- THE MAGAZINE
The fortunes of the North American railroads are increasingly cast in a mix of freight commodities. King Coal has not abdicated, but volumes of coal and agricultural products are trending below 2012. Total intermodal, however, is following seasonal patterns, but at levels slightly above 2012.
When it comes to performance, rails are registering a slight drop in speed when the 40-week averages of the Class 1 railroads are compared to 2012 — showing 25.3 mph in 2012 and 25.1 mph in the like period of 2013. Similarly, terminal dwell time was 0.1 hours longer for the 2013 period. The third critical measure of performance, average freight cars on line, could offer some explanation. Car supply dropped from an average199,869 in 2012 to 194,000 year to date in 2013.
Kansas City Southern registers the highest average train speed year to date at 28 mph, and CSX the slowest at 23.2 mph. Terminal dwell times were lowest on the Canadian National (15.7 hours) and highest on the Union Pacific at 26.8 hours.
Direct comparisons may be difficult given the differences in lanes, commodities, and volumes handled by the different railroads, but one possible observation to put forward is that there is little difference in overall performance through the latest reporting period in 2013 vs. the same period a year earlier despite the fact there are an average of nearly 6,000 fewer rail cars online.
At 28 mph, Canadian National has the best average train speed in the third quarter. Coupled with the lowest dwell times of Class 1 railroads, Morgan Stanley analysts have described it as best in breed. The Canadian National shows promise, says Morgan Stanley Research, given the change in leadership (Hunter Harrison joining as CEO) and an opportunity for productivity improvement. Longer term, the potential for improvements which are non-economic in nature could help the railroad make gains despite some market volatility.
And, in spite of the fact that coal volumes dropped 8 percent year on year in the third quarter, CSX saw total volume rise 2.6 percent. Morgan Stanley comments that if CSX can maintain pricing discipline and continue to improve productivity, its 2014 financial performance could be an “upside surprise.”
In its analysis, Morgan Stanley shows CSX achieved a median annual productivity improvement of $145 million since 2004. Though some years were closer to the $50 million mark than the $150 million mark, productivity improvements were substantial even in years with strong market volume drops.
Norfolk Southern, says Morgan Stanley, is seeing its intermodal investments pay off and it expects the near-term exposure on coal will ultimately see long-term growth. The analysts note that slower coal exports and strong inventories at southern utilities put pressure on NS. In addition, Morgan Stanley suggests NS has been willing to bend on price to achieve higher volumes.
While Kansas City Southern suffers from some of the same issues as other Class 1 railroads (weaker coal and crude), it can also benefit from productivity gains. But from a traffic perspective, it has an added advantage in its Mexico connections — especially for cross-border intermodal. Though the Morgan Stanley analysts don’t attempt to quantify the effect, near shoring has clearly been beneficial for the KCS.
Like CSX in the East, the Morgan Stanley analysts see Union Pacific benefitting from many of the same factors of productivity improvements and pricing discipline.
When it comes to intermodal, volumes rose about 3.7 percent in the third quarter, which has been a plus for companies like Hub Group and JB Hunt which focus much of their market on intermodal. In this respect, Morgan Stanley describes Hub Group as one of the few 3PLs with a major presence in the intermodal market. In addition, Hub has shed less profitable business during 2013 and stands to gain from any increased intermodal use as hours of service rules begin to affect long-haul truckload.
Intermodal traffic is largely manufactured goods and consumer goods, including both domestic and import/export moves. U.S. manufacturing has been showing some strength, according to the Institute for Supply Management (ISM). In the most recent report on the manufacturing sector (through September 2013), the Institute of Supply Management notes that its PMI registered 56.2 (a figure above 50 indicates growth). This is the highest figure for the manufacturing PMI in 2013 and the highest since April 2011.
Though the ISM’s New Orders Index dropped by 2.1 percentage points, it still registered 60.5, while the production index rose 0.2 points to 62.6.
Of the 18 manufacturing sectors reporting, 11 reported growth in September.
Reporting on the PMI, ISM noted a PMI in excess of 42.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the September PMI indicates growth in the overall economy for the 52nd consecutive month, and indicates expansion in the manufacturing sector for the fourth consecutive month.
