It’s been an up and down year for the intermodal rail industry. Severe weather impacted operations early in the year. Yet the market absorbed those challenges and staged a modest recovery. By the end of the second quarter, total intermodal volumes had risen 7.9% year over year, according to the Intermodal Association of North America’s 2024 second-quarter report, released July 29. International containers, those 20- and 40-foot TEUs (20-foot equivalent units) coming into the nation’s ports, rose 13.3%. Domestic intermodal traffic, typically 53-foot containers, improved 5.0%, while trailers fell 20.6%.
“International volume provided the biggest lift,” noted Joni Casey, IANA’s president and CEO, who is retiring at the end of the year, in a news release announcing the report. “Domestic containers played a supporting role, especially important as the decline in TOFC [trailer on flatcar] moves continued.” Total IMC (intermodal marketing company) volumes increased 5.5% year over year in Q2, she added.
Nevertheless, troubling signs are on the horizon that could derail the market’s newfound stability. According to the Institute for Supply Management’s “Manufacturing ISM Report on Business” for August, economic activity in the manufacturing sector contracted in August for the fifth consecutive month (as measured on a year-over-year basis). But compared to July, the August index was up slightly to 47.2, or 0.4 percentage points.
And while the overall economy continued its expansion for the 52nd consecutive month (after one month of contraction in April 2020), U.S. manufacturing activity remained in contraction territory, the report’s author, Timothy R. Fiore, chair of the ISM’s Manufacturing Business Survey Committee, said.
“U.S. manufacturing activity contracted slower compared to last month. Demand continues to be weak, output declined, and inputs stayed accommodative,” he said in a statement, adding that three key related indexes—New Orders, New Export Orders, and Backlog of Orders—“remained in strong contraction territory.”
One silver lining has been the U.S. consumer, who has kept spending at a positive yet measured pace, providing an underpinning for the overall economy. That’s been good news for intermodal service providers looking for a more sustained recovery.
WHAT’S AN OPERATOR TO DO?
Larry Gross, founder and president of Gross Transportation Consulting,has seen any number of market cycles over his decades of work in the intermodal industry. “There is a lot of churn, a lot of uncertainty in the markets right now,” he’s observed. A lot of freight moved earlier in the year as shippers took steps to pull forward inventory in an attempt to avoid potential disruptions from various issues.
Those issues include a potential East and Gulf Coast port strike, labor unrest with Canada’s railroads (workers are now back on the job while their contract is in arbitration), continued geopolitical hostilities, concerns over the upcoming election, and the prospect of future new tariffs on a variety of imports next year.
Worries over a disruption at East Coast ports in particular “have caused a swing to the West Coast in terms of TEUs coming into North America,” says Gross. “There has definitely been a diversion,” he adds, citing container volumes out of the Pacific Northwest that were up 83% in July over last year. “The PNW is getting really congested,” and that, Gross says, is part of the reason why the Los Angeles and Long Beach ports are seeing container volumes surge as well. “It’s a reversal of a long-term trend, which was west-to-east migration.”
Those trends also reflect routing decisions made months ago by shippers to avoid potential port strike disruptions, and which will take months to unwind, Gross points out. “Containers on the water today, headed to West Coast ports and eventually destined for transfer to intermodal trains, are based on decisions shippers made in the spring or before. They’re set in stone,” he says. So as intermodal operators look at that incoming traffic, they have to plan for and start repositioning assets to handle those volumes at those ports. And that takes time.
“August and September are typically the biggest months for international,” Gross adds. “October is the biggest month for domestic. The rail network, from all indications, is running smoothly. Trains generally have recovered [from earlier operating hiccups] and are running consistently, but it takes time for the system to fully reset,” he says, and it could take months for the system to balance out.
PLENTY OF CAPACITY
Intermodal rail capacity is not an issue, according to several reports. Whereas ample capacity and rate competition through most of 2024 caused shippers to move some freight from rail to road, “the bleeding has stopped,” says Gross. “The erosion of share from intermodal to truck” has subsided, and rail intermodal operators are working hard to “claw that traffic back,” he adds.
Of the overall volume of truckload freight moving 500 miles or more, excluding ISO container moves (moves of international intermodal containers coming off ships), domestic intermodal accounts for about 6% of the market, with truck accounting for 94%. During the pandemic, intermodal’s share hit nearly 7%. For the past six quarters, that share has returned to the more typical 6%.
“I am of the opinion that the market we are in right now with regard to freight is not that unusual,” says Gross. “We are not that far off” [from a more balanced market],” he adds. “[The railroads] have removed poor service as a reason for shippers to abandon intermodal. Now the door is open, and they have to close the sale.” For a shipper who is close to an origin and destination intermodal terminal, “it is almost unbeatable.”
Indeed, Class 1 railroads are making operational improvements, investing in capacity and infrastructure, and gearing up to aggressively go after more intermodal business as the year proceeds, buoyed by surging international import volumes, according to several industry sources.
At Union Pacific, which generated $5.6 billion in second-quarter revenue, “service levels and network performance for the second quarter remained strong, demonstrating our recoverability in the wake of major weather disruptions,” said Eric Gehringer, UP’s executive vice president of operations, in the company’s recent second-quarter earnings call. Freight car velocity was flat, as improvements in terminal dwell were offset by weather-related drops in train speeds.
