Intermodal freight operators entered the year expecting modest gains over a somewhat lackluster 2019 in which the industry handled some 13.7 million rail container units. Then the Covid-19 pandemic hit. Businesses shut their doors and sent employees to work from home. Consumers sheltered in place, unemployment skyrocketed, and the economy contracted to levels not seen since the Great Depression.
The impact on intermodal traffic was immediate. April and May saw volumes crater as weekly intermodal shipments dropped at an unprecedented pace. Ocean lines canceled hundreds of ship calls, reducing the flow of import containers into the U.S. to a trickle. Transportation companies furloughed employees. Railroads parked locomotives and sidelined railcars. Containers and chassis stacked up at ports and intermodal yards across the nation.
Then June arrived, and the market came roaring back. Consumers, stuck at home, embraced online ordering of everything from foodstuffs to exercise equipment to home improvement products. Retailers’ inventories were rapidly depleted. Essential goods demanding timely delivery began to soak up available truck and rail capacity. Service providers pivoted to redeploy equipment, bring back workers, and ramp up services.
By August and September, the industry was in a completely different place, facing capacity shortages and struggling with demand and volume challenges that just 60 days prior could not have been imagined.
“I have never seen a market like this,” observed Phillip D. Yeager, president and chief operating officer of Oak Brook, Illinois-based Hub Group, the nation’s second-largest intermodal services provider with $3.7 billion in revenue, a fleet of 42,000 containers and 5,000 trucks, and 5,000 employees. “It’s just been an amazing increase in volume and demand” as appetite for consumer products surged and retailers struggled to restock. “Consumers … are putting their government subsidies into home improvement and other discretionary items, whereas before they’d be spending on going out to restaurants and travel,” he notes.
In response, Hub Group upped its investment in capacity, buying and deploying 3,500 new containers in June, and, anticipating the surge in business, taking on some additional costs to reposition equipment and adjust its network to support customers, Yeager adds.
DEMAND SPIKES BRING PRICE HIKES
Going into the fall, the capacity crunch shows few signs of letting up—which means many shippers will soon be paying more for service. Rail lines already have implemented multiple rounds of surcharges, particularly on containers coming off the West Coast. At the same time, the surge in volume, coupled with tight capacity, is driving up spot rates for both over-the-road (OTR) truckload and intermodal. Higher contract rates are likely to follow.
Yeager believes that if the current demand trends continue, “it sets us up for a really interesting 2021 bid season coming out of 2020.” Shippers who “support their partners” and have locked in capacity will do well, he says, noting that peak season “is happening right now. I think it’s going to be a spiky but prolonged peak,” with tight capacity extending through the end of the year.
Brandon Leonard, president of intermodal for Salt Lake City, Utah-based refrigerated carrier C.R. England, is seeing some service providers, already capacity constrained, turning down tenders and giving back recently awarded freight. “I think some are experiencing buyer’s remorse” on bids they won in April and May, Leonard says. He reports that he’s getting more “mini-bids” from large shippers who are looking for alternatives to cover freight that their existing providers can’t handle or are servicing poorly.
England’s focus is entirely on refrigerated, deploying a fleet of 1,600 intermodal “reefer” containers. Compared with dry-goods containers, turning around a “reefer” takes more time because of the maintenance (such as fueling) and cleaning that’s required between shipments. With reefer containers typically handling perishable goods, Leonard notes the company is less transaction-oriented and more focused on strategic, long-term customer relationships based on consistent year-round freight. Yet as capacity has tightened, shippers are knocking on the door. “We have all these new friends [coming to us] who have great long-term opportunities for us—starting tomorrow,” he says.
From a service perspective, Leonard generally gives good marks to rail operators but notes that the rapid spike in volumes has presented challenges, particularly for intermodal terminal operations. “Time from train arrival to the unit’s being grounded on a chassis is much longer than it was six to eight weeks ago,” he notes. Yet the pressure of responding to fast-rising volumes is rippling across all segments of the supply chain. “Whether from a truck driver perspective, warehouse or DC, freight terminal, rail crew, or drayage, there is a shortage of people able to go back to work,” he notes.
Matt Parry, senior vice president of logistics for Werner Logistics, agrees. “Demand … is significantly outpacing supply capabilities in all modes,” he notes. “The challenge … will center around the fluidity of the entire transportation network. Customers are struggling to support enormous inventory replenishment efforts. It’s a fragile network with interdependencies throughout.”
That network fragility is also creating headaches for the intermodal services companies—known as intermodal marketing companies, or IMCs—that purchase rail capacity for their customers and coordinate the intermodal moves. Most intermodal companies also have their own (or have access to) over-the-road truckload resources so they can balance the best capacity choice for the shipper’s service and cost needs. As capacity constraints shrink the spread between intermodal and OTR rates, making that modal call becomes that much more involved.
