CSX Corp.’s container cargoes have increased about 10 percent for two straight quarters as eastern U.S. railroads invest billions in a business that threatens the trucking industry’s most lucrative shipments.
CSX and smaller Norfolk Southern Corp. are expanding yards, bridges and tunnels to make room for more cars carrying containers that can move by rail, highway or water. The upgrades will help blunt the impact of falling coal volumes and meet demand from trucking customers for an alternative to rate increases driven by higher fuel prices.
Shippers may save 15 percent to 20 percent when they send goods via so-called intermodal service using rail rather than by truck alone, with savings varying with the route and length of haul, said Kevin Sterling, a BB&T Capital Markets analyst in Richmond, Virginia.
“It’s a meaningful difference,” Sterling said in a telephone interview. “The rails need freight, and intermodal represents a big opportunity.”
Railroads are pushing intermodal service as a way to improve shippers’ speed and efficiency. Containers can be taken from a ship or truck at an intermodal terminal, stacked on special flatcars -- sometimes one atop another -- and hauled by the hundreds on one train to another terminal. Trucks then carry the boxes from that site to a warehouse, factory or store.
Class I railroads, the largest in North America, reported shipments of 3.92 million intermodal units in the second quarter, according to data from the American Association of Railroads. That’s an increase of 6.7 percent from the three months through March and 5.1 percent from a year earlier. Only total commodity carloads were higher.
Before 2004, when oil prices were lower, a 600- to 700-mile intermodal rail shipment wasn’t worth it for many customers, said David Vernon, a New York-based analyst with Sanford C. Bernstein & Co. Those shippers opted to send their goods via truck instead.
“Fast forward to oil being $80, $90 a barrel and highway diesel being a lot more expensive, you start to see more and more interest in those shorter lengths of haul,” Vernon said.
The domestic container cargo business at CSX, the biggest eastern U.S. railroad, has been growing 6 percent to 7 percent a year for the past four to five years, Chief Executive Officer Mike Ward said in a telephone interview.
Investments in the National Gateway and a northwest Ohio terminal are positioning CSX to vie for about 9 million truckload opportunities longer than 550 miles (885 kilometers), the distance at which the Jacksonville, Florida-based company says it can start to compete with truckers.
The Gateway is a project raising the height of tunnels and bridge clearances to accommodate rail cars with double-stacked containers traveling from mid-Atlantic seaports to the Midwest. The routes parallel interstate highways such as I-95 from North Carolina to Baltimore and I-70 from Washington, D.C, to northwest Ohio.
“There’s a huge market to go after,” Ward said, referring to intermodal operations. “The pie is so big we can all have a nice big slice and enjoy ourselves. That’s why you are seeing us expanding terminals, as is Norfolk Southern.”
CSX’s intermodal shipments increased 9.6 percent to 484,000 in the second quarter, on a year-to-year basis, compared with growth of 11 percent to 471,000 in the previous three months, according to data compiled by Bloomberg.
Its intermodal cargoes still lag behind Norfolk Southern, which saw them increase 3.3 percent to about 659,000 in the second quarter and 1.9 percent in the previous three months.
Both railroads have been raising clearances on routes and building new yards to take advantage of the growth. Norfolk Southern (NSC:US), based in Norfolk, Virginia, budgeted $2.4 billion for property additions this year.
The railroad is buying land for intermodal yards, laying down double track and making other facility improvements geared toward a high-capacity route from New Jersey to Louisiana that will compete with trucks along several major interstate highways, the railroad said in a filing.
CSX plans to invest $2.3 billion this year, with more than half expected to go toward infrastructure enhancement, Lauren Rueger, a spokeswoman, said in an e-mailed statement.
The company “continues to see record domestic intermodal volume” driven by customers switching from highway to rail, Rueger said.
The competitive threat to trucking, along with challenges from higher fuel prices and a shortage of drivers, is reflected in investor valuations of the two industries.
The Standard & Poor’s 500 Railroads Index (S5RAIL) has climbed 12 percent in 2012, with CSX gaining 9.2 percent and Norfolk Southern advancing 2.6 percent. The increases all outpace growth of 1.3 percent in the Bloomberg U.S. Truckload Trucking Index (BNUSTLIX), which includes Swift Transportation Co., based in Phoenix.
Trucking “companies that have not embraced intermodal risk losing share,” said Lee Klaskow, a Bloomberg Industries analyst in Skillman, New Jersey. “It’s not going away unless capacity in the rail industry is so tight they can’t provide a quality service.”
Shipment volumes in long-haul trucking, which typically generates more revenue per load than shorter trips, declined on a year-to-year basis for the first three quarters of 2011, according to data compiled by Bloomberg. Gains in the first half of this year have been less than 10 percent.
Truckers that move into intermodal, such as J.B. Hunt Transport Services Inc., based in Lowell, Arkansas, and Swift Transportation, are benefiting from the need for drivers to pick up rail shipments and carry them on their final leg.
J.B. Hunt, which has arrangements with most major North American rails to transport truckload freight in containers, gets more than half its revenue (JBHT:US) from hauling the container cars. In the second quarter, the company’s intermodal revenue grew 13 percent compared with revenue from trucking, which fell about 3 percent.
Hub Group Inc. (HUBG:US) is increasing its containers by 2,100 to 24,000 for the peak shipping season, and will remove only 1,000 afterward.
Local shipping on the East Coast offers “tremendous opportunities” to win customers converting from truckload shipments to intermodal, Hub Group CEO David Yeager said on a July earnings call.
Previously, “rails didn’t really have the infrastructure prior or the length of haul and the cost to be able to compete effectively against truck,” he said. “That’s no longer the case.”
The freight-transport management company, based in Downers Grove, Illinois, drew about 65 percent (HUBG:US) of its $2.75 billion in sales last year from intermodal.
Many customers want to switch to the service “from a strategic perspective over the long term as they expect that there is going to be some underlying dynamics within the truckload sector which are not going to be favorable,” Yeager said.
Swift Transportation plans to add 2,000 containers by November in order to raise its intermodal revenue opportunities.
“More and more of those traditional trucking companies are partnering up and including intermodal as their service,” Jonathan Starks, director of transportation analysis at FTR Associates, said in a telephone interview. Intermodal is “slowly growing a little bit of market share into some more traditional truck segments. That occurs slowly over time. It doesn’t tend to make big, deep, broad strokes.”
Intermodal service has garnered high-profile customers such as FedEx Corp. and United Parcel Service Inc., which pay railroads for long-distance transportation before putting their packages on trucks for final delivery to customers.
UPS typically uses intermodal for ground deliveries traveling more than 750 miles, Susan Rosenberg, a UPS spokeswoman, said in an interview.
The company’s growth in intermodal has helped improve container car rail service by pushing the carriers to be on time and more efficient, BB&T’s Sterling said.
“The rails see this as an opportunity to take the service to other shippers,” Sterling said. “They can walk through shipper’s doors and say ‘We’re doing this for UPS, we can do it for you.’”
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