Truck rates fell last year while J.B. Hunt partners Norfolk Southern and CSX Transportation generally increased intermodal rates.
“In today’s environment, there is a challenge to grow in the east because the customers are able to secure truckload capacity at rates equal to or better than intermodal,” Darren Field, J.B. Hunt’s executive vice president of intermodal, told investors and analysts on the company’s earnings call this month. “And until we can offer economics and service, combined, that outperform truck, we’re going to be challenged there.”
Service on both Norfolk Southern and CSX Transportation improved in the second half of 2019, Field says.
But neither railroad cut intermodal rates amid stiffer truck competition, rail executives have said.
NS, J.B. Hunt’s major intermodal partner in the East, has embarked on a “yield-up” pricing strategy as it adopts an operating model based on Precision Scheduled Railroading.
Likewise, CSX executives say they won’t cut rates to gain volume. CSX dropped service in hundreds of low-volume intermodal lanes in 2017 and 2018 as part of a bid to reduce complexity and boost reliability, which cost J.B. Hunt up to 70,000 loads annually.
Intermodal had its second-best year ever in 2019, according to the Association of American Railroads. But overall domestic intermodal volume last year fell 6.1%, according to data from the Intermodal Association of North America.
J.B. Hunt’s intermodal volume slumped 3.4% last year, to 1.9 million loads. J.B. Hunt’s eastern loads declined all four quarters of 2019, while its transcontinental loads were up in the third and fourth quarters. BNSF Railway is J.B. Hunt’s partner in the West.
The company’s intermodal profits grew 2% per year over the past six years, well below the 11% growth over the prior six-year period, Susquehanna Financial Group analyst Bascome Majors points out. His question to J.B. Hunt executives: Is intermodal still a growth business?
Over the long-term the answer is yes, Field says, noting that J.B. Hunt believes there are 8 million to 10 million loads it can convert from highway to intermodal.
“The reality is we have to produce the combination of economics and service that convince that customer base that intermodal is the right solution for them,” Field says.
That’s not easy with rail rates where they are now.
“In today’s environment, our customers are expecting a more truck-like service environment with a benefit in the economics. Obviously, they’re not going to give us intermodal business at rates that are higher than they can get the … truck for. They do expect some version of a discount, and it’s up to us with our rail providers to develop service solutions that will continue to drive intermodal growth as we move into the next several years,” Field says.
Nonetheless, J.B. Hunt executives say they expect the company’s intermodal volumes to rise this year.
Intermodal analyst Larry Gross agreed with J.B. Hunt’s view of the marketplace.
“The only reason someone gets on the rail versus utilizing a truck is to save money,” Gross says. “If there is an opportunity to save money, the next question is: is the service (reliability and speed) good enough that the shipper can feel comfortable taking advantage of the savings opportunity? Intermodal is just about always slower than truck and because it is more complex, with more steps required to get the freight from A to B, it tends to be less reliable with more transit time variability. So if intermodal doesn’t offer savings, then it won’t get the freight.”
Todd Tranausky, a rail and intermodal analyst with FTR Transportation Intelligence, says it’s unlikely intermodal will regain market share this year.
“With the truck market forecast to only slowly tighten back to its historical utilization rate of 91% over the course of 2020 and the way railroads have alienated shippers with their rate and operating practices, we expect that shippers will stay with truck as long as possible, even after it becomes more expensive than rail,” he says.
Gross predicts that the Class I railroads that are shifting to Precision Scheduled Railroading operating models will eventually seek more intermodal volume growth.
“The simplest way to goose growth will be to become more competitive on rates and I think we will see that at some point,” Gross says, noting this would likely have a negative impact on operating ratios and profit margins.
“The more difficult but ultimately more rewarding way to grow would be for the railroads to pivot from focusing on making their own lives easier by simplifying their intermodal offerings and go back to making their prospective customers’ lives easier,” Gross says. “This means figuring out how to deal with more complexity while maintaining adequate levels of both service and profitability.”
Intermodal, which is almost evenly split between international and domestic segments, represents roughly half of all rail traffic.
Since I”m older than dirt and had parents who worked their way through the period 1929-1940, I keep returning to that narrative against which to measure current management practices. This is the period when the bottom fell out for almost everyone irrespective of education or employment. At a time when not one locomotive was booked (1933) and a Wabash was worth $1million vice the $100 million Pennsy had paid for it several years prior, managements at a few roads were planning for the future.Ralph Budd ar CB&Q was developing plans with EMC for the Zephyr passenger trains. Pennsy management, with the backing of Jesse Jones ar the federal RFC (a Herbert Hoover creation that flourished under FDR) took a gamble lon its nascent electrification project to complete the line from DC to NYC at a cost that today would be about $40 billion. WWII was not yet on the horizon when these decisions were made. Each, had they not been successful, would have ruined their respective companies. These were investments that had a nominal service life of 15to 30 years. Where is similar entrepenurial risk-taking today? Actually, the question should be inverted: what is the risk ofnot doing something similar. I don’t think we’re going to see anything constructive with current execs. Their mindset has beenWall St poisoned. Some bright individual is going to see the potential and make a lot of money long term, not short term like the current crew.
