13th Annual Rail/Intermodal Roundtable: Emerging optimism?

The rocky ride that the freight rail carload andintermodalsegments have experienced over the last couple of years appears to continue due to reduced demand, lower volume, inflation, and a host of mixed economic indicators.

However, there are signs of optimism emerging in these vital segments, such as solid pre-pandemic volume comparisons; signs of improved service; a decent amount of excess capacity ready to be sprang into action as volumes eventually trend up; and the potential for increased technology innovation that would certainly yield operational gains.

And, as always, industry stakeholders need to keep a watchful eye on the regulatory front, with theSurface Transportation Board (STB)continuing to closely monitor service metrics as well as the ongoing discussion regarding reciprocal switching.

To help bring the current state of the nation’s rail and intermodal network into sharper focus, LM is joined by three of the nation’s foremost experts in the market, includingLarry Gross,principal atGross Transportation Consulting;Anthony Hatch, rail analyst and principal atABH Consulting; andAdriene Bailey,partner and head of the North American Rail Team atOliver Wyman.

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Logistics Management (LM):How would you define the state of the rail carload market?

Anthony Hatch:在这个时间点,我卧室uld say ‘rolling over.’ After being the best part of a weak rail volume story, it now appears that just as inventory corrections are ending in retail, they’re beginning in manufacturing.

Chemicals have had one up month in a year in August, and rail’s ‘natural’ share recovery has been slower than expected. It’s not an awful story, but not a pretty one, either. This seems to be a slow-burn version of what I feared a year ago— ‘all revved up’ as rail crew shortages abate, but ‘with no place to go’ as demand slows.

Adriene Bailey:The North American carload market has seen some recent gains in traffic, but remains below pre-pandemic levels. Coal in particular has been stronger than expected due to strong oil and gas prices. But, overall, there’s not a lot of growth or particular strength in any one area. The overall rail portfolio of traffic is stagnant.

Year to date, carload traffic is up 1.6% compared to 2022 [through August]; however, when compared to 2019, year-to-date carloads are still down 6.9%. Carload traffic has fared better than intermodal. In fact, the number of intermodal rail units is down 9.4% compared to 2022 and down 10.4% compared to 2019. As a result, total rail traffic is down 8.6% year to date compared to 2019.

LM:How would you describe the intermodal market from a volume and demand perspective?

Larry Gross:Remember that the intermodal market is actually composed of two sectors—domestic and international. Both sectors saw significant declines during the second half of 2022, as the unprecedented post-pandemic surge finally ran out of steam. More recently, the declines abated in the first quarter of this year, and both sectors now appear to have turned the corner. While significant annual deficits remain, the comparisons are much more kind when looking at pre-pandemic traffic levels.

With regard to capacity, substantial numbers of new domestic containers and chassis have now arrived. Further, with lower volumes, congestion on the network has ended and this has resulted in greatly improved equipment cycle times and better productivity. This has restored fleet capacity that had been lost during the service crisis. The bottom line is that there’s plenty of capacity available to meet current and upcoming demand levels.

Hatch:This answer reflects ‘from the frying pan,’ carload, and into the ‘fire’ that’s been intermodal for the last 12 months. The intermodal supply chain—rails, ports, chassis—has recovered, but demand has plummeted, driven down by the aforementioned inventory correction and the consumer shift from Pelotons to Disney rides.

Bailey:Indeed, intermodal volumes have been weak over the past year. International volumes remain low and the West Coast ports continue to see share shift to the East Coast where rail intermodal has lower share. Domestic 53’ box intermodal continues to lose market share to truck.

The capacity is there, with plenty of parked containers, but overall truckload volumes are down and trucking rates are low. Shippers continue to choose the truck experience over rail, especially when the rate differential is small.

There does seem to be a renewed focus on developing new services such as Canadian Pacific Kansas City [CPKC] and CN creating new offerings into and out of Mexico, which target trucks.

LM:How do you view current service levels compared to this time last year?

Hatch:Much better, but not yet good enough. Rails’ focus on crews—hiring, training, retaining—and overall better labor relations post-contract are indeed making an impact on service for the better. Restoring the rail union labor pay premium is a big step. But it has been slow going, slower than expected, as we learn once again the importance of experience in railroading in things like flat-switching.

Natural, formerly-rare weather events and the East Palestine incident have made an impact as well. However, rail’s renewed focus on resiliency as part of what I call ‘The Great Experiment,’ or a back-to-the-future renewed emphasis in the intermediate-to-long term through a cycle investing and the achievement of a sustainable ROIC, should lead to a consistent improvement in service as a critical part of the whole strategy.

Bailey:I’ll add that there’s been discernible improvement in service levels. Year-to-date through August, average terminal dwell times across North America have decreased by 2.6%, and average velocity has increased by 5.0% compared to 2022.

More encouraging is that we’re starting to see railroads embrace new operating philosophies that improve service and velocity, like Norfolk Southern’s multiple departure intermodal service from Chicago to Harrisburg that allows traffic to be advanced every eight hours instead of every 24—reducing service failures and providing a more truck-like transit time.