He sees opportunity to drive stronger terminal dwell performance “by removing unnecessary car touches across the network.” Results also benefited from a 6% improvement in locomotive productivity driven by better network fluidity and improved asset utilization. Train length improved 2%, with June marking the first month ever with a UP train length over 9,600 feet. “That’s a remarkable achievement by the team as they continue to generate mainline capacity for future growth,” Gehringer said.
Looking ahead, Jennifer Hamann, UP’s executive vice president and CFO, noted “a lot of the drivers that were present in the second quarter are going to be present at least into the third quarter. International intermodal is staying strong, [and] coal is weaker.” On the industrial side of the business, Hamann said, “while we have great business development opportunities, there’s a little softness there.”
Added Jim Vena, UP’s CEO: “We’ve got a great team. They know what the end goal is. So I see us optimizing the railroad and getting better at how we operate.” Yet what really will help improve UP’s operating margin, Vena believes, “is revenue growth. We are pushing hard on that piece by both bringing in volume at the right price” and managing pricing effectively to account for inflation and other cost challenges the railroad has endured.
A FOCUS ON SERVICE
At BNSF, the railroad is leveraging a $3.92 billion capital plan this year to, among other things, add main track miles, expand intermodal parking, add rolling stock, increase production capacity at intermodal yards, improve technology, and make “resiliency investments” to harden its network against extreme weather conditions, according to Kendall Sloan, BNSF’s director of external communications.
“BNSF’s reach is broader than any other Class 1 railroad,” she notes. The railroad operates 32,500 miles of track, providing “direct access to the country’s biggest … inland markets and multiple service options,” with particular attention to customer service.
One example she cites is the BNSF’s partnership with intermodal operator J.B. Hunt. Last fall, the two companies jointly launched Quantum, a new intermodal service “to accommodate the service-sensitive highway freight needs of customer supply chains,” she says. Citing as its hallmarks consistency, agility, and speed, Sloan says Quantum is averaging “up to 98% on-time delivery,” generally providing a service that is a day faster than traditional intermodal.
On the technology side, BNSF has been investing in and deploying new technologies to better leverage data to provide improved analytics and support safety improvements. Among those have been “brake health effectiveness detectors, drones,” and other advanced equipment, software tools, and systems, all designed to provide more timely and accurate data. On the labor front, BNSF as of Sept. 4 had reached tentative collective bargaining agreements with six of its labor unions, months ahead of schedule. The agreements will now need to be ratified by covered employees.
In preparation for the upswing in demand expected from this year’s domestic intermodal peak season, BNSF since early July has deployed additional train crews, locomotives, and railcars across the Pacific Northwest, California, and Texas. The railroad so far has seen a 40% increase in Inland Point Intermodal (IPI) volumes (IPI moves are cargoes going from a port to a shipper’s door in the interior of the country via a domestic or international intermodal container), handling a record number of on-dock railcar loadings from Southern California’s ports of Los Angeles and Long Beach in the first half of this year.
What are intermodal customers asking for? Reliable capacity; safe, efficient operations; and consistent, reliable performance that meets expected delivery times at a reasonable cost. For Class 1 railroads, that means continued investments across the board. Among BNSF’s initiatives in this regard are a planned multibillion-dollar investment in its Barstow (California) International Gateway and a master-planned logistics hub in Arizona’s Maricopa County.
“We know that our customers always are looking for new ways to move their shipments as safely and quickly as possible,” notes Sloan. That’s the underlying incentive for both the rail’s billion-dollar investments in the network and its focus on safety, exemplified by the railroad’s finishing last year with “the fewest injuries in BNSF’s history,” Sloan says. “We continue to lead the industry in safety and are committed to continuous improvement.”
OPPORTUNITIES AHEAD
As the intermodal rail market settles back to prepandemic levels, there remain opportunities, yet the constant competitive tug of war between over-the-road trucking and intermodal shows no signs of abating. IANA’s Casey expects the industry to continue to deliver modest growth—a prediction that was borne out in July’s and August’s upbeat volume numbers—fueled by containerized import traffic returning to the West Coast, which has seen double-digit gains for most of the year.
Domestic container growth, however, has not been as strong “due to tougher year-over-year comparisons and competition with over-the-road trucking,” she notes. “Still, modest growth of industrial activity and transloads from West Coast imports have provided a tailwind.”
With peak season in full swing, she believes the industry can avoid the congestion issues experienced during the pandemic. “Fleet owners have signaled that container velocity continues to trend to prepandemic levels. The intermodal network appears to have [sufficient] assets in place. And there has been no mention of any chassis supply constraints,” she says.
Yet challenges are looming. Among the most worrying to shippers is the prospect of a strike at East and Gulf Coast ports. “This would be disruptive not only for those locations, but also for a good portion of the intermodal supply chain,” she believes. “That would force shippers to execute contingency plans.” Other concerns center on the upcoming election, the prospect of higher tariffs under a new administration, and other disruptive “black swan” events.
On the opportunity side of the ledger, Casey cites the growth of nearshoring and reshoring as companies move operations from Asia to Mexico, increasing opportunity for cross-border U.S.-Mexico moves. She also cites transloading and the potential for domestic intermodal growth as well as the accelerating demand for “sustainable” transportation driven by clean air initiatives.
At its core, in her view, the intermodal rail industry still has three primary advantages over highway truckload service: “environmental stewardship, service consistency, and cost savings.” And those are advantages that will continue to endure and deliver sustainable value in any market cycle.
