The COVID comeback is supporting volumes for now, but service competitiveness will tell the story longer term.
Numbers for United States rail traffic through early March tells of a stark contrast between the intermodal and carload sides of the Class I railroads’ performance this year. Statistics released by the Association of American Railroads (AAR) showed that total combined traffic increased 1.7% during the first nine weeks of this year compared to last, but that carloads were down 5.7% while intermodal units were up 8.6%.
Intermodal growth is all about the COVID-19 economy, as demand for goods spiked after the first few months of lockdowns and e-commerce levels particularly flourished. Consumer spending is expected to remain elevated in 2021, leading Class I railroads to pin their hopes on intermodal, especially when it comes to replacing their declining coal business. (See story on page 2.) Data suggests that they will need to up their service game if they are to be successful in this quest.
Parcels from UPS, FedEx, and Amazon “really juiced up demand” for intermodal, said Lance Fritz, CEO of Union Pacific at a recent investor conference. “We’re seeing demand through those service products really, really strong.”
Spending on goods is forecasted to rise 7% in 2021 “due to continued pandemic-induced spending patterns,” noted Alan Shaw, chief marketing officer at Norfolk Southern (NS), during a recent company call with analysts and journalists. “Projected strength in consumer spending, low inventory levels, and record tightness in the trucking industry will continue to spur growth in intermodal.”
The railroads intend to press their pricing advantage “particularly in this environment as things tighten on the truck side,” Kevin Boone, chief financial officer of CSX told investors recently.
Truck capacity aside, service levels have long been part of the intermodal value proposition. But federal regulators issued letters to the seven Class I railroads late last August, complaining of late trains. “It is our expectation that there will be heightened emphasis on improving employee availability, equipment resources, and robust communication to quickly resolve service issues as they arise and to prevent them from becoming widespread,” the letter said. The railroads responded by outlining their efforts to maintain service levels, particularly in bringing back furloughed crew members.
Crew shortfalls may have been temporary, but the railroads have also been focused on cost cutting and productivity measures, and these may have taken a toll on intermodal service. NS has increased train weight 9% above train length increases in recent months, according to Shaw. CSX grew train lengths 13%, while Kansas City Southern grew train lengths 16%, in the third quarter of 2020.
Lengthening trains may present an opportunity to streamline operations, but trip plan compliance (TPC), a common key performance indicator, has suffered over the last year. CSX and KCS have each reported recent TPC declines and Norfolk Southern has ceased using TPC to track performance.
So, it remains to be seen whether the railroads can continue to count on increased intermodal profitability to replace other faltering segments. Productivity gains may reduce costs, increase margins, and support attractive pricing, but boosting service levels is necessary to enhance intermodal’s competitiveness and market share.
