New regulation may spell opportunity for intermodal transportation
By Theodore Prince
Originally published in the January 2018 issue of Blueprints, the quarterly journal of Blue Book Services.
As the fresh produce supply chain grapples with the latest food safety rules, transportation mandates, and driver demographics, shippers should take a fresh look at the availability and cost performance of intermodal (truck and rail) delivery.
By definition, perishables deteriorate over time or if exposed to extreme temperatures (hot or cold), humidity, or other degrading environmental conditions. Proper handling, storage, and temperature control throughout transit is essential.
For many years, the long haul (over 1,500 miles) temperature-controlled market has been served predominantly by small trucking companies (e.g., less than five trucks) with a minimal share held by rail. The U.S. Department of Agriculture (USDA) estimates that boxcars handle 5 percent and intermodal only 1 to 2 percent of shipments. This extremely fragmented market is at a point of inflection, with the potential to grow significantly.
Intermodal is a substitute for traditional truckload movement. Like trucks, intermodal is loaded at the source and delivered to destination without any intermediate rehandling. Unlike truckload, intermodal does not have a single transportation provider performing door-to-door service. It relies on railroad carriers for the underlying long-haul line movement in combination with local pickup and delivery (drayage) at the origin and destination rail terminal locations. Intermodal does, however, require an integrator to put all the pieces together to provide truck-like service.
RAILROADS AND PRODUCE
Refrigerated transportation and the railroad industry grew together. As urban populations increased, so did the distance between food production and consumers. Refrigerated cars were in use as early as the 1840s, but only during the winter months.
By 1860 railroads began moving food stored in bins of ice taken from lakes and ponds, followed by chemically-manufactured ice, making it possible to ship perishables from West Coast producers to Midwest and East Coast markets. In the 1940s, Frigidaire (then part of General Motors) eliminated the dangers of toxic and flammable refrigerants with Freon, leading to refrigerated railcars.
The same technology that enabled mechanical refrigeration on boxcars also made it possible for trucks. By 1957 C.R. England was offering 72-hour coast-to-coast service by truck. The combination of the interstate highway system, truck competition, and deterioration of rail service all eroded the railroads’ share of business in the 1960s and 1970s.
The introduction of doublestack in the early 1980s was the most important intermodal innovation since containerization.
One crew could handle traffic (which would have otherwise required the use of two or three crews), while reduced weight generated fuel and track savings (estimated at 10 to 15 percent
less than standard intermodal).
Previously, two 40-foot containers would be carried on a 63,000-pound rail car; with doublestack transportation, ten 40-foot containers can be carried by a 161,000-pound stack car.
Rail car weight per container decreased from 31,500 to 16,100—a reduction of almost half.
In the past 30 years, intermodal has successfully penetrated the long-haul truck market because the length of haul (1,400 to 2,000 miles) is sufficient for railroads to overcome the advantages
trucks have in the short haul.
Operationally, railroads provide a reliable transit time by operating intermodal unit trains that run intact from origin to destination ramp.
The introduction of articulated cars and the elimination of enroute switching not only improved transit reliability, but service by reducing the likelihood of cargo loss and damage.
To date, however, temperature controlled transportation has largely resisted this rail conversion because so much capacity resides with small trucking companies that rely on owner-operators.
Large motor carriers operate a regional network with fixed terminals and domiciled drivers supporting a 300 to 600-mile length of haul. Most eschew longhaul routes and seasonal freight. Smaller companies lack such a network and generally have lower rates.
A win-win rapprochement between intermodal providers and produce shippers seems inevitable.
THE VALUE PROPOSITION
The historical value proposition of intermodal has been to look like truckload shipping, but offer a discount to incent diversion.
A traditional rule of thumb has been that intermodal is ‘truck plus one day’ (adding one day to standard truck transit time, i.e., 500 miles per day), with a discount of 5 to 15 percent.