Decision factors can include raw transportation cost, service consistency, sustainability, and diversity, notes Parry. “The cost of moving OTR versus rail can often be a lot more complex than [just] rate per mile,” he explains. “Transit time, securement cost, and inventory-carrying cost all need to be considered.” Poor service and/or low reliability also can add cost to the supply chain. Mitigating risk and building in flexibility are key. “Many times, we recommend to source 70% of a lane intermodal and 30% OTR to create the most effective balance between capacity, consistency, and cost,” he adds.
BUILDING MORE RESILIENT SUPPLY CHAINS
The fallout from the pandemic is leading some supply chain leaders to reconsider the lean, just-in-time (JIT) supply chain models they’ve had in place for years. Covid-19 has exposed the inflexibility and brittleness of JIT supply chains, causing managers to examine how they can improve resilience and their supply chains’ ability to withstand shock—whether it’s a hurricane, fire, flood, or health pandemic.
“I think we’ll see companies rethinking DC (distribution center) sizes, to allow for more inventory to be forward-stocked,” says Glen Wegel, vice president of operations and IT for Raleigh, North Carolina-based Kitchen Cabinet Distributors.
At KCD, one of the nation’s larger providers of pre-made kitchen cabinetry, Wegel directs a logistics operation that brings in over 500 containers a year from Asia, into four primary U.S. ports. He uses a combination of OTR truckload, intermodal, and less-than-truckload services to move product from two U.S. warehouses, distributing to building suppliers, cabinetry dealers, and local contractors supporting the repair and remodel industry.
With growth in excess of 35% projected for this year, Wegel is planning for a third warehouse.
“I think 2020 remains volatile” with respect to the freight markets, he says, noting that we may not yet have seen the “bullwhip” effect of an economy recovering from the pandemic. Among his current strategies: avoiding Los Angeles and Long Beach and booking inbound ocean containers into ports that are less capacity-constrained, planning for longer shipment transit times, and shifting freight from rail to OTR. As for the latter, Wegel says he’s still using intermodal where service is consistent and reliable, but has shifted “quite a bit of freight” to OTR at his customers’ request. “Considering OTR fulfillment can shave seven to 10 days off a delivery window, many of our customers are requesting OTR and are willing to pay the cost difference,” he reports, adding that KCD has had “great luck” with service from truckload carriers Schneider and Knight-Swift.
ROLLER COASTER FOR THE RAILS
As one might expect, the pandemic roller coaster has also been a stressful ride for the nation’s rail lines. At Union Pacific (UP), weekly intermodal volumes in April bottomed out at 25% below levels for the same period in 2019, noted Kenny Rocker, UP’s executive vice president, marketing and sales, in the company’s second-quarter earnings call. “Our weekly run rates have been improving since that time,” he said.
As the economy recovers and freight volumes rebound, some shippers are citing equipment shortages as the cause of recent service problems. Lance Fritz, UP’s chairman, president, and CEO, rejects that notion. “We do not have an equipment shortage,” he emphasized during the earnings call. Capacity has been staged and available all along, just waiting to be redeployed as volumes returned, he said.
“I went for a train ride, and we had cars parked in places that I never thought I would ever see cars park,” he recalled. At one point during the pandemic, the UP had more locomotives stored than it had operating, Fritz acknowledged. Yet they were “ready to go … we had them close at hand.” When the time came, train crews and staff came off furlough and returned to work, “with more than 90% “accepting [offers] to come back to work, which is fantastic. We’re not having to worry about having to retrain people,” he added. According to one industry report, in the four weeks from mid-July to mid-August, the UP’s intermodal volume was back, averaging 5.5% higher than the year-ago period.
It was a similar situation at the Burlington Northern Santa Fe Railway (BNSF). “Peak-like volumes” have returned, says Tom Williams, the BNSF’s group vice president, consumer products. “Customers’ inventories were low as we went into the pandemic,” he noted. Since then, a combination of surging online sales, demand for personal protective equipment, and rebounding brick-and-mortar store sales has driven up traffic.
“Our network is in good condition,” Williams adds. “We have invested heavily in our network and continue to expand our capacity.” The railroad’s Southern California-to-Chicago line is nearly “100% double tracked … a super-highway for high-velocity trains.” He notes that the BNSF’s expedited service in this lane is 2.5 days.
Even as intermodal volumes return and railroads and IMCs ramp up—despite a pandemic that continues to ravage the country—shippers still seek one measurable attribute that remains most compelling of all. “What do shippers want?” asks the UP’s chief operating officer, Jim Vena. “They want reliability. They want consistency and to save on their assets … We’re going to be there to give them service.”