Jimmy Buffett built a career on singing the virtues of changes in latitudes and changes in attitudes; a similar mindset—albeit without the inevitable frosty, fruit-based drink—seems to have now come to define North America’s intermodal sector.

Most insiders point to Feb. 5, 1989 as the “birth date” of the trend, as it was on that day that the Atchison, Topeka, and Santa Fe Railway (now the Burlington Northern Sante Fe railroad) loaded a J.B. Hunt Transport Services Inc. trailer onto a railcar, thus ushering in the current age of intermodal freight transport.

But something equally profound has occurred in just the last few years.

Gone are the rivalries that used to divide the rail and motor carrier communities. Instead, and particularly in the past three to five years, there’s a growing acknowledgement that to prosper, firms in both camps need to work together.

And those efforts have been a boon to reliability in both freight movement and cargo handling.

“Ten years ago in intermodal, an on-time delivery rate of 70 percent was not an unusual level of service and 90 percent was considered exceptional,” says Dave Howland, VP for land transport services at APL Logistics, a unit of Singapore-based Neptune Orient Lines (NOL).

“Today, 98 percent is the norm, and a ‘bad lane’ would be one that performed at 92 percent,” he continues.

The key, Howland says, is a dramatic shift in philosophy by the rail carriers who once longed to have containers move from highway to railcar, but now better understand the underlying values that can make that desire a reality.

“While a number of things have happened in the intermodal sector in recent years, I think the most dramatic has been how the railroads have gotten so much better at dedicating train capacity and box capacity in this area,” Howland says.

“Frankly, that’s been a game changer, and as a result the overall reliability of intermodal has improved significantly. Whereas once, you could even think about putting over-the-road freight into an intermodal environment, now we’re even moving a lot of just-in-time freight that way.”

Rail carrier improvements

Could trucking firms really be that impressed by the recent moves made by their one-time competitors?

You bet, was the resounding answer.

Zach England, VP of the domestic intermodal division at C.R. England Global Transportation, boils the new reality down to four main actions that he feels have had a direct bearing on the improved reliability in the sector.

“The first thing I’d point to is they now have very consistent train starts,” England says. “They are moving when they say the freight is going to move, and they are arriving at their destinations when they say they are going to arrive. That’s different from how it used to be.

“The second thing is the frequency of trains. They are running trains every single day for the most part in the key lanes that we want to move freight on,” he says. “That allows us to go to our customers, the big shippers of the world who need to move refrigerated goods, and say, ‘Hey, it doesn’t matter what day you have the product ready, we can move it on the train that day.’ That frequency of service is a big, big deal.”

The third change England points to is a new sensitivity in the area of equipment handling. In the past, he says issues with rough handling of reefer units frequently led to power outages and other issues that forced C.R. England to claim the load as a loss.

“It’s been over a year, knock on wood, since we’ve had any issues like that, and that’s a direct result of the railroads doing a number of things on their end in terms of the placement of reefer units and how they load and unload them,” he says.

“And the fourth thing for me is communication,” England continues. “After all, this is transportation. There are going to be problems. But now, we can depend on them from a communications standpoint; we know that when problems occur, they will be communicated to us in a timely fashion so that we can talk to our customers about it.”

He adds, “Even when there are not problems, how they communicate information to us has greatly improved; we’re constantly getting updates on the progress of a shipment and that kind of thing. When it comes to providing a reliable service to our customers, each of these things is a critical service the railroads are providing.”

When asked for his perspective on the shift that has occurred in the intermodal arena, Howland offers a two-part answer.

“If you think back to how it was—and I guess you can think of this as the dark past of intermodal—10 years ago the railroads routinely offered 20 percent to 25 percent discounts, and in some cases 30 percent discounts to entice customers to use intermodal rather than over-the-road,” Howland says.

“The railroads used this service to build up their network and generate positive cash, but it was never a huge revenue stream,” he explains. “What they realized over the last 10 years, however, is that if they provide a reliable on-time service, they can squeeze the spread between intermodal and over-the-road.

“So the better the service has gotten, the more reliable it’s gotten, the more they’ve been able to leverage their rates up toward over-the-road rates, and obviously, the more they’ve leveraged those rates up, the more profitable the business has been.

“Now, even with consistent capacity and consistent delivery of products, we’re still seeing discounts for intermodal service at around 10 percent, but that’s far better for them that the old 20 percent to 30 percent discount,” Howland says. “At a 10 percent discount, the railroads make good money, not just positive cash, but a very respectable profit.”

With those profits has come a wave—actually, a veritable tsunami—of reinvestment in rail infrastructure. “And again,” Howland says, “a lot of it is really all about that dependability and reliability that has been achieved in intermodal, and as they’ve been making those investments, they’ve also been adding capacity at their terminals.

