Intermodal rail in 2024 is likely to still face pressure from the trucking market; however, market conditions for the overall freight transportation market also appear to be returning to pre-pandemic patterns, and so providing good rail service will be key in enabling intermodal rail to compete, according to Matt Muenster, chief economist for Breakthrough, a transportation management technology provider.
“Railways will likely experience headwinds in growing intermodal shipping in 2024, especially in the first half,” Muenster told FreightWaves. “I think one of the most prominent headwinds is their level of competitiveness with trucking. Dry and refrigerated truckload linehaul rates have decreased substantially over the last year and a half or so. Because truckload rates have fallen, intermodal shipping isn’t particularly competitive, relative to the pre-pandemic environment.”
He continued, “On the positive side, railroads are improving service. We’ve seen train speeds increase and dwell times decrease year over year, which is helpful.”
In talking with shippers, the issue of intermodal rail’s costs “comes up first and foremost,” with intermodal rates having a more compressed per mile savings than truck. As a result, truck rates are presently more competitive than intermodal rates, and intermodal providers may be challenged in growing their volumes in the near term, Muenster said.
“We expect truck rates to rise next summer and intermodal rate increases to lag the truckload market. The lag in intermodal rate price growth will widen the gap between truckload and intermodal rates,” he said.
“Ultimately, as we approach the second half of 2024 and beyond [and] as long as the U.S. economy can maintain its current trajectory to a soft landing, then the difference between truckload and intermodal rates will again widen and make those economics more attractive and bring more freight onto the rails,” Muenster said.
The challenge in intermodal rail being able to compete with trucks for the first half of 2024 comes amid a backdrop of normalizing market conditions in the sense that 2024 will be more in line with pre-pandemic supply and demand patterns, he said.
“Demand for goods is not overheated by a significant shift from service spending and fiscal stimulus, and inventories are not in a state of dramatic surplus because of supply chain disruption and the post-pandemic shift in consumer spending toward services,” Muenster said, explaining that these factors create a more balanced freight market.
The importance of good rail service
For intermodal volumes to really grow, service must be key, Muenster said.
“Shippers expect a certain level of service. Railways will need to provide evidence of continuous improvement in their service levels after the experience of the past five years or so to gain trust and grow intermodal volumes,” he said.
Mike Baudendistel, a market expert and head of intermodal solutions for FreightWaves, echoed Muenster’s remarks about providing good rail service, although Baudendistel observed that shippers still found incentives to utilize intermodal rail in the second half of 2023, as seen by rising volumes. That increase may be due to improved rail service, he said.
“While shippers generally expect a savings of 10%-plus when using rail intermodal as compared to truckload, service is often the determining factor for modal selection. During the service meltdowns in 2021, shippers were pulling their containers out of intermodal yards to truck them. That was a ‘missed opportunity’ where intermodal lost market share despite the tight truck market,” Baudendistel said.
But “this past year, amid improved service levels, many shippers used intermodal more heavily despite the loose truckload market,” he continued.
“The truckload market will again tighten at some point from a combination of capacity exits and demand improvement, but the associated higher truckload rates will only support intermodal volume if intermodal service levels are adequate,” Baudendistel said. “Intermodal service levels are solid now, but how service holds up in the face of a potential disruptive event remains an open question.”
Still another factor that has affected intermodal rail’s growth prospects is that intermodal service availability into cities is constrained, particularly for cities that are not historically big intermodal destinations, Baudendistel said, noting that recent partnerships, such as the Quantum service between J.B. Hunt (NASDAQ: JBHT) and BNSF (NYSE: BRK-B), could address that issue.
“The Class I rails have [also] announced several collaborative partnerships to expand their intermodal reach. Those announcements have made me more convinced that intermodal is truly a growth area than I was a year ago,” Baudendistel said.
Recent partnerships seeking to bolster links between the U.S. and Mexico, and the U.S. Southeast and Mexico in particular, could provide intermodal rail providers with an opportunity to grow market share, according to Muenster and Baudendistel.
“Mexico has become the largest source of imports for the U.S., overtaking China in 2023 and likely the foreseeable future as imports from China as a percent of U.S. imports continue to decrease. These North American trade lanes, particularly from Mexico, have provided an opportunity for shippers to achieve resilience,” Muenster said.
What also could support intermodal rail volumes is the push for companies, including shippers, to adopt more sustainability initiatives, which would include looking at which transportation modes produce fewer emissions, Muenster said.
“As intermodal service and safety improve, shippers will begin to consider the emissions savings,” Muenster said. “Our clients, who are shippers across numerous industries, including food and beverage and consumer packaged goods, are already contemplating mode choice based on total emissions. In some circumstances when the cost is comparable, the shipper will be internally obligated to pursue the movement of goods with fewer emissions.”
However, one unknown in the upcoming years will be how labor negotiations will go between the craft unions and the railroads. Negotiations for a new labor contract officially kick off in January 2025. While the process takes years, the most recent negotiations became so contentious that Congress and White House eventually intervened in November and December 2022.
“It will be interesting to see how shippers respond to those negotiations and the amount of goods they’ll convert to the railroads. But I still think the most prominent factor in the slow growth for intermodal is just the competitive nature of where truckload and intermodal rates presently sit,” Muenster said.
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