future will look like if we don’t significantly reduce emissions.
Q: There are different categories of emission levels, depending on the role within the supply chain. Scope 1 are “direct” emissions under the reporting company’s control. For apparel, this might be the production of raw materials or the manufacturing of the finished product. Scope 2 covers “indirect” emissions from purchased energy, such as electricity used in these processes. Scope 3 emissions are harder to track, as they include emissions from supply chain partners both upstream and downstream.
Now companies are finding there are legislative efforts around the world that could soon require them to track and report on all these emissions, including emissions produced by their partners’ supply chains. Does this mean that companies now need to be more aware of not only what greenhouse gas emissions they produce, but also what their partners produce?
A: That’s right. Just to put this into context, if you’re a brand like an Adidas or a Gap, you still have to consider the Scope 3 emissions. In particular, there are the so-called “purchased goods and services,” which refers to all of the embedded emissions in your products, from farming cotton to knitting yarn to making fabric. Those “purchased goods and services” generally account for well above 80% of the total emissions associated with a product. It’s by far the most significant portion of your emissions.
Leading companies have begun measuring and taking action on Scope 3 emissions because of regulatory developments in Europe and, to some extent now, in California. I do think this is just a further tailwind for the work that the industry is doing.
I also think it will definitely ratchet up the quality requirements of Scope 3 data, which is not yet where we’d all like it to be. Companies are working to improve that data, but I think the regulatory push will make the quality side increasingly important.
Q: Overall, do you think the work being done by the Apparel Impact Institute will help reduce greenhouse gas emissions within the industry?
A: When we started this back in 2020, we were at a place where companies were setting targets and knew their intended destination, but what they needed was a blueprint for how to get there. And so, the roadmap [provided] this blueprint and identified six key things that the sector needed to do—from using more sustainable materials to deploying renewable electricity in the supply chain.
Decarbonizing any sector, whether it’s transportation, chemicals, or automotive, requires investment. The Apparel Impact Institute is bringing collective investment, which is so critical. I’m really optimistic about what they’re doing. They have taken a data-driven, evidence-based approach, so they know where the emissions are and they know what the needed interventions are. And they’ve got the industry behind them in doing that.
The global air cargo market’s hot summer of double-digit demand growth continued in August with average spot rates showing their largest year-on-year jump with a 24% increase, according to the latest weekly analysis by Xeneta.
Xeneta cited two reasons to explain the increase. First, Global average air cargo spot rates reached $2.68 per kg in August due to continuing supply and demand imbalance. That came as August's global cargo supply grew at its slowest ratio in 2024 to-date at 2% year-on-year, while global cargo demand continued its double-digit growth, rising +11%.
The second reason for higher rates was an ocean-to-air shift in freight volumes due to Red Sea disruptions and e-commerce demand.
Those factors could soon be amplified as e-commerce shows continued strong growth approaching the hotly anticipated winter peak season. E-commerce and low-value goods exports from China in the first seven months of 2024 increased 30% year-on-year, including shipments to Europe and the US rising 38% and 30% growth respectively, Xeneta said.
“Typically, air cargo market performance in August tends to follow the July trend. But another month of double-digit demand growth and the strongest rate growths of the year means there was definitely no summer slack season in 2024,” Niall van de Wouw, Xeneta’s chief airfreight officer, said in a release.
“Rates we saw bottoming out in late July started picking up again in mid-August. This is too short a period to call a season. This has been a busy summer, and now we’re at the threshold of Q4, it will be interesting to see what will happen and if all the anticipation of a red-hot peak season materializes,” van de Wouw said.
The report cites data showing that there are approximately 1.7 million workers missing from the post-pandemic workforce and that 38% of small firms are unable to fill open positions. At the same time, the “skills gap” in the workforce is accelerating as automation and AI create significant shifts in how work is performed.
That information comes from the “2024 Labor Day Report” released by Littler’s Workplace Policy Institute (WPI), the firm’s government relations and public policy arm.