“Honestly, in the past, most railroads never really matched up how many trains they were going to land versus how much strip track they had, so as trains came in, they just landed them on yard tracks until that could pull them onto a ramp,” he continues. “Sometimes that would result in an eight hour delay in delivery; sometimes it could be as long as 24 hours.

“Now, there’s not a railroad out there that doesn’t match their train arrivals and departures based upon strip track availability. That’s a huge change,” he says.

Unlikely partners

Mike McClellan, VP of intermodal at Norfolk Southern Corp., agrees with the motor carriers’ assessment that things have indeed changed.

In explaining why reliability has increased so dramatically in intermodal, he says the underlying motivation is simple business common sense: shippers want reliability, and if you give it to them, you naturally have access to more freight.

“At the end of the day, shippers are really looking at three things when deciding how to move their products,” McClellan says.

“The first thing they look at is whether there is even an intermodal service available. After all, there are millions of truck lanes across the country, compared to, probably, thousands of intermodal lanes,” he says. “So the first thing a shipper considering intermodal assesses is whether there’s a lane out there for them. That’s the first hurdle, and it is something that we are very aware of—it’s why we are going to continually add more and more lanes to our network. You expand the ‘net,’ you catch more freight.

“The next decision point is, ‘Is intermodal’s pricing competitive with whatever my current available option is?’ Generally, people do not use intermodal if it is more expensive than truck,” McClellan continues.  “They use it to save money or to provide capacity at certain times of year. So the question is, ‘OK, is this service offered at a price that’s attractive relative to my needs?’

“The third factor is transit time and reliability,” he says. “So when you think about intermodal, you have to look at it in the context of those three dimensions. From that perspective, the reason intermodal volumes are improving is number one, there are more domestic services out there; the first hurdle has been met. Number two, there’s value out there—value, primarily, relative to trucks—and third, the reliability has improved dramatically and continues to do so.”

When it comes to hauling cargo throughout the U.S., the history of the industry can be divided into neat epochs lasting a half century each. During the first half of the 20^th Century, railroads dominated. Then, in the 1950s, President Dwight D. Eisenhower unleashed the development of the interstate highway system, and the motor carrier industry came to dominate.

“They basically cleaned our clocks,” McClellan says.

Then came the aforementioned partnership between J.B. Hunt and the BNSF, which soon drew other firms, among them, notably, Schneider National, into the intermodal arena.

“The J.B. Hunt-BNSF deal made it acceptable for railroads and motor carriers to work together,” McClellan says. “Today all truckers—at least the ones we know of—are at least asking the question, ‘Should we be in intermodal and if so, under what kind of strategic positioning should we have in intermodal?’

“And there’s a full range of responses there,” he continues. “One is going all-in, like Hunt has done, where intermodal is their primary business and they’ve made a huge investment in it. At the other end of the spectrum are firms who are using intermodal as a line-haul substitution product when say, they don’t have a driver available to take a load to Chicago on a given day. So it’s more of a tactical relationship.

“I think it’s interesting that not only are motor carriers and railroads are working together better, but that we are doing so in a number of different ways,” McClellan says. “From that perspective, reliability has been an enabler for the motor carriers to use us.”

Warming to the subject, McClellan lauds motor carriers generally, saying that historically, his counterparts in over-the-road delivery have provided “really high levels of service both in terms of speed and reliability.”

“So as a result, they don’t want to jeopardize their account position by doing something risky, and a decade ago, putting your trailers on a railcar might have been perceived as risky—particularly in terms of reliability,” he says.

“Now, I think the reliability is—while by no means perfect—so much better than it was even five years ago, that motor carriers feel they can put their cargo on rails with a degree of confidence they didn’t have in the past,” McClellan adds.

Using Norfolk Southern’s recent history as a guide, it’s clear that the nation’s railroads continue to have the lion’s share of the market when it comes to the trans-continental and long-haul markets. Where they see the biggest growth opportunities—and where their intermodal business is critical—is in capturing hauls ranging from 550 to 1,500 miles.

“That’s where the majority of drive-share is on the highways,” McClellan says. “Getting into the market requires more the things we’ve already talked about, better products, better reliability, and a better economic structure.”

It also, evidently, requires a bit of soul-searching and honest, face-to-face discussions with both customers and other industry professionals.

“Over the past decade, we went through and had very detailed conversations with shippers and motor carriers and discussed a whole range of issues that boiled down to a simple question: What degree of speed and reliability would you need to convert freight from highway to rail?” McClellan says. “What we got from those discussions was a better understanding of what the needs were in terms of transport lines and terminals, and that’s when we launched a series of corridor initiatives, the biggest of which are the Meridian Speedway, the Heartland Corridor, the Patriot Corridor, and the Crescent Corridor, the first phase of which opens in 2012.