ISM’s Bradley J. Holcomb states, “The past relationship between the PMI and the overall economy indicates that the average PMI for January through September (52.9 percent) corresponds to a 3.3 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI for September (56.2 percent) is annualized, it corresponds to a 4.4 percent increase in real GDP annually.”
The U.S. is still a major manufacturing center. Companies responded to a survey by the Massachusetts Institute of Technology (MIT) that 52.6 percent of their manufacturing and sales are U.S. based. China ranks second with 21.1 percent. The 2012 study (U.S. Re-Shoring, A Turning Point) showed that when North American locations were combined, the total was 61.8 percent.
Though one third of respondents didn’t answer the question about plans to re-shore manufacturing to the U.S., a third said they were considering re-shoring and 15.3 percent said they definitely planned to re-shore some manufacturing.
Top reasons for re-shoring were time-to-market, cost reductions, product quality, more control, and hidden supply chain management costs.
Manufacturing is going through a “genuine transformational period,” according to the study’s authors. The drivers are well known: volatile fuel costs, labor costs rising in developing nations, automation, and risk.
What this can spell for the transportation industry is high-value finished goods moving into and across the U.S. With rule changes and other factors affecting productivity of the long-haul trucking sector, this places rail intermodal in a position to continue to increase its role through new volume and mode shifting. In fact, Morgan Stanley Research describes the truckload sector as having “tepid industry demand.” It adds that hours-of-service-driven productivity headwinds” are hampering carrier earnings and it sees little change longer term, even if carriers are able to increase prices. The story the Morgan Stanley analysts repeat relative to the truckload sector is that despite efforts to improve their strategic positioning, truckload carriers will continue to face serious challenges from regulations and cost increases — some of which is related to driver pay and efforts to gain and keep qualified drivers in the developing driver shortage.
The challenge for intermodal is not managing the long-haul that had been handled by truckload, it is reaching the final destination — completing the door-to-door move. Tom Sanderson, ceo of Transplace acknowledged that fact after the non-asset 3PL joined forces with Celtic International, which manages over 100,000 pieces of rail-owned equipment and ISO containers. In January 2012, not long after that acquisition, Sanderson told attendees at the SMC3 Jump Start event that the 3PL didn’t add value for shippers by simply converting their long-haul moves to intermodal. The key, he said, is in providing the door-to-door services, which means mastering the dray and dealing with the complexities of true door-to-door. In doing so, it followed the lead of Hub Group, which acquired drayage and truckload services company Comtrak in 2006.
The non-asset or asset-light third parties have increasingly invested in acquiring access to the assets that will permit them to ensure high levels of service in the last mile. Truckload carriers that identified opportunities in intermodal had that advantage and more in the fact they had power units and drivers across the country that could handle the first and last mile of an intermodal move. This has actually extended the reach of the dray in some cases, allowing shippers and consignees access to intermodal ramps that are not just within the commercial zone limits of most drayage carriers. The combination of a longer haul to or from the ramp has helped make shorter haul rail moves feasible in some intermodal lanes.
When CSX located its North Baltimore, Ohio intermodal facility, it initially looked at the facility as a hub for intermodal traffic on its own network. The facility design did not include a gate to handle local traffic — an oversight that was quickly remedied, opening up at least 180 new origin-destination pairs for intermodal over CSX.
That region had previously seen a new intermodal hub in Marion, Ohio where a public-private effort converted a former U.S. Army supply operation to an intermodal ramp. Schneider National developed its part of the intermodal operation initially to serve customers in the Ohio Valley.
A more recent addition to the BNSF intermodal network is in Kansas City. The BNSF Logistics Park Kansas City sits on 558 acres and has the capability to handle 7 million square feet of buildings, 3 million square feet of which can be direct-rail served. BNSF’s total investment in the facility will be $250 million, including the purchase of 1,000 acres on the park.
The facility has six tracks and five wide-span cranes capable of 500,000 lifts. It will offer domestic and international intermodal service and will also be capable of providing direct-rail carload service. Its intermodal capacity, at full build out, is 1.5 million units.
The initial traffic expected at the facility is international imports moving eastbound, but Kansas City is a “mixing center” says BNSF, and that could help shift a lot of current less-than-truckload freight to full truckloads.
Rails may still be one of the best modes for bulk commodities such as coal and agricultural goods, but improved service and increased investment in intermodal has positioned the railroads at a crossroads in time to meet a rising market need.