12/22/2020

Intermodal 2020 Year in Review

Shipping Containers

Year in Review: Intermodal

Mark McKendry, Regional Vice President of Intermodal

What have you seen this past year in the intermodal industry?

To summarize what happened in 2020, we have to go back in time to 2019 where widespread adoption of the precision scheduled railroading (PSR) methodologies really took a hold of all North American Class I railroads. Obviously the Canadian railroads have been doing it a bit longer, but the adoption domestically has created opportunities for the railroads to increase their financial position by becoming more efficient, leaner, increasing their asset velocity, and reducing the amount of the employees that they have supporting their operation. Now what that does is it essentially provides only enough capacity for what the market really dictates. 

As you look at the back half of 2019, in December the administration basically waged a tariff war on China and we saw a lot of pull forward freight come in globally. We also saw very strong domestic volumes because 2019 had been a strong year domestically anyway. It only increased as more imports hit Western ports and Eastern ports, creating a drain on domestic capacity. Quite a few international shipments start life in a marine container and become transloaded into a 53’ domestic container, which is why the blend of volume between international and domestic intermodal is always so codependent.

Unfortunately, all of that seemed to happen at the same time. It created a huge strain on capacity, both in the drayage space; ports were congested and we also had a lack of capacity on the West coast. Then all of a sudden, the world changed for us both domestically and internationally as well. We had a big V-shape to our volume through 2020 and at the bottom of that “V” was what struck first internationally around March and then domestically in April. The cause for that was obvious with the Chinese New Year shutdown that we see every year. But on top of that, there was the Coronavirus epidemic spreading through China causing widespread factory shutdowns, a real turnoff to manufacturing capacity, and frankly their ability to output finished goods in China, which obviously impacted the international and domestic traffic. 

Then as we got into March and April we had this perfect storm of factors that really led to a ratcheting down of rail capacity because if you’re the railroads and you’re trying to run as efficiently as possible, you’re going to have a huge drain on your revenue and your demand. When that happens, you need to ensure that your cost structures are aligned with your new reality. One of the other tenants of PSR is that, regardless of your revenue, you need to be able to control your costs so that if your revenue dips, so too will your costs. It’s creating very little cost structures out of what used to be fixed costs that make PSR railroads successful. And that’s precisely what they did when the freight economy dipped on them in March and April. Unfortunately, what no one could have predicted was that they were ill served for any sort of uptake in capacity, especially one that was as quick as we saw.

Unfortunately for the folks in manufacturing, they didn’t see the same uptick back that finished goods and containerized traffic saw. It’s a tale of two worlds: a bifurcated demand picture where manufacturing support like flatbed and specialized equipment were really struggling to find freight; however, there was no shortage of freight on the essential goods and consumer staples side, as stimulus money created a very stable and confident consumer in the short term. The demand landscape for imported goods never really was affected. The only thing that really affected us in 2020 was the ability to get goods out of China. When that returned, we saw unprecedented demand at a time where the railroads were underserved. There was no way with the way they control their costs, that they could have predicted this uptick and be able to scale quickly enough to support it. 2020 in a nutshell has been volatile and there’s no real end in sight to when that volatility will taper off, but we are seeing at least some stability in demand.

What was the most challenging part for shippers in 2021?

One of the biggest challenges for shippers in 2020 has been getting carriers to cover the loads that they say they’re going to cover. So shippers have been really challenged this year and not just with carrier issues, but also their own forecasting. There was no way that consumer packaged goods (CPG) companies could have ever predicted the uptick that they saw, their sales went through the roof, especially if they were in home essentials. Even if they were able to react quickly and make more products, finding carriers to haul it when everyone else is looking for the same capacity created a huge crutch for shippers. That’s why they saw their carriers fall off and be unable to support their business, even if those carriers were there for them through thick and thin in the past. There’s only so much capacity in the marketplace. And while I would say that the capacity landscape is somewhat unaltered, it’s fragmented across North America, domestically we’re seeing regionalization capacity like we never had before. A lot of that was due to the winners and losers of 2020, because if you’re not essential, unfortunately, you’re not really in business. The essential players tend to be concentrated more regionally, and that led to the fragmentation that we’ve seen. It became harder for certain shippers to find capacity, and even when they could, they were probably paying more for it. 

It’s been a challenging market for shippers in 2020 on the rail side. We’ve also seen some of the behaviors of PSR railroads manifest in excess charges for rail shippers. Things like storage, demurrage, container usage, chassis fees, all of these have gone up fairly dramatically and that cost gets passed on to end consumers and that’s a product of supply and demand. Unfortunately it’s a reality for shippers in 2020 and is likely going to set the stage for 2021 as well.

How has NFI helped customers this past year?

What NFI brings to the table is scale, we’re able to stay “yes” to our intermodal customers because we are in possession of equipment and non-asset based, too. When we think about what makes us successful and stand out from the crowd, it’s the fact that we have very deep relationships with Class 1 railroads and owning the assets opens that door. On the non-asset side of the business, we have a very large scale in this marketplace and that affords us the ability to reuse equipment that may have been picked up in another market. Our ability to do that, and work with drayage partners on the scale that we do, gives us a competitive advantage in this marketplace. 

One other key differentiator for NFI is our ability to communicate the good, bad, or ugly. We will not hide the truth from our customers. Unfortunately, 2020 was a year of difficult conversations, but conversations we had to have with our shippers, and frankly ones we’re always happy to have. Informing our customers on how the market is reacting both in the rail space and the non-asset side of our business makes us who we are.

How do you think this past year has shaped the intermodal market moving forward?

One thing that we’re being better equipped for in the future, thanks to 2020, is blueprinting. How would we handle a crisis like this again? And while we hope to not see another pandemic, I think it’s realistic that the opportunity could arise where we have to go back to the playbook. The playbook would dictate that we don’t necessarily want to turn off capacity should there be a global pandemic or some other crisis that affects the entire planet. We know we’ll be better suited to react, respond, and execute in a climate like we have in 2020. I think that’s a key takeaway for leaders. I know within our business, we’re absolutely going to make sure that we’re prepared better for a downturn like this because it is temporary. We can’t always predict what governments will do, but we definitely believe that the blueprint is there for how we can potentially handle this better in the future. 

One of the things we’re going to see specifically with rail is incremental capacity gains in 2021 and beyond. I think that there’s an acknowledgement both in the Eastern railroads and the Western railroads, that they were not really set up to achieve what they set out to achieve in 2020. And while we can talk about externalities driving that, I do believe that some of that rests with the railroads themselves. There are other systemic things that I know they’re working on to incrementally build capacity and work collaboratively, not only with folks like NFI, but with Intermodal Marketing Companies (IMC), asset-based partners, and other stakeholders that are used to delivering an intermodal solution (like drayage providers and port operators), because we’re all interconnected. Chassis also played a role in this. All of those areas are seeing incremental capacity gains through 2021 and beyond. A lot of that has to do with the strong outlook for intermodal. There is going to be a long-term need for rail to be a release valve for a heightened capacity crunch in the over-the-road market and the rails realized that. They weren’t set up to capture that, but their ultimate goal is to steal share from trucks, and this was a great year for them to try and do that. Unfortunately, it didn’t work out, but they will be looking at exactly how they can do that better in 2021 and beyond.

portrait mark mckendryMark McKendry, Regional Vice President of Intermodal at NFI, is responsible for NFI’s asset and non-asset intermodal sales and operations teams across North America. Mark and his team are experienced in domestic and cross-border intermodal solutions.