Gross:Much of the congestion and disruption that plagued intermodal last year has dissipated. The Surface Transportation Board [STB] statistics that track the line-haul performance of the railroads indicate that operations are fluid. Intermodal train speeds are higher than last year and, in fact, higher than the long-term average.

The number of intermodal trains being held in terminals—for lack of crews, power, or other reasons—is below last year and also lower than average. The same is true of the number of loaded intermodal cars not moving for 48 hours or more.

Equipment velocity has increased, which has improved the productivity of the intermodal equipment fleets and largely alleviated last year’s shortages of containers and chassis.

Equipment is flowing through the terminals faster, and this should theoretically be relieving them of the need to store large quantities of boxes, making operations more fluid. However, statistics on terminal operations are not publicly available so we have no way to verify this.

LM:What can shippers expect in terms of service in the next yearor so?

Bailey:Shippers can reasonably expect continued, gradual improvement in rail service levels. Given the increasing focus of rail CEOs on growth and service, there’s also a real possibility that the industry could achieve a step change in its ability to deliver and sustain much higher levels of service over a longer time horizon.

To start, this will be a railroad-by-railroad unfolding of how the networks can be operated cost-efficiently, on time, and with resilience to external shocks. At the same time, the industry must prepare for increased frequency of disruptions due to climate-driven events.

There will be at least one railroad that transparently proves it can deliver on-time service along with the cost and resource requirements to achieve that service.

Just like we saw with Precision Scheduled Railroading [PSR], once the equation is proven and shown to have value and deliver results—including growth—the rest of the industry will follow.

Gross:I expect intermodal service to continue at current levels. Given lower loadings, there should be no reason for rail service to deteriorate unless the railroads reduce manpower and resources from current levels.

Given the stated ‘pivot to growth’ plus regulatory pressure, I think such moves would be very unlikely. However, I don’t expect to see significant service improvements either. That would take a major reset in railroad operating philosophy that I don’t see on the horizon.

Hatch:我们将会看到大Experim的稳步提高ent—at NSC, CNI, CPKC, CSX—rolls out. I left the two western carriers out of that list only because BNSF reveals less to the Street, and because of the new management at Union Pacific (UP)—the one carrier to buck the pro-marketing trend of late and hire a renowned operating leader as CEO.

But that has worked out well at CPKC, so we’ll see. Speaking of CPKC, their dramatic pro-growth combination and the declared threat to existing rail market share ought to inspire a pro-service competitive response, and, along with the Great Experiment, help change the entire narrative of the industry over the next year or two.

LM:Is pricing where it needs to be for railroad and intermodal in light of capital expenditure outlays made by carriers?

Gross:As always, intermodal price levels will be dictated in large part by what’s happening in the truckload space. Truckload spot rates are currently at rock bottom, reflecting a combination of significant supply and waning demand. However, the decline appears to have ended, and over time, spot rates should begin to recover.

Contract rates have not fallen as far or fast. This is typical behavior, with contract rates being both less volatile than spot as well as having a roughly six-month lag [both upward and downward]. With regard to intermodal spot rates, the railroads have appeared to have reached a limit on how low they are willing to go.

Rates have therefore been flat at a low level, but evidently not low enough to maintain volume. This is most evident in the weak performance on the part of the rail-owned domestic container fleet, which has seen large year-over-year deficits. Intermodal contract rates have also responded to truck market pressure as intermodal must continue to offer shippers savings versus truck in order to maintain their position in the marketplace.

Hatch:Well, rails would say ‘no,’ of course, and intermodal is an area where weak truck spot pricing has had a deleterious impact. Overall, rails remain confident that they can ‘price above rail inflation,’ even as that number has climbed. Inflation is well understood, and so is passing along those costs. Rails must be able to price to justify their capex—15% to 20% of revenues, more than half of which goes into just maintaining their network. Strong pricing will reinforce their long-term investment thesis.

Bailey:Larry and Tony both make good points. I would add that railroad pricing, in a rather flat economy with excess truck supply, needs to stay competitive. For flexible freight, or freight with a choice between truck and rail, railroads tend to be behind the price curve—lowering prices too slowly when truck pricing falls and rebounding too slowly when they rise.

For shippers, there are tradeoffs to be made between chasing short-term price swings and creating stable relationships that allow carriers to invest in infrastructure and capacity over the long term.

Rail growth requires constant improvement in the value provided to customers. Where rail has the advantage, that comes from price, but arguably even more importantly from service and a customer-centric focus.

LM:How do you view the emerging technology andautomationin freight rail?

Hatch:Well, of course, this is complex. In 2017, Oliver Wyman’s Rod Case at the RailTrends event in New York scared the industry half to death when he stated that convoys of digitized trucks, both EV and AV, taking away current rail structural advantages in labor, fuel and emissions, could take away around 30% of the rail business. But, that hasn’t yet come to pass. But, change is coming. And it could be beneficial in terminals and drayage, as well as a threat.

And then there’s the whole issue of the rails being allowed to use existing technology by regulators/legislators that can have huge benefits. Here, I’m talking about inspection technology with enormous proven improvements in accuracy and capacity, but are being held back by what I think is the Federal Rail Administration’s [FRA] pro-jobs stance.

