Shippers to Face Higher Intermodal Rail Rates this Fall
No secret trucking capacity has been very tight this year. The industry has seen an increase in demand with intermodal tonnages increasing year over year 1.3% in June and 3.6% in July, and with other trucking opportunities more lucrative than handling intermodal traffic being available have all combined to create this capacity issue. Given these conditions industry pricing has already rose at a 4% rate year over year.
To exacerbate the situation is the outright loss of trucking capacity. During 1Q2014, 390 trucking companies with approximately 10,600 tractors closed the doors, which followed 335 companies with about 7,750 tractors shutting down during 4Q2013.
As astounding as these figures are one industry analyst suggests the actual number of trucking companies that have gone out of business is even higher. Some companies closure went by unnoticed and unreported as they were small operators with ten or fewer tractors and their closing garnered little or no media coverage, except perhaps in their immediate market. The second group that is most likely underreported are owner-operators who have become discouraged by rising operating costs and have simply parked their trucks foregoing bankruptcy.
With no easing of the trucking situation in sight, and coupled with a surge in intermodal traffic, this has opened the door for rail carriers to raise domestic intermodal rates this fall. This comes on top of the 3% to 5% rate increase some rail carriers had implemented earlier this year.
One railroad executive recently commented, “As truck capacity tightens, we anticipate continued volume growth and pricing opportunity in our domestic network.”
Another suggested to investors the surge in intermodal traffic and the constriction of trucking availability would allow the railroad to “exercise their pricing power.”
The executive vice president of yet another rail carrier told investors, “The trucking market is an effective competitor for a wide swath of our business, not just intermodal business. Certainly, as their costs go up, that gives us opportunity to see more demand for our network, and we’re seeing that, and we have been seeing that, and we’re going to continue to price to the market based on that.”
Notwithstanding shippers concerns with the overall decline in intermodal rail performance rail carriers appear determined to implement these increases by leveraging the ongoing trucker issue, shipping volume gains realized by the improving domestic economy, and the backlog of cargo due to the harsh 2013-2014 winter.
Several analysts came to the conclusion that both domestic and international intermodal pricing year over year rose an average 4% in the first months of 2014, and expect rates to end the year 3-4% higher than 2013.
Adding to the discussion other analysts commented;
• “Although intermodal costs seem to have peaked for this year and have been falling over the last couple of months, they remain considerably high compared to the last several years.”
• “Interestingly, intermodal pricing hasn’t fallen as rail performance has become atrocious largely because shippers don’t have much other choice than to turn to rail if they want to shield themselves from rising truck rates and mitigate fears of not finding space for a load.”
Suggesting there’s light, dim as it may be, at the end of the tunnel several analysts offered the conclusion they do not expect an intermodal meltdown this peak season and that while service levels will be below the status quo, they aren’t likely to get any worse this year.