Periodically, business conditions change. These changes can have positive or negative effects on certain sectors of the freight transportation industry.
Intermodal transportation uses at least two modes of transportation (i.e. road, rail) to move freight. The intermodal option works best when the rail service provider has terminals within a fifty-mile radius of the origin and destination points and on major long haul (i.e. over 1000 mile) lanes. While intermodal volumes have grown over the past couple of decades, this business remains a niche market. The typical road/rail combo service is usually a few days longer than over the road transportation, but it is normally priced a few percentage points below truck service. This may be a pivot point for intermodal. Here’s why.
The US and Canadian Domestic Intermodal Freight Markets
Two hurricanes in the southern US and solid economic conditions in Canada and United States have been driving a tightening of trucking capacity. As it tightens, intermodal service can be an option on some freight shipping corridors. Shippers often look to intermodal service for lower freight costs. As truck capacity shrinks and spot market rates rise, this may create an impetus for shippers to migrate some traffic from road to rail.
Another facilitating factor is the US federal government mandate that truckers must install electronic logging devices (ELDs) by December of this year. There is a concern that the ELD requirement, which forces carriers to monitor their hours of operation more precisely, may push certain truckers out of the market.
The availability of truck drivers must also be considered in the road/intermodal trade-off. According to a recent report by The National Transportation Institute, driver turnover (which is currently around 100% per annum in the United States) will likely continue to grow for the balance of 2017 and into 2018. Driver supply will continue to decrease. Construction, a longtime competitor for labor talent has a growing gap between hiring needs and hiring results. Demand for repairs and construction of homes and infrastructure in the southern US, skyrocketed after Hurricane Harvey and Irma.
Housing build times are stretching out by months due to the labor shortage. Hourly rates for laborers and semi-skilled workers are increasing rapidly. Wages for truck drivers have not kept pace with wage increases in other industries. Wage increases for truck drivers require freight rate increases, a non-starter for many shippers.
Intermodal service has improved over the past 5 to 6 years. The rails have increased double tracking in some areas, added or expanded terminals and implemented technologies such as automated gate technologies to improve network efficiencies.
In Canada, intermodal service has long been popular on LTL and truckload traffic between Canada’s major cities in Central, Eastern and Western Canada. Long distances and low population density have made intermodal transportation very attractive for trans-Canada freight.
Since the United States is so much more heavily populated than Canada, intermodal service is more popular for truckload shipments, primarily dry van loads on long haul corridors.
Recently, intermodal has become an option for temperature-controlled shipments of fresh produce, frozen food, and pharmaceutical products, both domestically within the United States and on cross-border shipments. For companies that employ telematics equipment, they can monitor their shipments while in transit and adjust temperatures, as required.
International Intermodal Traffic
There are two components to North American international intermodal traffic, offshore shipments, and NAFTA cross-border freight. One of the growth areas for intermodal has been international traffic through the US and Canadian ports on the west and east coasts. In addition, there are now direct links between the Port of Saint John, New Brunswick and Boston, Mass. along with the connection between Prince Rupert, BC via Chicago, Ill to the heartland of the United States. In some cases, shipments are transloaded onto domestic intermodal containers or trailers for delivery to their ultimate destination. Cross-border intermodal services between Canada and the United States have expanded over the past decade.
President Trump has made it clear that he does not see value in multilateral (Win/Win) free trade agreements. Rather, he prefers bilateral (Win/Lose) trade agreements where he can use his negotiating/bullying skills to strike more favorable deals for the United States and to reduce trade imbalances. To highlight this view, one of Mr. Trump’s first acts as president was to withdraw from the Trans Pacific Partnership (TPP) Agreement. This trade agreement was intended to reduce trade barriers among the 12 signatories.
Similarly, the Trump administration’s tough talk on the North Agreement Free Trade Agreement may ultimately diminish the flow of intermodal containers between America and its two NAFTA partners. Canada is the largest export market for 34 US states. The US is Canada’s largest trading partner.
The three NAFTA countries just completed round 4 of a 6-round negotiation process. The demands coming from America’s negotiators suggest that the negotiation process is a charade and that president Trump intends to intimidate Canada and Mexico into accepting some very unfavorable trade terms or the US will walk away from the agreement. Certainly Canada has been looking for alternate trading partners for several years.
If these trade deals fail, will the manufacturing return to the United States? Will Americans be able to afford goods made with a much higher US labor content? Is Make American Great Again a viable strategy?
President Trump’s current trip to Asia may provide some further clues on America’s trade policies. This long trip will provide him with an audience with several key leaders in the region. He is being presented with an excellent opportunity to create a rapport with these leaders and improve trade. This could clearly be a potential pivot point for trade and for international intermodal shipments.
To sum up, the two hurricanes that hit mainland USA, the ELD mandate, solid economic growth, a shortage of truck drivers and the low wages for the position may conspire to trigger a “perfect storm” for domestic intermodal revenue growth.
International intermodal shipments are clearly a question mark. A withdrawal from the TPP and a pullout from NAFTA, while helping increase some domestic road and rail volumes would likely have an overall negative impact on the economies of the three NAFTA countries and on freight volumes. If a satisfactory re-negotiation of NAFTA takes place, watch for a surge in intermodal volumes. We will find out soon if this is a positive or negative pivot point for intermodal traffic.
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