CSCMP's Supply Chain Quarterly
Intermodal
December 14, 2017
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Intermodal

Happy days ... for now

Comment
Intermodal should continue to see steady growth for years to come, but some developing trends could slow things down in the long term.

Intermodal transportation is in a good place today, because it's poised for continued growth. Intermodal—shipping freight using rail/truck combinations—has long been competitive with long-haul trucking, although it has not fully penetrated that market. Thanks to improved service levels, it is increasingly competitive with medium-length hauls as well. As long as fuel costs stay high, intermodal should continue to see growth opportunities in coming years. It's also getting a boost from companies' growing interest in reducing their carbon emissions, but in the longer term the potential increase in "reshoring" and "nearshoring," and the shift by trucks to lower-cost fuel could lead to some negative consequences.

Intermodal continued its recovery in 2012, growing more than 4 percent over 2011, and 2013 is evidently growing at a similar pace. (See Figure 1.) This strength results from intermodal's ability to add value for all players: Railroads get volume. Shippers get low rates. And trucking firms can shift from long-haul to drayage (local hauls), which improves quality of life for their increasingly hard-to-find drivers.

Article Figures
[Figure 1] First quarter 2013 intermodal volume
[Figure 1] First quarter 2013 intermodal volume Enlarge this image

Intermodal also has obvious appeal because it fits in with some of the "mega forces" affecting both society and business today. Rail is very efficient (a ton of freight travels about 480 rail miles on a single gallon of fuel, according to the Federal Railroad Administration). As fuel costs rise, therefore, rail segments become proportionately more cost-effective than truck. Moreover, rail takes trucks off the roads; as highway congestion increases, intermodal will offer one way to relieve that pressure. And transferring freight from highway to rail reduces greenhouse gas emissions by two-thirds compared to truck transportation, making intermodal a very attractive option in a society that is becoming increasingly concerned about its environmental impacts.

Hurdles still to overcome
Investments in technology and infrastructure are helping to overcome the traditional drawbacks in intermodal service and reliability. Intermodal marketing companies (IMCs) use technology to efficiently plan routes, manage truck-train transitions, track shipments, and manage equipment. More recently, integrated truckload carriers have brought single-brand, asset-controlled solutions to the market. Both types of companies have become essential players in the intermodal value chain. Meanwhile, railroads on the East Coast are making their corridors more intermodal-friendly by investing in such infrastructure as new rail yards with highway access, rebuilt tracks, and higher tunnel clearances.

These investments could shift intermodal's traditional geographic distribution. In the past, the large majority of international intermodal shipments came through Pacific Coast seaports. But improvements to rail corridors in the eastern third of the United States may make intermodal attractive on a wide variety of other lanes, including East and Gulf Coast imports and fast-growing domestic intermodal and export shipments.

Many industry observers look at this growth opportunity in terms of length of haul: where once the point above which intermodal could outcompete a truckload was 800-1,000 miles, now it may be closer to 500 miles. However, if the choice were so clear-cut, then intermodal carriers would already have captured substantial amounts of this medium-length traffic, and some long-haul traffic would not remain elusive.

Perhaps a better way to analyze the situation, then, is in terms of shippers' supply chain networks and purchasing practices. Traditionally, these supply chain networks have been set up to take advantage of intermodal only for imports and for inbound shipments to distribution centers. That's an outdated approach, because intermodal service today offers advantages for other types of hauls, too. Yet many shippers fail to make use of those services, due in part to purchasing practices that create hurdles to intermodal based on internal policies, loyalty to private fleet assets, or skepticism about intermodal's reliability or cost differentials. Thus, the challenge for intermodal carriers will be to sell their product effectively by understanding their purchasers' psychology and internal practices.

Intermodal providers should eventually be able to clear these hurdles (assuming they can continue to improve service and reliability, and assuming infrastructure improvements are done well). That's the key to maintaining short- and medium-term growth in this sector.

However, two longer-term trends could negatively affect intermodal. The first is liquefied natural gas (LNG). As trucks convert to LNG-powered engines fueled by a nationwide network of filling stations, they could achieve a 38-percent reduction in fuel costs while also cutting greenhouse gas emissions by 30 percent. Because fuel represents half the cost of running a truck, LNG could significantly reduce intermodal's price advantage, potentially making truckload's performance and reliability a worthwhile tradeoff.

The second is the reshoring and nearshoring trend, in which manufacturers choose to locate plants in the United States or Mexico rather than in Asia. Currently, Long Beach is a consolidated point of origin for intermodal, with more than 40 percent of Asian imports coming through southern California. If Asian imports decline and are replaced by multiple points of origin across the continent, intermodal traffic may become less dense, and service demands more challenging to meet.

Still, IMCs, integrated truckload carriers, and railroads, which have all made so much progress on service and efficiency in the recent past, may yet find ways to address these trends. In the meantime, intermodal can enjoy its continued growth for some time to come.

Jeff Ward is a partner in the transportation, travel, and infrastructure practice with the global management consulting firm A.T. Kearney.

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