Freight pattern shifts threaten intermodal growth potential

Chart of the Week: Outbound Loaded Rail Container Volumes – USA SONAR: ORAILL.USA

Loaded rail intermodal container volumes were down approximately 8% from the first quarter last year and, more surprisingly, 5.7% from pre-pandemic Q1 2020 — suggesting there has been more than simple freight demand erosion for the sector. Shifting transportation demand patterns have already cut into the mode’s volumes and may threaten growth potential in the coming years.

Intermodal as a growth opportunity has long been a question for the railroads. Moving intermodal units is far lower margin than moving highly-profitable unit trains of bulk commodities, but intermodal should still represent a viable avenue for volume growth that contributes to operating margin dollars. 

The pandemic boom for consumer goods should have been the perfect chance for intermodal to shine as trucking rates soared, but congestion around the multiple touch points showed how inflexible infrastructure can limit growth potential even though it drives efficiency in stable environments. 

The largest intermodal lane by volume is Los Angeles to Chicago, which has seen ~14% less demand this past week than a year ago. Los Angeles to Dallas, another major lane, has dropped 18% y/y. Neither of these are shocking considering overall demand has deteriorated across all transportation in the past 12 months. 

Import volumes have fallen over 16% since April of last year with a slight demand shift away from the West Coast. The collapse in imports has been to blame for intermodal operators in the near term with some level of recovery expected as inventories stabilize. While this expectation is valid, the longer-term concern is how much potential remains as the macroenvironment changes. 

The rails have benefited from a more than 20-year growth period during which companies increasingly sourced goods from China. Political pressures are now incentivizing them to move away from China as a main source of goods. 

While moving supply chain infrastructure is a long game that occurs over multiple years, the railroads do not have unlimited options in where they position their equipment. The concept of precision scheduled railroading (PSR) has helped the rails achieve extreme levels of operating efficiency, but it has arguably led to service deterioration, which calls into question intermodal’s ability to compete with truckload for time-sensitive loads in the coming years.

Trucking has also felt the impact of deteriorating demand out of California. While this change is a strong factor in the near term, carrier networks can change with relative ease compared to the rails. 

Truckload demand has started to recover out of Southern California with truckload tender volumes up about 25% out of the Ontario market versus January. A similar pattern can be noted for loaded containers, which may mean the bottom for demand is behind us. Both figures have still eroded faster than the aggregate market over the past year through the first quarter. 

While less intermodal volume does not mean the end of the railroads, it may mean they will need to find ways to adapt to grow revenues in the long run. 

Intermodal expert Mike Baudendistal contributed to this article.

About the Chart of the Week

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Source: freightwaves - Freight pattern shifts threaten intermodal growth potential
Editor: Zach Strickland, FW Market Expert & Market Analyst