In most cases, the intermodal advantage over truck increases with distance. The relative improvement of average cost per mile increases proportionately to the price of fuel. As the price of fuel
drops, the minimum distance to compete increases.
Here are two examples: at $5.00 per gallon, intermodal’s cost equals truck shipping at 500 miles and the cost benefits increase proportionately with longer lengths of haul; at $2.00 per gallon, intermodal does not cost the same as trucking until 1,250 miles—and the cost benefit does not increase significantly.
Today, the intermodal industry is emerging from an almost three-year perfect microeconomic storm, which included several factors: (1) the lower price of diesel, which greatly reduced intermodal’s secular price advantage over trucking; (2) the lower price of natural gas, which reduced demand for fracking and freed up trucks and drivers; (3) the core of U.S. intermodal—California eastbound—was diminished due to high retailer inventory levels for consumer goods; and (4) the drought in California (now over) had also depressed the market for eastbound produce.
Traditional intermodal operators (brokers) pay most of their expenses in cash (i.e., rail and drayage), whereas a great deal of the expense associated with operating a truck includes average costs
accrued over a specified interval but may not become cash outlays for a specific period (e.g., tractor maintenance may accumulate by mile driven, but may not actually come due in the short term).
While company trucks pay [cash] wages to drivers, they are notional to an owner-operator who takes what, if any, margin is left.
History has shown that intermodal conversion is beneficial in the long term, but challenging in transition, as it requires changes in established business methods.
GAME CHANGER: ELDs
Mandatory implementation of electronic logging devices (ELDs), which began in December, is transforming perishables transportation through strict hours of service enforcement.
With ELDs, per-day truck miles can decrease by almost 30 percent (according to Nashville, IN-based freight forecaster FTR Associates).
This will require a corresponding per-mile rate increase to maintain driver earnings. These economics, along with driver demographics, will likely result in a significant driver shortage and higher rates.
Although owner-operators routinely offer fifth-morning service on transcontinental produce shipments, singledriver truck transit will approach seventh-morning arrival on most shipments.
Since intermodal service should remain the same sixth-morning service, intermodal will go from truck-plus-one to truck-minus-one service for shipments.
Hours of Service, ELDs, and Drayage: Detailing the Impact of Delays and Deadtime
While team drivers, of course, could provide legal fifth-morning or faster service, there are complications: not only is driver turnover exceptionally high, but there’s a sense that hours of service compliance may be problematic if one driver ‘uses’ the other’s miles. For this and other reasons, perishables shippers should take a fresh look at intermodal.
History has shown that intermodal conversion is beneficial in the long term, but challenging in transition, as it requires changes in established business methods. The chart on the previous page demonstrates how intermodal drayage will be impacted by ELDs and any delays during pickup, hauling, and delivery.
Due to the vagaries of handling produce, pickup is often problematic as product must be picked and chilled before loading. Deliveries are also challenging in congested distribution centers operating on a first-come first-served basis. Long-haul providers tolerate this deadtime because it represented ‘only’ a 5 to 10 percent penalty of their total transit time.
For drayage providers, this deadtime penalty approaches 50 percent; this is not economically sustainable and could result in a dearth of drivers willing to handle these loads.
To maximize cargo weight, drayage providers will also need to use ultralight day cabs, which do not have the accoutrements of a sleeper.
In addition to minimizing driver dwell times, there are other issues that need to be resolved. First, intermodal can carry the same legal loads as highway trailers, but requires a different pallet configuration (especially for containers).
To prevent shifting enroute, void fillers (less expensive than traditional airbags) can help ensure cargo arrives undisturbed. Another important consideration is scheduling—missed train cutoffs can result in 24 to 72-hour delays if a load must wait for the next day’s train.
A win-win rapprochement between intermodal providers and produce shippers seems inevitable. The market already has intermodal providers with both trailer and container transportation.
Going forward, the issue is not the hardware, but rather how well and how quickly providers and purchasers of cold chain transport can develop integrated door-to-door solutions to offer an alternative to current truckload dependency.