NFI Industries

Intermodal Industry Outlook: 2018

David Broering, President, Integrated Solutions at NFI, and Mark McKendry, Vice President of Intermodal, share their expectations for the coming year.

The intermodal marketplace is one that is always predicated on the strength of the overall transportation market, and more broadly, the economy. As the U.S. economy accelerated in 2017, and along with it the transportation marketplace, things began to shift in favor of the major rail providers.

2018 is shaping up to be a very strong year for the rails as well as companies that own and manage intermodal assets. Much of this connects to the continued strength of the economy as well as the momentum in the marketplace; which is going to continue to push customers into consuming more intermodal. While there is a lot of momentum, there are a few factors that are also going to potentially negatively affect the intermodal markets as well.

Positive Momentum

Overall, the strength of the economy is helping to propel an already tight transportation marketplace to a place where there is a deficit of capacity in the marketplace. Since the two hurricanes that battered Texas and the Southeast receded, the market has not been the same. As we headed into Q4, the transportation market was incredibly hot, and demand was very high for capacity. This was the case for all modes – truckload, LTL, and intermodal. As we hit the end of the year, and the Electronic Logging Device (ELD) mandate was officially enacted, things have gotten even more constrained on the capacity front – this will continue to drive freight to intermodal as shippers run out of logical options to move things over the road (OTR).

Two of the biggest factors for the pace of demand in 2018 for intermodal services connect directly to the ELD mandate – intermodal transit times versus OTR transit times, and the cost of intermodal versus market OTR pricing. First, the way in which a carrier must operate with their Hours of Service (HOS) being managed electronically indicates that the average mileage that can be run legally by a driver on a daily basis will be diminished. Traditionally, intermodal runs one to one and a half days behind OTR when it comes to transit time on an average run. While this is not the case for every lane, it’s commonly the case in the pre-ELD world of paper logs. This diminished average operating range for OTR carriers immediately makes intermodal more competitive for shippers with time sensitive products – especially as the runs traverse more mileage. The second factor is the way in which the demand for capacity combined with already constrained capacity emanating from the shorter average miles driven is driving up the cost of hire for carriers, and is flowing back into big increases for the movement of goods nationwide. Drivers need to make as much money, or more, operating these trucks today, and they are now running less miles weekly, which leads to higher overall pay in a rate-per-mile. As of this writing, the DAT average rate-per-mile was up more than 30 percent year-over-year for OTR movements. As these costs have escalated and intermodal costs have stayed relatively flat, the adoption of intermodal has begun to rise rapidly. This will continue to be the case as the year wears on and shippers start to build the lead-time into their supply chain that is necessary to put their freight on the rail, and as they look to get their goods moving at lower cost to the OTR options they have been using previously.

Headwinds for Intermodal

While the market looks to be headed in the right direction for intermodal, there are a few things looming that could make this a challenging year for the industry. The questions surrounding a potential U.S. exit from the North American Free Trade Agreement (NAFTA), the driver shortage, and how the how the railways respond to the increased demand could challenge both shippers and intermodal carriers in 2018.

North American Railways

Due to excess truck capacity, low oil prices and soft demand, the past three years saw the economic advantages of intermodal transportation, relative to OTR, deteriorate substantially. Prior to 2015, intermodal could compete at lengths-of-haul as short as 600 miles. By mid-2017, that competitiveness eroded to lengths-of-haul exceeding 1,000 miles. All this while North American railways had been investing billions into their infrastructure in anticipation of a growing need for intermodal services. They spent these billions expanding track, boring out tunnels to allow for piggyback containers, and building / expanding terminals.

Now that the fundamentals for intermodal have never been stronger, the railways expect to capitalize and generate a return on their invested capital. A recent example of this was the sudden and unprecedented increase to Freight All Kinds (FAK) rates after a decidedly early start to “peak” season. Unfortunately for the rails, a lack of backhaul demand coupled with poor eastern network management led to a failure to provide the market with the requisite capacity to become a viable short-term alternative to truck. While the railways should expect to generate sustainable increases in intermodal yield, it is clear they need to be better connected to the markets they serve. This means understanding the head haul and backhaul dynamics as they continue to evolve – and pricing these lanes accordingly, while listening to the shipping community’s demands to become more responsive.

The optimism surrounding intermodal transportation is well deserved, challenges notwithstanding. A stronger North American rail infrastructure and a confluence of factors challenging OTR capacity means that intermodal carriers are well positioned to take over a sizeable share of market from OTR carriers in the near term. The simple reality is that shippers should have an intermodal strategy to provide them with the necessary optionality to endure unpredictable road capacity. As the rails adjust to this ‘new normal,’ their ability to offer consistent capacity and a competitive price will stabilize.

NAFTA

With as few as six months notice, the transportation landscape, as we know it, could be forever altered. If the U.S. exits the NAFTA, and there are no bilateral free trade agreements in place with Mexico and Canada, the potential for congested borders, retaliatory tariffs, idled border infrastructure, and reduced rail service becomes likely. While the actual impact of a heavily revised (or outright eliminated) free trade agreement remains unknown, the ripple effect on consumers, shippers, and the transportation industry would be enormous.

Notably, a NAFTA exit is not a mode specific challenge, but rather, an industry challenge. The impact to a railroad would be substantial because of their exposure to bulk commodities, merchandise traffic, and their need for a seamless border. This wildcard will continue to loom over the industry, yet isn’t likely to be an influence in day-to-day decision making until there is clarity as to the outcome of the ongoing negotiations.

Driver Shortage

The same factors that are contributing to skyrocketing OTR prices certainly affect the intermodal drayage business as well. Qualified drivers are being aggressively recruited by truckload carriers across North America. As a result of the attractive benefits being offered by these carriers, there are less available drivers to fill the seats of company-owned dray trucks. Another force which had constrained dray capacity in 2017 was the increase in short-haul import freight. Thanks to reduced price sensitivity and an increase in marine transloading, port drayage business is expected to continue to attract available drivers away from city and highway dray fleets.

The impact of the driver shortage on drayage won’t be as severe as it will be for OTR carriers, thanks to a heavy reliance on owner operators. Nonetheless, drayage companies are keeping their eyes on the forces of supply and demand and adjusting their prices accordingly. Port dray demand had, at times, severely constrained local and highway drayage capacity in 2017 and that trend is expected to continue throughout 2018, but to what extent remains an unknown. Moreover, dray carriers will likely be forced to keep their compensation for drivers in line with the rest of the market, which will drive up costs. The values that have always been present for intermodal dray drivers (local work, lots of home time) become less valuable when there are lucrative regional opportunities to take advantage of and substantially increase take home pay. This will be a factor for the 2018 intermodal marketplace and it’s pricing dynamics.

2018 looks to be setup as an interesting transition year for the intermodal business. The rail lines have built the infrastructure to handle more volume, they are more focused on intermodal as a business (due to a consistent reduction in shipments of carload) and have the market tailwinds to help drive customers to them in new lanes and markets. What remains to be seen is what business will stick with them, and how that will drive the overall marketplace for demand both inside intermodal and more broadly in the domestic North American space.

 

Joining NFI in 2012, David is in charge of NFI’s North American brokerage, transportation management, intermodal, and drayage businesses. David is leading this rapidly expanding division by offering a more robust suite of services to new and existing NFI clients.

 

 

Mark McKendry is responsible for NFI’s intermodal sales and operations teams. Mark’s focus will be growth via value-added solutions, new product development, and business process improvement.