As 2023 moves from summer into fall, the good news for intermodal rail shippers is that the delays experienced in 2022 from congestion at West Coast ports and Midwest rail yards have receded into distant memory. The not-so-good news is that as the economy stumbles into the final quarter of 2023, the rail freight industry remains in a slump, with projections for continued weak demand and softness well into the second half of 2024.
It’s been a challenging year for America’s railroads. Over the first eight months of 2023, the Association of American Railroads (AAR) reported intermodal traffic, which is the movement by stack train of both ocean and domestic containers as well as trailer-on-flatcar traffic on U.S. railroads, was down 9.2% from the same period a year ago. The primary culprit: a falloff in international container volumes primarily through West Coast ports, which typically generate some 60% of intermodal box traffic moving on U.S. railroads.
“August was the third straight month in which total year-over-year U.S. rail carloads have fallen,” says John Gray, AAR’s senior vice president of policy and economics. “This year, if you look at what retailers [currently] have for inventories and buying levels going on, we are probably not going to have a [meaningful] peak season,” he’s observed.
Indeed, volumes arriving at the ports of Los Angeles and Long Beach, which combined represent the nation’s largest port complex, have been well below last year’s. Through the first six months of 2023, Long Beach handled some 3.72 million TEUs (20-foot equivalent units), trailing the more than 5 million containers handled in the first half of 2022. At Los Angeles, some 4.14 million TEUs moved through the port in 2023’s first half, which was significantly below the 5.41 million units handled over the same period last year.
On the flip side, for Los Angeles, total empties for export—containers returned to the port and loaded on ships for return trips to Asia—were down over 39% in July from last year. That sends a troubling signal about future factory output in Asia, as fewer empties being returned could foreshadow lower output—and lower imports later in the year—resulting in potentially fewer ocean boxes for rail intermodal to handle.
Lastly, drought conditions and low water levels in the Panama Canal, which as of early September was restricting through traffic to 32 vessels per day, could further impact where intermodal boxes eventually land in the U.S. According to a report from investment firm T.D. Cowen, “While shipping data indicates a pile of ships waiting at the ends of the waterway, containerships have not [yet] been materially impacted in the U.S. East and Gulf Coast ports. Potential [delays] will hinge on weather and reservoir replenishment.” AAR’s Gray, however, points out that should those conditions worsen, “shifts [of traffic] to West Coast ports could be big.”
Nevertheless, Gray reports that from a service perspective, “intermodal is functioning pretty well today.” Rail operators have capacity, they’ve been adding crews and equipment, retailer inventories are trending to more normal levels, and retailers appear to be ordering conservatively. That all gives Gray hope that “we’ll get through [the holiday] season without the congestion issues of the past, and things could actually improve.”
SOFT PRICING AND A DIVERSION FREE-FOR-ALL
Jason Seidl, managing director at T.D. Cowen, notes that contract rates for this year “have been hit pretty good” and generally have come in below last year, by as much as 10% on average. He doesn’t expect a rebound until “the second half of next year, when we will see … firming of truck pricing, and hopefully, good rail service levels. That should help drive volume and bring pricing up off the depressed environment we’ve had this year.”
He adds that the recent rise in diesel fuel costs may provide some help to intermodal, as shippers look to offset the 23% rise in diesel—and related fuel surcharges—seen this summer. He cites one shipper whose trucking bill was $400 higher because of diesel fuel. “He thought it was a mistake,” Seidl recalls. “When you think about modality and how shippers choose between different modes, diesel [cost] becomes a factor.”
Shelli Austin, president of InTek Freight & Logistics, an Indianapolis-based third-party logistics service provider (3PL) and intermodal marketing company (IMC), and board chairman of the Intermodal Association of North America (IANA), echoes Seidl’s comments. “The market is soft, and rates are continuing to go down,” she’s observed, noting that 90% of InTek’s business is intermodal moves. And while rail operators typically have tried to hold the line on pricing, as summer has proceeded into fall, “the rails have become more aggressive going after market share. It’s definitely the time to look at intermodal pricing,” Austin says.
Modal shift, or the diversion of freight by shippers from rail to truck, has been erratic, she notes. “Shippers are vacillating back and forth. Now that the rails have decided they need to get market share back, it’s all over the board. It’s kind of a diversion free-for-all. You’ve got to be on your toes,” she says, noting that intermodal spot rates are down more than 20% from last year. “At one point in time, truck was at the bottom of the barrel, but now not so much, as intermodal is going after market share in a big way since they have capacity to fill.”
Yet her experience with larger shippers who have been longstanding clients is that they continue to stick to their plans and strive for a balance between truck and rail. “They understand [the current market] is just a moment in time; they want to protect their capacity and maintain a reliable supply chain flow,” she notes. “They don’t spend a lot of time chasing rates and moving freight back and forth.”
With intermodal rates declining and rails looking to fill capacity, is that providing 3PLs and forwarders with an opportunity to increase margins?
“With the rails getting aggressive, I would wish that were true,” says Austin. “But it actually has had an adverse effect.” As head of a 3PL emphasizing intermodal, she’s competing against truckers with plenty of capacity and other IMC and rail providers for freight as well. “Because the market is loose and there’s so much capacity out there, we have to trim our margins somewhat to be competitive, keep the business we have, and win new business,” she notes.
