Panelist Says 2020 Pandemic has Matched 2008 Great Recession in Negative Effects on Railroads

The COVID-19 pandemic has had as large of an effect on railroads as the Great Recession of 2008 an industry observer told Railway Age during a panel discussion.

Jason H. Seidl, a managing director of Wall Street firm Cowen and Company, said permanent changes in trade flows will likely cause the Port of Los Angeles to permanently lose about 15 percent of its market share to Gulf and East Coast ports.

He said that is a setback for western railroads but a gain for CSX, Kansas City Southern and Norfolk Southern.

Seidl noted that freight volumes moving through ports have been down with the Port of LA down 17 percent through June.

Imports began picking up in July, and August and September are expected to be better than earlier forecasts but still post increases in the single digit range.

However, Seidl said the Port of Houston has seen a stronger July than usual.

“When COVID-19 hit China early in the year, it caused lower exports out of China,” he said. “Ocean carriers took steps to lessen the numbers of sailings. Per the Port of Los Angeles, there were 40 canceled sailings of ships, or roughly 25 percent of the total number of ships.”

During the second quarter of this year about 15 percent of sailings were canceled to the Port of LA. The Port of Houston saw 14 canceled sailings.

Seidl said that the outlook for the peak shipping season this year is mixed and unclear.

Los Angeles port officials said it took 10 years to recover from the 2008 recession when volume declined more than 30 percent.

This year the Port of LA has seen 14 consecutive months of export declines as it bore the brunt of the trade war between the United States and China. Officials there do not expect a traditional peak season.

The Port of Houston, though said its customers are expecting a peak, although it is unclear if that will flow from increased demand or increased need to replenish inventory.

Although the back to school shopping season traditionally has boosted retail sales, this year there is weaker consumer demand, supply chain disruptions, apparel markdowns and lack of newness coming into play.

Not All Intermodal Lanes Are Equal

Railroad intermodal freight traffic has been lagging and industry observers point to many factors behind that.

Many of those start with the economic downturn triggered by the COVID-19 pandemic but other forces are at work and were depressing intermodal traffic before the pandemic began.

This included a shift in business to trucks and even railroad choosing to forgo some intermodal business because it was not profitable enough.

But the forces depressing intermodal rail shipment have not affected all intermodal traffic lanes in the same manner.

Competition from trucks, for example, is not the same in every market.

An analysis by e-newletter FreightWaves that was published by Railway Age show that in some lanes rail intermodal holds up well against truck completion.

One of those is Los Angeles to Chicago where rail has an advantage due to the density of the market and the transportation infrastructure unique to those cities.

The anchor cities in that market are two of the nation’s largest consumption centers.

They also have more outbound than inbound freight.

Intermodal rates in the Los Angeles to Chicago lane are considerably above the intermodal national average.

In the New York to Chicago lane, intermodal does not enjoy the same rate competitive advantage.

Trucking spot rates have fallen significantly, as they have throughout the country, which has eaten away at intermodal value.

Trucks can ship freight in two days, which provides shippers better service than intermodal for a slightly lower cost.

Intermodal volume from New York to Chicago has underperformed nationwide intermodal volume in the past month.

The analysis said it remains to be seen if the strength of the Los Angeles to Chicago lane for intermodal will be sustained.

It might have been rooted in a surge in imports at the end of April and early May.

Since then imports have fallen and the truck market in Southern California has weakened.

That could lead to an eroding of the relative value of intermodal shipping.

Intermodal a Study in Contrasts

The story of intermodal freight shipments these days is one of contrasts.

At a time when the trucking industry has surplus capacity, truckers are cutting their rates in an effort to chase business.

Railroads, though, generally are increasing their rates.

The Association of American Railroads reports that in 2019 intermodal enjoyed its second highest volume year on record but the Intermodal Association of North America reported that domestic intermodal volume fell 6.1 percent last year.

J.B. Hunt, a trucking company working with railroads to offer intermodal service, reported that in 2019 its intermodal volume fell for the first time.

Yet Hunt executives remain optimistic that there is business to be had that can be diverted from trucks, including in the eastern United States where the market for intermodal is most challenging.

“In today’s environment, there is a challenge to grow in the east because the customers are able to secure truckload capacity at rates equal to or better than intermodal,” said Darren Field, J.B. Hunt’s executive vice president of intermodal, during a company earnings call this month.

Field said those challenges will continue until Hunt and its railroad partners can offer economics and service that outperform what trucking companies offer.

Some analysts question whether intermodal is any longer a growth industry.

They note that Hunt’s intermodal profits grew 2 percent during the past six years. During a six-year period prior to that intermodal profits enjoyed 11 percent growth.

One source of the loss of intermodal volume has been a decision by CSX to drop intermodal service from hundreds of what it termed low-volume lanes in 2017 and 2018.