“All of these things are a response to our customers’ need for more land, bigger terminals, more productive terminals, and faster service,” he says. “I also think it illustrates another reason motor carriers are getting more interested in intermodal—we listened to them. When they said, ‘If you want to convert this freight, this is what you have to do,’ we responded with new services, new capacity, and more competitive transit times.”

According to McClellan, 2012 will be the “most transformative year” in Norfolk Southern’s intermodal history.

“We have four major terminals opening over the next nine months in Memphis, Birmingham, Hagerstown, Md., and Mechanicsville, NY, and we also have two major expansions going on, one at Harrisburg, Pa. and one just outside of Boston. So we will have three-quarters of a million units of lift capacity coming on line, which in turn provides us with the opportunity to offer up to 160 new lanes.

“Now, we won’t just suddenly open 160 new lanes all at one, but we will be bringing on new capacity, most likely launching five to 10 new lanes at a time,” he adds.

To put all this activity in perspective, McClellan points out that Norfolk Southern opened four new terminals in the past 10 years.

Technology investments

Motor carriers have responded in a number of ways, not least of which is making dramatic investments in their own operations.

“What the railroads have done—in terms of their commitment to intermodal—has been very impressive, and not only does that give us confidence in utilizing their services, it gives us the peace of mind to grow and to invest in additional assets as well, ” Zach England says.

Last year, C.R. England invested in 300 refrigerated containers, doubling the size of its intermodal fleet.

“That’s indicative of just how comfortable we’ve come to feel about our railroad partners,” England says.

“It took a little bit of flexibility, open-mindedness, and creatively for us to work together and bring these new containers to the market; at the same time, it shows you how much—and how for the better—the relationship between intermodal partners has evolved in recent years,” he says.

The company has also invested in telemetric units to give it the ability to monitor and communicate with reefer containers in transit via cellular networks.

“That gives us the ability to monitor temperature, both in terms of the actual temperature and what our setting is at, where the cargo is located, and we can even turn the unit on or off, remotely, from our Salt Lake City headquarters,” England says.

“It allows us to offer our customers a greater sense of product integrity and another level of detail we can communicate to them, which is huge,” he says.

For Howland, the evolution in rail operations has lead to APL striving to be ever more connected through technology with its intermodal partners, and he says that’s significantly changed the dynamics of communication with clients.

“It used to be that you set appointments for delivery with clients when the railroads notified you the cargo was on the ground at whatever ramp it was headed to,” he says. “It was the only way you could be sure the cargo was actually there, and then it became a matter of when the client could take it—sometimes the next day, sometimes three days out.

“Now we make appointments for the delivery when we actually make the pickup on the other end,” Howland says. “So, if you want to talk about a change in behavior, now the customers are getting far earlier notification of when their stuff will arrive, the draymen are getting far earlier notifications so they can plan their capacity, and you can handle a lot more of the process electronically, which eliminates a lot of overhead expense while speeding up the velocity of the service.”

The rise of the new and improved intermodal has also helped motor carriers deal with the perennial issue of driver shortages.

“It’s really hard to get long-haul drivers these days,” Howland says. “The lifestyle is horrible. So a lot of trucking companies are moving to intermodal because it’s a lot easier to get a driver for a dray: the driver is home every day, so [he] can actually have a life.

“The other thing is, the equipment, the tractors, are always home at the end of the day, so it’s easier to service and maintain them,” he continues, adding that there is another side to all this—intermodal being “greener” than traditional trucking.

“So customers shipping with intermodal are reducing their carbon footprint, reducing their CO2 emission, and that is good for everybody,” he says.

Increased flexibility

England says the evolution of intermodal has also tracked well with changes in how shippers are dealing with the economic crisis, in effect opting for just-in-time delivery of smaller amounts of goods at a time.

“What the heightened efficiencies in intermodal amount to is a greater confidence among shippers that they can ship x amount of freight by rail, and it’s going to be where they need it on time. They don’t have to worry that freight is going to get sidetracked, so they can make the changes they need to their supply chains to keep themselves afloat in a time of economic uncertainty,” he says.

The question is what happens to all these gains in reliability when the economy heats up again and capacity once again begins to get tight.

“I guess what I hearken back to is the situation we had with fuel back in 2008,” England says. “Fuel prices went crazy, and carriers did everything they could to cut their fuel costs. Then, when fuel prices normalized, they looked at the strategies they had adopted and saw that if they just kept at it, they’d be better and leaner than they were before the fuel crisis. So I think a lot of the improvements in intermodal that we’ve seen in recent years will carry over.”

But, he admits, he does worry that as the railroads get busier, they may begin to bog down as they have in the past.

“We’ve already started to see that to a certain degree,” he says. “Now, from a carrier standpoint, I think we will be fine. But I do wonder whether as volume comes all the way back to 2006 levels, things are going to function as well as they have recently.”