Two areas where Austin believes intermodal has proven advantages in any market are sustainability and safety. By one industry estimate, freight moving by train can reduce a shipper’s carbon footprint by up to 75% versus truck. And as shippers begin to address coming requirements for ESG (environmental, social and governance) reporting, particularly around greenhouse gas emissions (GHG), they will “truly understand the importance of intermodal and how it helps them execute their supply chains in support of GHG goals,” Austin says.
The other area she sees as an advantage to intermodal is safety. “In the truckload industry, there is some nasty fraudulent brokering going on that is creating havoc and impacting shippers,” she notes. In some cases, she has seen three or four different parties involved in brokering a load—as well as bad actors working as part of theft rings targeting certain types of freight and impersonating carriers. That puts truck drivers as well as shippers—and their freight—at risk.
“With intermodal, the exposure to potentially nefarious trucking activity is much shorter, with less opportunity for fraudulent players to be involved,” she notes. “Once [that container or trailer] is on the rail and moving, there is less risk of its being compromised.”
Overall, Austin counsels her customers to “plan strategically, act tactically” to manage the ebbs and flows of freight transport markets. “Shippers should remain diversified in mode selection and assignment. Make a commitment to your IMC or rail provider to protect your capacity. At some point, we’ll go back to a stable market,” she advises, adding that “constantly shopping for the lowest rate isn’t sustainable.” When the market finally stabilizes, “capacity providers will remember who put their feet to the fire,” she warns. “At some point, trolling for the lowest rate constantly will come back to bite you” and leave you on the carrier’s doorstep without capacity.
RAILS STEP UP
Having persevered through last year’s challenges, Class 1 rail operators have been applying lessons learned and implementing strategies to improve service, reduce delays, and invest in rolling stock and infrastructure to support reliable capacity—even in the face of a down market.
“The railroad is in great shape with service at or, in some cases, exceeding 2019 levels,” says Kendall Sloan, spokeswoman for the Burlington Northern Santa Fe Railroad (BNSF). “Velocity continues in the right direction. BNSF’s hump yards have set all-time bests for productivity almost every month of 2023,” she notes.
Sloan says BNSF has been focused on three primary drivers to improve service: restoring network fluidity and velocity, increasing locomotive and crew availability, and boosting car inventory. The company pulled more than 250 locomotives out of storage over the winter and deployed additional units in the spring. Shop activity was accelerated, and output increased by using overtime to speed locomotive repair. Both actions brought assets online faster and improved network fluidity, Sloan says.
Lastly, sick-leave agreements were reached with 11 out of 12 unions, which, along with other scheduling changes, helped the BNSF hire more workers and “improve the work-life balance of our employees’ schedules,” she says. The overall goal: “to ensure we have the right resources in place at the right time to move the freight that needs to move,” Sloan says.
Over at the Union Pacific Railroad (UP), the company “still expects to outpace [the overall economy’s] industrial production [this year] in certain markets, but weak demand for consumer goods has pushed our full-year volume outlook below current industrial production estimates,” says UP spokeswoman Robynn Tysver.
The railroad “has ample capacity to handle our customers with room for growth,” Tysver adds. “We are leveraging our dependable capacity to create new opportunities and industrial development.” One of those initiatives was a new Mexico-U.S.-Canada service that the UP launched in conjunction with Canadian National Railway and Grupo México Transportes. Tysver says the “Falcon Premium” intermodal service will provide the “fastest, most reliable rail service between Canada and Mexico” through combining the services of each partner.
The railroad in May also announced a new service intended to expedite the delivery of goods landing at the Port of Houston. It’s designed to “allow intermodal containers to be loaded directly onto railcars from cargo ships and then shipped directly to inland terminals without being trucked overland,” she explains.
Tysver emphasizes that rail intermodal represents “one piece of the supply chain—the middle mile.” She adds that, “The beauty of intermodal is how it increases the overall capacity in the transportation supply chain, combining the benefits of both [truck and rail]. [It] creates capacity and efficiency in the total supply chain at a lower cost than truck alone and delivers on sustainability initiatives that reduce the shipper’s carbon footprint.”
For Norfolk Southern (NS), the capacity challenges that plagued the industry last year have abated, notes Shawn Tureman, the railroad’s vice president, intermodal and automotive marketing. And while the company expects a “muted” peak season and a market where volumes have moderated, Norfolk Southern nevertheless has capital improvement projects coming online to increase terminal capacity and is hiring more employees. Among the investments: the addition of nearly 5,600 chassis in 2022 and 2023.
Tureman notes that the railroad has not been immune from the effects of soft demand and the diversion of some freight from intermodal to truck. He characterizes it as “a cyclical change that has impacted shipper decisions about routing traffic. This has required us to adjust as well.”
And while he has seen some traffic shift back to the West Coast, “we are seeing continued strength at our East Coast ports,” he reports. Citing the Savannah, Georgia, market in particular, he notes that Norfolk Southern has added “three additional trains in each direction” to handle the volumes.
Despite a soft market and a variety of challenges, Tureman believes that Norfolk Southern overall is headed in the right direction. “NS, like all railroads, has been working aggressively … to overcome [the labor] challenge through recruiting and training hundreds of new conductors and locomotive engineers, as well as purchasing additional chassis capacity—despite the market downturn,” he notes.
“For the past year and a half, we have continued to invest in infrastructure and technology to add capacity and throughput,” he emphasizes. “Going forward, we will continue these investments in order to get ahead of the long-term growth curve we know is coming.”