Norfolk Southern is taking similar steps with its “yield-up” pricing intermodal strategy.

Both railroads contend that these changes will result in improved and more consistent service.

Field said Hunt has noticed that NS and CSX did improve their service in the second half of last year.

Nonetheless, Hunt reported that its intermodal volume declined by 3.4 percent last year, to 1.9 million loads.

Loads in the eastern region of the country fell in all four quarters of 2019.

A bright spot for Hunt was that transcontinental loads rose in the third and fourth quarters.

Field said Hunt managers believe there are 8 million to 10 million loads it can convert from highway to intermodal.

“The reality is we have to produce the combination of economics and service that convince that customer base that intermodal is the right solution for them,” he said.

Intermodal traffic is about half of all rail freight volume and is split about 50-50 between international and domestic loads.

CP Contract to Affect Ohio Valley Market

Canadian Pacific doesn’t own a foot of track in Ohio and the Port of Vancouver, British Columbia, is thousands of miles away, but the Buckeye State looks to benefit from a recent contract that CP reached that will increase its share of intermodal traffic in Vancouver.

CP will begin hauling starting April 1, about 85 percent of the Ocean Network Express traffic passing through the Port of Vancouver.

How does that affect Ohio? It will boost traffic in the Ohio Valley intermodal partnership that CP has with the Chicago, Fort Wayne & Eastern and Indiana & Ohio.

Ocean Network Express is a consortium of shipping companies K-Line, MOL, and NYK.

Canadian National has 70 percent of the container traffic moving through the Port of Vancouver, but CN officials say they will have to turn away some business due to capacity constraints.

International intermodal traffic moving on CN has experienced faster-than-expected growth and increases in traffic in frac sand, grain, and other commodities have left CN congested, particularly in Western Canada.

CP said the agreement with Ocean Network Express is worth $80 million annually over the three-year contract.

Interestingly, CP is gaining back traffic it walked away from when E. Hunter Harrison was CEO of CP because he thought domestic intermodal traffic was more profitable.

But now CP says its costs are similar to those of CN, which puts it in a position to vie for lower-margin international intermodal traffic.

Intermodal Freight Traffic Grew in 1st Quarter

The Intermodal Association of North America said intermodal freight volumes grew in the first quarter of 2017 following a year of declines in 2016.

First quarter international containers rose 2.9 percent to 2.1 million units, and domestic containers climbed 1.3 percent to nearly 1.8 million units compared with first-quarter 2016. Intermodal trailers posted a slight gain of 0.3 percent to 310,393 units in the quarter.

Overall, intermodal volume totaled 4.2 million units, up 2 percent year over year.

“All intermodal market segments showed improvement in the first quarter,” said IANA President and CEO Joni Casey in a statement. “What’s notable about this is that it comes on the heels of 2 percent growth in the same quarter of last year, suggesting real gains, not just a weak comparison.”

IANA said the seven highest-density trade corridors posted a collective 2.1 percent increase in the first quarter compared with the same period a year ago. Those corridors account for 63.4 percent of total intermodal volume.

Traffic gains ranged from a 7.4 percent increase between Eastern and Western Canada, to a 1.3 percent loss in the South Central-Southwest corridor. The corridor with the highest volumes, the Midwest-Southwest, grew 1.7 percent.

Intermodal marketing companies registered a 7.5 percent gain in total loads for the quarter, which IANA said reflected the continued strength of highway shipments.

“These increased 11.6 percent over the same quarter the previous year,” IANA said. “Intermodal loads also gained 3.6 percent after a double-digit drop for the full 2016 year.”

Intermodal Rose 1% in 4th Quarter of 2016

Intermodal freight volumes rose 1 percent during the fourth quarter of 2016 when compared with the same period in 2015, the Intermodal Association of North America said.

IANA said in a news release that there were 4.35 million shipments during the fourth quarter, an improvement that occurred “despite an ongoing freight recession that permeated the transportation industry and resulted in lower intermodal volumes during the second and third quarters.”

Shipment declines during the second and fourth quarters resulted in a 2.1 percent decline in intermodal volumes in 2016 when compared with 2015. The total of 17.1 million shipments was the first full-year decline since 2008.

Domestic containers posted a 3.4 percent increase in the quarter. International shipments rose 0.6 percent. Declines continued in the trailer segment, which were down 9.2 percent in the quarter.

The seven highest-density trade corridors — which account for 63.3 percent of total intermodal volume — rose a collective 1.8 percent during the fourth quarter.

The Midwest-Northwest and Northeast-Midwest lanes saw the largest fourth quarter increases at 4.3 percent and 4.2 percent, respectively. Midwest-Southwest volumes, which were the highest, grew 1.4 percent. The South Central-Southwest lane, the only major lane to post a decline, fell 4.4 percent on container losses.