Nearly a year ago, in February 2015, I wrote a column entitled “Intermodal Outlook — Cloudy” in which I forecast a slowing of intermodal’s breakneck pace of growth. As 2015 unfurled, that prediction was proven out. Through the first 10 months of last year, overall intermodal growth averaged just 3.2 percent year-over-year, quite a retreat from the 5.2 percent year-over-year growth of the comparable period in 2014.
Both sides of the intermodal house have felt the pain: International growth declined in the period from 5.0 percent to 3.2 percent, while domestic growth slowed from 5.3 percent to 3.3 percent.
The reasons for the slowdown are multifaceted:
- The U.S. West Coast port disruption in early 2015 dislocated cargo flows. When congestion finally broke loose in March and April, intermodal lost some freight because shippers were forced to use expedited trucking, even for long hauls, to restock depleted shelves.
- The disruptions also caused diversion from the West Coast to the East and Gulf coasts, an unfavorable development from an intermodal perspective. For freight moving to the Midwest and Texas from the West Coast, intermodal dominates because of the length of haul. But trucking is more of a factor on freight moving from the East and Gulf coasts because the hauls are shorter and therefore more amenable to the use of truck rather than intermodal. Table A shows the extent of port diversion as of November. It measures the year-over-year percentage change in the number of revenue movements of international containers (20-, 40- and 45-footers) between various regions over the three months through October.
- The growth in demand for long-haul dry van transportation has slowed as the economic recovery has shifted from an industrial-led basis to a consumer-led basis, the latter of which has less freight content per percentage point of economic growth. So even though GDP continues to grow, it feels like a slowdown in terms of freight.
- The December 2014 congressionally mandated rollback of the 34-hour restart provision of trucker hours-of-service regulations added critical capacity to the U.S. truck fleet in 2015. Coupled with slowing growth, this resulted in a looser capacity environment in 2015 than the previous year, allowing shippers the option to go all-highway when they chose to.
- Intermodal service, which tanked in 2014, was slow to recover. Although service is improving now, some damage has been done.
- The plunge in fuel prices hasn’t helped the intermodal economic equation. As fuel prices have declined dramatically, the fuel efficiency of intermodal and its lower fuel surcharge percentage has lost traction.
- Rail intermodal execs were slow to recognize the shifting winds and continued to take price increases in base rates even as the fundamentals were eroding.
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So what does this say about 2016? FTR Associates’ view of economic fundamentals are for more of the same: slow consumer-led growth, headwinds on the industrial side, but no recession. But trucking and rail companies will feel the chill winds of slowing growth because of the aforementioned change in the economic mix of the recovery.
International cargo, including transloads off the West Coast, accounts for at least 58 percent of all intermodal revenue movements and should settle down. There are no major longshore worker agreements expiring in 2016, so the ports should be able to stick to their knitting and continue to work to decongest their operations. The Panama Canal expansion project should be completed by midyear, but the ongoing project to raise the Bayonne Bridge at the Port Authority of New York and New Jersey, and dredging requirements at other major ports should restrict the widespread application of larger ships until 2017 at the earliest.
One possible international intermodal negative is the container shipping industry’s chronic overcapacity, which will result in more instability and degraded service. It also appears it will finally push the container carriers into some consolidation, which will scramble the existing alliance structure and cause more confusion during the transition.
Put it all together and we think 2016 will look a lot like 2015. There will be major gyrations in the year-over-year figures early in 2016 as we lap the worst of the West Coast crisis, but these will be statistical anomalies that should be ignored, because they will say more about what was happening in 2015 versus current performance.
Similarly, it’s difficult to find a catalyst for acceleration in domestic intermodal activity. Shippers were jolted by the capacity shortage that occurred during the so-called Snowpocalypse winter of 2014, and scrambled to lock up intermodal capacity. But as the situation calmed in 2015, they returned to show-me mode in terms of the coming capacity crunch. They’re aware of the potential problem, but feel it’s far enough away that they don’t have to take immediate action.
Although the pace of trucking regulatory activity hasn’t slowed, the timing of important new regulations is such that the full effect won’t be felt until 2017. Assuming the pace of economic growth doesn’t pick up, there should be ample truck capacity available in 2016. Although it’s always chancy to predict fuel prices — how many of us truly foresaw the recent plunge? — our best guess is that prices will stay about where they are, and that major moves up or down aren’t likely.
One piece of good news is that service has improved, removing a major burr under the saddle for shippers and making defections back to the highway less likely.
The domestic battleground between trucking and intermodal is occurring at the shorter lengths of haul. Although intermodal had been making steady progress in this arena, that’s no longer the case. A measure tracking the average length of haul for domestic intermodal by quarter had declined steadily until 2014, when the trend leveled off. It has now risen significantly for the second quarter in a row. Clearly, the growth in shorter-haul markets has slowed.
The net result is that the intermodal market will have to work harder for growth in 2016, particularly in shorter lengths of haul. Intermodal can’t count on a near-term trucking capacity crunch to drive traffic onto the rails. Rather, it will have to earn the freight through the restoration of the price-service balance that has worked in the past.
Our outlook for 2016 is therefore modest, with continuation of 2015 trends through most of the year. Importantly, we still see things eventually tightening significantly on the trucking side. With the Federal Motor Carrier Safety Administration now having issued a new Electronic Logging Devices mandate, a 24-month countdown is in motion that will require all trucks have ELDs at the end of 2017. We think this will be a big deal in terms of reduced productivity and that the effects will start to be felt as early as late 2016 or early 2017.
Intermodal will be a major beneficiary. Again, this presumes no further regulatory delays. A further slowdown in the economy is certainly possible in this timeframe, and that also would moderate significantly the effects of any shortage, so this is by no means a sure thing.
Lawrence J. Gross is president of Gross Transportation Consulting in Mahwah, New Jersey, and a partner at FTR Transportation Intelligence. A veteran with 34 years in the transportation business, he covers freight transportation, concentrating on the intermodal and trucking sectors from a transportation and equipment perspective. He is a frequent speaker at industry events. Contact him at ljgross@optonline.net and follow him on Twitter: @intermodalist.