Intermodal transportation in North America is poised to break more records. In 2013, intermodal rail operators handled 15.5 million container and trailer units combined. For 2014, intermodal units easily could top 16 million, if the run rate through 2014’s third quarter — up 5.3 percent year-over-year — holds.
2015 should continue this trend, but not without some anxiety for shippers. Rates are likely to increase, even in the face of declining fuel prices, as truckers face significant driver shortages, and railroads struggle to handle burgeoning traffic growth in all commodities, not just intermodal.
Intermodal continues to make inroads into generally shorter-haul domestic shipping lanes. Ten years ago, international shipments comprised 55.3 percent of all intermodal shipments in North America. In 2014, the balance between international and domestic shipments was roughly even. And in the year’s closing weeks, domestic volume actually overtook international volume.
Another 2014 trend worth noting is the modest, 3.8 percent year-over-year increase in trailer shipments. Motor carriers, facing capacity and resource challenges, put many of their trailers onto trains to get them to their destinations. At the same time, sluggish rail service lengthened container cycle times, creating spot shortages of domestic containers and leaving some shippers with little choice but to use trailers for intermodal.
Although intermodal transportation’s growth and changing composition are impressive on their own merits, such performance is all the more remarkable given the well-publicized congestion and service issues on the railroads. For much of 2014, railroad service across the northern swath of the U.S. and western Canada suffered from growing traffic volumes, difficult winter weather conditions, a dearth of train crews and insufficient equipment and infrastructure. Although initially blamed on cold weather, service issues persisted even as the seasons transitioned into spring, summer, fall, and, again, winter.
As 2015 begins, rail carriers are unlikely to be able to get their houses completely in order. Some headway was made in 2014, as railroads spent massively to expand infrastructure, acquire new — and, in some cases, used — locomotives, and hire several thousand train service employees. These assets and resources may not be brought online in time to clear existing traffic backlogs, however, even as a new record harvest is being readied for market and potentially disruptive winter weather moves in again.
In addition, seaports, especially those on the West Coast, are struggling to match chassis and railcar supply with the huge volume surges created by the new generation of 18,000-plus-TEU vessels. Because of a relatively weak global economy and the near-sourcing trend — itself driven in part by lower domestic energy costs — these outsized vessels are consolidating volume into fewer, larger peaks, rather than smoothing day-to-day volume levels. This creates operational challenges, as more resources are required to handle peak volumes, even if overall import-export volumes don’t necessarily increase.
Of course, not all is gloom and doom for intermodal, as many factors operate in its favor. First, intermodal transportation has an advantage when it comes to infrastructure, because its primary competitor, trucking, relies on the publicly funded highway system. U.S. investment in infrastructure has been woefully inadequate of late, as federal and state governments struggle — thus far, unsuccessfully — to balance the need to maintain and expand transportation infrastructure against a reluctance to raise taxes and user fees.
Rail carriers, the backbone of intermodal transportation in North America, don’t rely on public funding but invest in their networks themselves. In 2013, U.S. Class I rail carriers invested almost $14 billion in infrastructure maintenance and expansion, a figure expected to have grown substantially in 2014. Consequently, while truckers must deal with highway infrastructure that isn’t growing, intermodal has access to well-maintained and expanding railroad infrastructure.
A second factor in intermodal transportation’s favor is the truck driver shortage. According to the American Trucking Associations, the industry is short some 25,000 drivers. By 2020, that number could grow to 330,000. Part of the issue is changing demographics. As with most industries in North America, the Baby Boomer generation has constituted the majority of the trucking industry’s workforce. That generation is retiring, but subsequent generations aren’t rushing to fill the void. In particular, millennials are less willing to work a job that requires them to be on the road at all hours of the day and night and away from home potentially for weeks on end — while working for wages that are annually losing ground to average U.S. wages.
And, with drivers subjected to more regulations, controls and monitoring than ever — and losing much of their autonomy in the process — truck driving has become less fulfilling as a career choice.
Even once recruited and hired, there is no guarantee that today’s driver will also be tomorrow’s driver. Driver turnover is currently hovering around 100 percent, according to the ATA, so for every driver hired this year, a new driver likely will need to be hired to take his or her place next year — at a substantial cost to the industry.
Driver shortages also impact intermodal transportation, but to a lesser degree. One critical component, drayage, could see similar problems hiring and retaining a sufficient number of drivers to handle demand. Because drayage drivers have the luxury of working close to home and even returning home at the end of most days, the shortage isn’t expected to be as pronounced as in long-distance trucking. Unfortunately, Oliver Wyman sees the same demographic trends eventually impacting road train crews at railroads.
For shippers, this complex picture means 2015 could be a trying year. What should shippers expect?
— Greater transit time variability. That means they may want to increase inventory levels as a hedge.
— A shortage of drivers and equipment. This is something shippers can impact directly, by turning delivered containers and trailers as quickly as possible. Shippers also need to make sure delivering drivers aren’t detained at loading docks. Ideally, drivers should be able to drop their inbound loads and depart immediately with outbound shipments.
— Rate increases in excess of inflation. In a capacity-constrained environment, there will be a need to fund higher driver wages, while railroads are projecting record capital expenditures for equipment and infrastructure.
The intermodal network is somewhat resource-constrained, but efforts on the part of shippers and intermodal service providers to foster better driver productivity, reduce equipment cycle times and expand capacity should ensure the network continues to support demand growth in 2015 and beyond.
Jason Kuehn is a vice president in the surface transportation practice at New York-based consulting firm Oliver Wyman. Contact him at Jason.Kuehn@oliverwyman.com. Jarod Hage is a specialist in the firm’s Multimodal Systems Practice. Contact him at Jarod.Hage@oliverwyman.com.