The Great Retreat

Over the past two years, three of the Big Four U.S. rail systems have dropped intermodal service between hundreds of points, curtailed steelwheel interchange in Chicago and other gateways, and de-emphasized or even closed some intermodal terminals. By one analyst’s estimate, these service reductions represent 1 point’s worth of the 4% year-to-date decline in intermodal volume. You could call this the Great Retreat. 

This trend, part of the industry’s embrace of Precision Scheduled Railroading, has alarmed some observers. And it is a surprising development when the rail industry removes a couple of cylinders from its intermodal growth engine. 

In the past two decades, railroads have spent billions on the extra mainline, siding, and terminal capacity necessary to handle service-sensitive intermodal traffic. They also expanded service to secondary markets. The predictable result: Steady growth in domestic and international intermodal traffic.

Now railroads are dropping service to smaller markets altogether – or discouraging it by forcing shippers to use costly, inefficient rubbertire moves between Eastern and Western railroad terminals in Chicago and other gateways. Aggressive price increases also push volume to the highway. In essence the railroads are saying we only want your business if we can hook and haul it in 12,000-foot stack trains between major points. Again, the results are predictable: Domestic container traffic has notched four straight quarters of volume decline, the first time that’s happened since the intermodal analyst Larry Gross began tracking such data in 2000.

If you’re scratching your head over this Great Retreat strategy, you’re not alone. After all, the transportation market is getting closer to consumers by delivering freight to more and more locations. Railroads are running in the opposite direction by concentrating traffic on major corridors, where they say their simplified operations can compete most effectively. 

But let’s not paint the railroads with too broad a brush. There are differences as CSX Transportation, Norfolk Southern, and Union Pacific adopt Precision Scheduled Railroading. 

CSX has taken both a sledgehammer and a meat cleaver to its intermodal network, smashing its hub-and-spoke system and lopping off service between hundreds of origin-destination pairs on and off its railroad. The hub-and-spoke system was slow, unreliable, and high cost – three things that are not a recipe for success in the low-margin world of intermodal. At the other end of the spectrum, Norfolk Southern has made much more surgical changes to its intermodal network, using a scalpel to trim service here and there, much as it has done regularly over the years. Somewhere in between is Union Pacific, which has cut service to points both on and off its system and consolidated its Windy City intermodal terminals. What all three railroads have in common is forcing low-density interline moves to rubbertire between intermodal terminals in Chicago and elsewhere. 

Everyone wants intermodal to grow, so the PSR strategies are discouraging. Or at least they are until you pause to consider Canadian National’s intermodal experience over the past 15 years and what it might mean now, with CSX, NS, and UP still in relatively early stages of PSR.

In 2003 CN embarked on its own intermodal retreat. It slashed low-margin services, shut terminals, and shed volume while developing a lower-cost and more efficient intermodal network. Only then did CN launch new services that added volume and revenue growth. 

The key takeaway: Since 2006, overall U.S. intermodal volume is up 17%, while CN’s intermodal volume has nearly doubled. And now CN expects intermodal volume to grow 5% to 7% a year, which is faster than the North American economy.

Keith Reardon, who heads CN’s intermodal sales efforts as senior vice president of consumer product supply chain, spoke earlier this month about what he called the railway’s painful transition to a better intermodal network. Of interest is who led the charge on CN’s intermodal changes: Chief Marketing Officer Jim Foote, now chief executive at CSX. Foote has seen this movie before, and he’s running the sequel at CSX.

There are signs that CSX, the first big U.S. railroad to adopt PSR, is making a CN-like shift toward intermodal growth. On-time performance is up, no more major network overhauls are planned, and next month CSX will begin new short-haul interline service with CN that links Toronto and Montreal with New York, New Jersey, and Philadelphia. It also is reportedly considering resuming some interline service with Union Pacific that had been cut last year.

When broad volume gains will show up is anyone’s guess. But for the sake of the industry, let’s hope today’s PSR railroads are able to follow CN’s lead and once again grab market share from the highway.

You can reach Bill Stephens at bybillstephens@gmail.com and follow him on Twitter @bybillstephens