Intermodal continues to be the long-term growth engine for the railroad industry. It accounts for 43 percent of Class I unit volumes and may surpass 50 percent within three years. Intermodal revenues accounted for 22 percent of Class I revenues in 2013, outdistancing 20 percent coal revenues.
Norfolk Southern is a good example of how intermodal has changed the rail industry. NS has evolved from dependence on coal 20 years ago to become the second largest intermodal carrier by volume in North America.
Energy
While intermodal is viewed as a more ecologically sustainable mode of transport, shippers have not yet shown a willingness to pay a premium for sustainability benefits. The domestic energy boom is changing the fundamentals of the domestic crude oil market. Pump prices for gasoline and diesel have dropped approximately 10 percent this year and there’s strong market debate about the future price direction.
This is good news for shippers, but it could create some headwinds for intermodal growth, particularly if trucks are able to serve shorter haul lanes more economically due to the adoption of LNG engines.
Infrastructure
Distribution centers are being located farther from urban cores, where land is cheaper and more available, and infrastructure is less burdened. Intermodal terminals such as Harrisburg (Chambersburg, PA), Chicago (Joliet, IL), Kansas City (Edgerton, KS), and Atlanta (Austell, GA) are also moving farther away from urban areas. This change works because the core market for intermodal transport is from producer to distribution center.
To keep up with current traffic projections, the industry will have to build two to four new large intermodal terminals each year. The harsh winter of 2013-2014 and high traffic levels brought congestion back with a vengeance on some segments of the network – especially the key Chicago intermodal hub. But capital investment by the Class One’s has produced results: revenue ton-miles for the second quarter of 2014 eclipsed pre-recession highs and grew by 5.7 percent just from the first to second quarter of this year, even if the service metrics showed no improvement.
After mandated investments in positive train control, railroads will have to carefully target their remaining capital to where it will have the greatest impact on revenue growth. In addition, railroads will have to manage this growth so it does not overwhelm their network.
Other Issues
The trucking industry is facing unprecedented driver shortages, especially for over-the-road drivers, and may be forced to raise rates and pay levels to attract new drivers to the industry. Falling fuel prices might give truckers the breathing room to do this without raising rates, but if fuel prices stay fairly flat, increased driver pay will surely result in higher truck rates and make intermodal more attractive.
However, with the implementation of new Tier IV emissions standards, one of the two builders of locomotives for the U.S. market will cease production for at least two years. Locomotives are already in tight supply due to record traffic growth, and railroads may face difficulties in the near term purchasing sufficient locomotives to keep up with demand. This may raise the specter of rationing horsepower, although high-rated, faster service intermodal would likely be less impacted than low-rated, lower speed bulk traffic.
Continuing to Deliver
A reservation system for intermodal trains to ensure all available slots are filled could support top line growth. Combined with tighter integration into supply chains through data sharing, this could improve terminal productivity on a smaller footprint. In key lanes, this could one day make intermodal the preferred mode of transport.
Jason Kuehn is a vice president at Oliver Wyman (www.oliverwyman.com), with nearly 30 years of experience in the rail industry. His specialties include rail freight and passenger operations planning and optimization, marketing and yield management, and business strategy.
