But rate and cost changes may signal the bottom of a cycle.

Besides all the other headwinds facing the intermodal sector so far this year, competition from the full truckload sector has also frustrated the ongoing efforts to convert more over-the-road shipments to intermodal rail. Trucking companies added massively to their capacity during the pandemic freight spike, leaving them with lots of idle equipment as volumes normalized and remained stagnant this year. The resulting rate plunge made trucks a more attractive alternative to intermodal from a cost and a service perspective.

A report from the Kearney management consulting firm indicated that, coming into 2023, “road freight—which constitutes the largest chunk of logistics spending—saw little change in overall volume, but an increase in capacity,” leading to a sharp decline in spot rates, induced shippers to increase their use of motor carriers at the expense of intermodal.

“Truckers have hired drivers and brought on tractor and trailer capacity,” concurred a report from the Intermodal Association of North America. “This is creating a competitive environment where truckers are chasing traffic that would otherwise move on the intermodal network.”

Competitive Freight Environment

That’s why Joni Casey, IANA’s CEO, cited the “competitive freight environment” as one reason for intermodal’s lackluster performance during the first half of 2023—it’s the bite taken out of intermodal volumes by trucks.

There are, however, indications, or at least hopes, that the current cycle has hit bottom and that trucking rates and costs may allow intermodal to recover some competitiveness going forward. On the rate front, “spot rail pricing tends to lag truck pricing by four to six weeks,” according to a C.H. Robinson report. “The pace of decline appears to be slowing, as the market may have reached a bottom on this cycle.”

C.H. Robinson projects a slight recovery in truckload rates during the peak season, while contracted rates are expected to finish 2023 at an average of a 2.8% decline year over year. Meanwhile, “the railroads are still offering discounts in historically volume deficit markets,” said the report. “Making commitments now in markets like southern California and outbound Mexico will result in lower rates and favorable capacity allocation agreements before the market shifts back to historic norms.”

According to the IANA report, the prevailing conditions—namely, “the lack of any meaningful stress in the truck freight market”—is depriving the intermodal sector of competitive advantage. One potential bright spot for intermodal is that diesel prices, which fell by over 25% over the last year, are beginning to recover. “With spot rates still weak,” said the IANA report, “a reversal in fuel costs declines—or at least a halt in carrier’s fuel cost relief—could push more small carriers out of the market. However, that loss of capacity will matter only if freight volume grows significantly.”

C.H. Robinson advises that shippers should start considering intermodal again as a competing service to truckload. “Now is the time to update expected rail transit times,” its report said. “The transit times have normalized above averages. This may make rail better positioned to support supply chain needs.”