And don’t even get me started on ‘mandatory two-man crews’ as supported by the FRA—and even more worryingly by some members of Congress. There were three men in the cab in East Palestine. The rails must be allowed to pursue autonomy just as the trucks are being encouraged to do.

Bailey:技术和自动化工具im至关重要proving the customer experience as well as the efficiency of rail operations. Railroads continue to look for and implement innovative technology with benefits for all stakeholders.

Examples include enhanced equipment and track inspection, more seamless in-gate processes at intermodal terminals, and in-cab automation that improves train efficiency and safety.

It’s clear that technology has a huge future role to play in the railroads’ ability to enhance safety, improve the customer experience, and lower costs. The industry and regulators need to lean in and embrace these opportunities—not find reasons to slow down.

Gross:For intermodal to compete effectively with truck, it needs to offer the most ‘truck-like’ service possible. This includes both truck-like levels of reliability, as well as shipment visibility. Intermodal still has a way to go for it to achieve this level of visibility, particularly on the international side. The task is more difficult because of the many participants that play a role in delivering a load via intermodal. Technology can make this process easier.

LM:What are your thoughts on the regulatory fronts as they relate to things like reciprocal switching and STB service mandates?

Bailey:Rail is struggling to deliver the critical efficiencies and improved service needed to support more complex, more demanding, and more tightly managed supply chains. Given the safety and carbon emissions benefits of rail and the large public costs of highway expansion, all stakeholders would benefit greatly if regulators focused on promoting greater use of rail.

The industry has redoubled efforts around safety in the wake of the East Palestine accident. For the most part, rail CEOs are in favor of regulations and standards around wayside detection and other areas where there’s been a lack of science and data-based standard setting. What must be avoided is politicizing rail regulation and forcing costs into the system that do not provide verified and tangible safety benefits.

In the case of reciprocal switching, there is a valid argument that shippers need more choice, but if implementation is not handled carefully, it could result in worse service at higher costs—which won’t help customers.

Gross:Increased STB oversight will certainly make the railroads think twice before reducing their workforce the next time business levels wane. Indeed, some have concluded on their own that such actions are counterproductive because they inevitably result in shortages, disruptions and higher costs when business returns.

某些监管行动已经启动by the way that carriers, particularly ocean carriers, treated shippers during the recent post-pandemic surge. The Federal Maritime Commission is taking action with regard to the detention and demurrage charges on international shipments.

How those policies will interact with rail policies at inland locations is a topic which is still to be fully worked out.

Hatch:As mentioned above, the regulator front is threatened on the umbrella of ‘safety.’ After East Palestine, every advocate has come out of the woodwork to argue for crew size, jobs, train length, etc. Does the FRA want more trains? As that means more crews, probably yes—but that doesn’t improve public safety.

On the commercial front, the STB is behind its own schedule for ruling on ‘Reciprocal Switching,’ what the rails call ‘forced access.’ Canada took a blow as the mileage increased. This is counter-intuitive, as it adds complexity to the supply chain, but it’s meant as a ‘soft cap’ on rates, so the regulatory pressure will continue. I continue to think it will be a small gesture at first, but the delay in ruling and the fights with the western rails cause concern. The STB is, after the CPKC approval, past-peak powers. But, it remains a busy watchdog.

LM:How will the rail and intermodal markets look five years from now?

Gross:Intermodal has lost considerable ground over the past year. Market share versus long-haul truck has declined sharply. The first 32 weeks of 2023 saw volume at the lowest level in ten years. If intermodal had achieved the same share of the market in the second quarter of 2023 that it routinely achieved in the 2014 to 2017 timeframe, intermodal revenues would be running about four billion dollars higher on an annualized basis.

I’m hopeful, but far from certain, that the current widely discussed ‘pivot to growth’ will include an examination by the intermodal industry of what has changed over the last six years to cause this market share decline and how it can be reversed.

Hatch:It has to be much better. I can’t solve for the economy, but the ‘The Great Experiment’ should play out as a win-win over the next five years if investors—and regulators, Congress, shippers and labor—show patience.

Intermodal, led by domestic demand, has simply got to get back into the lead-dog position and grow well above GDP by providing consistent service. I’m encouraged by The Great Experiment, by the rail—and intermodal marketing companies—capex, their growth plans as announced over three to five years [notably by NSC, CN and CPKC, and BNSF’s Barstow project], and by service metric improvements.

Bailey:I agree with Tony. If we look over the past five years, rail growth has been stagnant, which means the industry has been losing market share versus truck. If rail could just hold on to its market share, the gains could be as high as $177 billion in additional revenue over the next 10 years.

As labor conditions continue to tighten, climate change pressures increase, and highway congestion grows, the importance of rail to the overall health of the North American economy and environment will continue to expand.

To most effectively capture benefits, railroads must continue to invest in industry-wide research and implement solutions to drive improved safety, higher levels of service, and efficient operations. As an industry, rail needs to be transparent, data-driven, and rigorous to drive real value creation. •