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Is intermodal the future of rail freight?

  • Why are firms investing in intermodal?
  • Why coal is shrinking and intermodal is growing?

 

The rail freight industry consists of companies that provide rail based transportation services for a wide range of cargo such as dry bulk, petroleum products, chemicals, etc. This industry plays a vital role in the transportation of goods from numerous logistics centres to far or near places. The industry transports approx. 91% of bulk commodities (automobiles and components, agriculture and energy products, coal, food, chemicals, equipment, metals, construction materials, minerals, paper and pulp). The remaining 9% is intermodal traffic (consumer goods and other miscellaneous products). Although rail freight transportation is less flexible than truckload transportation, it is more fuel efficient. While rail freight’s fuel efficiency ranges between 150-520 tonne-mile-per-gallon, truck freight’s fuel efficiency varies between 70-140 tonne-mile-per-gallon. 

The rail freight industry is consolidated and is dominated by few global vendors owing to their vast geographical reach. Currently, North America dominates the market. The global rail logistics market is projected to grow during 2017-21 at a CAGR of nearly 4% to $210.13 billion (Source: Technavio report). This growth is primarily attributable to improved efficiency of rail freight in comparison with trucks, the growth of rail intermodal and lower carbon footprint. The key industry players include Canadian National Railway, Union Pacific (when measured by revenue and market capitalization), DB Schenker, SBB Cargo, CSX, BNSF, Norfolk Southern, Kansas City Southern, etc. 

In the past five years, the three companies mentioned in the above table registered a decline in their coal segment. The baseline coal market generated only US$2.3 billion (2015), a drastic drop in revenue (2011) from US$3.7 billion. Moreover, competition from natural gas was one of the major factors affecting the coal output. This trend can be ascribed to:

  1. Reduction in natural gas prices on the account of massive natural gas shale resources that have become readily available in the past decade.
  2. Technological innovation and government subsidies led to lower prices of renewable energy.

 

Subsequently, the demand for coal is expected to decline. While the coal business is shrinking, the intermodal segment is experiencing growth.

Intermodal has emerged as a competitively priced and environmentally friendly alternative to freight transport and has reduced the excessive dependence on highways. Presently, the intermodal market accounts for c. 42% of the rail freight logistics and is projected to have the highest growth rate (CAGR ~5%, 2017-21). This growth is primarily based on the cost-efficient solutions provided by intermodal to transport complex commodities. Furthermore, the growing demand for intermodal transportation encouraged several investments from rail manufacturers and operators. This was for the enhancement of efficiency through development and integration of intermodal technologies. For instance, Canadian National Railways invested around US$ 250 million for the development of an intermodal and logistics hub in Milton (Ontario). Additionally, logistics firm CSX developed tracking systems to help shippers track their intermodal containers from the source to the destination. Similarly, Union Pacific is the largest publicly traded, class 1, rail road company in the US and invested more than US$1.1 billion in the intermodal facilities since 2000. The firm converted its intermodal containers from trucks to trains and steadily improved its market share in the intermodal cargo through systematic reinvestment in the network, providing door-to-door transportation services and enhancing the intermodal interchange facilities.

      

  

Further, an examination of revenue shows that CSX registered revenues to the tune of US$11.1 billion, a dip of 6.7% as compared to the previous year since volumes declined by c. 5%. CSX’s coal division accounted for close to 17% of the volume and registered a decline of 21% with a total drop of 42.5% since 2012. On the contrary, CSX’s intermodal segment accounted for US$1.7 billion or 16% of the company’s total revenue and c. 42% of volume. The division registered a growth of 8.3% in the last 5 years. In order to boost the growth CSX is building new terminals and augmenting its network capacity to broaden the market presence, especially in key growth areas. The OPEX for the firm totalled US$7.7 billion (2016), a decrease of 6.6% (from 2015). This decline was due to lower labour, materials, fuel and other volume related expenses.

Secondly, Union Pacific generated a revenue of US$ 18.6 billion, but, this was a drop of 8.8% over the preceding year due to lower levels of volume. Intermodal contributed 39% and coal 16% to the revenue. Although intermodal registered a drop of 8.8%, the drop in coal volumes was significantly higher at 24.6%. The volume declined in coal, crude oil, frac sand, international intermodal, metals and grain shipments more than the offset volume growth in the finished vehicles, automotive parts, domestic intermodal, industrial chemicals and plastics shipments. Consequently, OPEX amounted to US$ 12.7 billion and decreased 7.9% over the previous year. This drop was attributable to the decline in volumes leading to fuel cost savings coupled with savings from strict cost control measures.

Similarly, the revenue for Canadian National declined in both local currency as well as in the US dollar terms by 4.9% to C$ 11.3 billion or US$8.9 billion. The decrease was attributable to a decline in volumes of coal, crude oil, frac sand as well as fuel surcharge rate, this was somewhat offset by the freight rate increase and positive currency translation impact of the weaker Canadian dollar. While intermodal accounted for 41.6% of the revenues through agricultural products at 11.6%, coal accounted for just 6.4%. The OPEX for the company decreased by 8.4% to C$6.7 billion or US$5.3 billion, primarily due to drop in volumes, lower fuel expenses and cost-control measures. This was moderately offset by the negative impact of the currency translation of a weaker Canadian dollar.

In conclusion, it can be stated that while the coal segment continues to register a decline, rail intermodal has come to the rescue of the industry. Further, as demand for freight shipments rises, the rail freight industry in general and the intermodal rail freight industry in particular present a socially viable and beneficial alternative to meet the growing demand. Recently, billions of dollars were invested on track upgradation, new intermodal terminals and related infrastructure projects to make rail intermodal more robust, reliable as well as cost effective. In addition, the rail freight operators and suppliers are investing heavily on redesigning of freight cars for the improvement of capacity and efficiency of containers. Besides these, customer retention strategies, as well as competition between companies looking to expand the market-share, may continue to drive the consolidation in the industry.   

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