“We continue to see a labor shortage and an urgent need to upskill the current workforce to adapt to the new world of work,” said Michael Lotito, Littler shareholder and co-chair of WPI. “As corporate executives and business leaders look to the future, they are focused on realizing the many benefits of AI to streamline operations and guide strategic decision-making, while cultivating a talent pipeline that can support this growth.”
But while the need is clear, solutions may be complicated by public policy changes such as the upcoming U.S. general election and the proliferation of employment-related legislation at the state and local levels amid Congressional gridlock.
“We are heading into a contentious election that has already proven to be unpredictable and is poised to create even more uncertainty for employers, no matter the outcome,” Shannon Meade, WPI’s executive director, said in a release. “At the same time, the growing patchwork of state and local requirements across the U.S. is exacerbating compliance challenges for companies. That, coupled with looming changes following several Supreme Court decisions that have the potential to upend rulemaking, gives C-suite executives much to contend with in planning their workforce-related strategies.”
Stax Engineering, the venture-backed startup that provides smokestack emissions reduction services for maritime ships, will service all vessels from Toyota Motor North America Inc. visiting the Toyota Berth at the Port of Long Beach, according to a new five-year deal announced today.
Beginning in 2025 to coincide with new California Air Resources Board (CARB) standards, STAX will become the first and only emissions control provider to service roll-on/roll-off (ro-ros) vessels in the state of California, the company said.
Stax has rapidly grown since its launch in the first quarter of this year, supported in part by a $40 million funding round from investors, announced in July. It now holds exclusive service agreements at California ports including Los Angeles, Long Beach, Hueneme, Benicia, Richmond, and Oakland. The firm has also partnered with individual companies like NYK Line, Hyundai GLOVIS, Equilon Enterprises LLC d/b/a Shell Oil Products US (Shell), and now Toyota.
Stax says it offers an alternative to shore power with land- and barge-based, mobile emissions capture and control technology for shipping terminal and fleet operators without the need for retrofits.
In the case of this latest deal, the Toyota Long Beach Vehicle Distribution Center imports about 200,000 vehicles each year on ro-ro vessels. Stax will keep those ships green with its flexible exhaust capture system, which attaches to all vessel classes without modification to remove 99% of emitted particulate matter (PM) and 95% of emitted oxides of nitrogen (NOx). Over the lifetime of this new agreement with Toyota, Stax estimated the service will account for approximately 3,700 hours and more than 47 tons of emissions controlled.
“We set out to provide an emissions capture and control solution that was reliable, easily accessible, and cost-effective. As we begin to service Toyota, we’re confident that we can meet the needs of the full breadth of the maritime industry, furthering our impact on the local air quality, public health, and environment,” Mike Walker, CEO of Stax, said in a release. “Continuing to establish strong partnerships will help build momentum for and trust in our technology as we expand beyond the state of California.”
That result showed that driver wages across the industry continue to increase post-pandemic, despite a challenging freight market for motor carriers. The data comes from ATA’s “Driver Compensation Study,” which asked 120 fleets, more than 150,000 employee drivers, and 14,000 independent contractors about their wage and benefit information.
Drilling into specific categories, linehaul less-than-truckload (LTL) drivers earned a median annual amount of $94,525 in 2023, while local LTL drivers earned a median of $80,680. The median annual compensation for drivers at private carriers has risen 12% since 2021, reaching $95,114 in 2023. And leased-on independent contractors for truckload carriers were paid an annual median amount of $186,016 in 2023.
The results also showed how the demographics of the industry are changing, as carriers offered smaller referral and fewer sign-on bonuses for new drivers in 2023 compared to 2021 but more frequently offered tenure bonuses to their current drivers and with a greater median value.
"While our last study, conducted in 2021, illustrated how drivers benefitted from the strongest freight environment in a generation, this latest report shows professional drivers' earnings are still rising—even in a weaker freight economy," ATA Chief Economist Bob Costello said in a release. "By offering greater tenure bonuses to their current driver force, many fleets appear to be shifting their workforce priorities from recruitment to retention."