On a related note, but off topic, the fantasy of self-driving trucks was spectacularly displayed during a recent snow storm .here in Erie, pa. We had an
Mr. Lockman, Thank you for your fact-filled and insightful information.
The railroads are living in a fantasy land. Some of the major cost cutting to reduce operating ratios should be returned to the shippers to develop and keep volume. I don’t trust railroads methodology in its assumption that shippers will return if and when the trucking market tightens. Why aren’t the railroads leading the market? They won’t because their mindset is reflective and defensive rather than offensive. UP’s business is dropping like a rock. Investors better wake up or the industry and UP will shrink more. It is lot easier to loss business than gain it back. Too, why after all this time is PSR not improving the performance of intermodal to compete against trucking, dray issues withstanding?
There’s a measure used in the trucking market called a “Tender Rejection Ratio”. (no, not of the “not tonight, dear, I have a headache” variety) that looks at loads offered on the short term and spot market at the price offered by load brokers.
The same dry van load between the same shipper and consignee might find a trucker willing to take it at $1.40 per mile on a Tuesday night, but not find a taker at $2.35 per mile on a Friday afternoon A broker will usually offer the load at the lowest rate they think they can get – and re-tender the offer at a higher rate if they don’t get a bite.
Right now, tender rejections are near long-term lows (mid-single-digit percentages) which means more truckers are going after less freight. As mentioned earlier, the weaker carriers are beginning to fall by the wayside, and are closing in on point of pricing for cash (cover the gas, pay the driver and the tolls, and we’ll worry about replacing the Kenworth next month – maybe).
Railroad intermodal pricing is usually fixed under long term contracts – right now, the brokers are able to find drivers that will move for less that railroad cost, and the Schneiders and JB Hunts are having to look harder to find loads to keep their drivers moving (and therefore making money themselves.
To be honest, this isn’t great, but there are several factors have led to such a situation. These factors include tariffs on both maratime and NAFTA trade, weak industrial output, and a weak trucking market. In addition, year over year comparisons are also not a good reflection of performance as in late 2018, there was a large pre-tariff surge in an attempt to move product before tariffs came into place. 2019 was the second best year for intermodal rail in history. A large driver of weakness was also mode conversion, but this is largely as a result of excess capacity created by poor demand in the trucking industry. I am not sure if many are aware, but last year was a bad year for trucking too, with a record number of bankruptcies in the industry. To be clear, the current situation isn’t good, and railroads should step up their game and provide better service, but it isn’t the end of the world, far from it really. It seems these days, that people will find any excuse to get on their soapbox and tell the tragedy of PSR and how railroads are a sick and dying/dead industry. The comment section in News Wire lately is really proof of this.
Eureka! For the record. Decreased intermodal loadings were not a reflection of a weakened economy, tariffs or a trade war with China. LOL…. Its got to be embarrassing to be the only American sector not growing with this thriving economy.
“Gross predicts that the Class I railroads that are shifting to Precision Scheduled Railroading operating models will eventually seek more intermodal volume growth.”
Eventually? The time is now! Don’t wait until you’ve boiled all your water out the pot…..
“The simplest way to goose growth will be to become more competitive on rates and I think we will see that at some point,” Gross says, noting this would likely have a negative impact on operating ratios and profit margins.”
….. Mr. Gross…. Have you not paid attention to UP’s latest earnings report? They’re too busy cutting their OR down to 50%.. Their 4th Quarter profit sunk and missed Wall Streets target price.. That record OR though!.. smh. The negative impact is already there as traffic has decreased, and will not grow until some of the C1’s make intermodal and carload competitive by lowering pricing which will not eat into margins.. RR’s are volume not truck load.. So when you actually provide consistent reliable service your traffic will grow regardless..
Jim Norton, you’ve hit the nail on the head.
More evidence Precision Scheduled Railroading weakens every aspect of today’s railroading. Intermodal, the “golden boy” of rail transportation, is now shrinking! Imagine that. Nobody would have ever believed this 20 years ago when there was worry about growth causing capacity issues by 2020. Hunter Harrison should have been tarred and feathered. His legacy is making a joke out of railroading and giving away more market share to trucking.