Most surprisingly, the loaded rail intermodal container volumes were down roughly 8% from the first quarter in the previous year, and 5.7% down from the pre-pandemic Q1 of 2020. This suggests that there is more than just a simple freight demand erosion for the sector. The shifting transportation demand patterns have cut into the mode’s volumes, and could have the potential to hurt the growth potential within the next few years.
The railroad system has been questioning whether the intermodal system is a growth opportunity. The intermodal units that move have a much lower margin as opposed to moving the highly profitable unit trains, which are used primarily for bulk goods.
The need for consumer goods have risen drastically during the pandemic, which was the perfect scenario for intermodal to shine due to the trucking rates rising quickly. However, the congestion around the touch points displayed how inflexible infrastructure could limit growth potential, despite it driving efficiency in environments that are stable.
One of the largest intermodal lanes in terms of volume is Los Angeles through Chicago. Despite it being the largest lane, it has seen a 14% drop in use during the past week compared to a year ago. Another lane from Los Angeles to Dallas has dropped 18% in the year to year comparison. This revelation is not shocking whatsoever as the overall demand has deteriorated across all transportation within the past twelve months.
Further drops over the past year are in terms of import volumes, dropping 16%, even with a demand shift away from the West Coast. The drop in imports is one of the main reasons as to why the intermodal operators are expected to have some level of recovery as the inventories stabilize. Even though the predictions are valid, there is still long term concern as to how much potential is still around as the macro environment changes.
The intermodal rails have been on the positive end of a more than twenty year growth period, which is when many companies have sourced goods from China. However, due to new pressure from the political landscape, many companies have been incentivized to move away from China as their main source of goods.
The supply chain infrastructure is ultimately a long game that operates over multiple years. This being said, the railroads do not have a high number of options as to where they position their equipment. Due to precision scheduled railroading, also known as PSR, rails are able to reach high levels of operating efficiency. However, these high levels of operation have led to service deterioration, calling into question whether the intermodal system will be able to complete truckloads that are considered time-sensitive within the next couple of years.
The trucking industry has started to increase in demand within Southern California, as the tender volumes are up roughly 25% out of the Ontario market. This is a similar pattern for loaded containers, leading many to believe that the low demand is in the past. Even though the intermodal volume has decreased, it does not mean the end of railroads. They will however have to find new ways to adapt and grow revenues.
The FreightWaves Chart of the Week is a chart that provides data to describe the state of the freight markets. This helps individuals have a visual of the freight market with real time data. The Market Expert posts a new chart each week, which is then archived in FreightWaves.com to be used for future references.
Overall, the intermodal system should have excelled during the pandemic due to the boom in consumer goods. Despite this scenario, the intermodal system has not lived up to expectations as the use of these lanes has decreased in the past year.
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