Is intermodal going off the rails?

Basically, the cost savings for shipping on the rail is not enough to offset the deterioration in service. This explains the deterioration in volumes over the past few months to an extent, but the tender rejections indicate the carriers may be struggling to meet demand anyway. The timing is just unusual.    

Looking at the intermodal rejection rate at a market level, the bulk of the rejections can be explained by a large jump from loads originating in Southern California. The single largest lane for intermodal shipments in the U.S. is Los Angeles to Chicago, a lane that has struggled to keep pace with demand for several months.  

Peak season surcharges were put in place this spring, even though it is not the traditional peak season for freight for the rails. Union Pacific announced a temporary suspension of eastbound movement from the West Coast terminals to Chicago — this is due to congestion in Chicago because of a lack of drayage capacity.

Volumes have been trending lower out of LA as well, meaning there should be more capacity, but that does not appear to be the case looking at the rejection rates. Congestion in Chicago may be contributing to the rise in rejections. 

International versus domestic containers

Looking at the domestic versus international loaded container volumes, the majority of the deterioration comes from the international container segment that consists of 20- and 40-foot containers that largely originate from overseas. 

These containers have become a rare commodity and are not owned by the rails. With the container shortage becoming an increasing issue, the shipping companies that own these containers are making more of an effort to move them back across the ocean where they are needed and can make them the most money. 

This means these containers have to be emptied into warehouses or transloaded, preferably close to the ports. With the numerous delays and congestion around the ports and rail facilities, a lot of this freight will get palletized and placed on trucks, which after a round of significant rate increases and surcharges, is not as much of a premium as it used to be. 

The rails are not totally to blame for the service deterioration — drayage capacity/container shortage — but they have historically sacrificed service for operational efficiency and now they are charging more for less (service). Trucking compliance rates have started improving from their historic lows, which may mean that intermodal may have missed its peak opportunity for growth.

About the Chart of the Week

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